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It’s the net that matters — not necessarily the desire for fish

What Bermuda's economy needs: A new fishing net

I recently watched an online video commentary by Brian Wesbury at First Trust on basic economics (links to the videos below). What struck me about these pieces was their elegant simplicity in summarising what many would consider complex economic aspects. At the end of the day there are two basic economic trains of thought: demand side economics and supply side economics. I’ll summarise each briefly and then end with a great story to narrate my own preference for supply side economics and minimal government involvement.Demand side economists, or Keynesian economists, believe that demand, or consumer spending, is what drives the economy. Basically the buyers support sellers who in turn support workers that buy things. Circular for sure but the concept is simple. If there is no demand for goods then there really is no reason to produce anything. Therefore, Keynesian economists believe the government needs to step in when the consumer won’t spend in a recession or economic slowdown. Government fills the void left by a drop in demand from consumers and in turn helps to stabilise the economy.Supply side economists, or those that follow the teachings of Jean-Baptiste Say, believe that supply creates its own demand. New products and ideas drive the economy. If you build it, they will come. Often, as consumers, we have no idea what we want. It is the entrepreneur or the creative company that comes up a product, an idea or a new way of doing something that actually makes the consumer crave something that until recently we did not even know that we wanted. Take for example the iPad. In the 1970s no one was marching around demanding a tablet computer. In fact it’s likely no one even had the idea for one. But once Apple perfected its design and function demand took off which led to revenues and profits and a contribution to the economy in numerous forms. The world has changed because Steve Jobs and Co invented something, not because people wanted this something to begin with.The problem with government involvement in economies is summarised in a story by Paul Zane Pilzer called “The Parable of the Fish” and eloquently summarised by Brian Wesbury:“Imagine ten people live on an island. Each person catches two fish every day, which is subsistence living. There are no savings. Children, or immigrants who do not know how to fish, would be hard to absorb. The people would be desperate to increase production. But then, a miracle happens. Two of these people figure out how to make a boat and a net.“They fish 200 yards offshore. The two of them catch 20 fish each day with this new technology, which replicates the daily GDP created by all ten using the old technology. At this point, eight people no longer need to fish and the island has a choice. The eight could grow corn, pick coconuts, fix the boat and the net, or trade some other good or service to their more productive neighbours. Living standards would rise. Abundance and plenty would be created. Children and immigrants could be absorbed.“Or … the eight without a boat could become envious and complain that a ten-fish-to-2 fish income ratio is unfair and that the rich fishermen should pay taxes. So, the island votes to institute an 80 percent tax on anyone that uses a net. Let’s assume that the fishermen with a boat continue to catch 20 fish a day. If so, the other eight would stop fishing and divide up the 16-fish tax between them. Everyone would still get two fish a day. Living standards would not rise. Kids and immigrants who did not know how to fish would be a burden. The benefits of the new technology would go to waste.“This is the problem with attempts by the government to be fair and socially just. This is also the problem with trying to spend our way out of economic pain. It doesn’t work. And even if we decide not to tax the fishermen, but instead borrow the fish and give them away, the same thing happens. Borrowing the fish, and then consuming them, does not create new wealth.“It only puts a burden on the less productive that they will never be able to repay. This is what has happened in Greece and many other European countries. Government spending, whether paid for with debt or with taxes, undermines job growth and wealth creation.”I think we can all learn plenty from this simply story. Bermuda can’t continue to borrow its way forward. In doing so, we simply sell our future piece by piece. We also need to acknowledge that governments do not create jobs. They can foster attractive environments mainly by “getting out of the way”. True economic prosperity and growth in Bermuda will only develop when someone invents a new net to catch fish.Video links:http://www.ftportfolios.com/Commentary/EconomicResearch/2013/8/14/keynesian-fallacy---part-ihttp://www.ftportfolios.com/Commentary/EconomicResearch/2013/8/15/keynesian-fallacy---part-ii