The study of economics would be the same thing as the study of evolution of humans if humans did not invent. Without invention there is no reason for trade. Why would we trade my berries for your berries if they are essentially the same berries? If we both eat the same dead animals, what would the purpose of trade be? Without trade, production is limited to the immediate needs of the person. Perhaps you might store up some nuts, but everything else will spoil. Note that shelter is an invention, unless it only involves taking over a cave or a hole in a tree. The unique feature of man is that he is a rational animal and in the economic realm this means that he invents. No other animal invents. Only humans change their environment to meet their needs.
The driving function of evolution is the Malthusian Trap. In the Malthusian Trap, food (things need to survive) is limited and population growth in any species is always greater than the growth of the food supply, except humans very recently. This puts species into competition for food and selects for the species that are most successful in a given area. The only reason that humans (some) were able to escape the Malthusian Trap was that they invented faster than their population grew. Meaning the rate at which technology changed provided greater productivity growth than the expansion in the population. Why after 20,000 to 100,000 years of human existence did people in England, the United States, and the West suddenly escape the Malthusian Trap? Clearly, the rate of invention accelerated in these places so that productivity outstripped population growth. But why there and why then? There is extensive evidence that the introduction of property rights (individual – there is no such thing as group property rights) always provides a strong incentive to maximize return on an asset. England and then the U.S. at the beginning of the Industrial Revolution were the first large groups of people to introduce property rights in inventions. This provided the necessary impetus to invent new technologies and diffuse them widely. Clearly, patents cannot provide this incredible benefit outside of a system of individual rights and property rights. However, it was the linchpin that launched large groups of humans outside of the Malthusian Trap and the constraints of biological evolution.
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This book, The Birth of Plenty Predictions: How the Prosperity of the Modern World was Created, purports to explain the conditions necessary for a nation to escape the Malthusian Trap. The author, William Bernstein, states that four conditions are necessary: 1) property rights (including intellectual property rights), 2) the scientific method, 3) efficient capital markets, and 4) transportation and communication infrastructure. The first part of the book explains why each component is necessary. The second part of the book applies this structure to the historical evidence associated with various countries to show that all four components are necessary. The third part of the book attempts to make predictions based on the thesis. This is an excellent book. It is easy to read, full of interesting historical facts, and is well reasoned for the most part.
Unfortunately, the author attempts to defend the welfare state as created by Roosevelt in the USand the mixed economy of Great Britain. This clearly departs from his thesis. First of all, the welfare state under FDR was an attack against property rights. Despite the author’s claim that regulation of capital markets is necessary for them to be efficient, all econometric studies show that they are at best ineffective and most likely damaging. This means that the regulations FDR created to regulate the financial markets caused the capital markets in the USto be less efficient. Sarbanes Oxley is present-day example of the damage caused by absurd regulation of capital markets. The New Deal was not based on scientific method, it was based on emotion and the desire for political power. (For more information see FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression). So at least three of the four criteria were undermined by FDR and the “New Deal”, (AKA the bend over and take it deal). The author’s defense of the New Deal is based on sociological studies that show income disparity between the wealthy and the poor causes social unrest. These studies are clearly flawed. Income disparity can occur because of political favoritism (crony capitalism) or because of the opportunities created in a free economy. These studies do not differentiate between these two very different situations. As a result the studies cited by the author are contradictory and therefore do not support his thesis.
How do the four factors apply to the UStoday? Property rights have been under assault in the US., see Kelo v. City of New London . Patent rights have been weakened since 2000, see Intellectual Property Socialism. The scientific method has been under attack by both the political right and left, see creationism and global warming – climate gate. Our capital markets have been significantly compromised by Sarbanes Oxley and now the Frank Dodd financial reform act. For more information see Sarbanes Oxley the Medicine is Worse than the Disease. The US transportation and communication infrastructure is slowly deteriorating because funds are appropriated in larger percentages to social welfare programs. The US is regressing in all of the four categories that Bernstein defines as necessary for sustained economic growth. It is no wonder that the US is on the verge of bankruptcy.
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