The road to prosperity

by Russ Roberts on May 4, 2007

in Standard of Living

The road to prosperity for a nation is to find ways to get more from less. To make the pie bigger, you have to find a more effective way to combine people, machines and raw materials. Technology is one way this happens. Trade is another. In modern America, we get richer, paradoxically, by putting people out of work, by finding production techniques that make the remaining labor force in a particular factory or industry more productive. Sometimes that happens by using a new production process. Sometimes it happens by importing something more cheaply than we can make it domestically. (In this essay and in my book, The Choice, I try and show how these two forces are really the same.) This is the story of manufacturing in the United States over the last fifty years. A lot fewer people are involved producing steel and cars but their output is much greater. Trade lets us produce additional steel and cars the roundabout way—by swapping  goods and assets for steel and cars. I suspect producing those goods and assets also involves many fewer people than was the case in the past.

Both methods, technology or trade, involve short-run hardship—the people who are displaced must find new work. Both methods create prosperity once the short-run hardship is endured.

All political systems must fight the tension between reducing the short-run hardship and enjoying the longer-run benefits. When the benefits come quickly, the short-run adjustments are easier to endure. In America, new jobs come along so quickly (fueled by the resources that are freed-up by the improvements in productivity), that there is limited political traction to stop short-run hardship. In Europe, it appears, the demand to allay short-run hardship is more effective in making their economies less dynamic. So while national borders are a red herring in discussing the economics, they are important in generating the political forces that discourage or support economic change.

The incredible American labor market easily generates more new jobs to more than make up for the jobs that no longer exist because of technology and trade. The proportion of the US labor force that wants to work has risen steadily over time. I don’t think we know which direction causation runs—is the American labor force participation rate high because it is easy to find work (because new jobs are constantly arising) or is the job creation rate high because more and more Americans want to work? But whatever the direction of the causation, the dynamic nature of the US labor market means that the "long-run" benefits of increased productivity come very quickly, long before we are all dead. That in turn reduces the political pressure to stop the economic forces creating the prosperity with their short-run hardships.

Despite all the claims that the middle class is stagnant, most Americans enjoy a dramatically higher standard of living than their parents enjoyed 20 and 30 years ago. For those of us beyond the age of 40 or so, the change in material well-being over a generation is palpable. We have much more stuff and the quality of it (from our music players to our heart surgery) is much better. And access to stuff has never been higher. (I will soon post a pdf with data that makes this case more formally.)

I’ve been thinking about this because of my recent conversation with Mike Munger on the division of labor and his essay on the topic. And because I came across this nice quote from Adam Smith that shows someone improving the quality of life by putting himself out of work, a microcosm of the paradoxical effects I’m talking about:

In the first fire-engines,
a boy was constantly employed to open and shut alternately the
communication between the boiler and the cylinder, according as the
piston either ascended or descended. One of those boys, who loved to
play with his companions, observed that, by tying a string from the
handle of the valve which opened this communication, to another part of
the machine, the valve would open and shut without his assistance, and
leave him at liberty to divert himself with his play-fellows. One of
the greatest improvements that has been made upon this machine, since
it was first invented, was in this manner the discovery of a boy who
wanted to save his own labour.

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{ 33 comments }

Sam Grove May 4, 2007 at 10:51 am

There is also the dynamic of a growing market. The very first cars were hand built and thus the province of hobbyists. The application of production techniques made the first factory produced cars available to a relatively wealthy few. As production became more efficient, the price of cars came down, thus expanding the market, and as particular aspects of assembly were automated, the displaced workers could be absorbed into remaining positions as production expanded. For instance, when welding robots are introduced, the welders may become weld inspectors.

Bruce G Charlton May 4, 2007 at 11:32 am

The greater mobility of the US labour force compared with Europe is probably a major factor in economic dynamism.

Compared with Europe, US people quite readily move to new places to get new or better jobs. This is helped by the continent sharing a language and a mass media etc., but there are probably also factors stemming from the recent frontier migrations and US being a recent immigrant culture.

I have an idea that labour mobility has replaced trades unions as a much better method of preventing exploitation of workers, or bad working conditions:

http://www.hedweb.com/bgcharlton/ed-expansion

Indeed, a social ethic which emphasizes the benfits of mobility is probably a good thing for modernizing societies.

jp May 4, 2007 at 11:38 am

Re labor mobility — It's also a lot harder to fire or lay off an employee in much of Western Europe than it is in the U.S. (although it's still riskier in the U.S. than it should be).

Josh May 4, 2007 at 11:47 am

I agree with the basic principles of this article. However the US is running twin deficits,The Federal reserve is priniting money to debase our currency into oblivion as in past decades of boom and bust cycles ,consumers maintain record debt levels, US government has 41 trillion dollars of promised benefits for baby boomers. Our standard of living is a mirage which we will have to one day pay for. Maybe I should just put on my smiley face like the rest of the folks and live in denial until day of reconing hits.

Methinks May 4, 2007 at 12:28 pm

JP,

That reminds me of a recent article in the WSJ's European edition.

A French company, Saint-Gobain, laid off 154 workers. The former employees sued. After a drawn-out two year court battle, the highest court in France ordered the company to re-hire the workers – even though the plant in which they worked was shut down.

France better get it's act together and figure out how to liberalize its economy. It's about one Segolene Royal away from becoming a submerging market!

trumpetbob15 May 4, 2007 at 1:48 pm

One argument in this debate that economics minded people make is that menial jobs are being turned into service jobs, which Sam Grove touched on in his welding example. And that leads me to this idea. Why would anyone go to college if they were going to work in a factory job down on the line? Yet, I often hear people complain about outsourcing, and then turn around and bemoan how many people aren't going to college. (Even more priceless when the critic of outsourcing is in college.) College prepares people for service or management-style jobs. So actually, with the emphasis on college in the U.S., we need more menial jobs to vanish and be replaced by service oriented, or else no one will be able to pay back those large student loans.

jp May 4, 2007 at 3:41 pm

methinks — great story!

muirgeo May 4, 2007 at 4:16 pm

I'm having a great time reading your articles and listening to the podcast. I'm still very skeptical of what I guess is called Economic Liberalism or of Hayek's theories. But I'm also very new to these ideas, thus quite ignorant. However, sometimes a novice can come to an issue with a new perspective that the indoctrinated will not see. So please bear with me and my novice questions…and often my confrontational style because bottom line for me is that we usually have the same ultimate goal….to leave a better world for those who follow.

The subject of economics is so vast, so complicated and pertinent to all of life I'm finding it fascinating.

All of life is about economy as I see it. Every animal lives in some sort of "economy" and until the appearance of man and civilized society all animals were ruled by the law of survival of the fittest.

The big questions I have would like to ask; is man likewise ruled by survival of the fittest..is it possible to escape that rule? And what's the implication for how we set up or society, governments and economies.

Sorry I know this is off topic but just hoped to introduce myself and don't want to push the thread off topic.

I have already ordered a couple of books that have been recommended here to see if some of these things are addressed.

Kent Gatewood May 4, 2007 at 4:28 pm

I feel really bad about myself for giving three weeks notice at my last job in "at will" economy.

tarran May 4, 2007 at 4:30 pm

muirgeo,

This is a good question, but I think you are coming at it from the wrong angle.

One major difference between humans and animals is that human beings produce what they consume, whereas animals must gather what they consume.

In other words, animals compete because they have to. The number of acorns available to squirrels is beyond their control. A squirrel can only increase his consumption of acorns at the expense of other squirrels.

Human beings do not have to compete. Many people mischaracterize free markets as being one of dog-eat dog competition. This is not correct. A free market is one of maximized cooperation. When two people engage in a trade, they are in effect cooperating, leaving both better off. For example, if I trade an apple pie for a bushel of apples, the farmer enjoys the benefits of my baking, while I enjoy the benefits of his orchard.

What is seen as competition is in fact the effect of this cooperation in trade. In a free market, you will naturally want to spend the least that you can to buy the most satisfying product. Thus, those who are best at cooperating flourish, and those who are worst at it tend to have the hardest time getting things from other people.

I strongly recommend adding one of Hayek's teachers to your reading list. Ludwig von Mises. Most of his writing is posted on the web, and he is a very logical and clear thinker.

muirgeo May 4, 2007 at 4:31 pm

OK back on topic.

I have some skeptism over Mr Russels claim;
"Despite all the claims that the middle class is stagnant, most Americans enjoy a dramatically higher standard of living than their parents enjoyed 20 and 30 years ago."

Yes we have more things, better health and longer lives but are we truly having a "higher standard" of living.

What about commute times, total hours worked by the family, the rising cost of health care and collage and just the general perception that people are showing more and more signs of being overly stressed by modern life?

My idea of advancing society would be to see families only having to work 50 hours a week total and still being able to afford college and health care. The current trend is NOT in that direction and IMO huge accumulations of wealth by an elitist group on the top threatens our very democracy with "economic serfdom".

Kent Gatewood May 4, 2007 at 4:44 pm

Biologically, if we arn't having more children, we are not better off. My grand and great grand parents were much "wealthier" than I.

Russ Roberts May 4, 2007 at 4:47 pm

Muirgeo,

The article I mentioned that is coming soon (a pdf file) will deal with at least some of your concerns about health care and college, commute times, concentration of wealth and so on. Please keep reading and questioning.

Russ

True_Liberal May 4, 2007 at 5:20 pm

By virtually any standard, my sibling and cousins (many of them) are much better off than our grandparents, who relied on truck farming and general laboring (by our parents as well as by Grandpa) to scrape by. Most of us graduated from college, felt free to move where the work took us, several are pilots, …

And if some have long commute distances, it's by choice.

Will C. May 4, 2007 at 6:17 pm

If some work long hours it is by choice. Most of those want the money more than they want the leisure time. Work is often very rewarding in ways other than money. It reminds me of neighbors of mine where both parents have to work to live in the six bedroom castle with the three car garage. It is simply a matter of choice and values.

muirgeo May 4, 2007 at 6:42 pm

Someone commented on the dangers of France's economy. I'm not so sure they suffer or are in as big of danger as some think.

"While France has a very generous welfare state, and its workers enjoy long vacations and short workweeks, it's not clear that this state of affairs has put the economy on the road to disaster. For example, the Organization for Economic Cooperation and Development (OECD) estimates that France's level of productivity is 7 percent higher than in the United States.

Economists generally view productivity as the most important determinant of living standards. In fact, when measuring the ability of productivity to raise living standards, France's rate of productivity growth has even kept pace with the United States through the post-1995 productivity boom in the United States.

On a per person basis, France spends about half as much as the United States on health care, yet it enjoys longer life expectancies and lower infant mortality rates. Exploding health care costs threaten both the U.S. economy and the government's fiscal solvency, yet its political system is so corrupt that few observers see major health care reform as a realistic possibility. France has no comparable problem.

France does now have a current account deficit, but it is in the neighborhood of 1-2 percent of GDP, a level that could be sustained indefinitely. By contrast, the United States has a current account deficit that is hovering near 6 percent of GDP, a clearly unsustainable level. Also, while the United States now is an international debtor, owing an amount that exceeds 25 percent of GDP, France is still an international creditor. "

From;

http://english.hani.co.kr/arti/english_edition/e_editorial/206725.html

Chris Poole May 4, 2007 at 9:06 pm

Many of these comments ignore one of Hayek's most useful insights: in all respects relevent to the discussion of markets, there's no such thing as "the middle class", or "Americans", or "we". The market is the place where each individual gets to decide exactly what "better off" means, and they get to act on that understanding. They may regret their decisions, but individual regret is the most powerful modifier of individual understanding/action/results. That's the wonderful efficiency that we find in markets. It is not that they efficiently come to resemble your or my vision of how the world should be.

blink May 4, 2007 at 10:40 pm

"The road to prosperity for a nation is to find ways to get more from less."

While I heartily endorse the inspiring commentary in the first paragraph, I am ultimately dissatisfied with the post. I simply cannot take the topic seriously – why must we kowtow to the “jobs created” metric? Recognizing that employment decisions represent voluntary transactions between employers and employees, I suppose a “job created” deserves applause. But this is true of “one hamburger purchased at McDonalds” as well, although the magnitude is smaller. Considering magnitude, “one new home purchased” probably yields more surplus for the buyer and seller than “one new job created.”

My concern is that the focus on jobs implicitly supports a specious line of argument. Today we speak of “jobs created” as an end in itself; next we will be debating the “lump of labor” sophistry. Is it insufficient to show that we get more from what we put in? Let’s embrace the “less” and live up to the Adam Smith story.

David P. Graf May 4, 2007 at 11:20 pm

Will C. made the comment that if some work long hours that it's by choice. That is certainly true in some cases. By putting in more time, people can make more money or get ahead in other ways. In other cases, the additional time is put in not because of more money or desire, but because one will lose their job otherwise. Salaried employees get paid the same regardless of whether one works 40, 50, 60 or more hours a week. It's another way, some less than ethical businesses can do more with less.

David P. Graf May 4, 2007 at 11:26 pm

Blink talks about how "employment decisions represent voluntary transactions between employers and employees". However, isn't there an inherent discrepancy between the power possessed by an employer and the employee? Isn't that part of the incentive for people to become entrepreneurs and not have to answer to a boss?

Python May 4, 2007 at 11:52 pm

Muirgeo,

Nearly every point that you mention in your post has been covered here many times. Please continue to ask questions, but while waiting for answers please peruse the archives.

For example, higher unemployment counter-intuitively leads to higher productivity per employee. As for longetivity of life, if you compare the French to white Americans, the difference is very small (79.7 versus 78). (Perhaps the French would be slightly higher if you only looked at White French as well.)

http://www.cdc.gov/nchs/pressroom/05facts/lifeexpectancy.htm
http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy

Commute times in France are significantly worse if you trust the BBC and US Census to use similar measurement techniques. (36 minutes to 24 minutes).

I personally disagree with the term "corrupt" to discuss the American political system. By most measurement systems that analyze corruption the United States is not too bad, and very similar to France. I think what you mean is "deadlocked" or "partisan". Much like the French have been about how to deal with high unemployment, lack of ethnic mixing, and their own perennial pension problems.

http://us.rediff.com/money/2003/oct/07corrupt.htm
http://www.worldaudit.org/corruption.htm

If you honestly seek economic wisdom, you will find very quickly that being a debtor or creditor nation is not as important as many people think. I will have to add however that I don't think I've met a single person who doesn't quickly acknowledge that the standard of living is much higher now than 30 years ago.

Methinks May 5, 2007 at 1:46 am

Muirgeo,

to add to Python's reply…

Infant mortality has been covered on this blog as well. Premature births and multiple births have increased in the United States, resulting from fertility drugs and in-vitro fertilization. Multiples are associated with higher premature birth rates and that population has a higher mortality rate. In Europe, premature infants who die are not counted as live births while in the US they are counted as a live birth and then an infant death. These differences make US infant mortality appear worse than other countries’.

http://www.oecd.org/dataoecd/15/23/34970246.pdf

Cancer mortality rates are significantly higher in Europe than in the United States. One reason is that new cancer drugs are available months or even years earlier in the US because European regulators won't allow patients access to a drug until regulators extract a favourable price.

http://www.oecd.org/dataoecd/15/23/34970246.pdf

France:

The overall unemployment rate in France is 10%, 20+% among 20-somethings and around 40+% for minority youth.

France's GDP/Capita has slipped from 7th in the world to 17th.

GDP/Capita in France is only about half the that of the US (on a purchasing power parity basis).

2006 GDP grew 2%, compared to the Euro zone's 2.8% and the United States' 3.3% rates.

In a recent French poll, 70% of respondents said that they believe France is in decline.

The country is experiencing a major "brain drain". The best and brightest are seeking both jobs and lower taxes abroad in such numbers that Sarkozy was forced to make a campaign stop in London, calling it "one of the great French cities". 300,000 French escapees live there.

France leads the world in anti-depressant consumption.

In the European media, France has taken the title of "sick man of Europe" from Germany.

I was clearly slightly exaggerating when I made my comment about Sego. Slightly.

Methinks May 5, 2007 at 1:49 am

Sorry, I'm tired. The correct cancer mortality link:
http://www.aei.org/publications/pubID.26032,filter.economic/pub_detail.asp

True_Liberal May 5, 2007 at 10:20 am

muirgeo -

Furthering tarran's comments between the human vs animal economies, there are cases in nature where two species work cooperatively, where one animal feeds itself by ridding another of pests and such. We humans may label the former a "parasite", but this is a pejorative term because each species is benefitting from the transaction.

And thus it is with human transactions. If a party sees no net benefit in a transaction, or sees a better transaction elsewhere, he is free to change.

save_the_rustbelt May 5, 2007 at 11:31 am

Yes, jobs are plentiful……….

Working double time

Tough times mean multiple jobs, taxed lives for 250,000 in state

Jennifer Youssef / The Detroit News

Margaret Henwood used to have a busy social life, going out with friends, playing softball on Sundays and visiting her nieces and nephews in Seattle, Port Huron and New Jersey.

Those days are only a happy memory now that she's taken on three jobs just to pay the bills. When she actually does have time to do anything but work, Henwood, who is in her 40s, said she's too tired to leave her house or talk to her friends.

"Well, you have no life and that's the hardest part," said Henwood of Royal Oak.

Henwood's complaint is a familiar one among the more than 250,000 Michigan residents who are working two or more jobs. With decent-paying full-time jobs getting harder to find, more workers are holding down several to keep their homes and put food on the table.

Python May 5, 2007 at 12:58 pm

Save_the_rustbelt,

So 250,000 Michiganians are working multiple jobs. The other 4 million working Michiganians are not. Why do you anecdotallly look at the person in the vast minority (6.25%)? Perhaps some of the other 93% used to have tough lives but don't now – where is their story?

I'm from Flint, Michigan. And I love Michigan. But it has an economic mindset of being held hostage by unions and by a single industry. The economic hard times that the mentality creates is not a good enough reason to think that the American economy in general is hurting.

Chengkai Zhao May 5, 2007 at 4:39 pm

I agree all of those. Low cost is important to everywhere. Low cost of labor force is important for the company, but like the coin has two sides sometimes it also can hurt the country. If overseas labor are cheaper, the unemployment will increase.

Python May 5, 2007 at 5:02 pm

"If overseas labor are cheaper, the unemployment will increase."

This type of thinking is so out of date that I can't believe it is on the Internet, and not scrawled on a papyrus reed.

Matthew Sleyzak May 5, 2007 at 7:29 pm

Its people's decisions to be wealthy or not. It all depends if they want down time more than money and happiness. I think people who really want to succeed and be rich usually are because they work for it instead of having down time. So what car we drive is based on how much you want something and how hard you want to work for it.

True_Liberal May 6, 2007 at 8:38 am

[i]"If overseas labor are cheaper, the unemployment will increase."[/i]

A perfect example of "everyone knows that…" This mantra may have very limited and short-term validity; but in the long run it gives the worker the opportunity to find a better job, and provides him with goods and services at lower cost.

True_Liberal May 6, 2007 at 8:43 am

Rustbelt, does the Detroit News story touch on the effect of Michigan's new minimum wage law, which is nudging new auto production facilities to locate in your neighboring state to the southwest?

Isaac Crawford May 6, 2007 at 9:25 am

"Henwood's complaint is a familiar one among the more than 250,000 Michigan residents who are working two or more jobs. With decent-paying full-time jobs getting harder to find, more workers are holding down several to keep their homes and put food on the table."

If the job situation in Michigan is so awful, I would respectfully suggest that if the state government would get their collective heads out of their asses and emulate the more successful states, things would improve quickly. High minimum wage, mandatory union hiring, etc. are making businesses flee to states that actually want them. As long as the state legislature sees businesses as adversaries that need to be policed, you will see fewer businesses open there. If you want jobs, and that includes good paying jobs, you have to make it worthwhile for people to create jobs there. Yemen (where I currently live) is having a similar problem, but at least they recognize it and are working on it. It's pretty sad to see Yemen having a more economically sound strategy than Michigan… See my blog for more…

Isaac

Joshua S. Walker May 6, 2007 at 10:29 am

While you can make the argument that technological advancements are eliminating jobs as technology becomes more efficient than humans you must recognize that there are also many jobs created by the development of technology, not to mention the improved quality of life that is garnered as well. It is difficult for me to agree that national borders are simply a red herring when discussing technological advancements and their effect on the job market. National borders are much more important than the mere political tool they play in national politics. The technological race between countries and the competitive nature of businesses in a global market must be considered as well when discussing job loss and this is not simply a red herring.

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