Jewish World Review December 4, 2012/ 20 Kislev, 5773
Freedom spawns prosperity
By Jack Kelly
http://www.JewishWorldReview.com | Is economic growth over?
Gross Domestic Product has grown 3 percent a year, on average, for the last century. But tax hikes and spending cuts next year will likely send the economy back into recession, the Congressional Budget Office estimates.
The recession triggered by the subprime mortgage crisis was just the "overture," said investment guru Peter Schiff. "The opera is coming" next year, or in 2014, he said.
So batten the hatches. A big storm's coming. Will growth return to "normal" if misguided policies are reversed, as most conservatives think?
No, says economist Robert Gordon. "The rapid progress made over the past 250 years could well turn out to be a unique episode in human history," he wrote in a paper for the National Bureau of Economic Research.
For most of history, wealth barely grew. "It is fairly clear that up to 1800 or maybe 1750, no society had experienced sustained growth in per capita income," wrote Robert Lucas, a Nobel laureate in economics.
The annual rate of growth in the 18th century was just one third of 1 percent. Then, suddenly, growth spurted. World economies grew three times as fast in the 19th century. World production grew at an average annual rate of 2.4 percent in the first half of the 20th century, 4 percent in the second half.
Wealth exploded because of the vast increase in productivity generated by the inventions of the Industrial Revolution. But productivity gains from many of those innovations can happen only once, Mr. Gordon said, and they're petering out. Growth rates will plunge chiefly because population is growing more slowly, and resources -- particularly energy -- are more expensive.
Our old GDP growth rate is "gone forever," agreed Jeremy Grantham, chief investment strategist for an asset management firm. Future GDP growth will average less than 1 percent a year, he predicts.
If they're right, things will get ugly. Before the Industrial Revolution, people thought the only way to get more wealth was to take it from someone else. This sparked class conflict and wars of conquest.
Why -- after thousands of years of stagnation -- did the Industrial Revolution break out where and when it did? That's the key question, but Mr. Gordon and Mr. Grantham didn't ask it.
The answer is found in the ideas of two men.
People have God-given rights no king or parliament has a right to take away, John Locke said in his "Second Treatise on Civil Government" (1690).
When people are free to pursue their self interest, nations prosper, because they make mutually beneficial arrangements, Adam Smith said in "The Wealth of Nations" (1776). The concept of win-win was born.
It's no coincidence the Industrial Revolution bore its first and greatest fruits in Britain and the United States, where the ideas of Locke and Smith were most assiduously followed.
Resource limits are often predicted, but rarely materialize in free societies, because imaginative people create resources out of materials not previously regarded as valuable. Petroleum was considered a pollutant until Canadian geologist Abraham Gesner in 1849 found that kerosene was an excellent substitute for whale oil (a declining resource at the time) in oil lamps. The chief material ingredient in the computer chip is silicon. We're not likely to run out of sand anytime soon. The fracking revolution indicates that all that stands in the way of abundant low-cost energy is government policy.
Most of us have difficulty seeing beyond the here and now. Only a few have the imagination and persistence of a Thomas Edison, who saw the electric light, the phonograph and the motion picture camera when no one else did. When I was the age my daughter is now, I couldn't have imagined the Internet or cell phones. Fortunately, others could.
People like Edison, Eli Whitney, Cyrus McCormick, Clarence Birdseye, Henry Ford and the Wright brothers are very rare. But I doubt such genius was restricted to 19th-century America.
When Thomas Edison was born, the population of the United States was about 23 million. It's 13 times as great now. How many potential Edisons might there be among us, whose creativity is being stifled by overbearing government?
Freedom is the only "natural resource" required for economic growth. If Americans become again as free as once they were to pursue their dreams, economic growth will resume, probably greater than ever before.
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© 2011, Jack Kelly