You can’t accurately describe how complicated the global economy is.
There are more than 200,000,000 businesses in the world. Three-hundred trillion dollars of financial assets. Eighty trillion dollars of GDP. Almost 200 countries, thousands of cultures and norms. With seven billion people, a rough calculation shows there’s about two tons of pure serotonin careening through the global economy at every moment. Economists try in earnest to model all of this in Excel.
Wrapping your head around the global economy – predicting recessions, bubbles, GDP growth and the like – is nearly impossible. There are too many moving parts. But that doesn’t mean we should give up trying to understand it. It just means we should keep things broad and simple.
One of my favorite quotes is from John Reed, who writes in his book Succeeding:
When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.
This is so applicable to economics, where there are infinite details but a few core principles that explain a lot of what’s going on. Here are five I often think about.
Most of what’s now awesome came from something that was once miserable. Capitalism solves problems, and nothing motivates people to solve problems like hardship. We don’t discover new oil-drilling techniques when oil prices are low; we do it when prices are high bleeding consumers dry, incentivizing anyone who can solve the problem with a sense of urgency. Same with medicine. The only reason we’re vaccinated today is because we had urgency to solve problems that were once killing tens of thousands of people. Uber and Lyft weren’t created to be part of the taxi system, but to fix an endlessly frustrating one. No one cheers for hardship and suffering, but we should recognize that it’s the most potent fuel of problem-solving, serving as both the root of what we enjoy today and the seed of opportunity for what we’ll enjoy tomorrow.
Success has a target on its back and a bounty on its head. Capitalism can’t stand outliers. It’s constantly looking for standout successes to dismantle and shove back to the boring world of mediocrity. High profit margins attract competitors. High salaries attract more workers. Bubbles and bull markets attract self-destructive behavior. Popular products attract imitators. Capitalism’s job is to ensure no one is ever comfortable. If you’re below the top, you’re clawing up at competitors. If you’re at the top, you’re pushing down on them.
Every successful business must eventually appease customers, employees, suppliers and shareholders. Many business models address one or two of these stakeholders – say, an awesome product that’s not commercially viable, or high margins that come at the expense of exploiting workers. You can get away with that for a while, but the bill eventually comes due. Everyone has a breaking point where they say, “enough.” The common denominator of long-term successful businesses isn’t a great product, a decent place to work, high shareholder returns, or a strong supply network. It’s the presence of every one of those, even if none individually are top of their class.
People desire control over their time more than almost anything. This is true of consumers, whose tastes in fashion comes and goes but whose desire to not wait in line or waste a weekend getting their car fixed is timeless. It’s true for employees, most of whom want to work hard but question everything when they have to miss their son’s baseball game. It’s true for businesses, who want to take long-term risks without shareholders waving a ticking clock in their face. Few things are universal and timeless, but the sting of feeling like someone owns your calendar is one of them. Find a way to give people more control of their time and they’ll beat a path to your door. This was true 100 years ago and it’ll be true 100 years from now.
People resist change; economies resist stability. A good rule of thumb from history is that the longer a boom or bust lasts, the stronger the forces are building up against it. There’s a reason for this: Booms cause people to discount room for error, while busts cause people to stockpile it. But people don’t think like that. We have short memories and poor imaginations, so the most common economic forecast of what will happen next is extrapolating whatever happened last. Bear markets breed pessimists, bull breed markets optimists. Consumer confidence peaked in 2000 and bottomed in 2009. Long-term government budget projections were staggeringly optimistic in 2000, and equally depressed in 2010. People forecast in straight lines, but markets push back against things attempting to stay the same, instead preferring cycles, waves, and new paradigms.
Which is what keeps things interesting.