I wish to thank Dirk Philipsen and Katherine Trebeck for their response to our lead essay. I share their aspiration for creating an environment where people can flourish. Below, I outline a few thoughts on the importance of markets and innovation.
Economics Is Not Physics
It is a common confusion that economic growth is based on physical things. Among other things, economics is a study of value creation. Economics does not refute the law of thermodynamics or the fact we have a finite number of atoms on the planet. It is the value of things that count, not the quantity of things.
Thomas Sowell noted that “The cavemen had the same natural resources at their disposal as we have today, and the difference between their standard of living and ours is a difference between the knowledge they could bring to bear on those resources and the knowledge used today.”
Knowledge is not subject to the laws of physics. As George Gilder put it, “Wealth is knowledge and growth is learning.”
Markets Enable Innovation and Cooperation
The market is the process for discovering what’s valuable. It is where inventions are tested for their value-creating potential. It is where learning occurs. In order to maximize the learning that can occur in markets, buyers and sellers must be free to come and go, and prices must be free to rise and fall. Centrally planned economies always fail, because people cannot learn what’s valuable and what’s not valuable.
But markets serve another important role in human society. They build trust and cooperation. Goods and services are traded among strangers and across vast distances, guided—to a great degree—by the valuable information produced by the price mechanism and by the reputation of the trading parties. Repeated transactions among trading parties encourage trustworthiness—a moral side-product of capitalism that we do not spend enough time talking about, let alone celebrating.
Precaution and Risk
Embrace of the precautionary principle can actually result in a more dangerous and poorer world. As Martin Peterson, Research Fellow in the Department of History and Philosophy of Science at the University of Cambridge as noted:
There is no doubt that a [new product] might be dangerous and that precautionary measures should be taken to avoid unnecessary risks; however, the precautionary principle makes a much stronger claim about decision-making. It tells us to replace traditional cost–benefit analyses with a more imprecise reasoning that focuses on possible negative effects. The precautionary principle therefore replaces the balancing of risks and benefits with what might best be described as pure pessimism.
We enjoy prosperity today because our parents and grandparents bet on the future by balancing precaution against potential gains.
Global Inequality Is Decreasing
Branko Milanovic, a former lead economist in the World Bank’s research department, is a recognized authority on measures of income inequality. He found that income inequality has declined substantially since 1980. He compared Gini coefficients between countries on a population-weighted basis and calculated that the global Gini coefficient had declined by 26.2 percent, from .61 in 1980 to .45 in 2017.
Innovation Benefits the Poor Most
Since the poor spend much more of their income on basic food commodities, a reduction in the time price of commodities benefits the least fortunate the most. Since 1960 the time price of rice has fallen by 87.2 percent. This means that rice has become 681 percent more abundant. That means that instead of spending eight hours a day working to buy food, people in developing countries can spend less than one hour working to buy food. They now have seven hours a day to improve their lives in other ways such as discovering and creating valuable things and using their new wealth to buy new clothes, better housing, more education, etc.
Production versus Productivity
One of the main differences between centrally planned and market-based economies is that the former focused on producing more, whereas the latter focus on producing more with less. A capitalist asks, “How can I reduce inputs, in order to increase the value of what I create?” A socialist in contrast, asks, “What do I have to do to meet my production quota?” The former searches for ways to save resources. The latter does not have the information or the incentive to care. That’s why the environmental record of centrally planned economies was so much worse than the environmental record of market-based economies.
We have already noted Andrew McAfee’s revolutionary findings concerning the absolute decline in the use of resources in advanced economies. He has put up $100,000 on even-money bets that by 2029 the United States will consume in total fewer metals, fewer industrial materials, less timber, less paper, less fertilizer, less water for agriculture, less energy, and use less cropland, and have lower greenhouse gas emissions. Details about these bets are available at the Long Bets website. Will the skeptics like Paul Ehrlich bet against him?