Saturday, April 08, 2006

The Causes of Economic Growth

There are several reasons that the real value of aggregate and per-capita economic output increases with time, in a (more-or-less) free-market economy:

1. Hard work

The tradeoff here is with "non-work" activities, and the tradeoff can be costly. But those who choose wisely in sacrificing non-work activities then acquire additional cash income, which can be used to offset the loss of non-work time and/or to improve the tools of one's trade.

2. Smart work

Working smarter requires education, specialized training, and on-the-job learning. Today's workers are (on the whole) more productive than their predecessors because the education, training, and on-the-job learning of today's workers incorporates lessons learned by their predecessors.

3. Saving and investment

Resources that are saved (not used to produce consumption goods) can flow into investment (services and goods such as pharmaceutical research and development, advanced computer and telecommunications technologies). It is investment that enables the production of new, more, and better consumer goods with a given amount of labor. (Government investment is an inferior alternative to private investment.)

4. Invention, innovation, and entrepreneurship

These are the primary activities through which saving becomes investment, usually via the medium of financial institutions. Inventors, innovators, and entrepreneurs (along with shareholders, debtholders, and financial intermediaries) accept the risks associated with failure and the rewards of success. It is the prospect of rewards that encourages invention, innovation, and entrepreneurship -- and the benefits they bestow on workers and consumers. (Invention, innovation, and entrepreneurship -- like work -- are "socially responsible" activities because the pursuit of gain is motivated by the satisfaction of wants.)

5. Trading

If A makes bread and B makes butter -- and if both prefer buttered bread -- both benefit from trade. Where they produce bread and butter matters not; A and B could be neighbors, live in different parts of the United States, or one of them could live in a different country. In any event, both are made better off through voluntary exchange.

6. Population growth

Given the foregoing, a larger population means more people to work "hard" and "smart"; more output that can be saved and invested; more inventors, innovators, and entrepreneurs whose activities can be leveraged into greater per-capita output; and a multiplication of opportunities for beneficial voluntary exchange.

7. The rule of law under a minimal state

Predation -- whether by individuals, mobs, or government -- discourages everything that fosters economic growth. The more that government tries to direct the economy, the less it will grow and satisfy human wants.

Other related posts:
Why Outsourcing Is Good: A Simple Lesson for Liberal Yuppies
Trade Deficit Hysteria
Brains Sans Borders
The Main Causes of Prosperity
Straight Thinking about Business Cycles
Understanding Economic Growth
The Population Mystery
The Economy Works, in Spite of Zany Economists
What Economics Isn't
Why Government Spending Is Inherently Inflationary
Understanding Outsourcing
A Simple Fallacy
Ten Commandments of Economics
More Commandments of Economics
Three Truths for Central Planners
Bits of Economic Wisdom
Productivity Growth and Tax Cuts
Zero-Sum Thinking
Economist, Heal Thyself
Liberty, General Welfare, and the State
Monopoly and the General Welfare
Trade, Government Spending, and Economic Growth