Even if we don’t understand all of the details, we’re familiar with how the economy works. People earn money by working, they spend that money on goods and services or invest it in businesses. In either case the majority of that money received by businesses goes towards paying wages, purchasing capital, and paying various forms of rent and leases. This circulation of money around goods and services and the infrastructure that supports it is what most of us think of when we hear the word “economy”.
There’s another economy, though; one that doesn’t revolve around goods and services. An economy that doesn’t require much in the way of infrastructure. This second economy doesn’t build anything and doesn’t perform services, and yet it still circulates hundreds of trillions of dollars. The second economy is the economy of finance. It’s all about moving money around, lending money, and insuring assets. We usually hear about it when we hear words such as “derivatives” and “hedge funds”. It started out as a way of making the business process more efficient, but over time it became a self-sustaining playground for those who feel that their pile of money isn’t big enough.
Since the second economy creates nothing, it is a zero-sum environment. Almost all increase in wealth occurs at the expense of others who participate in the economy. Anyone who deals with it recognizes this nature, and the zero-sum philosophy leaks into everything.
You’ll notice I said almost all increase in wealth. How does an economy come into existence if nothing within it is ever created? There’s a trick to it, and this trick explains the faulty logic behind giving money to the wealthy as “job creators”. All of the money in the second economy was pulled from the primary one at some time in the past.
When wealthy individuals receive money, their natural tendency isn’t to spend it — it’s to use it to make more money. This means they have to invest it. They get the choice of investing it in the economy of goods and services or investing it in the economy of finance. When the main economy is in poor condition, it reduces the return that can be achieved from investing in it, which increases the attractiveness of the financial economy. Investing in the financial economy pulls money out of the primary economy, further weakening it. This process continues until the primary economy tanks and goes into a recession.
The upshot of this is that, when the primary economy is weak, any extra money that goes to the wealthy is mostly directed into the financial economy, not the primary one. If that money is pulled from the primary economy — which the government is part of — it only serves to further weaken this economy.
The relationship of the two economies can be best understood if we think of them as organisms. Human labor is the energy that feeds and drives the system, much like sunlight is the energy source that feeds plants. Herbivores get their energy from the plants, the carnivores take energy from the herbivores, etc. In this model, we could consider employees to be the grass — the initial energy generators — putting businesses in the role of the herbivores and the business owners in the role of the carnivores. At this point the analogy breaks down, because in a perfect analogy, the carnivores, herbivores, and grass would all shed sunlight back onto the grass. This is equivalent to spending and business investments.
The financial economy feeds off of the goods and services economy without completely consuming it. The biological term for this behavior is “parasitism”. From here, we can make a few observations. There are many, many kinds of parasites. Some of them are a nuisance, but not actually a problem. Many cause serious but not life-threatening diseases. A few completely take over the host organism and drive them to their doom. The parasite economy falls somewhat short of the worst case. Those who operate it and benefit from it most definitely exert strong control over the host economy, but they know that they have to keep it somewhat healthy in order to continue feeding off of it. This results in a careful balancing act in which policy shifts back and forth between letting the host keep its energy so it can grow, and siphoning off more of the energy so that the parasite can grow.
Based on the current trend, the end goal appears to be to produce the weakest host (the primary economy) that can continue to feed the parasite (the financial economy), such that the host has the least possible amount of control over its own path. Having reduced the host to a helpless automaton, the parasite would then be able to feed indefinitely off of a host that has no interest in attacking it, and may even consider this parasitism to be the natural state.
Robert Rapplean is a compulsive autodidact who was ejected from Machiavelli’s School for Evil Geniuses due to his unfortunate penchant for attempting to save the world. When he’s not earning money writing software, Robert studies economics and artificial intelligence, plays Rock Band, and designs his not-so-evil robot army.