June 2020 – Perspectives of a 92-Year-Old Economist

Having a surplus is an essential component in the creative process. To bring an idea to fruition a surplus is necessary. Moreover, the greater the amount of surplus that is devoted to higher priorities, including additional consumption, the less of it is available for cr Canva - Creative young ethnic craftsman working with screen printing in workshop eative ventures. Not only is that true for a novel work of art, it also applies to any invention or innovation. For more about the creative process see my blog post entitled “Creativity: Ideas, Invention, and Innovation”. It makes no difference whether we are talking about a new product, a new process of production, a new way of getting products to consumers, a new work of art or any other new, novel concept.

Let’s begin by looking at works of art. It is important to realize that a surplus is required before any work of art can be created. That is because the artwork is not part of the goods and services the artist uses up daily for current consumption. On a daily basis survival, along with one’s other priorities, comes first. Moreover, the materials, equipment and supplies that go into making the work of art come out of surplus as well. An essential element of the creative process is that there is no guarantee ahead of time that the idea will ever come to fruition. Regardless of whether it does or doesn’t, the person who comes up with the idea must use some of their limited TERF just to survive and to fulfill any obligations and commitments that they have taken on. That takes priority over all else. Continue reading “Surplus: Creativity” →

Canva - 20 Us Dollar Bills Having a surplus is essential to creativity. Without a surplus there would be no new products or new processes of production, some of which can lead to lower costs and prices.

Typically when we think of “efficiency” we imagine that the product was made in the simplest, most direct, least expensive way — avoiding any waste. Certainly, new products and processes of production can be more efficient than the old ones.

However, that is part just of what we, as economists, mean when we talk about efficiency. When we call a society efficient there is a second and very important component: that the society produces the mix of goods and services that the people want most at a price that just covers the cost of production.

While the existence of a surplus makes that possible, it also creates circumstances that make it less likely. Surplus puts money into the hands of the innovators — both the companies and those at the upper-end of the income distribution. They can use that extra surplus to reinforce a company’s market position and promote the recipients political agenda. When the innovation is widely adopted the significant addition to surplus makes that outcome more likely. It reminds me of the old adage ‘Money talks’.
Let’s take a closer look at how the increased surplus can lead to greater inefficiency.

Initially there is strong incentive to inform potential customers about the new product and to get it to market as soon as possible. Other considerations fall by the wayside. The Boeing 737 Max is an example. Effectively the company took over the government’s role and responsibility for ensuring plane’s safety.

Continue reading “Surplus: Inefficiency” →