Similar to my previous threads on programming for programmers and programming for businessmen, I’m going to try and go over some basic stuff that I think people should know. Note though that I’m not an economist, and in fact may be entirely wrong in this case. I’m largely going on what I understand of what I have read, and introspection (worked for the Greeks!) Thus, if I’m particularly wrong, feel free to correct me.
We will pretend that there is a universe where there are only two people, Alpha and Beta, and a bank which is (of course) run by Alpha and Beta. Each of the our people is a farmer, producing exactly one food unit a day. One food unit sells for one dollar, and is exactly how much a person eats in a day. The bank has no money.
Each day, Alpha and Beta farm their one unit of food, and sell it to the other. Thus each one has a daily income of one dollar, and a daily expense of one dollar. Overall there are only two dollars in the whole world, which they trade back and forth every day.
Beta, in his free time, builds a machine that will allow a person to farm double the amount of land in a single day. He offers to sell it to Alpha for $10 dollars. Alpha thinks this sounds pretty good, so he takes out a loan from the bank for $10, and buys the machine. The bank now has -$10, Alpha has $1, and Beta has $11. Alpha has to pay a dollar to the bank each day until he has paid back his loan, plus one.
Now, Alpha produces two units of food a day, which means that Beta doesn’t need to farm any more. Instead, Beta offers to tell Alpha a story every day for one dollar. Since he needs to pay back the loan, though, he declines.
So every day Alpha makes two food units, selling one to Beta, and using that money to pay back the bank. After ten days, he’s paid back the bank. So now Alpha has $1, Beta has $1, and the bank has $0 again. Alpha now accepts Beta’s offer to tell stories, so every day, he sells Alpha a unit of food, and Beta sells him a story.
So, for doubling production of food, Beta was able to cause there to be $12 in the system for a day, $11 for another, $10 for yet another, etc. and Beta both alternately put himself out of a job and created new work for himself.
The bank was willing to go into a $10 deficit as its owners (Alpha and Beta) both trusted that the bank would make that money back with Alpha’s increased productivity. And now, even though there are still only two dollars in the world, there are two units of food, and one unit of stories being produced every day.
Nearly all businesses run on a deficit, including banks. Society at large allows them to do this as doing so creates the excess money that allows people to embark on productivity-enhancing endeavors–and because society trusts that those endeavors will suceed and that the money will be made back.
Notice though that Beta will only be wealthier than Alpha so long as he continues to increase productivity of the whole system. When he stops, everyone goes back to having an even amount of money. But of course for the time he did have the extra money he was able to relax and do nothing. True that in this case he was out of a job, but in the real world, generally increased productivity results in other people going out of business, rather than yourself. But for having put himself out of business, in the sum total of the world life was made better because of it. Doing so allowed new industry to come into being–specifically it allows for industry that is unnecessary for mere survival. The farther the economy progresses, the more divorced the majority of business will become from necessities of life.
Saying more than this–for instance, exporting labor, taxes, etc.–gets into debate territory though, so I’ll just leave it here.