Back in 1776, Adam Smith talked about the “invisible hand” of the economy. Investopedia explains how the invisible hand works as, “In a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large.”
We talk and act today as if governments and economic policy are what make the economy behave as it does. Unfortunately, Adam Smith was right; there is an invisible hand guiding the economy. Today we know that there is a physics reason for why the economy acts as it does: the economy is a dissipative structure–something we will talk more about later. First, let’s talk about how the economy really operates.
Our Economy Is Like a Self-Driving Car: Wages of Non-Elite Workers Are the Engine
Workers make goods and provide services. Non-elite workers–that is, workers without advanced education or supervisory responsibilities–play a special role, because there are so many of them. The economy can grow (just like a self-driving car can move forward) (1) if workers can make an increasing quantity of goods and services each year, and (2) if non-elite workers can afford to buy the goods that are being produced. If these workers find fewer jobs available, or if they don’t pay sufficiently well, it is as if the engine of the self-driving car is no longer working. The car could just as well fall apart into 1,000 pieces in the driveway.
If the wages of non-elite workers are too low, they cannot afford to pay very much in taxes, so governments are adversely affected. They also cannot afford to buy capital goods such as vehicles and homes. Thus, depressed wages of non-elite workers adversely affect both businesses and governments. If these non-elite workers are getting paid well, the “make/buy loop” is closed: the people whose labor creates fairly ordinary goods and services can also afford to buy those goods and services.
Recurring Needs of Car/Economy
The economy, like a car, has recurring needs, analogous to monthly lease payments, insurance payments, and maintenance costs. These would include payments for a variety of support services, including the following:
- Government programs, including payments to the elderly and unemployed
- Higher education programs
Needless to say, the above services tend to keep rising in cost, whether or not the wages of non-elite workers keep rising to keep up with these costs. Continue reading