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01 / 05
An Old-Fashioned Recipe for Economic Growth

Blog Post | Economic Growth

An Old-Fashioned Recipe for Economic Growth

Elected officials can help the U.S. economy continue to grow by allowing the American people to innovate and exchange.

With the recent inversion of the yield curve sparking recession fears in the United States, and the stock market swinging wildly in response to the ongoing trade negotiations with China, some are wondering if the longest economic expansion in American history may soon come to an end. Those uncertainties bring renewed urgency to the age-old question at the heart of economics: what creates wealth?

Throughout most of human history, there was almost no wealth. People were very poor, and there weren’t that many of us. While our species is roughly 300,000 years old, for the first 290,000 years or so we were foragers barely scraping by. Even after Homo sapiens embraced agriculture, progress was still painfully slow. Then, suddenly, population skyrocketed, followed shortly by an explosion in income and standards of living.

Between 1700 and 1900, the world’s population rose from about 600 million people to about 1.5 billion people. Between 1800 and 1900, GDP per person per day doubled. Income grew over twice as much in that century as in the preceding 18 centuries combined. The two trends of rising income and population are related.

It is obvious that wealth allows for a larger population, but could a larger population in turn also create more wealth? The answer is yes – so long as people are allowed to innovate. The computer or tablet or smartphone on which you are reading this op-ed is the product of a complex system of human innovation and cooperation that spans the globe.

People have been innovating since the australopithecines left the African forests – carrying primitive weapons – some 7 million years ago. Moreover, precursors of modern humans have been specializing for least 2 million years. Yet economic progress was very slow. What allowed humanity to at last fully realize its innovative potential to create wealth?

To figure out what caused the wealth explosion, we need to consider where and when the change began. Economic growth started to accelerate some 250 years ago, first in Great Britain and the Netherlands, then the rest of Western Europe and North America, and finally the rest of the world. So, what happened?

There are different theories, many of them complementary. The Nobel-prize-winning economist Douglass North contends that the evolution of institutions including constitutions, laws, and property rights was instrumental to economic development. Economist Deirdre McCloskey attributes the wealth explosion, or the “great enrichment,” to a change in attitudes about markets and innovation. Long scorned as vulgar, merchants and inventors began to enjoy respect and institutional protection – what she calls “bourgeois dignity.”

But there was also a broader change in the way people thought. It wasn’t just that the British and the Dutch started to look upon shopkeepers and manufacturers without disdain and instead to respect them. Harvard University psychologist Steven Pinker argues that progress is ultimately rooted in the values of the Enlightenment. He claims that reason, science, and humanism are behind the transformation.

Another scholar, Stephen Davies, believes that innovation took off in Europe because of interstate competition. Historically, empires like China, Russia, Mughal India, the Ottoman Empire, and Safavid Iran, were so large that conflict between them ended in a stalemate. The primary danger to their sovereignty was internal instability, and so they suppressed ideas and innovations which threatened the traditional order in the name of stability.

But Europe was divided between many constantly warring powers, so the ruling classes could not totally suppress progress without risking the loss of sovereignty. They relied on innovation to keep them in power and so they allowed innovation to take place. Over time, new ideas as well as greater inclusivity of political and economic frameworks allowed for a sustained increase in human numbers and prosperity.

For the first time, the individual was sovereign, innovation was honored and human rights were (increasingly) respected. Today, the world’s population is at an all-time high even as hunger is at an all-time low. The revolution in ideas and institutions, in other words, transformed humanity’s lot – for the better.

The basic recipe for economic growth is still the same today. Like a beloved family cooking recipe, handed down through the generations, it has stood the test of time. Elected officials can help the U.S. economy continue to grow by allowing the American people to innovate and exchange. To do so, burdensome regulations and taxes should be eliminated and lowered, and trade wars ended.

This first appeared in the American Spectator.

NBC News | Personal Income

The Typical US Worker Out-Earned Inflation by $1,400 a Year

“While higher costs for everything from milk to medicines have preoccupied U.S. consumers in the pandemic era, earnings have also risen enough, on average, to push up households’ purchasing power a bit. And blue-collar workers have been the biggest beneficiaries.

An analysis published in July by economists at the Treasury Department found that the median worker can afford the same representative basket of goods and services as they did in 2019 — plus have an additional $1,400 a year.”

From NBC News.

Wall Street Journal | Wealth & Poverty

The Dramatic Turnaround in Millennials’ Finances

“The median household net worth of older millennials, born in the 1980s, rose to $130,000 in 2022 from $60,000 in 2019, according to inflation-adjusted data from the Federal Reserve Bank of St. Louis. Median wealth more than quadrupled to $41,000 for Americans born in the 1990s, which includes the generation’s youngest members, born in 1996. 

The turnaround has been so dramatic that millennials—mocked at times for being perpetually behind in building wealth, buying homes, getting married and having children—now find themselves ahead.

In early 2024, millennials and older members of Gen Z had, on average and adjusting for inflation, about 25% more wealth than Gen Xers and baby boomers did at a similar age, according to a St. Louis Fed analysis.”

From Wall Street Journal.

Blog Post | Energy & Natural Resources

The Simon Abundance Index 2024

The Earth was 509.4 percent more abundant in 2023 than it was in 1980.

The Simon Abundance Index (SAI) quantifies and measures the relationship between resources and population. The SAI converts the relative abundance of 50 basic commodities and the global population into a single value. The index started in 1980 with a base value of 100. In 2023, the SAI stood at 609.4, indicating that resources have become 509.4 percent more abundant over the past 43 years. All 50 commodities were more abundant in 2023 than in 1980.

Figure 1: The Simon Abundance Index: 1980–2023 (1980 = 100)

Graph highlighting the increase in the SAI over time, as resources have become 509.4 percent more abundant.

The SAI is based on the ideas of University of Maryland economist and Cato Institute senior fellow Julian Simon, who pioneered research on and analysis of the relationship between population growth and resource abundance. If resources are finite, Simon’s opponents argued, then an increase in population should lead to higher prices and scarcity. Yet Simon discovered through exhaustive research over many years that the opposite was true. As the global population increased, virtually all resources became more abundant. How is that possible?

Simon recognized that raw materials without the knowledge of how to use them have no economic value. It is knowledge that transforms raw materials into resources, and new knowledge is potentially limitless. Simon also understood that it is only human beings who discover and create knowledge. Therefore, resources can grow infinitely and indefinitely. In fact, human beings are the ultimate resource.

Visualizing the Change

Resource abundance can be measured at both the personal level and the population level. We can use a pizza analogy to understand how that works. Personal-level abundance measures the size of an individual pizza slice. Population-level abundance measures the size of the entire pizza pie. The pizza pie can get larger in two ways: the slices can get larger, or the number of slices can increase. Both can happen at the same time.

Growth in resource abundance can be illustrated by comparing two box charts. Create the first chart, representing the population on the horizontal axis and personal resource abundance on the vertical axis. Draw a yellow square to represent the start year of 1980. Index both population and personal resource abundance to a value of one. Then draw a second chart for the end year of 2023. Use blue to distinguish this second chart. Scale it horizontally for the growth in population and vertically for the growth in personal resource abundance from 1980. Finally, overlay the yellow start-year chart on the blue end-year chart to see the difference in resource abundance between 1980 and 2023.

Figure 2: Visualization of the Relationship between Global Population Growth and Personal Resource Abundance of the 50 Basic Commodities (1980–2023)

Between 1980 and 2023, the average time price of the 50 basic commodities fell by 70.4 percent. For the time required to earn the money to buy one unit of this commodity basket in 1980, you would get 3.38 units in 2023. Consequently, the height of the vertical personal resource abundance axis in the blue box has risen to 3.38. Moreover, during this 43-year period, the world’s population grew by 3.6 billion, from 4.4 billion to over 8 billion, indicating an 80.2 percent increase. As such, the width of the blue box on the horizontal axis has expanded to 1.802. The size of the blue box, therefore, has grown to 3.38 by 1.802, or 6.094 (see the middle box in Figure 2).

As the box on the right shows, personal resource abundance grew by 238 percent; the population grew by 80.2 percent. The yellow start box has a size of 1.0, while the blue end box has a size of 6.094. That represents a 509.4 percent increase in population-level resource abundance. Population-level resource abundance grew at a compound annual rate of 4.3 percent over this 43-year period. Also note that every 1-percentage-point increase in population corresponded to a 6.35-percentage-point increase in population-level resource abundance (509.4 ÷ 80.2 = 6.35).

Individual Commodity Changes: 1980–2023

As noted, the average time price of the 50 basic commodities fell by 70.4 percent between 1980 and 2023. As such, the 50 commodities became 238.1 percent more abundant (on average). Lamb grew most abundant (675.1 percent), while the abundance of coal grew the least (30.7 percent).

Figure 3: Individual Commodities, Percentage Change in Time Price and Percentage Change in Abundance: 1980–2023

Graph of the 50 basic commodities and there percentage change in time price vs abundance, where abundance has increased significantly as time price falls.

Individual Commodity Changes: 2022–2023

The SAI increased from a value of 520.1 in 2022 to 609.4 in 2023, indicating a 17.1 percent increase. Over those 12 months, 37 of the 50 commodities in the data set increased in abundance, while 13 decreased in abundance. Abundance ranged from a 220.8 percent increase for natural gas in Europe to a 38.9 percent decrease for oranges.

Figure 4: Individual Commodities, Percentage Change in Abundance: 2022–2023

Graph of the percentage change in abundance of the 50 commodities.

Conclusion

After a sharp downturn between 2021 and 2022, which was caused by the COVID-19 pandemic, government lockdowns and accompanying monetary expansion, and the Russian invasion of Ukraine, the SAI is making a strong recovery. As noted, since 1980 resource abundance has been increasing at a much faster rate than population. We call that relationship superabundance. We explore this topic in our book Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet.

Appendix A: Alternative Figure 1 with a Regression Line, Equation, R-Square, and Population

Graph showing that even with population growth, the resource abundance shown by SAI has increased significantly.

Appendix B: The Basic 50 Commodities Analysis: 1980–2023

Appendix C: Why Time Is Better Than Money for Measuring Resource Abundance

To better understand changes in our standard of living, we must move from thinking in quantities to thinking in prices. While the quantities of a resource are important, economists think in prices. This is because prices contain more information than quantities. Prices indicate if a product is becoming more or less abundant.

But prices can be distorted by inflation. Economists attempt to adjust for inflation by converting a current or nominal price into a real or constant price. This process can be subjective and contentious, however. To overcome such problems, we use time prices. What is most important to consider is how much time it takes to earn the money to buy a product. A time price is simply the nominal money price divided by the nominal hourly income. Money prices are expressed in dollars and cents, while time prices are expressed in hours and minutes. There are six reasons time is a better way than money to measure prices.

First, time prices contain more information than money prices do. Since innovation lowers prices and increases wages, time prices more fully capture the benefits of valuable new knowledge and the growth in human capital. To just look at prices without also looking at wages tells only half the story. Time prices make it easier to see the whole picture.

Second, time prices transcend the complications associated with converting nominal prices to real prices. Time prices avoid subjective and disputed adjustments such as the Consumer Price Index (CPI), the GDP Deflator or Implicit Price Deflator (IPD), the Personal Consumption Expenditures price index (PCE), and the Purchasing Power Parity (PPP). Time prices use the nominal price and the nominal hourly income at each point in time, so inflation adjustments are not necessary.

Third, time prices can be calculated on any product with any currency at any time and in any place. This means you can compare the time price of bread in France in 1850 to the time price of bread in New York in 2023. Analysts are also free to select from a variety of hourly income rates to use as the denominator when calculating time prices.

Fourth, time is an objective and universal constant. As the American economist George Gilder has noted, the International System of Units (SI) has established seven key metrics, of which six are bounded in one way or another by the passage of time. As the only irreversible element in the universe, with directionality imparted by thermodynamic entropy, time is the ultimate frame of reference for almost all measured values.

Fifth, time cannot be inflated or counterfeited. It is both fixed and continuous.

Sixth, we have perfect equality of time with exactly 24 hours in a day. As such, we should be comparing time inequality, not income inequality. When we measure differences in time inequality instead of income inequality, we get an even more positive view of the global standards of living.

These six reasons make using time prices superior to using money prices for measuring resource abundance. Time prices are elegant, intuitive, and simple. They are the true prices we pay for the things we buy.

The World Bank and the International Monetary Fund (IMF) track and report nominal prices on a wide variety of basic commodities. Analysts can use any hourly wage rate series as the denominator to calculate the time price. For the SAI, we created a proxy for global hourly income by using data from the World Bank and the Conference Board to calculate nominal GDP per hour worked.

With this data, we calculated the time prices for all 50 of the basic commodities for each year and then compared the change in time prices over time. If time prices are decreasing, personal resource abundance is increasing. For example, if a resource’s time price decreases by 50 percent, then for the same amount of time you get twice as much, or 100 percent more. The abundance of that resource has doubled. Or, to use the pizza analogy, an individual slice is twice as large. If the population increases by 25 percent over the same period, there will be 25 percent more slices. The pizza pie will thus be 150 percent larger [(2.0 x 1.25) – 1].