Economics: Production and Distribution

Building an Economics View:
The Purpose of the Economy
Problem-Solving Mindset
Production and Distribution
Motivations and Incentives
Inequality

At the beginning of this series, we stated the purpose behind economics: to provide as many people as possible with their basic needs so that they are free to pursue lives that are meaningful to them. In Economics, there are two major processes, production and distribution. It is very common in economics arguments for people to fixate on just one of these, and ignore the other. However, both are essential for a successful economy.

Without production, there is no economy at all. Everyone starves, and everyone sleeps in the rain. Production is often measured by a country’s gross domestic product, or GDP, which is roughly the amount of money spent within a country during the span of a year, adjusted for inflation, as well as some other factors. More useful is the GDP per capita, which divides the GDP by the number of people living in the country. Of course, production and money are not the same thing, but in general, people spend more when production is high, causing the GDP to go up.

However, if we only focus on production and ignore distribution, we get large inequality, with most of the wealth that is created piling up in the hands of a powerful few. Of course, some level of inequality is inevitable, because some people are lucky, and some people make wiser choices. But when inequality gets so great that it prevents people’s needs from being met, or it prevents people from being able to pursue meaningful lives, the economy is not doing its job. So while it may be tempting to say that a high GDP per capita means more prosperity for all, that is not necessarily true.

On the other hand, it can also be tempting to look at the inequality in the world or the country, at the fact that there are both millionaires and poverty, and conclude that we have already produced enough, and distribution is all that matters now. But focusing only on distribution and neglecting production is unsustainable. The reason people get rich is very often because they contribute a lot to production. If we take money and goods from those who contribute a lot to production, people will feel less incentive to produce. If we don’t produce, we will run out, and have nothing left to distribute.

For an economy to work in accordance with our values, we need to take into consideration both production and distribution. So how do we do this? What are our options for the means of production and means of distribution? Here are four that I thought of off the top of my head:

1. The means of production are owned by individuals and corporations, and the means of distribution is the market.

2. A central authority, such as the government, coordinates production and/or distribution.

3. People produce and distribute voluntarily.

4. The means of production and distribution are automatic and run by artificial intelligence.

While reading this list, it’s possible that one of the options jumped out at you as the obvious right answer. It is also possible that I missed something. However, what looks true at first glance is not always the real truth. Remember what we talked about last time in the series; we are looking at this from a rational point of view, not an ideological one. Each of these options has things they do well, things they do poorly, and things they ruin. The real question is what balance of these four things, and any others I may not know about, an economy should have. Gaining knowledge to answer this question more wisely will be our focus in the future installments of this series.