Two economic realms

There is a real world of production, consumption, exchange, and distribution. At any given moment in time the economic system has a certain capacity. This capacity is determined by the total number of people available to work; and the total amount of tools, plant, and infrastructure they have available with which to work.

REMARKS

This capacity is not fixed in time. The total capacity can change through time. This change in total capacity can occur in several distinct ways:

  1. Changes in technology may enable more desirable economic outputs (or fewer undesirable outputs) with a fixed given set of inputs;
  2. Changes in the skills of the workforce may change the nature and quantity of the goods and services the economy is capable of producing; and,
  3. Changes the relative amounts of plant, tools, equipment, and infrastructure may change the nature and quantity of the goods and services the economy is capable of producing.

Point 1 is about changes in the quality tools through time, as well as the creation of new tools in response to new desires. Points 2 and 3 are about changes in the relative ratios of different existing desires. WWII provides examples of all three types of change. The war saw technological change, but it also saw changes in the type of outputs that the economies of the combatant economies were actually producing, and hence the skills and tools that were deployed.

THE REAL WORLD AND THE SYMBOLIC WORLD

Because this real world of production, consumption, exchange, and distribution involves people interacting and coordinating their efforts, there needs to be some way for them to communicate with each other. One of the unique features of the animal known as homo sapiens is our use of symbolic communication. This enables humans to coordinate their actions in ways that other animals are simply incapable.

There are lots of tools for symbolic communication. Books and instruction manuals are one example; prices and money are another. Although a particular form of symbolic communication will be instantiated in a particular way (for example, being recorded in a notebook, or stored in magnetic charges on a computer hard drive), it is their meaning, which is generated within human minds, that is really important as far as economics is concerned.

Symbols have meanings, and, depending on those meanings, symbols cause humans to behave in different ways. If I have lots of the symbol known as “money” (i.e. if my bank balance is high) I will behave differently than if I have little money. A share in a company is a symbol of the estimate of the real wealth that that company possesses at the moment and an estimate of the wealth it will generate in the future. This estimate is generated by the judgements of many different people, including accountants and market participants.

If I have purchased a share in a company I will behave differently depending on whether that symbolic value increases or decreases. If it decreases in value I may choose to “sell” my share in the company, thus cutting my losses, in doing so I will affect a small change on the collective estimate of that company’s prospects for generating real wealth.

REAL WEALTH AND SYMBOLIC WEALTH

There are two kinds of wealth; real wealth, and symbolic wealth. Real wealth is the ability to acquire a particular real good or real service at a time I wish. Symbolic wealth is the method by which we humans keep track of what our real wealth is, who is belongs to, and how it should be organised.