Oct. 1, 2012
The Queen in Alice in Wonderland claimed she could do six impossible things before breakfast every day. We can’t.
You can’t spend money you don’t have. You can borrow for a time but eventually you must pay back. Our current government deficits (federal) and mounting government debts and obligations (local, state and federal) will lead to bankruptcy if we don’t vigorously grow our economy.
Unless we get a growing economy we will revert to a zero-sum one where any gain to one comes with a loss to another. In a zero-sum economy the only way to get richer would be violence. Before the industrial revolution and free enterprise changed the rules, that was how it was. Everywhere. Always. We don’t want to go there.
The Republican Party is in favor of growing the economy. They are not unanimous on how to do it. Some advise cutting spending. Some advise cutting taxes. Some both. Some don’t have a clue.
The Democratic Party is conflicted about growth. Their environmentalist wing is against it, believing that a growing economy means a shrinking ecosystem. Government-unions want to grow the government part, but not necessarily the private part. OWS activists and assorted progressives are more centered on redistributing the wealth rather than growing it.
Which is better, redistribution or growth?
Facing a severe economic slump FDR, like Obama, campaigned to make the rich pay “their fair share.” FDR said the challenge was not to grow the economy but to spread the wealth around and solve the problem of what he called underconsumption (today the progressives favor the synonym demand).
In 1932 our GNP was 58.7 billion dollars. In 2010 it was 14,526 billion. We managed to grow the economy under both Democratic and Republican administrations so that we find ourselves 248 times as wealthy as we were in 1932. We are more equal in basic rights with less discrimination against minorities. Our environment is better too.
Almost everyone realizes that new technologies like steam engines, electricity and computers had a lot to do with the enormous growth in populations and wealth over the last two hundred years. Not as many realize capitalism has played an equally major role.
What is it about capitalism that fosters economic growth?
Win-win exchanges.
Unfortunately (like capitalism itself) this truth is not sexy enough for a good bumper sticker. Nevertheless win-win exchanges are the ultimate efficiency engines of capitalism that create profits, foster innovation and make modern civilization possible.
To get more wealth Adam Smith explained in 1776 you need three things: private property, specialization of labor, and free trade.
In olden days the peasant or serf (or slave) produced potatoes. He did not own the potatoes or the land. The lord did. The peasant or serf was not free to trade the potatoes for a loaf of bread or for a carriage ride to Paris or Rome. The lord could but probably would not. He could get the bread by commanding his peasants to raise the grain and bake a loaf. He could get the ride to Paris or Rome by commanding servants to hitch up his horses and take him. All free of charge.
Well, not really free. In a zero-sum command economy the lord had obligations as well as privileges. He had to provide basic survival benefits to his peasants or serfs (or slaves). Things like food, housing, security and health care. These entitlements were given in minimal quantities. Some lords were richer and more benevolent than others, but no lord wanted his workers to get sick or die on him.
When the lord wanted more land or more potatoes or more bread or more serfs or peasants–economic growth in other words–he led his knights to attack a neighbor and steal what they could. If the peasant or serf wanted a larger share he revolted and tried to take it from the lord. Like all command economies, it was zero-sum. If I win, you lose. If you win, I lose.
Actually the lord’s power was not based solely on violence. In medieval times the church reinforced zero-sum memes. Barbara Tuchman, dean of medieval historians, explains: “The Christian attitude toward commerce…held that money was evil, that according to St. Augustine ‘Business is in itself an evil,’ that profit beyond a minimum necessary to support the dealer was avarice, that to make money out of money by charging interest on a loan was the sin of usury, that buying goods wholesale and selling them unchanged at a higher retail price was immoral and condemned by canon law, that, in short, St. Jerome’s dictum was final: ‘A man who is a merchant can seldom if ever please God.’” The Church did soften this advice by also preaching benevolence, forgiveness and charity to the poor.
Note how similar these zero-sum ideals are to the views of modern secular progressives and radical Muslims. Making only minor word changes progressive leaders like FDR and Obama, as well as radical leaders of al-Qaeda and the Taliban, would for the most part agree with the Church and the nobles. A major difference is progressives and radical Muslims want to substitute a benevolent government for Church and nobility.
In the late Middle Ages all this began to change as Christian monasteries along with a growing merchant class began to make loans with interest, to raise capital to found new industries for profit; to foster trade; to move away from entitlement barter toward fungible money; and to support the creation of new more efficient technologies like wheelbarrows, better horse collars, rotation of crops, windmills and waterwheels.
With the Industrial Revolution these trends increased dramatically. Economic growth was now possible without theft or violence. Growth came now from the win-win transactions of free trade that produced profits, efficiency, and progress in science and technology.
There were holdouts. Our southern slave-based plantation society held out until the Civil War. After the Civil War industrial unions in the North challenged the power of industry owners and brought more equitable sharing of the newly created wealth.
When the peasant became a factory worker he (or she) was paid in money instead of benefits. No matter how small, the money was his to do with as he pleased. If he used some of it to buy a loaf of bread–the baker, the farmer who grew the grain, the teamster who transported the grain, etc. all profited in a series of win-win transactions. All strived to become more efficient to increase their share of the profits. Occasionally an ambitious peasant-turned-factory-worker saved some of his or her wages and invested in a new venture–say a new way of baking bread that used a new kind of mixer or a bigger oven. The peasant-turned-teamster bought a bigger wagon. The newly independent-farmer planted more wheat on now-fertilized acres that he now owned. The oven maker made more efficient ovens. Etc. The peasant entrepreneur became rich. The baker, farmer, teamster and oven-maker all profited and people got cheaper and better bread.
We can grow the economy today by multiplying win-win transactions. Reducing zero-sum ones (austerity) might help, but not as much and not always.
How do you tell whether a transaction is win-win or zero-sum?
It is win-win if someone is willing to pay good money for the goods or services. This means that most private sector transactions are win-win ones. The producer strives to offer a better product or service (or the same one more efficiently). In the end producers and consumers all profit.
Not all win-win transactions are good. Drug deals may be harmful to both buyer and seller. Deals may not be fair if one side is dishonest or has intimidating power. Deal that violate equal rights or foster discrimination are not good. Deals that harm the environment are not good.
As a general rule, transactions that involve the government tend to be zero-sum, but not all. Zero-sum is not necessarily bad. Some zero-sum ones are essential and some are zero-sum in the short term but win-win in the long run.
I’ll speculate next week on how government can help, or hinder, economic growth. Who knows, maybe we can do six impossible things before breakfast.
Bill Stonebarger, Owner/President Hawkhill
P.S. For a fresh look at the role of capitalism, religion and science in a growing democratic economy see the DVDs: Capitalism and Democracy, Religion and Democracy, and Science and Democracy. You can read and copy the scripts at no cost at www.hawkhill.com.