Duke, Duke, Duke of Earl – Duke, Duke, Duke of Earl. As I walk through this world, nothing can stop the Duke of Earl, intoned Gene Chandler in his 1962 hit. Dukes and Duchesses and what not are in vogue again with the rise of the hit series Downton Abbey – a show about the lives and loves on an old English country estate.
I read an article last week in another English import The Economist magazine, discussing the recent financial meltdown. In that article, the author actually described Gross Domestic Product (GDP) correctly as a measure of production – considering that The Economist and most publications always represent GDP as a measure of consumption.
Downton Abbey provides a stark example of the differences between production and consumption and why the two should never be confused. The series examines the operations of an English country estate during the pre WWII era with a focus on the interrelationships between the upstairs staff (the lord, lady and their court) and the downstairs staff (maids, butlers, cooks, etc.).
The upstairs court often – with great sincerity – describe their role as consumers of vast quantities of good, wine, clothing and flowers as necessary to provide employment for the good people of the estate. But since the house produces virtually nothing (except maybe heirs) the estate’s economy is really based on spending down the accumulated resources of others. The estate slowly drifts toward bankruptcy, which was the final disposition of so many of the landed estates of Europe.
Today, the financial and economic aristocrats in America – the lords and ladies in the Federal Reserve, the Treasury Department and in so much of academia – make the same economic error as did Lord Grantham and his court.
Economies, be they the economy of an estate, a town or even a country, are simply not driven by consumption, but by production. Economies create the things that we want and that we need, by combining the productive resources of available land, people and capital (which is really nothing more than claims on either past or future work) to produce things with a greater value than the value of the inputs.
In other words, economies grown when they take things from the land (say clay and natural gas), and combine them with labor or saved labor in the form of capital to make brinks. Or when they take labor and combine it with capital to make it more productive – like educating a short order cook to make him a chef (or in my case and economist).
This constant upgrading of the land, labor and capital of a society allows it to continue and prosper. But that takes effort – it takes work.
Today, our royal court wants us to believe that we can prosper by consuming. We can borrow from the future, or destroy capital saved from the past to throw lavish parties and festivals, thereby creating wonderful employment opportunities.
But the money for these parties needs to come from somewhere, and the dowry will always run out. Just like the manor house, the Duke will in the end lose everything, and the court will find that this is what will stop the Duke of Earl.