Friday, February 26, 2010

A fundamental misunderstanding about the economy: Stuff

Post recession, the mass media and people more broadly seem somewhat more economically literate, but one big misconception still lingers, that the economy is about producing Stuff. Pundits from both parties are deathly afraid of the loss of manufacturing jobs, because they think that if we're not producing Stuff, we're going to be poor. Pundits in all my science/technology magazines constantly say we need to train more engineers in order to produce the Stuff of the future. People worry that we will soon be spending 1/5 of our income on healthcare, leaving less money for Stuff.

(David Brooks column that inspired this).

My question is why? Do Americans need more stuff? People associate the Wealth of Nations with Stuff, but even today, the vast majority of our GDP is in services; the fraction of Stuff in GDP has been declining, and will continue to decline. Why should we be encouraging the production of more stuff when it is a dying industry.

Of course we will always want Stuff, we still eat food, even though the industry now only accounts for a percent or two of our labor force when it once accounted for nearly all of it. Just most of us shouldn't be making it. Services like healthcare, education, leisure, entertainment, these are the industries of the future. On any given day, I mostly am pretty happy with the Stuff I already have. But where I am stymied is finding a good movie to watch. Or a good TV show. There are a few good movies or tv shows that come out, but there could be more.

And some of the things I call services, are related to Stuff. Like iPhones. Yes, ths is an innovation in stuff, but it was mostly an innovation in design. The technology for the iPhone has long been around (so say people like Kodak, Creative Labs, and Nokia in their patent infringement lawsuits), what made it work was the design of it. Healthcare services require some new gadgets, but it is mostly the service that is valuable (as an aside, yes, wasted healthcare money is bad, but on the whole there seems to be little solid evidence that the US healthcare system is especially wasteful).

I'm not the first to note this of course. I suppose back in the 90's at the MIT Media Lab, they talked this in terms of Bits not Atoms. Apparently there's even a new book out on the subject. But it will take a while for this idea to percolate out there. (Analogously, I'm reading Stephenson's account about the century before Adam Smith, when the Wealth of Nations shifted from how much gold it had to how much trade. A professor of mine in grad school noted, that Adam Smith figured out the Wealth of Trade just when Wealth shifted from Trade to Industry. And then noted that Marx figured out Wealth from industry just when Wealth shifted from industry to human capital, which is building block of Memes, not Stuff)

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