Importance of Producing Stuff

Atanu Dey writes:

Stuff matters. What is stuff? Things that you find, things that grow, things that you produce, and so on. At the very bottom of the structure of any economic system is stuff. Economists call it goods.

Stuff is produced using land, labor, and capital the factors of production. Advanced industrialized economies use relatively more land and capital (and use them more efficiently given that they have advanced technologies) and relatively less labor and produce a lot of stuff. The average amount of stuff available is therefore high because they have fewer people to divide the stuff among. So they are rich. They are rich not because they have more money, but because they have more stuff per capita. Since they can produce a lot of stuff using less labor, all of the labor is not employed in producing stuff and so the surplus labor can produce services. and the labor involved in services can be given a share of the aggregate production of goods. That share is called income. And this income is denominated in monetary terms. Money, in this case, is for facilitating accounting of the stuff produced and who gets how much. If you don’t have stuff backing the money, it is useless. That is, handing out money to people does no good unless there is some stuff behind it all.

Production of stuff matters. That labor is required to produce the stuff is an unfortunate fact of life so far at least. In a perfect world, robots would produce stuff and people would be unemployed, free to compose music or watch the grass grow or whatever. In the imperfect world we live in, we have to use labor to produce stuff. But the less labor we use to produce stuff, the better off we all are with the obvious caution that we have to distribute the stuff equitably, of course. But the problem of distribution only arises after we have produced stuff. If little is produced, little can be distributed on average and therefore on average we will be poor. Distribution is a less taxing problem than production.

Now here is the point that I am building up to. If an economy produces a heck of a lot, and yet a significant percentage of the population is poor, then we know that there is a problem of distribution. In that case, we can improve the situation by a better distribution through transfer of stuff to those who are poor. But if the aggregate production of stuff divided by the total population is a small number, the economy will be a poor one irrespective of the distribution. Merely taking from Peter to give to Paul makes no difference to the aggregate amount of stuff available.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.