Where growth comes from

In an earlier post I attempted to shed a little light on “where wages come from” in order to dispel outdated (but still politically omnipresent) concepts that effectively pit “laborers” against “capitalists.” In our modern economy virtually everyone has the opportunity to not only work but to save, invest, and own land, mostly because of the economic growth we’ve been blessed to have since our founding.

Blessings shouldn’t be expected to continue in perpetuity, though, especially if we violate basic axioms about human behavior. The Church (and Israel before her) has been stressing this lesson for millenia concerning moral behavior. Economists have been stressing this for centuries concerning economic behavior, too. Though violating Church teaching has eternal consequences, the temporal consequences of violating economic teaching (especially on what causes growth) can be quite severe: poverty, income inequality, trade wars (which can turn into real wars), inflation, and recession.

In the political sphere, debates about rich vs poor, capitalism vs socialism vs interventionism, international trade, globalization, outsourcing, just wages, profits, etc., all spring from the fundamental phenomenon of production and trade. Why do we trade in the first place? Should there be less or more trade?

The difference is clear

There is one persistent myth about trade that infects virtually all faulty economic logic: trade is a zero-sum game. This myth has two variants: when two people trade, 1) one side wins and the other side loses, or 2) each side exchanges something of equal value. From a social perspective, then, trade has no net benefit. Examples abound: if owners win, workers lose. If companies win, customers lose. If one country gets richer, other countries get poorer. If we import, domestic business suffers.

In demolishing this myth, the empirical data must first be dealt with. If trade has no net benefit, why do we do it so much? If after any trade I have either a 50% chance of being worse off or a 100% chance of not benefiting at all, why would I engage in so many trades? If trade has no net benefit, why don’t we see more people producing things at home? If 50% of the time that I buy a shirt I’m going to get ripped off, why don’t I make all my own shirts?

The reality, which we all know intuitively, is that trade is a positive-sum game. Both sides win. I don’t get ripped off buying the shirt and neither does the clothing store, because I wanted the shirt more than my money and the store wanted my money more than the shirt. Trade allows each of us to get rid of something we don’t want and get something we do want. This is true if the trade happens between neighbors or between people at different ends of the globe. While you can look at the trade as catering to each person’s greed, you can just as easily look at the trade as promoting care for the other person. In fact, trade does both: if I want to make myself better off, I have to serve others.

Without recognition of this fundamental reality, economic growth isn’t possible. Under the zero-sum presumption, tribes are suspicious of offers from outsiders. Though free-trade often gets blamed for fostering greed and cutthroat competition, it is the mercantilist zero-sum philosophy that drove nations to try to accumulate gold from other nations while never allowing its own gold to leave the borders.

Certainly not every trade is beneficial or should be allowed: abortionists should not be allowed to kill unborn babies; slave traders should not be allowed their “commerce.” Trade that is forced or that violates the rights of unwilling third parties should not be allowed. Aside from legal restrictions, we also must form the consciences of buyers and sellers about the morality of certain legal transactions (e.g., selling alcohol to minors, producing ultra-violent movies, etc.).

If we are supposed to care for our own, our family’s, and our neighbor’s material well-being, it is prudent to recognize the most effective (and morally acceptable) ways to achieve economic growth. Whether it is politically popular or not, market exchange outshines any other economic system.

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8 thoughts on “Where growth comes from

  1. franklin says:

    This is simply not true. The median HOUSEHOLD income in the U.S. is about $50,000 per year. This is not enough money to support a family, pay for housing, food and other NEEDS and to save. This column shows a callous disregard for the millions of families in the US who are working HARD and barely making ends meet. Your statement that “In our modern economy virtually everyone has the opportunity to not only work but to save, invest, and own land, mostly because of the economic growth we’ve been blessed to have since our founding” is nothing short of a lie.

    1. Tim Shaughnessy says:

      What is simply not true? The main point of the post was noting that trade is not a zero-sum game; do you disagree?

      It’s “nothing short of a lie?” The homeownership rate is about 65.5% which is only a snapshot picture; most people who don’t own homes now will likely do so in their lifetimes. I don’t have the data at hand, but I would bet a large majority of workers do have a savings account and do contribute to a (defined-contribution) retirement plan or IRA.

      I’m truly sorry if times are hard for you and others. It’s no rose garden in the world of higher education either. But things aren’t going to get better if we enact policies that will further erode our ability to grow, or if we are ignorant about what causes growth in the first place. The only way to get household income up is to 1) radically reform government spending, and 2) create an economic climate conducive to business growth.

    2. Joe M says:

      franklin. How does your observation of median household income dispute Tim’s statement? — FWIW, the median household income counts college students as a “household”. So, that number is a bit misleading the way you referred to it. — Even if people were on average raising families on that number, the average mortgage is around $1800. That would seem to be covered by $50k with enough left over for living expenses and some savings.

  2. The PRIORITY of Labor says:

    I thought this is supposed to be a Catholic website. Time to spend some time with Laborem Exercens. The PRIORITY of Labor! Labor creates wealth.

    1. Tim Shaughnessy says:

      http://www.catholicvote.org/discuss/index.php?p=34851

      http://www.catholicvote.org/discuss/index.php?p=35104

      http://truthandcharity.net/labor-capital-and-entrepreneurship-day/ in which I report “Labor contributes 32% to growth in real GDP, but -12% in per capita GDP…Capital contributes 19% and 20%, respectively.”

    2. Joe M says:

      “The PRIORITY of Labor”. What/who do you think is gaining at “labors” expense?

  3. Insosiva says:

    When the nomination in the U.S.?

    1. Robert says:

      Nominations have already taken place: the current president Barack Obama for the Democrats, and former governor Mitt Romney for the Republicans, as well as nominees for much smaller “third parties.”

      The general election — which, without going into the intricacies of the Electoral College, basically elects the president — will be held on Tues., Nov. 6.

      Hope this helps . . .

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