Reasons for Optimism

One friend of mine expressed the opinion that our society was going down the tubes.  Sexual immorality and the social welfare state will cause our country to collapse.  I don't share this point of view.  Our society is not one that is on the verge of collapse.  In fact it's not even in decline.  The economy continues to grow faster than the population and life expectancy is on the rise.  Far from declining, it seems that our society is actually advancing.

One problem for anyone who supports free market economics, as I do, is that economic growth seems to have been faster in the twentieth century than in the nineteenth.  From 1820 to 1900 the total economic output of the world nearly tripled.  As impressive as that sounds from 1900 to 1980 it increased by a little more than a factor of 10.  On the whole, government spending was quite a bit higher in the last period.  What supporters of free market economics have to deal with is accelerating growth at a time when the proportion of the economy controlled by the government actually increased.

So what gives?  If taking money from the rich impedes capital formation thus making economic growth slower why is it actually faster?  We would think that taking more money from investors would leave them with less money to invest in productivity enhancing equipment.

Of course we can't reason from this that more government spending is leading to faster economic growth.  That would be an example of the post hoc ergo propter hoc fallacy.  Just because the economy grew when the government was spending so much money, doesn't mean that the growth was due to the spending.  The error in this thinking is that investment in productivity enhancing equipment is not the sole determinant of growth.  In fact much of this growth was the result of technological improvement.  If a model of growth doesn't include technology, then it is ignoring the most important driver of economic growth.

One problem here is that it is more difficult to predict the advance of technology.  Technology means knowhow.   By definition we cannot know what advances we will make in the future.  This would require knowing what it was that we would know in the future that we don't know now.  The only way for this to be the case would be if we already knew it now, in which case it wouldn't be technological progress.

Technological advance requires people.  I suspect that it helps if the people live near to many other people.  Thus I would suspect that population and urbanization would both increase technological progress.  However, we cannot naively assume that we can increase the population indefinitely on this account.  Technology cannot enable you to do something that is impossible.  If someone were to suggest that we can depend on future advances in technology to enable the entire mass of humans on the earth to approach or exceed the mass of the earth, this claim can be dismissed out of hand.  Thus the population of the earth cannot sustain exponential growth indefinitely.  Fortunately the growth rate seems to be declining.  I suspect that in the long run it will stabilize at the replacement rate.

Another factor is slavery.  If the rich can buy slaves instead of hiring workers, this will have an adverse effect on both technological progress and capital investment.  Instead of investing in equipment, they might find it more profitable to invest in slaves.  Beyond this living in a free society would likely lead to faster technological growth.  A free society is one that goes well beyond eliminating slavery.  Leaders of undemocratic countries may wish to use political suppression in order to stay in power even if none of the people are actually slaves.  Under slavery people are forced to work.  Political repression only prevents them from engaging in any political activity.  In order to accomplish this latter goal, a government would need to prevent the people from peacefully assembling.  Thus political suppression would be likely to prevent them from exchanging all kinds of information involving both politics and production.  Hence the very tools that would be used to keep the leaders in power would stifle economic progress.

While it may be the case that government in increasing in size in proportion to the economy as a whole, we are likely to see an increase in urbanization and political liberty.  Information technology is making it easier for people to communicate.  Thus we are likely to see technology progress even though capital investment won't be quite what it might have been if government were to spend less.  I would not be too surprised if the world economy continued to grow and that is a reason for optimism.