Drafted: June 10, 2020 (I have been meaning to publish this for a while – better late than never)
Introduction
Most economic theories focus on why certain economic systems are better than others. Few, however, step back and ask, “What are the characteristics that could make a system (any system) run indefinitely? And what leads economic actors (i.e. individuals, families, NGOs, companies, governments, and countries) to poverty versus prosperity?” Here is a possible framework to answer these questions.
Interchangeable Terms
The first step involves recognizing that certain terms are interchangeable. GDP, revenues, sales, salaries, or wages, for example, all mean the same thing and are top line metrics. GDP applies to a country, while sales and revenues apply to a company, and salaries or wages apply to an individual.
Additionally, profits, cash flows, savings, and surplus are also interchangeable terms and are bottom line metrics. Profits and cash flows apply to companies, savings to individuals or families, and surplus to governments or NGOs. Operationally there are negligible differences, as each term means there were resources left over after covering costs and expenditures. These bottom-line metrics also mean there has been some return on capital and or time invested.
The road to poverty is travelled when a family, company, or government invests their resources in a manner wherein they cannot recoup their principle or generate a return, or when expenses consistently exceed income. Over the long run, families must save, companies must profit, and governments must run a surplus to thrive. To do otherwise is unsustainable, and “workarounds” like a government printing more money or a company issuing more shares have ugly consequences that do not result in greater wealth.
Ideally, an economic actor will not only generate a return, but will generate the highest possible return while preserving principle. This is not an easy balancing act, however, given the risks that can be involved in maximizing the bottom line and the unintended consequences associated with possible environmental depletion and alienation of other economic actors (i.e., potential trading partners, employees, customers, etc.).
A Natural Cross Check
A good cross check for this proposition is the natural environment where living organisms are engaged in a profit and loss endeavour. For an organism to reach sexual maturity, its resource intake needs to exceed its body’s energy requirements. If it cannot do that, it starves, dies, and does not grow to reproduce. Growth to maturity and survival as an adult are the result of a calorie and energy surplus in excess of their body’s operating requirements; in other words, a profit or savings.
No Escape
The second step involves recognizing that the need to generate a profit applies to all economic systems. It applies to capitalist, crony-capitalist, socialist, national socialist, and communist systems alike. Once again, a good cross check is the natural environment. Just as the food chain (or web) applies in the ocean, on land, and represents a constant life must abide by, the need to preserve and generate a return on capital is a constant all economic actors and systems must abide by. There is no escaping the food chain by fleeing to another environment, and there is no escaping the need to generate a return on limited resources by adopting a different economic model.
The Holy Grail
Turning losses into profits converts capital from a non-renewable to a renewable resource. This applies to countries, companies, NGOs, families, and individuals alike regardless of whether their economic system is capitalist, communist, or something in between. Moreover, it applies regardless of the economic actor’s geopolitical aspirations, end markets, or cultural background. Turning any resource into a renewable one is incredibly powerful. In the case of economics, morphing capital from a non-renewable resource to a renewable one represents the topic’s Holy Grail.
