I recently had reason to read some elementary physics and had a flash back to my secondary school days. I have not done much physics since then. Reading physics now as an economist opened my eyes to some of the ways in which different fields kind of tell the same story. For example, one of the most important laws in physics is the law of conservation of energy. I remember almost none of it from my secondary school days but read it again during the week.
The law roughly translates to the idea that in a closed system, nothing new is created or destroyed but just transformed from one form to another. Apologies to the physicists for butchering their law but you get the gist. If you think of the universe as a closed system then everything we do or “create” can be broken down into the transformation of energy from one form to another. Transforming energy from a form we don’t want to a form we want.
In a way business, economics, and policy follow the same law with everything really being about transformation of things from one form to another and trade-offs between what is gained and what is lost. Take farming for example. Farmers get seeds, fertilizers (or the chemicals in it), and soil and harness energy from the sun to “create” the produce that we eat or use as raw materials. I put create in quotes because all farmers really do is facilitate the conversion of energy from the sun, combined with other chemicals from the soil and fertilizers, to food that is presumably more valuable. Imagine if you took a jar of sunlight to the Wuse market in Abuja to sell. You may be arrested for attempted fraud. But if you harness that sunlight through rice plants and convert all that into rice that people eat, then you are in business. In the simplified closed system, the farmer has subtracted energy from the sun and nutrients from the earth and added grains of rice.
The trade-offs are even more apparent in manufacturing sectors where all that is being done is converting raw materials to finished goods or pre-assembled components into more valuable units. Converting things from something less valuable to something more valuable. Things get a bit more complicated once you think about digital goods or services like finance. But if you think about it long enough they are still basically about conversions, transforming knowledge or memories or types of valuable stuff into other types of more valuable stuff.
The important point here is that almost everything is about trade-offs. For every plus on one side, there is a minus on the other. For every new valuable thing “created” some other presumably less valuable thing is “destroyed”. A world of plusses and minuses.
What about government? Pretty much the same thing. Governments in theory collect taxes, the minuses, and convert that into public goods, the plusses. A government collects some of your rice crops and uses it to pay soldiers to protect you. Or collects a value added tax on your financial transactions and uses it to pay judges who provide the public good called justice. Still a world of plusses and minuses. If a government says they want to provide some public goods then they must collect some taxes or borrow for somewhere else.
For the private sector we assume that people will mostly only convert less valuable stuff to more valuable stuff. Else there would be no point. Few businesses exist to make losses. In practice it is a bit more complicated once you think about externalities and other costs that are borne by parties other than businesses. But by and large, businesses mostly obey the rule. For the public sector though, the case is not that clear cut. Many governments collect taxes in exchange for public goods that are not more valuable that the taxes they collect. This is even before you talk about corruption. In essence, many governments collect more valuable stuff and convert in into less valuable stuff.The question to ask of any public service then is what is the cost, or the “minus”, and is it worth it?
So, what happens when the government tries a new policy, like ordering the Central Bank and the ministry of agriculture to give collateral free loans to farmers? A plus if you are a farmer for sure. But the question to ask is, what is the minus? What is the provider of this collateral-free finance going to subtract and is it really worth it? I leave that for you to decide.
Nonso Obikili
Dr. Obikili is chief economist at Business Day
