(noun, etymology Dutch from ‘boedel’: estate, possession, inheritance, stock.). 1. Crowd, pack, lot, as in ‘the whole boodle.’ 2. a. Counterfeit money b. Money acquired or spent illegally or improperly, particularly when used in bribery for political purposes. 3. Slang for money in general.

The Big Buck Theory

Posted on: Apr. 17, 2012  |  By: Ronnie Kahn  |  Category: Boodle-cise, General

Knowledgeable Pinheads and Sneaky Pickpockets make the Economic Universe

Let’s go back to the beginning…the very beginning.  All matter was gold until the great explosion sent gold pieces hurling into deep space.  When the stars and planets formed though they were not just made of gold and land but combined with labor and capital.  And so the Economic universe was created or at least a model of that universe was created which is what economists do, they create models.  Somehow though, it seemed as though the cosmos was expanding and contracting at the same time.  How could this be?  Was this just a matter of perception?  Was it just a case of glass half empty versus glass half full?

Why are some persons, some parents, some businesses, some governments, and some countries successful while others languish or flounder?  Let’s be clear and define success as efficient production and not get hung up by getting into things like who makes the most money and those who use force to get their way and so on.   It can be argued that there are those with money or power that have unfulfilling lives which could be considered a criteria of success.  The score evens out on things like this eventually anyhow.  Ideally, successful parents produce children that will make for caring individuals that make for better citizens, better workers, better parents, and hopefully a better planet.   Ideally, successful businesses produce products and services that will be cheaper, make life easier and safer, and also hopefully make for a better planet.  If we attend a high school reunion, you have probably played a guessing game beforehand at who would turn out to be successful.  There were sharp go-getters and so forth that you felt were destined for good things back in the day.  We are probably shocked though when we fast forward to today to find that while fortune has smiled on some of those early movers and shakers, most have seen their gains come in the form of pounds and the closest thing to money they will get to in the future is to having a safe dropped on them.  On the other hand, there were the nobody’s who became wildly successful and yet seemed to have nothing going for them back in school days.  Success seems like some stardust fell from our economic universe as there seems neither rhyme nor reason as to who makes it and who doesn’t and what traits make for success.

Your criteria in the guessing game as for why these persons would make it big might range from that they were the smartest, most motivated, most aggressive, most competitive, most talented, most creative, started out with good connections and had lots of money in the first place.  These are all traits that can give you a leg-up but obviously don’t guarantee success alone.  Not everyone who goes to a prestigious college ends up successful.  Those who are born to money can be clueless in how to use it.  Those who are creative may never get noticed.  Those who are competitive have to have something special to compete over, and so on.

Everyone makes a model of their economic universe that is built on their experience with the world along with what they were taught, their values, and the lessons they learned, both hard and easy.  That model may make the world into glass half empty or full but either way, we fit our decisions and choices into the model.  Our model may make us go to grad school, start a business, refuse to work for someone else, try and work our way up the corporate ladder, drop out, work for a non-profit, have a career where we help others, and so on.  Early on in computer technology, software was something that a company paid for by billing it out to those who would customize it for their business.  Bill Gates’ model was to charge a royalty by having someone pay for being able to include their software on a computer.  He changed the way the model worked.  Gates’ model included keeping the source code of this software proprietary to his company while the Linux model, an alternate operating system, is an open source model where everyone could share in improving it.  Even though Gates’ Windows operating system is almost a universal, nowadays it not only loses market share to Apple but even greater of a threat is the Internet.  Just like Microsoft replaced IBM as top dog, it seems inevitable that Google has or some other rival will eventually replace that Microsoft model.

Do you think the world will keep getting better or will we drive ourselves into the ground?  The media loves a doomsday scenario.  Whether it was Population explosion or then Nuclear Explosion, like money, the portrayal is that everything we have worked for can be taken away from us in the blink of an eye.  Now, we still have the nuclear threat but it’s from a rogue state or individual rather than the Cold War.  We have to add to it though the threats of pollution, ozone depletion, dying bees, and being struck by a meteor, etc.  While all of these should not be ignored, the question that comes to mind is can we fix the ones that we are in control of before they get us first by inventing new technologies to rescue us?

The reason the economic universe appears to be expanding and contracting goes back to the King of our Economic Universe, Adam Smith.  Most of us by now have heard of the metaphor of the Invisible Hand.  The idea is that by each person pursuing their own interests, they will actually unknowingly promote the interest of society as a whole which, in turn, brings all things like prices into equilibrium.  Even in situations of monopoly, government regulation, trade unions, or trade secrets where one company will have a significant price advantage, eventually this invisible hand will return prices to a natural state.  One firm tries to raise prices and another will sell at a lower cost.  Since the hand is invisible, it is perfectly suited for picking ones pocket.  Costs go up while returns go down which means the universe is contracting.

On the other “hand,” quite on the other hand, you have Smith’s idea of a pin factory.  If you are the first company to make a product, like pins, than you are the first to make money before anyone else.  After a bit, you start to buy machines to make more pins in less time and costs start to get lower.  Then you find ways to specialize in different types of pins and production becomes more efficient which can then allow you to lower prices making it even more difficult for new competition to take hold.  Now we have a case which is the polar opposite of the hand as we have costs going down while returns go up which means the universe is expanding.  [If you saw Annie Hall, this is why little Alvy won’t do his homework]

So what is your personal model of the world?  Is the universe expanding and things keep getting better or is it just inevitable that a black hole will suck us all up?  You may think this is all psychological or just some way of looking at the world positively or negatively but when it comes to economics, we need to fit a plan into a model of our making if you expect there to be a world for you, or possibly your offspring, to live in.  In a case of the hair of the dog that bit you, our decisions as to where the economy is headed affects and alters where the economy is headed.

There is an answer to the expanding-contracting dilemma.  It equivocates a little but there are certain contexts where each can be right.  If you want to be successful, there is also an answer as to what you will need to do in order to get there.  As you may have guessed, the two answers are tied together.  The answer is about how we use and process knowledge.  For certain companies, they have a certain know-how, a certain quality of worker, a sought after product or service, and/or a certain proprietary knowledge that gives them an advantage.  Unless you are a pinhead, we are speaking of the Pin Factory.  This will keep you on top but for how long?  If you are to stay on top you will have to adapt.  That is what company’s do all the time.  They change their products, their image, and spend money on research and development to gain new footholds.  Eventually, though, they will lose market share and eventually they will most likely be replaced at the top of the heap.  This means the invisible hand is at work.  What happens is that certain types of knowledge start becoming more widespread and universal.  At the same time, as the world changes and new technology comes along, such as the steam engine or internet, these new memes become the new paradigm.  This causes upheaval and new companies are born and old ones fail to adapt and die.  New technologies create new opportunities that didn’t exist before.  This is why there are a million future entrepreneurs today trying to develop the next mobile phone app like the Gold Rush of old.  Things keep changing and things keep improving as new ideas and inventions are developed.  With new knowledge, the universe keeps expanding, evolving, and progress flourishes.  In the long run, the Universe keeps expanding.  New pin factories come into existence.

So what can you do to be successful?  Those individuals, like companies, that thrive will be the ones at the forefront of knowledge and learning and then each must find a way to develop that knowledge.  The key is the difference between information and knowledge.  Information, like the internet, is just all those known bits of things that float around us.  It is someone or something that will take that disassembled information and then reassemble it in such a new way as to create knowledge.  It is a new way of looking at something in a new changing world.  We need to make a new model.  It is no secret that the more you learn; the better you will be, as an employee, a business owner, a person, or a parent.  Not only that, the best chance you have at finding knowledge is to put yourself in such a situation where new information and shared information is fertile and flowing.  Knowledge and growth are social and that is where the economic advantage of our universe lies.  Shared and collective knowledge, what the economists call nonrival, keep producing and building new knowledge which creates technological change which keeps our universe expanding.  If you are in a country, a school, a business, or an environment where seeds are being planted, then growth will occur.  If your soil has been drained of nutrients, you can expect a dessert on a dying planet as the likely consequence.

Exercise:  What is your model of the world and does the world fit that model or do you make your world fit the model?  How does your model affect your choices and decisions?  Is there a way to look at the information around you and create new knowledge with it?

 


For a good history of economic ideas and the invisible hand versus the pin factory see David Warsh’s Knowledge and the Wealth of Nations: A Story of Economic Discovery, W. W. Norton & Company 2007.

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