The economy is not a machine. We tend to have that model in our heads, a bunch of interlocking parts working in harmony – or disharmony when things are bad – the ever shifting gears our economy.
But what is the economy really? Since money drives the economy, the answer isn’t as simple as we might think.
The reason is that money is an illusion. It’s a shared illusion, so it has power in the tangible world, but it is an illusion nonetheless.
A piece of paper with some writing on it only has value because enough people believe it has value.
It follows that if money is a shared illusion, then the “economy” is an illusion too.
Scott Adams – the creator of Dilbert and the most accurate political pundit of 2016 (he predicted Trump’s win over a year ago) – has pointed out that since Trump’s win the US stock market has surged to record highs.
He makes the point that this surge is based on the fact that the economy runs on optimism, and Trump has promised big things for the economy.
Says Scott, “Optimistic business owners invest today because they expect tomorrow to be better. That investment creates jobs and stimulates the economy, creating a self-fulfilling path to prosperity. Individual companies can fail and succeed as usual, but the economy as a whole is likely to do well when optimism is high.
Scott adds that, In the ancient world, the big problem was resources, not optimism. You didn’t always have access to raw materials, the right kind of labor, or markets. But in 2016 we can generally find anything we need and move anything to anywhere. The physical element of economics is largely solved. All that matters today is how we think about the economy. That’s the key element.”
This points to a completely new way of thinking about leadership and economic growth.
Here in Canada, we’ve been told by the finance minister that growth is expected to remain low for at least half a decade.
At the same time, the government is planning to force through a carbon tax.
Regardless of the technical truth or merit of those statements and ideas, they have the effect of damaging the shared illusion we have about the economy.
If we all agreed the economy was going to grow and we would have more money in our pockets, that optimism would grow the economy.
If we saw a future of innovation and boundless opportunity, that shared illusion could be made into tangible reality.
But instead, our leaders promise a future of low growth, and propose new taxes that will cause people to worry about their spending power eroding.
This is creating a negative economic illusion, which will bring that negativity into tangible reality.
So what can be done?
We all understand that leaders can’t just promise 50% yearly economic growth – nobody would believe it. But shifting expectations from 1% to something around 4% is very doable.
It requires less of a cold and analytical mindset and more of a sales-mindset. Economists have done a great job telling us why the economy is struggling, but not so much in terms of fixing it.
That’s because it’s an emotional issue, not just data and analysis.
If people feel more hopeful and optimistic, the economy has a better chance of growing. We can make our shared economic illusion better for all of us.
All we need to do is think about it.