What is an economy?

In Margaret Thatcher's day, Britain became a leader in the service industry. As we de-industrialized, instead of selling goods, we started to sell our skills and expertise to the world. We still have industry, mainly in high-tech sectors such as pharmaceuticals and computer parts. However, if we think about what services do- they simply serve the other part of the economy, the "physical economy". For example, a legal firm may add to gross domestic product, but it is only possible if there are businesses in the "real" part of the economy, or the global economy for it to serve. You can't have a world economy based on the service industries, because there comes a point where you would simply have one legal firm giving advice to another, and so on. It is widely accepted by economists that the world depends on the "real" economy, the manufacturing/agriculture sector. If you look at everything around you, it was built by the real economy, the fake sector of the economy, services, can only provide the veneer on the finished product. Even things like health care need resources- it depends on a ready supply of chemicals and equipment to treat the sick. Notwithstanding, the medical professionals - clinicians - still need to eat for example, so you see where it goes. In order to have an "economy" you must have manufacturing, even if some countries/regions of the world can specialize, rightfully so, in services, the world as a whole still depends on industrial breadbaskets. Today these are China and India, and as they develop, and employment shifts from tertiary to secondary and primary industries, we may come to depend more on other countries for industrial produce. This substitution effect can only work for a while, so ultimately, in order to grow an economy, you require industry.

Now that we have established that industry is essential, we only need to understand that resources are finite, and that physical laws, such as entropy (everything slowly breaks down), and the law of diminishing returns, to realize that we can also not forever recycle our way out of trouble. Given that it is illogical that this finite economy will suddenly stop, it is ridiculous that everything will run out and break down all at once, we should expect world wide GDP to follow a bell curve, or something similar. Actually, this seems to be happening. From the beginning of modern industrial civilization, world GDP (income) grew year on year, as did population. GDP stopped in 2008, and shrunk quite dramatically, but population keeps on growing at 70 million a year. It seems we a trapped, we need to grow the economy to sustain per capita wealth, otherwise a burgeoning population will fight for an ever smaller cake as resources run scarce. Some people, myself included, have started to realize that what happened in 2008 may not be unusual in years to come. The extraction of any natural resource grows until no matter how much money is invested, it is impossible to extract any more that at peak, after which production enters terminal decline. Take oil, in each rig, you get to a point where the investment is greater than return, so even some resource lies in the ground, you cannot carry on production, because you would be losing money and resources, and resulting in a lower net production. As we approach the point where more wells "dry out" than new ones can be profitably brought on stream, production will fall and prices will rise exponentially. Problematically, the quicker economies grow, the more the problem exacerbates.

We can see, this actually happened in 2008, oil production had flatlined for 3 years, and prices started to creep up, hitting $150 in August. This proved to be the spark that kicked off the global economic crisis- remember the sub-prime mortgage troubles were actually in 2007, so they had not, contrary to what "experts" claim, proved to be the actual cause of the economic crisis. In 2009 and 2010, governments tried to throw financial solutions; more stimulus (spending), more debt, and money printing to solve a problem that had nothing to do with pieces of paper but everything to do with real resources in the ground. Unfortunately their efforts delivered mediocre results, at best offsetting some of the crisis by borrowing at interest against our future- of course all debts must eventually be paid back.

I suspect that what is happening is that government's have started to come to terms with reality, and are now realizing that the economic expansion which they had predicated economic policy upon was unrealistic. Now the are desperately trying to reduce aggregate demand in the economy, so as to prevent another oil shock. They call this "austerity", and their excuse usually goes along the lines of "we have a huge deficit that needs correcting". Of course, here is where their first mistake lies, but most people fall for it. In a national economy, it is not so much about your "profit", (surplus or deficit), because this is paid for by borrowing- creating money that must be repaid by future generations, rather "revenue" is the main concern, so actually, the best way to grow an economy, if growth is possible, is to lend lots of money, because money is actually "permission" to consume. The world leaders have may realized that there are limits to consumption, but they are being horribly dishonest is their austerity/conservation program, by not distributing the remaining wealth more equitably. They are preying on people's fears about a mythical financial crisis to rob them of what the real crisis might do anyway. The real crisis is actually a resource crisis, and people deserve to know.