Common Plots of Economic History

There are only seven plots that are so fundamental to the way we tell stories that every storyteller uses one of them: Overcoming Monsters, Rags to Riches, The Quest, Voyage and Return Rebirth, Comedy, Tragedy.

It's not that good stories are the same, but the plots are less diverse. When we realize this, we see stories in a new light, because we have come to the heart of what stories are about and why we tell them.

Looking for a few universal plot patterns reveals things fundamental to how all people think, which are likely to be repeated in the future and relevant to your own situation. This idea also applies to how the economy works.

Economic history can seem complicated because it's part of politics, psychology, sociology, criminology, biology, military, technology, education, finance, etc. But within all that complexity is a lot of similarities.

• People seem to want the same economic things – security, power, admiration, fulfillment.
• They tend to use the same tactics to acquire those things - work, risk, incentives, persuasion, theft, control.
• They tend to fall for the same flaws pursuing those things - overconfidence, pessimism, underestimating how fast things can change, etc.

Although economic history may seem complicated, there are only a small number of broad story plots throughout the world and throughout time.

A good idea taken to the furthest extreme becomes indistinguishable from a terrible idea.

The most important technological breakthroughs deliver such a high that most will fail to know the limits and will inevitably overdose. Railroads transformed every inch of the economy, from military tactics to where people could live and work. The excitement over rail's potential sparked overbuilding and cutthroat competition that pulled the country into economic chaos at least three times.

The history of oil, cars, banks, housing, and technology are identical. So are certain regulations, social programs, management principles, and business strategies.

The only thing harder than gaining a competitive edge is not losing an advantage when you have one.

Sears was the largest retailer in the world and so dominant at retailing efficiency that it could spread its efficiency to unrelated industries. But then the growing income inequality pushed consumers to either bargain or luxury goods, and Sears was left in the shrinking middle, becoming a shell of its former self.

The story of Sears losing its competitive advantage is not unique. Almost 40% of all public companies lost all their value from 1980 to 2014.

Five things contribute to the gravitational pull of competitive advantages:

1. Being right instills too much confidence that you can’t be wrong. But the outlier success will have competitors chasing them and threaten to overtake you.
2. Success tends to lead to growth. But a big organization is very different from a small one, and strategies that led to success at one size can be impossible at another.
3. The irony is that people often work hard to gain a competitive advantage so they don't have to work so hard at some point in the future. Once you reached your goal and start to relax, your competitors and a changing world will creep in unnoticed.
4. A skill that’s valuable in one era may be worthless in the next.
5. Some success is owed to being in the right place at the right time.

Future progress is underrated because past progress is misunderstood.

• There are times when optimism is so great and so broad that we become blind to future risks
• People tend to be optimistic about their own future but pessimistic about others. Most people you know are reasonably happy but suspicious over the direction of the country and its future. When people are cynical about others, a natural path is to discount what other people are capable of in the future.
• Underestimating future growth, in general, is also a typical plot.

1. Past progress as a one-time event misses how much of progress is incremental. A breakthrough never occurs in isolation but is the product of many little discoveries, often meaningless by themselves, that someone links together.
2. Assuming that big current problems will prevent future progress. This misses that most progress feeds off big current issues.
3. In real-time, it nearly always looks like progress over the previous decade has stalled, seeming to confirm that we've reached the limit of our innovation. This is because it often takes a decade or more for breakthroughs to be noticed. We will only recognize the best work of the last decade in the years to come.

Surprises are constant, and not necessarily because we’re bad at predicting, but because everything important in the economy is driven by power laws where a tiny portion of things are responsible for the majority of outcomes. No single forecaster can track every moving part.

The ability to believe things that aren't true or haven't happened yet is the foundation of all economic growth and decline.

Every society tells fictional stories and is willing to believe them to some extend. It isn't a bad thing: It's the root of most growth. Most economic growth comes from optimism, and optimism requires a degree of believing in something you can't or haven't verified.

A breakthrough is a big deal because no one had thought of it before. Because no one had thought of it before means it's likely either illogical or appears to violate previously accepted rules.

When someone pursues a breakthrough, as an entrepreneur, investor, or consumer, it requires a leap beyond your own abilities or the ability of someone else. It should not be surprising that stepping out might end up in failure. But without the willingness to move into the unknown, we would not have growth, productivity, and great innovation.