Element 1.12: There Are Multiple Sources of Progress
“The law of unintended consequences is the only real law of history.”
On the first day of an introductory economics class, the authors of this book often inform students that Americans produce and earn approximately thirty times as much per person today as in 1750. Then we solicit student views on the following question: “Why are workers so much more productive today than two and a half centuries ago?” Think for a moment how you would respond to this question. In fact, you can go back even further. Economists have calculated standards of living going back to the dawn of recorded time. Remarkably, for the average person Thomas Hobbes’ description in his 1651 masterpiece Leviathan of most peoples’ lives as “poor, nasty, brutish and short” was remarkably accurate.
While there is still inequality in the world, developments in recent years have totally changed the picture. Life expectancy at birth in Africa (the world’s poorest continent) has risen from 37.6 years in 1950 to over 68 years today, even accounting for the HIV plague affecting the continent. According to the World Bank the majority of poor residents globally own both a television and a cell phone. Between 2000 and 2022 the fraction of people in Central Asia who are “undernourished” according to the Food and Agriculture Organization of the United Nations has fallen from over 14% to 3%. This remarkable and sustained increase in material standards of living means that the longstanding debate over how to define “poverty” has become increasingly important. Are people poor if they cannot afford an acceptable standard of living (which may rise as a society becomes richer as a whole)? Or, are they poor if they have incomes below a certain fraction of a country’s average income, no matter how large that may be? There is no right answer to this debate. It poses what economists (and philosophers) call a normative question. What do you think?
What happened in the 18th and 19th centuries to cause this amazing change, not only in the US but world-wide? Invariably, our students mention three things: First, today’s scientific knowledge and technological abilities are far beyond anything imagined in 1750. Second, complex machines and factories, far better roads, and extensive systems of communications make work both easier and more productive. Finally, students mention that in 1750 individuals and families directly produced most of the items that they consumed, whereas today we typically purchase them from others through markets.
Basically, the students provide the correct explanation for human progress even though they have little or no prior knowledge of economics. They recognize the importance of technology, capital (productive assets), trade, and sound economic institutions. Their responses reinforce our view that economics is the “science of common sense”.
We have already highlighted gains from trade and the reduction of transaction costs as sources of economic progress. Economic analysis pinpoints three other sources of higher income levels and living standards: investments in people and productive assets, advancements in technology, and improvements in economic organizations. Let’s consider each of these sources of economic progress.
First, investments in physical capital (such as tools, machines, and buildings) and human capital (education, skills, training, and experience of workers) enhance our ability to produce goods and services. Workers can produce more if they use better machines and technology. A logger can produce more when working with a chain saw rather than a hand-operated, crosscut blade. Similarly, a transport worker can haul more with a truck than with a mule and wagon. Likewise, an experienced, highly trained mechanic can fix your automobile more quickly and at a lower cost than an unskilled person can.
Second, advances in technology (the use of brainpower to discover new products and less costly methods of production) spur economic progress. Since 1750, the steam engine, followed by the internal combustion engine, electricity, and nuclear power, replaced human and animal power as the major sources of energy. Automobiles, buses, trains, and airplanes replaced horses and buggies (and walking) as popular methods of transportation. Technological improvements continue to change our lifestyles. Consider the impact of personal computers, microwave ovens, smart devices, streaming services available anywhere and anytime, heart bypass surgery, hip replacements, air conditioners, and even voice-controlled personal assistants. The introduction and development of these products during the last sixty years have vastly changed the way that we work, play, and entertain ourselves. They have vastly improved our well-being.
Sometimes uniformed people claim that technical progress is bad because it “destroys jobs.” The facts say otherwise. Yes, the jobs in demand will shift and investing in education will become more important, but the primary effect of technical progress is to enable citizens to enjoy much greater material comfort while working far less. In the last 150 years the average number of hours worked per year among workers in developed countries has fallen from over 3,000 to between 1,400 (Germany) to 1,700 (US). The average industrial workers in advanced counties who worked 12 hours a day 6 days a week in 1900 now works an 8-hour day 4 days a week. Average years of schooling among young adults have risen from about 5 in 1900 in the United Kingdom to almost 13 now. And most workers even get time off for vacations. In the early 19th century bands of textile workers known as “luddites” burned factories and smashed automatic looms to “save jobs.” Who today would even want those jobs, especially when they produced cloth that today sells for $1 a yard at an equivalent price of $25 a yard?
Investment and improvements in technology do not just happen. They rely on investments in human capital. They also reflect the actions of entrepreneurs, people who face risks in hope of profits. No one knows what the next innovative breakthrough will be or just which production techniques will reduce costs. Furthermore, entrepreneurs are often found in unexpected places. Thus, economic progress depends on a system that allows a very diverse set of people from all walks of life to test their ideas to see if they are profitable. This simultaneously discourages the squandering of resources and the pursuit of counterproductive projects.
For this progress to occur, markets must be open so that individuals are free to test their innovative ideas. An entrepreneur with a new product, process, or technology needs to attract the support of enough investors to finance and sustain the project. But innovative new products must also face the “reality check” of consumers. Do consumers value what an entrepreneur is bringing to the market enough to pay a price sufficient to cover the cost of production? In a competitive market setting, consumers ultimately become judges and jury. If they do not value an innovative product enough to cover its costs, the entrepreneur-producer had best terminate production and move on to other activities. Failure to do so will lead to sustained losses and eventual bankruptcy.
Third, improvements in economic organization promote growth. By “economic organization” we mean the systems that organize human activities and the rules under which people operate—factors often taken for granted or overlooked. How easily can people engage in trade or organize businesses? The legal institutions of a country to a large extent determine the level of trade, investment, and economic cooperation undertaken by its residents. A just and objective legal system protects individuals and their property, enforces contracts fairly, and settles disputes efficiently. It is an essential ingredient for economic progress. In countries and communities without such a legal system, investment will be lacking, trade will be stifled, and the spread of innovative ideas will likely be absent. In Part 2 of this book, we will examine in more detail the importance of the legal structure, economic institutions, peace, and the primary sources of human progress and living standards.