In this first lesson we will consider a model of the economy in three different levels. This is meant to give a simplified practical understanding of the underlying elements of the economy. This may seem like common sense to some, but for others knowledge of these fundamentals will remove some limitations in your understanding of finance and investing. All three of these levels exist today, overlapping each other somewhat, each built on top of the last.
1. The Hunter / Gatherer Economy
The first level of the economy is the hunter-gatherer economy. It could also be called the stone age economy. Human evolution split from modern day chimpanzees with a common ancestor about 7 million years ago. In this level, we think of our stone-age ancestors who evolved from the other great apes a few million years ago. We were essentially intelligent wild animals, with basic stone tools, and for perhaps half of this era, the ability to use fire and build primitive shelter. Despite these new abilities, I want to focus on the aspects of the economy between groups of wild animals. The same principles still exist today as foundations in the modern economy.
The acquisition and distribution of group resources at this level depends on the social status hierarchy, or dominance hierarchy. In the wild, social animals fight among each other for social status. The fittest of the group become the leaders and have the most access to community resources, as well as the highest mating rights. The survival of the whole group benefits from having the strongest leaders.
Neighboring groups also fight against each other for territory, especially in times of scarcity. The size of a group was limited by the abundance of resources in the territory. During these times, the survival of the group depends on the successful defense and control of the territory. Once again, the group as a whole benefits by having the strongest, most powerful individuals as leaders to maintain the group’s territory. Thus we reach the key lesson from the hunter-gather wild economy.
Power and social status have always existed in the human economy. We have always organized into social structures and power hierarchies. It is necessary and natural – an effective way of working together for the good of the community. There is a common limiting misconception that wealth and power are inherently immoral, or that wealthy and powerful people are greedy and corrupt. It is more practical to think of wealth and power as natural aspects of social leadership.
2. The Agricultural / Technological Economy
The second level is the agricultural economy. This marks the beginning of genetically modern humans, part of a gradual technological revolution that started about 500,000 years ago, accelerated significantly about 10,000 years ago, and is continuing on through today. I will not go through all the details of the anthropology. Important changes to the human economy happened when we began widespread agriculture and the domestication of livestock around 10,000 years ago.
Agriculture and livestock allows humans to store up a wealth of food supply. Prior to this change, like wild animals we depended entirely on the food resources of the natural ecology within each group’s territory. If there was a period of scarcity, even for a few weeks, survival was threatened.
A direct implication of this storage is that larger group populations are possible for a given territory. In short, civilization and urbanization of cities happened. In hunter-gatherer economies, population densities were typically a few people per square mile – or up to 10 or 20 per square mile in very productive and competitive territories. Now in modern times densities can reach many thousands per square mile in productive areas, and tens of thousands in cities.
This increased population capacity was a direct benefit to agricultural economies versus hunter-gatherer economies when battles for territory occurred. Larger agricultural group sizes with more warriors (and often better weaponry) were favored. Over thousands of years this has gradually led to a global agricultural economy, while hunter-gatherer economies have become increasingly rare, and are now extremely rare.
Technological advance allows humans to store up structural wealth, and knowledge wealth. Larger group sizes with a storage of food allowed for greater division of labor. Scientific understanding rapidly increased and the ability to use metals began around the same time the agricultural revolution took hold. This led to the ability to make advanced shelters and tools that could last many lifetimes. This in turn gave rise to modern trade.
In this category belongs the wealth of technology, healthcare, education, transportation, and permanent shelters that has steadily advanced over the millenia. All of this wealth is potentiated by and dependent upon the agricultural wealth of food storage. Otherwise as hunters and gatherers, each member of the group must specialize in constantly finding their food each day. When the food source is already in hand, then people are able to specialize in broader pursuits.
Distribution of agricultural and technological wealth within a group still depends on power and social hierarchy. With a couple minor differences, civilized agricultural economies still distribute the community’s wealth and resources according to mammalian social power hierarchies. In the wild hunter-gatherer economy, this status was determined mostly by Darwinian fitness. In the agricultural economies the social status structure depends more on the leadership and organization of teams of people for the production of value and wealth mentioned above. That is, food stores, technology, permanent shelter, knowledge, and so on. In practice, both systems work side by side now to determine social hierarchy, wealth, and distribution of resources. They are overlapping.
This point is very important. Despite all the advances of civilization, we are still animals working together in groups for the common good and our basic survival in mind. Power and leadership are still the key to organized pursuit of that goal, and always will be. The mammalian social dominance hierarchy is still at work. That said, remember that with the agricultural economy there is a shift in values. Social status now depends more on an individual’s ability to create this agricultural and technological wealth for the team than it did in the wild. Agricultural economies depend on this wealth for survival.
3. The Modern Financial Economy
The third level is the modern financial economy. It began very recently, in the 1400s or 1500s. Specifically, modern finance was made possible by printing and accounting methods, and then greatly accelerated with the advent of the computer age. In the modern financial economy, every bit of agricultural and technological value creation is accounted for, tracked, and credited to each individual’s financial account. The accounting system is not perfect, but the lesson is easy to grasp.
We have developed the technology to track how much agricultural value each person creates for the group, and social hierarchy and wealth distribution depend more on this agricultural / technological value creation than they ever have before. I like to call it the financial meritocracy.
It’s important to remember that basic mammalian dominance hierarchies still matter. Leadership and power are still determinants of wealth. However, each individual’s contribution to, and use of, the collective wealth is now traceable by the use of money and finance. Furthermore, the huge increase in population and group size has decreased the relative importance of social dominance hierarchies. It is simply not possible for groups of many millions or even billions of people to socially interact with every other member of the group. A chain of command still exists. A power and leadership hierarchy still exists. However, the financial meritocracy now exists along side these systems, with a financial hierarchy between much larger groups of people.
All other things being equal, those who create more value for the group will tend to have more wealth and greater access to community resources. Likewise, those higher on the social hierarchy of leadership and power will tend to have more wealth and greater access to resources. The systems overlap.
The modern financial meritocracy rewards basic value creation more than ancient economies. It may seem like common sense to most readers. It may be an eye-opener for others. However, this simple lesson has not always been true in history, and is still not true in some modern economies where power hierarchies predominate this effect.
The financial economy and meritocracy is still relatively young by historical standards, but it will continue to expand because it is very efficient. It is a catalyst to the agricultural / technological economy, and has caused a significant increase in human wealth creation. Specialization and division of labor has advanced so much that now many people go their whole lives without learning the skills of either hunting-gathering or agriculture. This benefits the survival and wealth creation of the entire group. It is now possible for lower and middle status regular workers, by simple financial practices, to become relatively very wealthy compared to their counterparts from just a few hundred years ago.
Conclusion
In conclusion, we have discussed several economic and anthropological ideas. Here are the most important practical ideas from this section relating to economics. In prehistoric times from about 5 million years ago to 500,000 years ago, wild hunter-gatherer economies operated by the social hierarchy system. The group size was small and familial. The storage of group value was very limited.
In the agricultural and technological age from about 10,000 years ago to a few hundred years ago, group size increased dramatically. Storage of value became the norm. The public wealth and group resources increased dramatically. The social dominance hierarchy system was still the primary determinant of the distribution of group resources.
Finally, in the industrial and information age, beginning only a few hundred years ago, and still in a stage of transition around the globe – group size again increased dramatically with exponential growth. Similarly, storage of value, the public wealth, and group resources again increased. The economy in the industrial information age operates by the system of financial meritocracy. The social dominance hierarchy still plays a role, however the rules for the distribution of resources are balanced between these two elements.