by Jurgen Brauer, May 2006
Copyright: J. Brauer. No reproduction without permission.

By one definition, economics is about production, distribution, and consumption. All life forms, not just humans, need to produce their livelihood. Once produced, the fruit of one's work is distributed, whereupon it is consumed. It is entirely possible for a producer to distribute all proceeds to himself of course, and this is frequently the case. With equal frequency, however, one can observe that distribution takes place from producers to non-producers, especially from adults to their offspring so that the adults retain less than they produced. Another sort of distribution takes place over time: many species lay up winter stores; they invest a portion of their current production to be used at some time in future. This carries risk as stores may be discovered and plundered. Among humans, we accumulate from present production to fund retirement nest eggs to be drawn down in our twilight years. This also carries risk as one's savings may go sour.

Economics is about production, distribution, and consumption. One can consume by exchanging one's own production with what others have produced. One can also consume by relying on grants. Or one can consume by appropriating what others have produced.

The economics most celebrated in textbooks is exchange economics, or "free market economics." The idea here is that instead of producer A and B producing both food and clothing, they can mutually benefit when each specializes in what he or she does best. Producer A and B negotiate the terms of trade – the price – so that some of, say, A's foodstuffs are exchanged (distributed) for some of B's articles of clothing. Because both specialize on what they do best, they will be more productive than if they had to produce both items by themselves. Their joint product will be larger than what they could produce individually, and therefore their joint consumption will be larger as well. Exchange economies rely on a measure of trust and, trust failing, contract law and its enforcement.

This is all good and well. But there are other ways to make a living. Grants are unilateral transfers (distributions) from a producer to a non-producer. The grants economy is large. Every dollar you donate to your favored charity is a grant, in exchange for which you receive nothing, except perhaps good feelings. Every dollar given to one's children or grandchildren is a grant (who may then use it to engage in the exchange economy). Some people specialize in receiving and living off grant money. They include of course all the millions of good-hearted people working for charities or non-governmental organizations (NGO's) and also all those working for religious organizations. Perhaps it can be argued that religious or spiritual leaders produce "spirituality," but certainly most of their income is derived from grants - the weekly passing-the-hat exercise at church. There is no direct quid pro quo where one exchanges the fruits of one's labor (in the form of money) for the priest's or rabbi's or imman's production of spirituality. The grants economy is not to be confused with the service industry. When I book a vacation, I do expect something in direct return. There is an exchange. But when I make a monetary or in-kind donation to a charity, a grant, I get nothing but a thank-you note, more fund-raising letters, and, perhaps, a tax deduction.

A third kind of economy is the appropriation economy. Government compels me to pay taxes against my will; a thief takes my car or robs my house; the mafia coerces protection money. All three make a parasitic living of me. Distribution is involuntary, and what is left over for me is less than I produced. Naturally, where risk of appropriation is high, incentives to produce are low. So will be incentives to store some of the production for future use because if income from current production is unsafe, so surely will be stored income (savings) from past production. Where risk of appropriation is high, people will tend to consume most or all of their current production and not save, or if they save, they will do so clandestinely by squirreling funds to other locales where thieves can't get it. Reduced or inaccessible savings reduces future local investment because there are no future, local funds to tap for investment. In turn, this reduces advances in productivity and hence limits the growth in consumption possibilities. Thus, insecure places are typically poor places.

To prevent or at least mitigate appropriation, people in the community need to band together and take part of their production proceeds to fund communal protection. This reduces consumption of course but less so than when they are unprotected. Banding together is a form of insurance. Communal governance, when first created, was likely a form of insurance until government became a beast unto itself, coercing contributions rather than receiving them as a voluntary grant. The predicament must have been the famous free-rider problem. If several of us make grants to fund a communal protection force then all of us are equally protected regardless of the size of the grants we make. This induces each of us to cut the size of our grants in the next funding period and thus undercuts the funding of the protection force. The only way to remedy this dilemma is for all of us to agree to establish a government, an agency separate from us, the people, and to permit this entity to coerce all of us to keep the grants coming - except that now the direct link between contribution and service rendered is severed, so that the funds are appropriated by this new entity, government.

Modern economics textbooks completely neglect the interaction between exchange, grants, and appropriation.

Regrettably, modern economics textbooks completely neglect this interaction between exchange, grants, and appropriation. Leaving out vast slices of what actually happens in economies makes the study (and students) of economics poorer and less exciting and relevant than it could and should be.