Actions of a Lifetime (2)

How one person's actions over their lifetime affect the rest of the world

My whole approach to economics has always been to look for things we can know for certain. This 2-part series is about one of these things: we can work out an exact effect of one person’s actions over their whole life on everyone else.

In part 1, we looked at the changes in Bob’s assets and liabilities over his lifetime:

• He started with no assets or liabilities.

• Over his life he gained various assets and liabilities.

• He lost some, probably most, of these over his life. (He couldn’t lose any assets or liabilities which he hadn’t previously gained because he didn’t have them!).

• After his death, the probate process cleared up his remaining assets and liabilities, so that he had none left.

Here in part 2, we’ll look at the effect on the raw net worth¹ of everyone else i.e. the group of people consisting of everybody other than Bob who has ever lived or ever will live. (I’ll call this group “etc.”). Since Bob ended up exactly where he started, we’re comparing like with like.

Bob’s “economic lifetime”

It’s useful to have a term for the period from the beginning of Bob’s life to the end of the probate process. I’ll call it his economic lifetime.

Always remember that every asset or liability which gets added to Bob’s balance sheet over his economic lifetime is eventually removed, one way or another. So for each asset and each liability, let’s look at:

1. The action which adds it, and

2. The action which removes it.

Then we can work out the combined effect of these actions on the RNW of the “etc.” group.

Debt Assets

Let’s start with a debt asset which Bob acquires at some point. He could be owed anything, but let’s say it’s £100. There are exactly two ways for Bob to gain this debt asset, and both involve someone else e.g. Alice. Either she:

1. Loses that debt asset (“transfer debt asset” action), or

2. Gains a £100 liability (“create debt” action), equal to the asset Bob gained.

The 2 ways Bob can gain a debt asset

Either way, Bob’s RNW ↑ by £100, and the “etc.” group’s RNW ↓ by £100.

Now, how does Bob lose the debt asset? Let’s assume that at this point, the person with the corresponding liability is Charlotte. Bearing that in mind, there are exactly two ways:

1. Someone other than Charlotte gains the debt asset (“transfer debt asset” action), or

2. Charlotte loses the liability (“write off debt” action).

The 2 ways Bob can lose a debt asset

Either way, Bob’s RNW ↓ by £100, and the “etc.” group’s RNW ↑ by £100.

So over the two actions together, Bob’s RNW is unchanged, and so is the “etc.” group’s. For example, here’s one of the 4 possible combinations:

Bob gains and loses a debt asset

Liabilities

That was straightforward. And so is gaining and losing a liability, as we’ll see. Suppose Bob gains a liability for a particular type of car. There are exactly two ways that could happen. Someone else (e.g. Alice) either:

1. Loses that liability (“transfer liability” action), or

2. Gains a debt asset for the car (“create debt” action), equal to the liability which Bob gained.

The 2 ways Bob can gain a liability

(If you aren’t yet familiar with the arrow notation, you might think that the first arrow is pointing in the wrong direction because Bob’s gaining the liability and Alice is losing it, but it is correct. The arrows always point from the person whose RNW ↓ and to the person whose RNW ↑).

Either way, Bob’s RNW ↓ by the car, and the “etc.” group’s RNW ↑ by the car.

Now, how does Bob lose the liability? Assume that at this point, the person with the corresponding debt asset is Charlotte.

1. Someone other than Charlotte gains the liability (“transfer liability” action), or

2. Charlotte loses the debt asset (“write off debt” action).

The 2 ways Bob can lose a liability

Either way, Bob’s RNW ↑ by the car, and the “etc.” group’s RNW ↓ by the car.

Again, over the two actions together, Bob’s RNW is unchanged, and so is the “etc.” group’s. Here’s one of the 4 possible combinations:

Bob gains and loses a liability

Is it all this simple? Not so fast!

Tangible assets

Suppose Bob at some point gains an apple, which is a tangible asset. There are exactly two ways for Bob to gain it. Either:

1. Someone else (e.g. Alice) loses that apple (“transfer tangible asset” action), or

2. He produces it himself (“produce” action).

The 2 ways Bob can gain a tangible asset

Either way, Bob’s RNW ↑ by an apple. And in the first case, the “etc.” group’s RNW ↓ by an apple. But in the second case, the “etc.” group’s RNW doesn’t change! This is completely different from what happens with debt assets.

Now, how does Bob lose the tangible asset? Again, there are exactly two ways:

1. Someone else (e.g. Alice) gains the apple (“transfer tangible asset” action), or

2. Bob consumes it (“consume” action).

The 2 ways Bob can lose a tangible asset

Either way, Bob’s RNW ↓ by an apple. And in the first case, the “etc.” group’s RNW ↑ by an apple. But again in the second case, the “etc.” group’s RNW doesn’t change! This is also completely different from what happens with debt assets.

Over the two actions together, Bob’s RNW is always unchanged, but the “etc.” group’s RNW changes in a more complicated way:

1. If Bob received the apple from someone, and later gave it to someone, the “etc.” group’s RNW is unchanged.

2. If Bob produced the apple himself and consumed it himself, the “etc.” group’s RNW is also unchanged.

3. If Bob produced the apple himself, but then transferred it to someone else, the “etc.” group’s RNW ↑ by an apple.

4. If Bob received the apple from someone, and consumed it himself, the “etc.” group’s RNW ↓ by an apple.

All 4 possible ways Bob can gain then lose a tangible asset

We can summarise all 4 possibilities like this:

The “etc.” group’s RNW ↑ by an apple if Bob produced it, and the group’s RNW ↓ by an apple if Bob consumed it. (If Bob did both, the increase and decrease cancel each other out).

Total

Every single one of Bob’s assets and liabilities over his economic lifetime fits one of the 3 patterns above:

• A debt asset has no effect on the “etc.” group’s RNW

• A liability has no effect on the “etc.” group’s RNW

• A tangible asset increases the “etc.” group’s RNW if Bob produced it, and/or decreases the “etc.” group’s RNW if Bob consumed it

We can summarise all this by saying that:

Over Bob’s lifetime, his economic activity increases the “etc.” group’s RNW by:

• everything he ever produced

• minus everything he ever consumed.

If he produced more than he consumed, everyone else’s combined RNW ↑ by the difference, and if he consumed more than he produced, everyone else’s combined RNW ↓ by the difference.

And that’s the simple answer to the question of what the economic effect of one person is on the rest of the world.

Other considerations

Human and social capital

We’ve looked at the economic effect of one person’s economic lifetime on the rest of the world. And that’s economic effect in a very specific sense: changes to what they own, what they’re owed and what they owe.

Some will argue that human and social capital (people’s skills in production as individuals, and as a group) are part of economics too — and rightly so. What if Bob had taught people how to cook better apple pies, or he’d organised his community so that they became better at working together to meet their needs? These definitely do have an important effect on economics.

But there’s no problem here. The effects are already included in the One Lesson’s model: the economic actions which happen after this will just be different from what they would have been otherwise. For example, there will be more “produce amazing apple pie tangible asset” actions, and fewer “produce mediocre apple pie tangible asset” actions. The effects of the actions, whatever those actions are, will still be as described by the model: the RNW of the producer will increase by what they produce.

Net consumers

We must remember that people are so much more than just their economic activity, and we shouldn’t value their life solely on what they contribute economically to the rest of the world. But it’s still important to understand that aspect. If someone is a net consumer over their life, someone else has to make up the difference. A society can’t ignore this fact. A political decision (informed by accurate economics, and taking incentives into account) is needed for how much this involves others being compelled to make up the difference, and how much is purely voluntary.

Summary

The difference between what Bob consumes and what he produces over his life is the difference between what the rest of the world produces and what it gets to consume.

Most people would probably think this is common sense, but hopefully this proves it to the economists!

1. Someone’s raw net worth (RNW) is what they own plus what they’re owed minus what they owe (i.e. their assets minus their liabilities). It is a “heterogeneous” sum/difference, which just means that things of different types are added and subtracted, not monetary “values” which have been assigned to them. If the idea is new to you, this article explains it with examples.