Over the past 10 or so years I’ve found myself on steep learning curve on economics. There have been times where I wished I studied economics at school or university as it would have surely helped in my advising and writing.
Anyone in business and politics needs to know about economics. It is the study of how policies, law, culture, business, nature and technology influence and bend the flow of capital.
Something strange happens when experienced business people who are not academics embark on traditional economic theory and dissect fiscal policies – they discover that the entire economics domain is inept.
Gross Domestic Parasites
It never ceases to amaze me how entire governments, academic cohorts, respected authors and influential leaders reduce the wealth, prosperity and goodness of a nation into a singular misleading metric.
GDP is the sum value of everything a country spends, less net exports. A high or growing GDP is considered to be a good thing because it means the nation is spending more, consuming more and selling more.
The Broken Bridge Scenario (I either invented this concept or accidentally plagiarised it.)
Say your federal government builds a bridge for $1b. Unfortunately, it falls down. So they spend another $1b cleaning up the mess and then another $2b rebuilding because of inflation.
Anyone with half a brain will tell you that the Broken Bridge is a terrible outcome. Society as a whole is $3b worse off. Sure, a whole heap of people were employed to clean up and rebuild the bridge. But society as a whole is aggrieved to a wasted sum of $3b with no additional assets or infrastructure to show.
Society worse off? Not according to GDP!
GDP tells the opposite story. Rather than subtracting $3b from the nation’s favourite wealth metric, GDP adds $3b! In other words, it does not matter whether spending contributes to, or subtracts from, the wealth of a nation. All spending is good according to GDP.
It is for this reason that Australians (along with most Western nations) find ourselves in the awful predicament we’re in. The governments of Australia, US, the UK, and most of the EU are spending about 9x more on administration than they are on building infrastructure.
Imagine a building company with 10 employees: 1 of them is building and 9 are doing admin. Of these 9 administrators, 3 are trying to prosecute the builder into bankruptcy.
This is not just a government problem. Due to the exponential rise of regulations, policies and codes, the private sector must also employ around 5 to 10 administrators for every 1 worker.
Don’t believe me? Name a business where greater than 20% of the total hours worked by all owners, employees and contractors is dedicated to building an actual product. Remember to include bookkeepers, accountants, consultants, compliance managers, auditors, actuaries, committees and anyone else who exists purely to fulfill reporting and regulatory obligations.
All of these services contribute to GDP but do not contribute to real assets, products or infrastructure.
GDP’s composition is thus 90% parasitic and 10% productive.
I must stress at this point, if you work in admin or compliance, whether in a family business or a federal bureaucracy, please don’t think I’m calling YOU a parasite. Much the opposite. Without you, the workers will be thrown out of business, prosecuted or even jailed by the state. Those who are fulfilling a role that was mandated into existence by the state are not the problem. It is those who create these mandates who are the problem.
I’m not suggesting we abolish all regulations. Rather we should seek to reverse the ratios. Instead of having 9 administrators for every 1 producer, we should have 1 administrator for every 9 workers – which is ironically what the ratio actually was when economists invented the GDP as a performance metric.
Until we can reverse the bureaucratic machine, or replace GDP with a better metric for calculating prosperity, be careful what you wish for. A healthy GDP is not evidence of productivity.
Deflation: Yeah or Nah?
I’m not going to write about inflation here. I’ve written plenty of books and articles about inflation as the most sinister, deliberate and reckless cause of most of the world’s economic and health problems.
At first glances, the idea of deflation (things costing less instead of more) sounds great. After 25 years of disastrous fiscal policy across most of the world, a price reduction is just what the doctor ordered, right?
Be careful what you wish for.
Big Tech and the AI bros are all promising deflation. And make no mistake, if they can pull off what they’re trying to pull off, we’re going to get a whole lot of deflation!
Unfortunately it is the worst possible varietal of deflation.
The two main causes of deflation are the good kind: The government reduces money supply. This causes money to increase in value relative to everything else. A short and sharp recession is typical in austerity-led deflationary times. That is because people hold off on buying things in anticipation of lower prices. When prices reach critically low levels, the floodgates open back up and the economy soars on the other end.
And the bad kind of deflation: a sharp drop in demand because 30% of the population suddenly finds themselves unemployed because their employer replaced them with an AI subagent for $15 per month. The worst part about this kind of deflation is it does not necessitate the reduction of money supply. Rather, when this happens, and it will, central banks around the world will go into money printing overdrive to stimulate the economy. Unfortunately, it is pointless and just delays the inevitable. This is because the cost of living becomes so unaffordable for the bottom 99% of society that the terminal loss of consumption outweighs the stimulus. Prices want to fall significantly but the continual creation of new money forces them higher, resulting in a slow and painful decline. From this, you don’t get a 1971, 1987 or 2008 era recession, you get a 1929 style depression – one that takes 25+ years to recover from.
Fiscal stimulus during a recessionary deflation is like giving drugs to a drug addict to delay his comedown. When the comedown hits, and it will, it is 10x worse than the cold turkey approach.
When I reflect on my wish to have studied economics, I have realised it was best to have been careful what I wished for. It is the academic fraternity that has manufactured the two-speed society we now find ourselves in. And now they gaslight us into believing everything is great and we are all contributing towards some grand noble cause to raise the GDP.
My advice to anyone contemplating studying economics is this: don’t.
Instead, start a business, raise a family, and thoughtfully criticise everything your tax is funding.
Do not allow the academic elites, government, media, or even your mates at the BBQ convince you that the economy is fine because the GDP is strong. Create your own measures for goodness and prosperity: the number of hours you spend with your family and loved ones per day, the number of inspiring books you read in a year, how you rate your financial, physical and mental wellbeing out of 10, how you rate the relationships you have with your spouse, children, friends and colleagues out of 10, the number of panic attacks, suicidal ideations and sleepless nights you have per week, the number of drug & alcohol free nights you have per week, the number of hours per week you spend doing something you love, the number of things you are in the top 1% in. And so on.
Something strange happens when you optimise the really important numbers. All of your “economic” numbers fall into the right place. This isn’t hippy-dippy spiritual crap. This is about being careful what you wish for. Because you’ll probably get it.
Welcome to fringe economics.