The economy, productivity, and us

Among the many valuable resources that Ray Dalio has freely shared is a 30-minute video on how the economic machine works. This is perhaps the best piece of educational content I’ve seen on YouTube, and in my opinion, watching it is time well-spent for anyone who doesn’t have a degree in economics.

Reflecting on the video, I've realized two things:

• The principles Ray talks about broadly apply to individuals as well. I think this is because the economy is essentially an aggregate of the entire population’s income and spending.
• Ray offers a model for understanding the economy, but gives only very general advice for optimizing it.

I considered Ray's main points and what he might have left unsaid, and investigated how these might apply to individuals. I’ll share my thoughts in this post.

First, let’s review the three summarizing points that Ray makes at the end of the video.

• Don’t have debt rise faster than income. If it does, our debt burden will increase and eventually ruin us unless we do something (in the case of nations’ economies, they either default or go through a painful deleveraging process).
• Don’t have income rise faster than productivity. If it does, we will become less and less competitive until the market forces our income to decline (which is painful).
• Do all you can to raise your productivity. Because this is the only way to increase real income in the long run.

Let’s apply some logic. If (1) debt should not rise faster than income, and (2) income should not rise faster than productivity, then it must be the case that debt should not rise faster than productivity.

Since average productivity rises slowly (about 2% per year, historically), and interest on debt after inflation is generally higher than 2%, it would seem wise to just avoid debt altogether. In fact, perhaps the only legitimate reason to take on debt is to accelerate productivity growth.

In the end, it would seem that everything is about productivity and how to increase it.

The next question, then, is what raises productivity? A quick online search reveals five main drivers of productivity:

• Investment in physical capital such as machinery, equipment, and buildings.
• Innovation in the form of new technologies or new ways of working.
• Skills, acquired through education.
• New enterprises that are better able to allocate and extract value from new innovations and/or workers who are more skilled.
• Competition, which drives innovation and investment.

What can we apply from the above learnings to individuals such as you and me? I’ll list some ideas.

Productivity growth is the key for individuals as well

If our salary is tied to our objective work performance, the only way to sustainably increase our salary is to create more, sell more, or otherwise deliver more value than before (without needing more time to do so).

Learn more to earn more

Acquiring new skills and/or knowledge is one of the most effective ways to make gains in our productivity. A good education truly is a pathway to success. From my experience, I find that most people may not allocate enough time to learning and improvement.

Borrow money only to invest, innovate or learn

If we can invest at a higher rate of return than the interest rate on debt, it could be worthwhile to borrow money. For example, getting a mortgage to purchase a property in Shanghai is probably a good decision that generates real income in the long run.

Similarly, borrowing money to pursue an education or otherwise improve our capabilities could also work well - so long as the expected marginal improvement on our productivity is higher than the cost of debt.

Conversely, borrowing money to consume (ie. buy a vehicle or a TV) is always a bad idea because it results in debt that will require sacrifices in the future to eliminate.

Productivity is tied to time, so find ways to save time

I'll begin with an example. Let's say that we're a lawyer who bills $100/hour to clients, but we spend half our time every workday doing work that a legal secretary who makes $25/hour can do. However, we choose not to hire a legal secretary because we can do the work twice as fast as any legal secretary we've seen.

This is a mistake. Though we can create twice as much value as a legal secretary, we cost four times as much. Recall that productivity is the amount of output per unit input. The legal secretary is twice as productive when we both work on tasks that can be done by a legal secretary.

In economics, this is a concepted called comparative advantage, which is somewhat counterintuitive. As a lawyer, we should spend as much time possible billing clients at $100/hour and hire a legal secretary to complete other tasks that we can't charge clients for.

I think many professionals would find that hiring an assistant immediately boosts their productivity (and thus their income).

I'll conclude with some actionable advice:

• Prioritize work that trains you to be more productive.
• Spend roughly half of your leisure time learning.
• Never use credit for consumption.
• Look into hiring an assistant if your income is a few times more than what an assistant's income would be.