the solid foundation underneath

I know that many of us are having a difficult time mustering faith in our economy. With your permission I would like to talk about the solid foundation lying underneath the economy.

In order to do that though I need to make sure that each of us understands what the economy really represents. For most of us, the economy is a very abstract thing and if asked to define it I feel that most of us would have difficulty in describing it. I am a big believer in boiling things down to their simplest components, so here goes.

The economy is a description of all of the resources that people are using in the course of their lives. As you know, these resources are very diverse, from lumber, to steel, to silicon, to cars, to computers, to horseshoes, to a particular understanding about a specific disease, to movies, to that great idea for a business you have. In an economy we take the raw materials available to us, change those resources in a particular way to make something new (e.g. manufacturing of a clock, printing of a newspaper, etc.), and then we offer it for sale.

So when we speak of economic growth, it is a measure of our ability to take raw materials and turn them into something more valuable than the sum of the parts. This is a somewhat magical process, and to my way of thinking it is a literal act of creation. Economic growth therefore represents a way of either getting more from the same set of resources, or getting the same from a smaller set of resources. Does this make sense? I hope that it does.

So for us to completely lose faith in the economy then it means that we need to lose complete faith in people’s ability to find new ways of solving old problems. Alternatively, a complete loss of faith in the economy requires a complete loss of faith in people finding better ways of doing something. I think that this is a pretty steep criteria to be met, wouldn’t you agree?

What all of this means is that there are always things out there worth investing our time, energy, and resources in, because you, me, and everyone else is endeavoring to improve their lives to the best of their abilities. This is the solid foundation that lies underneath every economy.

This does not mean that there are not large structural problems in the economy out there to deal with. Instead, it means that it is very likely that the economy will be bigger in ten years than it is now. Unless an asteroid hits, of course ; )

I have gotten a lot of e-mails from folks in the last week or so that have plainly stated that they are feeling scared by what is happening out there. There is tremendous uncertainty to be sure. It’s is my feeling that uncertainty is rooted in an intuitive sense that our old institutions, old ways of doing things, and old ways of solving problems are not working to solve our current problems. To the core of our being we are each wondering what we can rely upon because we feel a void that seemingly cannot be filled.

The answer to all of this is the innate ingenuity of people that I described above. The current crisis that we are experiencing is a GIGANTIC opportunity for new institutions, new ways of doing things, and new ways of solving problems to come into being. The void will be filled with an initial solution and it is our nature that this solution will make us feel somewhat more comfortable, not entirely eliminating our fears. As time goes on, more and more innovation and improvement on the initial solution will be added. In time, the result will be a new paradigm, new confidence, and a restoration of the economy.

Let’s keep believing in ourselves!

Jason

PS – The primary structural imbalance in the economy was that mortgages were priced too low to compensate for their risks. In effect, free money was being given away. Time after time, history has taught us that when things are priced too low that bubbles are created, and then they are popped by the needle of reality.