If you are reading this because you were attracted by the sleazy movie poster, be patient. I’ll get to ancient Egypt in a moment.
If you are one of the perspicacious few people who have read my book, and you have some knowledge of various schools of economic thought, you recognized that my system is based upon Austrian Economics (“AE”).
AE favors free markets and opposes government intervention in the economy. Its most famous historical proponents include Menger, Mises, Hayek, Hazlitt, and Rothbard, and present day advocates are either associated with the Mercatus Center, the Mises Institute, and other think tanks here and abroad, or are independent writers of blogs and substacks.
Because the book is aimed at a general reader rather than academic economists, I didn’t mention AE, but that is the base upon which I have added many new (as far as I can tell) ideas. Those are not yet part of AE, but could and should be, I believe, because they make the case for free markets even stronger.
I plan to write a piece soon that puts all my new ideas in one place, but in the meantime, I want to write about two of them that in combination explain cause and effect in the economy in a way you may not have considered. This post describes the concepts, and the second part will show how they play out today in multiple ways.
GDP vs. Living Standards: We should abandon GDP as something we want to maximize. It is a fine measure of overall activity in a society, but activity per se isn’t what anyone actually wants. What people universally desire is a higher living standard, which is our ability to get what we want, whatever that may be. Economic activity that doesn’t help living standards hurts them, even as they add to GDP, because despite having no benefit they have a cost which someone must pay.
Your living standard depends not only on your income and savings, but also on the cost of what you want. Both higher income and lower prices increase living standards, with the latter better because the government taxes higher income more heavily, but not discounts at all.
Changes in either have a much greater effect on the poor and even many middle income or above people, who might spend 98% of their incomes maintaining what they believe is a minimally acceptable living standard for themselves and their family. That leaves 2% for savings or the things that bring in some pleasure - dinner out, a movie, going to a ball game, or anything else enjoyable. Let there be 2% inflation and this person will have lost 100% of the part of life that makes it fun.
The rich, on the other hand, have the reserves to float by with no effect on their living standards by anything other than a major change in income or prices. This different effect works in both directions. It is the reason why rising productivity from business investments going on in free markets at all times, which push up wages and press down prices, helps the poor more than the rich, contrary to what most people think.
How can I claim that economists ignore living standards? Very easily. The stated policy of the Fed and every other central bank in the world is that the ideal target is 2% inflation. When it was below that, the Fed adamantly wanted it higher. Almost no economists see anything wrong with inflation, because their eyes are fixed on GDP. They don’t understand how inflation is deadly to the living standards of the poor. What we should want is what we had all through the 1800s except during the Civil War, steady price decreases from rising productivity which enhanced living standards.
The Pyramid Effect: In this concept I’m not talking about pyramid schemes, but actual Egyptian pyramids, 118 of them constructed starting about 2600 BCE and continuing for about 2000 years.
The more we learn from finds of papyri and archaeologic digs, the more it is clear that the pyramids were not make-work projects to give unemployed ne’er-do-well relatives of politicians something to do, nor were they built primarily by slaves as we might assume from Bible stories. Their construction was a massive, nationwide effort, involving some large percentage of the country’s most skilled craftsmen, architects, engineers and managers. The refuse pits of housing where they lived near the construction sites showed a diet similar to what we know the royals ate, indicating just how important these people were.
When a pyramid was under construction, which was most of the time, the country’s economy was on the equivalent of a war footing, with much of the population working on the project one way or another. Activities included mining copper and running furnaces to make tools, building ships, harbors and canals needed to get the supplies to the construction sites, directly working on the pyramids or support occupations.
Because it was blessed geographically in many ways, Egypt was likely the richest country in the world for thousands of years until the rise of the Romans. Yet the living standards of the average Egyptian—the farmer, fishmonger, weaver, shoemaker, midwife, etc., lets call them “consumer output workers”— had to be surprisingly low.
One reason is that the massive spending on the pyramid projects required heavy taxes, reducing their living standards, but consider also that heavy government spending necessarily causes a distortion in the balance between supply and demand of consumer goods and services. Here’s why:
A pyramid worker gets his pay; does he use it to buy shares in a pyramid? No, like anyone else, he wants bread, fish, shoes, furniture and maybe a better roof on his house. He desires these things, but he, and all the other pyramid workers, did nothing to increase the supply of these things. Yet he can afford to outbid the consumer output workers to buy them, because the government took their money and gave it to him.
Put another way, since both pyramid workers and consumer output workers are also consumers themselves, we have 100% of all people wanting to buy consumer output, but only some percentage well below 100% of the population producing them.
So as not to oversimplify, even in a very low productivity economy as every place was in ancient times, not everyone has to produce consumer output for a country to be broadly prosperous. With fertile soil and a good climate, an Egyptian farmer was likely more productive than those in less favored places, so there might have been plentiful food for all 100%. But I doubt that is what happened. Many of the materials and supplies needed for the pyramids had to procured from abroad. Phoenicians and Greeks weren’t going to donate them free, so with little else to offer, lots of Egyptian wheat was probably given them in trade.
Everything Egyptian farmers, cobblers, etc., might have wanted to buy to improve their living standards cost more than it would have, had all those pyramid workers been producing consumer output instead. Despite Egypt’s wealth, the living standards of the average Egyptian were probably well below those of less wealthy countries, since so many resources and effort got diverted away from producing anything they wanted.
The Pyramid Effect is another way of saying something I have mentioned in a few of my Substacks, which is “what people do at work counts.” If all your best builders are working on pyramids, don’t expect to also have nice houses.
GDP as a concept doesn’t distinguish between pyramids, which had a religious purpose that only benefited the royalty buried in them, and nice houses for everyone else. Had our modern economists been working for the pharaoh at the time, they would have criticized the Egyptian public for whining about their living conditions when the country’s GDP was obviously doing so wonderfully.
In Part 2 of this piece, I’ll show why we aren’t much different than the ancient Egyptians. A large and growing part of our economy consists of modern day pyramid workers, with the same impact on the living standards of our least well off.