The most important economic chart in Western civilization — and how it happened
It’s sad that the case for economic growth needs to be made. But it seems that too many people have lost sight of why growth is good as they fret about issues such as the environment and inequality (both of which growth actually helps).
In response, AEI’s Values & Capitalism series has published a little book, Economic Growth: Unleashing the Potential of Human Flourishing, that explores the benefits of growth and addresses common concerns regarding how growth impacts the poor, the environment, and culture.
Think about it: In real terms, the average income of Americans over the past two centuries went from $2,000 per person to $50,000. Here is the book’s formula for growth:
Governments seeking to unlock long-term growth should eschew command-and-control policies. Instead, they should craft economic institutions that reward all types of investment in physical and human capital, and that help markets function securely and inexpensively. For instance, an impartial judicial system that defines and enforces clear property rights gives firms and individuals the right incentives for work and investment; they know the courts will adjudicate property claims and contract disputes fairly, and uphold the rule of law.
Other key institutions include a stable, relatively corruption-free government, one that is able to provide for national defense and other public goods; a market system for the production and distribution of most goods and services, to provide monetary incentives for efficient allocation of resources and creation of jobs and incomes without need of government control or subsidy; and a financial system, modestly regulated for safety and economic growth paired with a sound currency, to encourage savings and to channel those savings into loans for large and small firms.
All good stuff, but I would boil it down to this: Respect and reward innovators and innovation. As Deirdre McCloskey has put it, the West became a business-admiring civilization and that changed everything:
What changed were habits of the lip. It’s not a “rise of the bourgeoisie,” but a rise in other people’s opinion of the bourgeoisie that makes for economic growth — as it is now doing in China and India. When people treat the marketeers and inventors as having some dignity and liberty, innovation takes hold. It was so to speak a shift in “constitutional political economy,” as James Buchanan puts the point. People agreed on the meta-rule of letting the economy go where it will. This contrasted with the earlier mentality, still admired on the left, that treats each act of innovation as an occasion to go looking for its victims. Victims there were, but they were greatly outnumbered by winners. It was ideas, not matter, that made the winners, and brought our ancestors from $3 to over $100 a day.