Thursday, August 11, 2005

The Economy as a Food Court

Super interesting essay that compares the economy to a food court:
"Coming into the Food Court each day are consumers, who want meals. At different times of the day, these same consumers work in the Food Court, earning income to pay for meals.

When the Food Court economy was relatively undeveloped, there were only a few recipes. They required a lot of work to prepare, and the meals were monotonous, low in nutrition, and not very tasty. Over time, however, people discover new recipes, which add variety, efficiency, and pleasure to the Food Court. This is the process of economic growth...

Capital markets will have emerged in the food court economy. There are a number of reasons for this.

First, some of the recipes are complicated, requiring many steps and taking several years. Some people are willing to wait, and others are less willing to wait. Those who are willing to defer consumption today in order to enjoy a better meal tomorrow make loans to those who prefer to eat more today.

New recipes do not come free. There is a price of progress. It takes time to invent and test recipes. While entrepreneurs are working on new recipes, they need to borrow from people who are willing to defer consumption.

New recipes are not without risk. Tests may reveal that the recipe fails to achieve the hoped-for combination of taste and nutritional value. Another risk is that while an entrepreneur is developing and testing a recipe, consumer preferences change or new competitors emerge that make the recipe unprofitable even if it produces the expected results in terms of taste and nutrition."

What a simple way to describe something very complicated!

The author continues on to discuss the concept and importance of intellectual property:
"Fifty years ago, economists saw the economy as like the steel industry -- a collection of gigantic factories housing powerful, expensive machinery, producing output measured in tons. The new paradigm sees an economy that looks more like the pharmaceutical industry or the popular music industry. In pharmaceuticals, as in our Food Court economy, the capital needed for production facilities is relatively unimportant. Much more capital is absorbed in the process of searching for new compounds and testing their effectiveness on diseases."

What is the best way to deal with something that costs little in materials to produce but much in development?

This essay is the second in a series.. check it out, it's super interesting!