Libertarianism by David Boaz

Author:David Boaz [Boaz, David]
Language: eng
Format: mobi, epub
Publisher: Free Press
Published: 2010-02-03T16:00:00+00:00

Economic Growth

How does economic growth happen? How did we get from a world in which people had only their own labor, land, and readily apparent natural resources to today’s complex economic structure supporting an unprecedented standard of living?

In their highly readable little book, What Everyone Should Know about Economics and Prosperity, the economists James D. Gwartney and Richard L. Stroup offer a concise guide to the sources of prosperity. A first point to note is that to consume more, we must produce more. Scarcity is a basic part of the human condition; that is, our wants always exceed the resources available to satisfy them. To satisfy more of our wants, we must learn to use resources more efficiently.

We should also note that our goal is not to increase “growth of the economy,” much less gross national product, national income, or any other statistical aggregate. There are many problems with such statistics (even though I will occasionally use them in this book), and they can lead people to make gross errors in economic observation, such as the notorious estimates that the Soviet economy was much larger than it was or the ridiculous statistics showing that the East German economy was half the size of West Germany’s per capita. The goal of economic activity is to increase the supply of consumer goods for people, which will entail also increasing the supply of capital goods with which to produce consumer goods. It may be hard to measure that accurately, but we should remember that our concern is real goods, not statistics.

One way to produce real economic growth is through saving and investment. By consuming less today, we can produce and consume more tomorrow. There are two basic benefits of saving. The first is to set something aside “for a rainy day,” a metaphor that recalls a primitive, even Robinson Crusoe economy. Crusoe sets aside some of the fish and berries he gathers today in case he is sick tomorrow or the weather prevents him from gathering more food. The second benefit is even more important. We save and invest so we can produce more in the future. If Crusoe saves food for a few days, he can take a day to produce a net, which would allow him to catch many more fish. In a complex economy, savings allow us to open a business or to invent or purchase equipment to make us more productive. The higher our level of saving (either as individuals or as a society), the more investments we can make in future production, and the higher our future standard of living—and that of our children—can be.

A complex economy needs an efficient capital market to attract savings and channel them into investments that will produce new wealth. The capital market includes markets for stocks, real estate, and businesses, and financial institutions such as banks, insurance companies, mutual funds, and investment firms. As Gwartney and Stroup write, “The capital market coordinates the actions of savers who supply funds to the market and investors seeking funds to finance various business activities.

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