What Drives Economic Growth?

I was laying in bed last night as my mind wandered to nerdy things. I was thinking about Keyensian philosophy and the Paradox of Thrift. If people horde their money, that unspent money does no good for anyone, and trade does not happen, so people are not increasing their value. This causes economic stagnation. Then, of course, you get the concerns of more hording if the economy stagnates, and the cycle continues. It’s not a perfect theory, and I have a lot of problems with it, but that’s the gist of it.

But why would people not spend their money? If products are more valuable to them than the money they hold, they will purchase that product. If they’re just holding off, waiting to get more value for their dollar, their demand for that product is not high enough to demand it now such that they can enjoy it sooner. At some point the waiting is not worth the discount and they will purchase the product.

Anyway, the idea that dawned on me last night is that there is a point in economic development, assuming no new technology or invention, in which optimization and productivity improvements maximize, and all products are sufficiently available to satisfy all needs. In other words, if there is no other development, at some point, farmers and food producers produce all the food needed for society with only a few needed resources. Homebuilders have built all the needed homes, and we have enough doctors to care for everyone’s health. The rest of the economy is given to unnecessary, but life improving, services. But is there such a thing as too much food? Is there such a thing as too many massages? Is there such a thing as too many movies? Yes, there certainly is. If, say, 20% of the economy was needed to provided necessities, and the other 80% was dedicated to entertainment and luxury, where is there room for growth?

Let me try to make the point a different way using a historic example, the dark ages. With the existing technology available, everyone was provided shelter, food, some medical attention, and occasional forms of entertainment through their economic structure. At their level of technology, they had maxed out their economy. It stagnated, held to a constant standard of living for centuries.

I wish I could explain my thoughts more clearly, but the point is that eventually, all our current technology, without any further developments, can only do so much, and at that point the economy maxes out and stagnates. There is a max level of efficiency based on the current technology node that will ultimately be attained. At that point no more work can be done to improve that industry, and everyone then has all that they can have. I should restate that: they can have more, but it is of no value to them to have more, it does them no good. For example, you could have a 24 oz steak, but you can’t even finish a 12 oz steak, so what’s the point?

The ultimate conclusion of this though experiment is that technology and innovation are drivers of economic growth. After each new technology develops, the economy may adjust, re-optimize, and then wait for the next technology development to come. In our modern society, technology and innovation are non-stop, thus the ability to improve efficiency never stop either. So long as this pattern continues, we will always have economic growth.

However, we have come to face political philosophies that tend to stunt and inhibit the driving forces of the economy. These philosophical ideas, while perhaps not intended for the purpose of stunting growth, nevertheless have the unerring effect of dissuading wealth creation through innovation. First, wealth redistribution and progressive taxation policies greatly reduce the rewards earned by successful entrepreneurs. This slides the risk v. reward balance toward the risk side, thus reducing the number of willing entrepreneurs. Second, the red tape policies delay, inhibit, and often destroy good ideas and talent that could possibly give society another technological leap forward. These policies include federal standards and regulations, business licensing laws, health and safety procedures (e.g. the FDA), and the such. These make the costs of developing new technologies astronomical, thus greatly increasing the risks, and again making the risk v. reward balance risk-heavy. Third, the policies that dissuade maximized efficiency promote an early max out, and thus an early stagnation. These policies include subsidies and protectionist tariffs.

There are likely more I could come up with, but the point is that if we are to promote a growing economy, we must eliminate the disincentives and improve the incentives to innovation and entrepreneurship. The risk v. reward balance should be naturally balanced. We have an enormous public sector full of nannies who choose to protect us from ourselves. They are naturally inclined, like any parent, to be risk averse, to not allow their “children” to do anything potentially hazardous. While this mentality prevails in government, innovation and entrepreneurship, and thus economic growth, will be hindered.