The third installment in a series by Michael Kruse about Christians and economics. I think many of us make remarks about economics on the basis of the Bible, but do we understand the economic theory at work in our statements or in our world?
Raw materials are extracted to create graphite. The graphite is transformed into graphite rods. Trees are grown and harvested. The lumber is processed into wooden cylinders that will hold the graphite. Tin is extracted from the ground. The raw tin is processed and rolled it into tiny cylinders for eraser holders. Raw materials are extracted for the eraser. These materials are processed and shaped into an eraser heads. Dye is created that will go into the paint that will go on the pencil … Getting the picture? Countless people in various locations are accomplishing all these tasks. But there is more.
Consider the sophisticated machinery involved at every step in this process. Each of those machines contains countless parts made of many different materials. Each of those was made from raw materials that had to be extracted from the earth, processed into components, and then assembled. These machines are also part of making a pencil.
We can go
deeper beyond this to the machines that created the machines to create the pieces
for the pencil. How about the machines that assemble the pencil? We haven’t even touched on the
transportation and communication infrastructure that allows us to move these
components and final products from place to place. There is much more. I’m
radically simplifying!
At each step
in this process, buyers and sellers are calculating the supply and demand for
their one part of the process. But here is the amazing thing: There is no
pencil czar monitoring the need for pencils and assuring that they are
supplied. No one knows how many pencils
are needed and no one knows how to make them. The vast majority of
participants in this pencil making process have no clue that they are even contributing
to the ultimate creation of a pencil. Yet through independent responses to
dynamic information and incentives (i.e. prices), a sufficient number of
pencils appear at a reasonable price every day.
Now take a
close look at items around you … from a stapler, to a book, to a computer.
Reflect on all the materials and processes that have gone into creating those
items. It is impossible to visualize how these things came to be, yet they all
appear with us giving barely a thought to their origins.
This
experience is new, having emerged in the past two centuries. Throughout most of
human history households produced virtually everything they consumed by growing
things or by extracting things from the ground. People lived in small communities and trade was largely
restricted to people within those communities. Imagine small communities of 100-500
people attempting to create pencils (much less cell phones or computers) from
indigenous materials. It cannot be done. What changed? At least three important
shifts happened.
From undifferentiated labor to specialized labor
– While there have been artisans from the dawn of civilizations, the great
majority of people have been agriculturalists. Over the past two hundred years,
societies have developed to where the masses spend years developing specialized
skills in occupations for which they are gifted. That makes each task more productive than if performed
indiscriminately by generalists. By cooperating with other specialized workers
and by engaging in trade, productivity (output per worker) has radically increased.
Few people are now needed for agricultural production. Entire new industries
spring up fulfilling ever narrower functions.
From muscle power to machine power – Muscles
(human and animal) have been the primary (not exclusive) source of productive
power throughout most of human history. Machinery powered by steam, combustible
fuels, electricity, and atomic reactions, have advanced human productivity
beyond what our ancestors would have dreamed. Machine power also led to the
creation of communication and transportation infrastructure, moving people,
commodities, goods, and information in previously unimagined ways and speeds.
From small isolated communities of face-to-face
exchange to a complex web of global market exchange – Centuries in the
making, hierarchical pyramidal societal structures of ancient societies gave
way to human webs of horizontal integration (i.e., “The World is Flat.”) Markets
are the information and incentive networks that coordinates billions of economic
decisions, moving resources from less valuable uses to more valuable uses.
Markets are what make possible our economic cooperation with others beyond our
small networks of family, friends, and acquaintances.
What has
this meant in practical terms? Using purchasing power parity (PPP) dollars,
economists attempt to normalize economic realities across history. Economist
Brad DeLong estimates (using 1990 PPP dollars) that annual global per capita gross
domestic product was about $90 in ancient history. It rose to $109 at Christ’s
birth. Between then and 1750 it rose to $178. Between then and 2000 it rose to
more than $6,600 and that was during a period when the population grew from
less than a billion people to nearly seven billion!
Are we on
the verge of Utopia? Hardly. When annual per capita income rises above a few
thousand dollars, international studies show there is no correlation between
increased income and increased happiness. Following Maslow’s hierarchy of needs,
societal needs shift to less material concerns as income rises. Over the past
half-century, the U. S. and Western nations have moved into a post-industrial
post-materialist age where basic material and safety needs are no longer the
primary concern for the vast majority of the population. Establishing identity and
self-expression have become central. Services that involve little material
production have become more prominent. Endless material expansion will not bring
happiness but material expansion is critical for improving the lives of world’s
poor. Furthermore, the “flattening” of the world is leading to major upheaval
in the way long-standing societal institutions have functioned in societies.
That is creating a sense of dislocation and chaos with no clear sense of where
it all leads.
Nevertheless,
this post hopefully highlights the centrality of markets as the real time
feedback loop of information and incentives that they are, coordinating the
work of countless specialized workers and industries. Markets are not perfect
and since they incorporate both the virtuous and not so virtuous acts of human
beings into the mix they will never generate the Kingdom of God. What tends to
separate economists on markets is how “leaky” they believe the markets are in
capturing all the relevant information and costs (including environmental
costs), and how much management is needed for them to function well.
However,
what economists overwhelmingly agree on is the necessity of healthy markets for
prosperity. What cannot be overlooked is the profound improvement labor
specialization, mechanization, and markets have brought to human existence.
That improvement is expanding through the world, despite occasional setbacks
like the current recession. Even economists who believe that markets function best
with little intervention don’t deny that markets are imperfect. The question
economists have for the critic is, “What alternative dynamic feedback loop of
information and incentives do you propose to take their place?”
We will have
more on this revolution in productive capacity next week but for now, as a
Christ follower, what opportunities or challenges do you see? Are there
theological implications?
(Note: The
pencil example is loosely borrowed from an essay by Leonard Read “I, Pencil. My
Family Tree as told to Leonard E. Read” written fifty years ago.)
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