Everyday Economics

“If you drop a bucket of water into a harbor, you will not find a bucket-shaped lump of water resting on top like a glob of jello”

A classical free market ‘ism’ you’ll hear, whether on TV or engaged in intellectual (or pseudo-intellectual) conversation, is the phrase ‘the rising tide lifts all boats’. When this saying is used in regards to economics, it refers to the idea that gains in one part of the economy or population will translate into improvements for the entirety of the economy.

In short – if the tide rises, it’s not going to discriminate between boats.

To be perfectly fair, this may not be the best model for thinking about the economy, because tides are, by definition, somewhat evenly distributed, and there is no realistic scenario in which certain tides favor certain boats over others. In reality, economic gains are often more concentrated, at least initially, before they spread to other parts of the economy.

Perhaps a more accurate analogy would be ‘dumping a bucket of water in the harbor will raise all boats’. It’s a little less elegant, but I prefer this analogy because it makes clear that the initial influx is concentrated, and if we want all the boats to rise, that influx must find a way to disperse.

Intuitively, we know that it has to. If you drop a bucket of water into a harbor, you will not find a bucket-shaped lump of water resting on top like a glob of jello. The water goes into the harbor and eventually mixes in with the rest, making its way under every boat. The question is, how effectively does the new bucket of water mix in with the rest of the harbor?

And that’s a difficult question to answer. It depends on things like the size and location of the initial influx, the overall size and depth of the harbor, and any barriers or channels that might influence the flow of water. The economy is no different – The speed and effectiveness of dispersion can be influenced by the size and nature of the initial gain, the structure and interconnectedness of the relevant industries, and any regulatory or market barriers that might otherwise impede the flow of benefits.

For these reasons, a gain in the pharmaceutical industry will disperse differently than software, which will disperse differently than aviation. Metaphorical buckets are thrown into the harbor constantly, under all manner of boats. This is economic growth, which most people will agree is a good thing. Some buckets disperse faster than others, but all of them eventually join the main body of water.

To that end, someone who’s worried about inequality might point out – why not simply limit our buckets to the places where we know they quickly disperse to the rest of the population? That way, we can keep our dispersion efficient.

Fair enough. But at some point, the buckets and the people carrying them are going to start running into each other, and we’ll find that there’s a bottleneck in how many buckets we can actually pour under a given boat. This makes intuitive sense in the economy. Even if you had everyone in the country working on how to make better electric cars, there is only so much progress that the electric car market would be able to make in a given year. Sure, it would be faster than it currently is, but not infinitely, or even proportionately so. Growth will be constrained by technology limitations, for example. And where are those technology limitations addressed? By pouring buckets under a different boat.

All this to say – there are a lot of different boats in the harbor, and a lot of different buckets being tossed in. It absolutely makes sense to notice when certain boats are getting a lot of attention, and dispersion is not as efficient as it should be. That being said, there is some method to the madness, which has something valid to say on this whole matter of tides (and buckets) and boats.