The One Lesson
A weekly series on a new One Lesson of economics
Governments move billions or trillions of pounds around. Many economists say that deficits don’t matter. And activists of all sorts tell us that their favourite political system will make everyone better off. Have you ever suspected that these people might not be acting in your best interests, but been told that you don’t know what you’re talking about if you question it? Then this substack is for you! With a single, simple economic lesson, you can recognise when people are trying to deceive you, and hold them to account.
In January 2008, I learned something which I hadn’t understood before: banks create money when they lend. While I was trying to work out whether this was some sort of fraud on the public, I found what seems to be a completely new way to understand economics. All you need to do is look at what everyone:
owns,
is owed by other people, and
owes to other people,
and how these change over time.
I’d tried learning economics from textbooks years earlier, but always found the standard approach frustratingly vague and unconvincing. My background in maths and systems analysis convinces me that this new approach is the key to making economics simple, and it can even be summarised in a single lesson, which is just a single sentence.
To make the sentence nice and concise, we need a name for “what someone owns plus what they are owed minus what they owe to others”: I’ll call it their raw net worth1 (or RNW for short). Then the One Lesson is this:
How exactly does this help?
What I’ve found, and hope to convince you, is that the modern global economy with all of its apparent complexity really isn’t much more difficult to understand than a barter economy (where people don’t use money, but transfer or exchange goods and services directly). The only real difference is that people regularly make, and trade, promises to pay later (debts). And because people don’t always keep their promises, someone who thought they’d been paid might find out later on that they hadn’t been after all.
So we could say that people transfer and exchange goods, services and debts. But it’s even simpler to say that people transfer and exchange some of their raw net worth. And that’s where the One Lesson comes in: we just need to look at when and how people’s raw net worth changes, which turns out to be both simple and intuitive.
Here’s a quick example to finish this introduction. Alice goes into a bookshop and buys a book for £10 in cash.
The green arrow pointing away from Alice and towards the shop shows that Alice’s RNW decreases by £10, and the shop’s increases by £10, when she hands over a £10 note.
The purple arrow pointing away from the shop and towards Alice shows that the shop’s RNW decreases by the book, and Alice’s increases by the book, when it hands the book to her.
As we’ll see, almost everything in economics which increases one person’s RNW decreases someone else’s by exactly the same amount. Unless someone is producing or consuming something, all of economics is a zero-sum game.
Most of the errors (or deceptions) in economics involve the false claim that wealth can be created at the stroke of a pen: that without producing anything, one person’s RNW can be increased without another person’s RNW being decreased by the same amount.
Welcome to a journey of discovery, where you’ll learn how not to be conned by politicians, economists and activists.
Even though it’s a bit of a mouthful, and an awkward phrase, technically it describes the idea quite well, and it’s the best I’ve come up with so far. In any case, the most important thing is the idea, not the name we give it.