I love this site. It has some of the best and clearest writing on economics for the non-expert (me), as well as on other topics. The writing often has a philosophical slant to it which broadens things out from a purely economic perspective. Yet it costs nothing to read. Long may it continue.
Hayek told us the knowledge to improve society is dispersed and coordinated through price. Central authority can only slow that process. Robinson Crusoe taught us that knowledge and ingenuity magnifies productivity. If government could simply watch and be sure legal frameworks are normalized so the playing field is clear and fair, we would run like the wind.
The destruction is an absolute requirement for the creative part, as the existing will always block the new. Evolution has created all life on Earth from one simple initial life, which requires death to work by natural selection and freeing up resources.
All the paper's centralized systems approaches (communism, socialism, government regulatory system), which appear so advantageous and rational, evolve to become bureaucratic monopolies with the ability to slow or block any innovation that threatens their existence. The same evolutionary process that blindly improves and optimizes nature works to optimize free economies with free markets.
Yes, humans have selectively bred animals using human intelligence in the design, but few of our designs can survive in nature. You don't see wild domestic chickens or pink pigs surviving in any real native ecologies with real predators.
The only time you get creativity out of a large government institution is when the government is threatened by elimination, such as in war. The creativity in the ongoing wars in drone technology is exposing the clay feet of the world's old military bureaucracies.
It is all about failure; in nature, it is death (non-reproduction), in economies, it is bankruptcy, in governments, it is war and revolution. Real progress is about failure and the elimination of what doesn't work.
I think resource allocation is important for prosperity, it’s just that the best allocation is not what progressives think. Turns out Jeff Bezos is a really good steward of capital.
Right. I think what Arnold is trying to say is that government redistribution done post the initial market allocation, of the kind that you see in mixed economies, is not going to make a poor country rich.
But having a market that makes the initial allocation of capital to its most productive use pre taxes and transfers is extremely important for promoting innovation.
And personally I think that even aggressive redistribution in a market economy will discourage innovation enough to greatly harm prosperity in the long run.
I think I understand why a dollar can buy more than a day's worth of food in much of the world but I nonetheless don't understand how anyone can think saying someone lives on a dollar a day is a meaningful statement.
Well, I would not be looking to speak to the vast majority of readers but, rather just simply measure the differences in wealth at a given point in time and/or over time. Energy consumption fits that goal perfectly and is pretty easy to measure all else being equal.
How many joules for someone whose only energy expenditure is their muscles? Calorie intake? Does one still count calorie intake for Elon Musk?Does someone who burns wood to stay warm have a meaningfully higher expenditure than someone living where it is always warm?
It is a pretty well know fact that the average human body consumes about 2000 calories/day which is approximately 8-8.5 megajoules. Staying warm is staying warm regardless of the method of heating used but for any given environment it isn't hard to get averages, Stu. Much of the required data is already available. For example, in 2021 Americans used about 900-1000 megajoules/day. Germans used about 400 megajoules/day. Kenyans consumed about 15 megajoules/day.
I think of it in terms of river rats, bums living under a freeway, and other hermits. So much of what we buy is not necessary to basic life. Imagine hunter gatherers, nomads, and others living in the wild, not much better than wild animals.
I don't think that explains all of it, but it seems plausible enough to explain a lot of it.
Why? Shelter, clothing, food, luxuries. Modern governments have raised the cost of living significantly with zoning and building codes. Imagine a one room shack for a family with five kids. Community bathroom, no running water, no electricity. Eat rice and beans. Cheap clothes patched to a faretheewell. No phone or computer or internet. I bet I could get that family's cost of living down below $10/day easy if government didn't make it illegal, and divide $10 by seven makes it $1.41 per capita per day.
RE:"Across time, particularly in the last 250 years, innovation has resulted in dramatic increases in living standards. [...] we can verify that living standards have improved by tracking particular trends."
Let me temper Arnold's big picture with two complications.
1. A short-term decline in living standards of the poor in England in the 2nd quarter of the 19th century (before innovation in public-health infrastructure in cities).
Twin shocks — the industrial revolution and rapid urbanization — caused the standard of living among the lower classes temporarily and visibly to decline in the 2nd quarter of the 19th century. Reformers, Utopian Socialists, communist revolutionaries (Karl Marx and Friedrich Engels), and Charles Dickens took notice.
Historians, hampered by inadequate economic data, debate inconclusively whether real wages rose or fell. However, anthropometric evidence, which captures the impact of the total historical environment on the human body, paints a clear, bleak picture.
Consider, for example, average heights of British youths at age fifteen. Between 1820 and 1850, average height of working-class 15-year-olds decreased by two inches, while height of upper-class 15-year-olds held steady. In 1843, working-class 15-year-olds were seven inches shorter than upper-class 15-year-olds. Here is Roderick Floud's sketch of broader impacts of “the ‘Hungry Forties’ and perhaps even hungrier thirties”:
"For those already malnourished by poverty […], cold, polluted water, foetid air and lack of living space must have often been intolerable; their nutritional status, as the heights of the children of the Marine Society from the slums and rookeries of London so eloquently show, was appalling. […] even if there were substantial gains in real incomes or in real wages for the working class in the 2nd quarter of the 19th century, these were more than outweighed by other features of the environment — urbanisation, disease, diet and possibly work intensity. […] such effects can be felt in the very long-term, affecting the life and death chances of the children of the 1830s and 1840s as they grew into adulthood and old age. […] it was only by the end of the 19th century that improvements in real wages, and in public health and other sanitary measures, compensated the British working class for the horrors of urban and industrial life which they had borne in the 2nd quarter of the century." — Roderick Floud et al., Height, health, and history: Nutritional status in the United Kingdom, 1750-1980 (Cambridge U. Press, 1990), Figure 4.12 at p. 185; and pp. 300, 305, & 319.
Material well-being is not the sum of happiness. Presumably many among the destitute preferred lively Dickensian urban distress and the satanic mill to more salubrious life on the farm.
2. A long-term decline in birth rates — a consequence of innovation (e.g., new contraception technologies) and of broad prosperity (and attendant protraction of education).
The birth rate in South Korea today is 0.7 (one third of the replacement rate). Where do metrics of trends in standard of living account for parents no longer receiving the blessing of grandchildren?
A needed corrective. Though life on the farm was hardly salubrious. Hot in the summer, cold in the winter. No running water or sewage. Lots of disease. And though the farm produced food, it was generally limited to a few staples.
A plot of economic freedom index vs per capita GDP growth over past 40 years would be quite challenging to explain away. You see poor growth in free European countries and breakneck growth in (still) communist China and over-regulated India.
Somethings these measures of regulation miss that, in poor countries, the regulations apply to the organized sector only which tends to be rather small compared with unregulated unorganized sector. In India, anybody can (and does) open a roadside food vending business. There are no licenses for cutting hairs,
Indeed. But "unregulated unorganized" means that the little business can't expand much, else it catch the attention of the regulators. There's a substantial limit to possible innovation or economies of scale.
The difference between EU and China regulation lies in where the regulation is, and how it compares to previous regulation. The EU has been slowly strangling itself for decades. China used to be nearly dead from self-strangulation, but eased up a few decades ago, and the CCP is now tightening its grip again.
The EU seems to be in a race of sorts: will the leaders continue canceling elections which elect the wrong people, or will enough wrong people be elected to reduce the strangulation? China is in more of a holding pattern until Xi dies or offends too many plutocrats.
During the period of China's explosive economic growth, there was a lot of economic freedom--and still is. Indeed, it was begun by allowing rural farmers to act as if they owned the land they farmed.
While the Draghi report is directionally correct, it seems like a more meaningful measure of productivity is GDP per hour of work. Since Europeans have much more vacation and leave than Americans (~1,500 hrs work per year vs ~1,800), it works out to more like 60% of US productivity.
Adjusting for purchasing power parity would further reduce the gap, although I feel less confident that that is the right way to compare.
Oh boy, I can just see it now, the Magical Money Tree proponents are going to latch on to that idea and claim borrowing actually increases society's wealth.
I love this site. It has some of the best and clearest writing on economics for the non-expert (me), as well as on other topics. The writing often has a philosophical slant to it which broadens things out from a purely economic perspective. Yet it costs nothing to read. Long may it continue.
"Is it really true that much progress has been relatively recent, in the last 250 years?"
President Coolidge's son died of an infected blister from playing tennis without socks in 1924, 101 years ago.
Hayek told us the knowledge to improve society is dispersed and coordinated through price. Central authority can only slow that process. Robinson Crusoe taught us that knowledge and ingenuity magnifies productivity. If government could simply watch and be sure legal frameworks are normalized so the playing field is clear and fair, we would run like the wind.
The destruction is an absolute requirement for the creative part, as the existing will always block the new. Evolution has created all life on Earth from one simple initial life, which requires death to work by natural selection and freeing up resources.
All the paper's centralized systems approaches (communism, socialism, government regulatory system), which appear so advantageous and rational, evolve to become bureaucratic monopolies with the ability to slow or block any innovation that threatens their existence. The same evolutionary process that blindly improves and optimizes nature works to optimize free economies with free markets.
Yes, humans have selectively bred animals using human intelligence in the design, but few of our designs can survive in nature. You don't see wild domestic chickens or pink pigs surviving in any real native ecologies with real predators.
The only time you get creativity out of a large government institution is when the government is threatened by elimination, such as in war. The creativity in the ongoing wars in drone technology is exposing the clay feet of the world's old military bureaucracies.
It is all about failure; in nature, it is death (non-reproduction), in economies, it is bankruptcy, in governments, it is war and revolution. Real progress is about failure and the elimination of what doesn't work.
I think resource allocation is important for prosperity, it’s just that the best allocation is not what progressives think. Turns out Jeff Bezos is a really good steward of capital.
Wasn't resource allocation precisely the problem with communist economies?
Right. I think what Arnold is trying to say is that government redistribution done post the initial market allocation, of the kind that you see in mixed economies, is not going to make a poor country rich.
But having a market that makes the initial allocation of capital to its most productive use pre taxes and transfers is extremely important for promoting innovation.
And personally I think that even aggressive redistribution in a market economy will discourage innovation enough to greatly harm prosperity in the long run.
I think I understand why a dollar can buy more than a day's worth of food in much of the world but I nonetheless don't understand how anyone can think saying someone lives on a dollar a day is a meaningful statement.
Maybe a better metric would be Joules/day.
Yes but instead of a somewhat misleading interpretation of $1/day, most people would probably have no clue how to extract any meaning from joules.
Well, I would not be looking to speak to the vast majority of readers but, rather just simply measure the differences in wealth at a given point in time and/or over time. Energy consumption fits that goal perfectly and is pretty easy to measure all else being equal.
Easy?
How many joules for someone whose only energy expenditure is their muscles? Calorie intake? Does one still count calorie intake for Elon Musk?Does someone who burns wood to stay warm have a meaningfully higher expenditure than someone living where it is always warm?
It is a pretty well know fact that the average human body consumes about 2000 calories/day which is approximately 8-8.5 megajoules. Staying warm is staying warm regardless of the method of heating used but for any given environment it isn't hard to get averages, Stu. Much of the required data is already available. For example, in 2021 Americans used about 900-1000 megajoules/day. Germans used about 400 megajoules/day. Kenyans consumed about 15 megajoules/day.
I think of it in terms of river rats, bums living under a freeway, and other hermits. So much of what we buy is not necessary to basic life. Imagine hunter gatherers, nomads, and others living in the wild, not much better than wild animals.
I don't think that explains all of it, but it seems plausible enough to explain a lot of it.
I think that is an insignificant part of the explanation.
Why? Shelter, clothing, food, luxuries. Modern governments have raised the cost of living significantly with zoning and building codes. Imagine a one room shack for a family with five kids. Community bathroom, no running water, no electricity. Eat rice and beans. Cheap clothes patched to a faretheewell. No phone or computer or internet. I bet I could get that family's cost of living down below $10/day easy if government didn't make it illegal, and divide $10 by seven makes it $1.41 per capita per day.
RE:"Across time, particularly in the last 250 years, innovation has resulted in dramatic increases in living standards. [...] we can verify that living standards have improved by tracking particular trends."
Let me temper Arnold's big picture with two complications.
1. A short-term decline in living standards of the poor in England in the 2nd quarter of the 19th century (before innovation in public-health infrastructure in cities).
Twin shocks — the industrial revolution and rapid urbanization — caused the standard of living among the lower classes temporarily and visibly to decline in the 2nd quarter of the 19th century. Reformers, Utopian Socialists, communist revolutionaries (Karl Marx and Friedrich Engels), and Charles Dickens took notice.
Historians, hampered by inadequate economic data, debate inconclusively whether real wages rose or fell. However, anthropometric evidence, which captures the impact of the total historical environment on the human body, paints a clear, bleak picture.
Consider, for example, average heights of British youths at age fifteen. Between 1820 and 1850, average height of working-class 15-year-olds decreased by two inches, while height of upper-class 15-year-olds held steady. In 1843, working-class 15-year-olds were seven inches shorter than upper-class 15-year-olds. Here is Roderick Floud's sketch of broader impacts of “the ‘Hungry Forties’ and perhaps even hungrier thirties”:
"For those already malnourished by poverty […], cold, polluted water, foetid air and lack of living space must have often been intolerable; their nutritional status, as the heights of the children of the Marine Society from the slums and rookeries of London so eloquently show, was appalling. […] even if there were substantial gains in real incomes or in real wages for the working class in the 2nd quarter of the 19th century, these were more than outweighed by other features of the environment — urbanisation, disease, diet and possibly work intensity. […] such effects can be felt in the very long-term, affecting the life and death chances of the children of the 1830s and 1840s as they grew into adulthood and old age. […] it was only by the end of the 19th century that improvements in real wages, and in public health and other sanitary measures, compensated the British working class for the horrors of urban and industrial life which they had borne in the 2nd quarter of the century." — Roderick Floud et al., Height, health, and history: Nutritional status in the United Kingdom, 1750-1980 (Cambridge U. Press, 1990), Figure 4.12 at p. 185; and pp. 300, 305, & 319.
Material well-being is not the sum of happiness. Presumably many among the destitute preferred lively Dickensian urban distress and the satanic mill to more salubrious life on the farm.
2. A long-term decline in birth rates — a consequence of innovation (e.g., new contraception technologies) and of broad prosperity (and attendant protraction of education).
The birth rate in South Korea today is 0.7 (one third of the replacement rate). Where do metrics of trends in standard of living account for parents no longer receiving the blessing of grandchildren?
A needed corrective. Though life on the farm was hardly salubrious. Hot in the summer, cold in the winter. No running water or sewage. Lots of disease. And though the farm produced food, it was generally limited to a few staples.
A plot of economic freedom index vs per capita GDP growth over past 40 years would be quite challenging to explain away. You see poor growth in free European countries and breakneck growth in (still) communist China and over-regulated India.
Somethings these measures of regulation miss that, in poor countries, the regulations apply to the organized sector only which tends to be rather small compared with unregulated unorganized sector. In India, anybody can (and does) open a roadside food vending business. There are no licenses for cutting hairs,
Indeed. But "unregulated unorganized" means that the little business can't expand much, else it catch the attention of the regulators. There's a substantial limit to possible innovation or economies of scale.
The difference between EU and China regulation lies in where the regulation is, and how it compares to previous regulation. The EU has been slowly strangling itself for decades. China used to be nearly dead from self-strangulation, but eased up a few decades ago, and the CCP is now tightening its grip again.
The EU seems to be in a race of sorts: will the leaders continue canceling elections which elect the wrong people, or will enough wrong people be elected to reduce the strangulation? China is in more of a holding pattern until Xi dies or offends too many plutocrats.
But China is and was always much behind EU in freedom indices. Still, it has managed to outperform the rest of the world in last 40 years.
So, does it not tell us that economic freedom, as measured in indices, is unrelated to economic growth?
During the period of China's explosive economic growth, there was a lot of economic freedom--and still is. Indeed, it was begun by allowing rural farmers to act as if they owned the land they farmed.
Political freedom on the other hand ...
While the Draghi report is directionally correct, it seems like a more meaningful measure of productivity is GDP per hour of work. Since Europeans have much more vacation and leave than Americans (~1,500 hrs work per year vs ~1,800), it works out to more like 60% of US productivity.
Adjusting for purchasing power parity would further reduce the gap, although I feel less confident that that is the right way to compare.
Oh boy, I can just see it now, the Magical Money Tree proponents are going to latch on to that idea and claim borrowing actually increases society's wealth.
Modern Monetary Theory = MMT = Magical Money Tree.
Tee hee.