William J. Polley

Professor Boudreaux asks a great question (actually two), but I think he misses somewhat on the answer. He asks: "[W]hat caused this great wealth explosion?" He answers: Economic freedom and then he elaborates with Cato Institute's description: "The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete and security of privately owned property."

Although those are important elements, they are not complete and all of those elements aren't necessarily required for a civilization to obtain "great wealth".

A more encompassing answer might be: great wealth comes from an environment conducive to innovation. This would typical include Cato's elements, but it might also include geography, abundance of natural resources, system of education, egalitarian principles, access to technology and more.

The other great question he alludes to is "What is wealth?". I suspect my answer might be slightly different than the good Professor's.

Best Regards!

In 50,000+ years of technology and human prosperity increase, I don't think that "free" markets and "property rights" played a significant role. On the other hand, investment and delayed consumption certainly played a role, and as Jared Diamond suggests, geography was critical, echoing calculatedrisk.

The biggest factor in the past centuries technology progress has been the consumption of about half the investment of a billion years of biological activity in the form of oil. A quick SWAG on the value of oil the US has consumed is $125T; that is mineral value gone forever as far as man is concerned. What capital has been created by that consumption. The US will be able to consume maybe twice that much oil (current dollars) and then the US will consume very little, and that will happen in less than a century for sure, and maybe as soon as a quarter century.

Without both a new technology that is unknown today and massive capital investment in this unknown technology, individuals in free market economies are going to be poorer than today.

I would also note that Katrina and Rita demonstrate that there is no such thing as secure property rights. For many, the only way they will be able to exploit their secure property rights is by the government investing massive amounts in recreating it, something that the government does at its pleasure. Or not.

CR and mulp,

Geography and natural resources can't explain why countries can suddenly take off and catch up with the industrial leaders. And the former Soviet Union was certainly well educated--not to mention the fact that they are probably the only country in modern history with enough natural resources to be almost self-sufficient. Even among countries that save and invest heavily, growth rates can differ tremendously.

Take a look at Parente and Prescott. They break it down in a lot more detail than just citing Cato style pillars of free markets.

For purposes of discussion, what alternative definitions of wealth should be laid on the table for consideration?

Professor, a couple of first hand examples: a few years ago I spent some time on one of the more remote islands in Fiji. My first impression was the Fijians were very poor, but as I spent more time with them, I came to realize that from their perspective they were wealthier than most Americans. They had fresh air, clean water, abundant food, and plenty of free time to pursue personal activities. If their political economy had all of the Cato elements, nothing would change since they lack the incentive to change. There would be no “explosion of wealth. Bordeaux’ “economic freedom” argument appears insufficient with respect to this remote island Fijian economy at the present time.

I’ve twice visited another country that lacked most of the Cato elements: Saudi Arabia. There is no question that Arabia saw an explosion of wealth. The reason was obviously the abundance of natural resources. I would argue that Arabia would do much better with the added incentives that come from personal freedoms and a more egalitarian society, but their economy has definitely prospered without “economic freedom”.

There are many more examples from history. I’m not arguing against economic freedom – I’m a strong proponent of those ideas – I just think the Cato list isn’t always necessary and sometimes insufficient.

Of course that touches on the other topic, what is wealth? The Fijian example illustrates the idea that economics doesn’t necessarily measure what human beings really value. Who is better off: an American working 50 weeks a year or a European working 46 weeks, but making only 80% as much money? The answer depends on the person. I think wealth is related to happiness, but since that is difficult to measure, we add up things like plumbing, the ease of travel, medical care, and other examples in Bordeaux’ article – and I don’t doubt that those make us happier (I was able to travel to Yellowstone!) and therefore they make us wealthier.

As to Parente and Prescott (I haven’t read their book), but I’m a proponent of free trade. But there are many issues associated with free trade ignore in that article. I’ll address two:

First, as an example I oppose child labor, so when we trade with another country we must make sure they meet certain standards. These standards include labor rules, environmental standards, and legal / IP protections. I’m not suggesting they meet our standards at first since that would make them non-competitive, just some minimum standards. As the trading partner’s economy improves, we should require that they meet ever higher standards of worker and environmental protections.

Second, the US must address displaced workers associated with free trade. This is difficult to address, but right now we are seeing a widening wealth gap in America and a hollowing of the middle class. In the long run, I don’t believe that is healthy for America. So this must be addressed with public and fiscal policies (shifting the tax burden away from high income earners to someone in the future is obvious exacerbating the problem).

Sorry for the long post … I’ve never read Adam Smith’s "The Theory of Moral Sentiments," and you’ve inspired me to add that to my reading list.

Best Regards.

Well, CR, you put your finger on a couple of things. I am, of course, familiar with the argument that "wealth" as measured by financial statistics is not necessarily the best measure of well-being, happiness, or whatever people would prefer to call it. I'm sure we can agree that Saudi Arabia is a very special case. If you can pull things out of the ground that other countries demand so much that they shower you with riches, you can bend some of the normal rules. In fact, you must bend some of the normal rules or the expansion of wealth can be destabilizing and lead to "Dutch disease".

I like the Fiji example better, at least in terms of the value of intangibles (like a Pacific sunset). They are, however, something like 8 or 9 times as wealthy in economic terms as most people thoughout human history. I'm not an expert on the country, but I'd guess that most of that increase came after WWII. Whether that's an "explosion" or not is in the eye of the beholder. I will also point out that imports and exports make up a large percentage of their GDP. Add in the tourist trade, and they are clearly benefitting in real economic terms from having an economy that is open to voluntary exchange. You bring dollars hoping to see a beautiful sunset. They can buy iPods with those dollars, or whatever they want. I trust that both of you walk away happier.

For most of human history, people survived on the equivalent of something approximating about $600 of per capita GDP. If technology or innovation was the whole story, differences in growth across countries would not be so different. What led to those differences?

I'm in partial but not total agreement on some of your other points. But this reply is already getting long, and I know that we're in it for the long haul. So perhaps we'll come back to those later.

As always, thanks for getting some discussion going!

Professor, thanks for the feedback. I really enjoy these discussions and its a free education for me! Thanks. Looking back to my first comment, I wrote that I thought: "great wealth comes from an environment conducive to innovation".

I didn't mean that technology created wealth, rather the circumstances that leads to innovation (like a good legal system for contracts and property rights) fosters the creation of wealth.

The opposite is definitely true: circumstances that limit or prohibit innovation, limit increases in wealth - except for the special cases like Arabia.

Thanks again for the education.
Best Wishes.