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The road to prosperity

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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