How do economies develop over time?

A common approach to answering this question is to divide the economy into three sectors - primary (extraction), secondary (manufacturing), tertiary (services) - and track the relative number of people employed in these sectors over time. Wikipedia's entry on the three sector economy offers these statistics:

First phase: Traditional civilizations

Workforce quotas:

• Primary sector: 65%
• Secondary sector: 20%
• Tertiary sector: 15%

Second phase: Transitional period

Workforce quotas:

• Primary sector: 40%
• Secondary sector: 40%
• Tertiary sector: 20%

Workforce quotas:

• Primary sector: 10%
• Secondary sector: 20%
• Tertiary sector: 70%

The economist Colin Clark was an early theorist on economic development. He created a nice system dynamics diagram to illustrate how the size of each sector changed over time. He tracked 4 sectors in his diagram.

James Beringer in his book The Control Revolution (1986) proposes a 5 sector model of the economy based on the role each sector plays in controlling a significant dimension of the material economy.

As we might expect, an economy's major sectors, as delineated by Clark (1940), Hatt and Foote (1953), and Bell (1973), correspond to major stages in the essential life process. The primary sector - agriculture, fishing, lumber, mining, oil and gas - represents the extraction of matter from the environment to produce energy, including the calories to sustain individual organisms. The secondary sector - processing primary goods, as in construction and manufacturing - represents the synthesis of matter and energy into more organized forms (negentrophy). The tertiary sector, including transportation and utilities, represents the infrastructure for distributing matter and energy about the system, while the quaternary sector - trade, finance, insurance, and real estate - constitutes a parallel infrastructure for the collection, processing, and distribution of information that is necessary in all living systems for the control of material flows. Finally, the "highest" of all sectors in its remove from the physical environment is the quinary sector, including government, law, and education, representing the societal programming - socialization, education, law making - and collective or representative decision making to effect control. ~p. 179.

When thinking about how sectors evolve over time you should avoid thinking that growth in, say, the Secondary sector depends upon growth in the Primary Sector. Growth in the Secondary or Tertiary sectors can in fact drive growth in the Primary Sector. For example, where I come from the prices for blueberries per lb is so low that some growers are not harvesting this year. As an amateur winemaker I felt it was incumbent upon me to see if some greater value can be created by converting the blue berry juice to a cooler, a wine, or port style. Yesterday 40 gallons of blueberries were harvested and today there were crushed into pulp and juice to begin the maceration process. The juice is coming in at 8 to 9 Brix (percent sugar). I have 20 gallons of pulp and juice to work with. My role as a winemaker would be a job in the secondary sector of the economy (manufacturing) and if I was successful it might create more demand and higher prices in primary sector production. Just having an excellent product to sell locally would not be enough to move the needle on demand without also having a higher volume distribution network. Setting up a distribution network would involve working with people in the tertiary sector (transportation and utilities) and above to extend the distribution network.

So how many sectors are there? I don't think the question requires one answer. There are as many sectors as are required to adequately answer the types of questions you are asking. In alot of situations a 3 sector model might be useful (e.g., economic growth in the private sector) whereas trying to understand some finer details of how industrial economies evolve over time required 5 sectors in Beringer's model.

I'll end this blog with a tribute to primary sector workers in the Oil & Gas industry. I had an opportunity last friday to see the rock/blues/reggae band Big Sugar whose song accompanies this video showing some Well Testing work being done in Alberta, Canada.

Below are some of the more notable resources I explored this week.

For Entrepreneurs

The payment platform Stripe has a guide to pitching that is worth checking out.

For Investors

Jason Calacanis recently released a book called Angel: How to Invest in Technology Startups (2017). Jason runs a site called This Week In Startups where he interviews leading entrepreneurs and investors. He also made around 100 million in tech investing. Here is a recent discussion at Google Talks occasioned by the release of his book.

Trending

CBC Ideas is one of my favorite radio programs. I recommend listing to the second in a three part series on the future of work called Platform capitalism, digital technology and the future of work. Platform Capitalism is an idea that I am encountering more frequently and the episode link also includes many useful followup resources.

I just finished reading the book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist (2017) by Kate Raworth. I've read a number of positive reviews of the book so I felt it was worth checking it out. Today I'll provide my own brief review of it.

The book is named after a diagram that Kate originally developed in a policy document she wrote for Oxfam. She argues that the proper task for a new economics is to develop policies and ideas that ensure that we stay within the light green middle layer of the doughnut by avoiding overshoot and shortfalls.

The diagram is meant to replace the limited goal of increasing Gross Domestic Product (GDP) that most economists are obsessed with. Kate wants to replace the goal of increasing GDP with a broader picture of the many other aspects of our existence that we need to manage better. Kate argues that economics needs new foundational diagrams and pictures and the doughnut diagram is the foundational one for a new economics.

The subtitle of the book is "Seven Ways to Think Like a 21st-Century Economist" and there are seven chapters devoted to the different ways of thinking. The table of contents is reproduced below because it offers a nice brief summary of the 7 ways of thinking that a 21st century economist must master:

1. Change the Goal
   from GDP to the Doughnut
2. See the Big Picture
   from self-contained market to embedded economy
3. Nurture Human Nature
   from rational economic man to social adaptable humans
4. Get Savvy with Systems
   from mechanical equilibrium to dynamic complexity
5. Design to Distribute
   from 'growth will even it up again' to distributive by design
6. Create to Regenerate
   from 'growth will clean it up again' to regenerative by design
7. Be Agnostic about Growth
   from growth addicted to growth agnostic

The book does not offer a simple set of solutions to the problems depicted in the doughnut diagram. Rather it encourages us to adopt a different mindset about these problems so that we might find new and better solutions to these problems. Kate discusses interesting recent research, ideas and examples in support of each way of thinking along with ample links to more research you can do on your own if you are so inclined. The seven ways of thinking are not independent of each other and are most powerful when combined to formulate a solution.

This is probably not a book to read if you are looking for a business book that encourages you to make more money or grow your business. There are enough of those books anyway. While that is not Kate's goal in writing the book, the problems she cites are not going away and the power of current economic thinking to solve them are counterproductive in so far is they mostly focus on ever increasing growth as the solution (which is causing many of the problems). I believe there are significant opportunities to create new businesses that arise from thinking like a 21st century economist. The book offers lots of useful ideas and examples to get you started.

I listened to a blogger on the radio who felt it was inadvisable to talk about yourself because you as a topic would inevitably become boring. That is true but it is hard to avoid talking about what you do especially if it gives you some joy.

The last couple of days have been warm and sunny but the season for swimming is coming to an end because the nights are getting cool. I just came back from a trip to my favorite swimming hole on my second-hand 2003 Yamaha Zuma Sports Scooter (49cc) that I purchased this spring. The Zuma allows me to drive down a rugged road and right up to the side of the river for a swim. I take it all over the place. A gas fillup costs about $3.50. The Zuma gives me some joy as does swimming in this river. It occurred to me that the swimming area is at least Olympic size because it is a workout for me to go up and down it once. There are no creatures in this water that you have to worry about and you could drink the water.

I took some footage from inside the river yesterday when it was sunny and a bit more windy. There is an area in the center where you can be up to your neck and that is where I shot some footage from.

My daughter competed as a swimmer in a chlorine filled pool and the thought never occurred to anyone that the river might have certain advantages as a place to train (e.g., upstream swimming).

Currently reading Kate Raworth's new book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist (2017).

She offers an interesting new take on how economics should be structured to remain relevant and useful. I hope to blog about the new economics that Kate envisions but before that I intend to explore some relevant background material that I will share with you in this blog.

Kate's critique of economics as currently taught and practiced builds upon the shoulders of giants, and one of the main giants is Donella Meadows who is pictured with the Limits to Growth all-star modelling team.

The Limits to Growth book is still timely, influential and essential reading for a new economics. Recently, the Donnella Meadows Project website posted some vintage videos of Donella lecturing on systems dynamics. Systems thinking as Donella practiced it is 1 of the 7 ways to think in the new economics that Kate Raworth is promoting so I took this as an opportunity to become more fully acquainted with Donella's methods and ideas.

A new economics might also consist of material contained in the free online textbook called The Economy. It will be useful to compare some of what Kate says to what it presented in this site as the core of what should be taught in economics.

One often cited classic of aglit (agriculture literature) is Maurice Grenville Kains' book Five Acres And Independence first published in 1935 and revised in 1940. The fact that it is still in print and easily purchased is a testament to its ongoing usefulness.

The book consists of 51 short chapters on a variety of critical areas of farm management from growing crops to managing finances. If you can't read the book, reading the table of contents alone (use Amazon's "Look inside" feature) is worthwhile because it is a masterful summary of the books contents.

The book contains lots of diagrams and figures because it is meant to provide practical instruction on a variety of farm matters. Again, if you don't have time to read the book cover to cover, simply browsing some of the diagrams would be a good way to quickly assimilate some useful content. For example, in the days before electric pumps, an hydraulic ram system was a way to use water to pump water. Here he shows how to setup an hydraulic ram system for use in the field:

Or in the home:

If you do have time to read the book, then you can consult the sections that are most relevant to you. The information does not seem too dated and it is useful to hear the perspective of a successful farmer from 80 years ago to see how they solved many of the same problems that farmers face today.

Some of the chapters that I read about first are his chapters on finance, capital, and accounting. In his chapter on Farm Finance I came across the idea of "hiring money". In the quote below, the masculinity of the pronouns dates the writing and the culture of farming that existed then but the points are still valid:

To determine ways to make money in farming the annual budget and the annual inventory are of prime importance. When the farmer starts business and at the beginning of each of his business years (which may be calendar or his own fiscal year, say March 1) he makes his inventory, then estimates his probable gross expenses and income for each month and for each crop or department so as to determine in advance at what time he is likely to be pinched for money, when he will have surplus, when he must borrow and when he can repay. Knowledge of business methods teaches him that hiring money is the same as hiring labor. [Emphasis mine] So he shows both his budget and his inventory to the cashier of his local bank and arranges for loans perhaps months before he will actually need to borrow. ~ p. 57

I think the notion of "hiring" money is an interesting one that potentially allows us to think more clearly about the role of capital than the notion of "borrowing" money. When a business needs money to startup, expand or as working capital that money is not borrowed but rather hired for a specific job that will ideally return an amount greater than the borrowed amount. We hire labor because their labor generates more revenue than it costs. Likewise, we hire money when we see an opportunity to generate more revenue than it costs.

The metaphor of hiring money encourages us to think about treating any money we might require to finance operations in the same way we would treat money used to hire labor. It needs to generate similar returns to be worth hiring. The metaphor of borrowing money is unhelpful in this regards - you are just putting it back into the original storage without any suggestion that it needs to generate a good ROI for the employer of the capital.

One other aspect of the book that intrigues me is the value assigned to "independence" in the title of the book. In these days of social media, I'm not sure you would be successful promoting the virtues of independence, but there was obviously a time when independence was highly valued, perhaps in the same way that resilience is valued today.