I. Economic Theory
I. Economic TheoryFor economic theory the question of how to increase wealth and get rich has a straightforward answer.
It has three components: you get richer (a) through capital accumulation, i.e., the construction of intermediate “producer” or “capital” goods that can produce more consumer goods per unit time than can be produced without them or goods that cannot be produced at all with just land and labor (and capital accumulation in turn has something to do with (low) time preference); (b) through participation and integration in the division of labor; and (c) through population control, i.e., by maintaining the optimal population size.
Robinson Crusoe, alone on his island, has originally only his own “labor” and “land” (nature) at his disposal. He is as rich (or poor) as nature happens to make him. Some of his most urgently felt needs he may be able to satisfy directly, equipped only with his bare hands. At the very least, he can always satisfy his desire of leisure in this way: immediately. However, the satisfaction of most of his wants requires more than bare nature and hands, i.e., some indirect or roundabout—and time-consuming—production method. Most, indeed almost all goods and associated sorts of satisfaction require the help of some only indirectly useful tools: of producer or capital goods. With the help of producer goods it becomes possible to produce more per unit time of the very goods that can be produced also with bare hands (such as leisure) or to produce goods that cannot be produced at all with just land and labor. In order to catch more fish than with his bare hands Crusoe builds a net; or in order to build a shelter that he cannot build with his bare hands at all, he must construct an axe.
However, to build a net or an axe requires a sacrifice (saving). To be sure, production with the help of producer goods is expected to be more productive than without it; Crusoe would not spend any time building a net if he did not expect that he could catch more fish per unit time with the net than without it. Nonetheless, the production of a producer good involves a sacrifice; for it takes time to build a producer good and the same time cannot be used for the enjoyment or consumption of leisure or other immediately available consumer goods. In deciding whether or not to build the productivity enhancing net, Crusoe must compare and rank two expected states of satisfaction: the satisfaction which he can attain now, without any further waiting, and the satisfaction that he can attain only later, after a longer waiting time. In deciding to build the net, Crusoe has determined that he ranks the sacrifice: the value forgone of greater consumption now, in the present, below the reward: the value of greater consumption later, in the future. Otherwise, if he had ranked these magnitudes differently, he would have abstained from building the net.
This weighing and the possible exchange of present against future goods and associated satisfactions are governed by time preference. Present goods are invariably more valuable than future ones, and we exchange the former against the latter only at a premium. The degree, however, to which present goods are preferred to future ones, or the willingness to forgo some possible present consumption for a greater future consumption, i.e., the willingness to save, is different from person to person and one point in time to another. Depending on the height of his personal time preferences Crusoe will save and invest more or less and his standard of living will be higher or lower. The lower his time preference, i.e., the easier it is for Crusoe to delay current gratification in exchange for some anticipated greater satisfaction in the future, the more capital goods Crusoe will accumulate and the higher will be his standard of living.
Second, people can increase their wealth through participation in the division of labor. We assume that Crusoe is joined by Friday. Because of their natural, physical, or mental differences or the differences of the “land” (nature) they face, almost automatically absolute and comparative advantages in the production of various goods emerge. Crusoe is better equipped to produce one good and Friday another. If they specialize in what each is particularly good at producing, the total output of goods will be larger than if they had not specialized and remained in a position of an isolated and self-sufficient producer. Alternatively, if either Crusoe or Friday is the superior producer of every good, the all-around superior producer is to specialize in those activities in which his advantage is especially great and the all-around inferior producer must specialize in those activities in which his disadvantage is comparatively smaller. Thereby, too, the overall output of goods produced will be greater than if each had remained in self-sufficient isolation.
Third, the wealth in society depends on the population size, i.e., on whether or not the population is kept at its optimum size. That wealth depends on the population size follows from the “law of returns” and the “Malthusian law of population,” which Ludwig von Mises has hailed as
one of the great achievements of thought. Together with the principle of the division of labor it provided the foundations of modern biology and for the theory of evolution; the importance of these two fundamental theorems for the sciences of human action is second only to the discovery of the regularity in the intertwinement and sequence of market phenomena and their inevitable determination by the market data. The objections raised against the Malthusian law as well as against the law of returns are vain and trivial. Both laws are indisputable.1
In its most general and abstract form, the law of returns states that for any combination of two or more production factors there exists an optimum combination (such that any deviation from it involves material waste, or “efficiency losses”). Applied to the two original factors of production, labor and land (nature-given goods), the law implies that if one were to continuously increase the quantity of labor (population) while the quantity of land (and the available technology) remained fixed and unchanged, eventually a point will be reached where the physical output per labor-unit input is maximized. This point marks the optimal population size. If the population were to grow beyond this size, income per head would fall; and likewise, income per head would be less if the population were to fall below this point (as the division of labor would shrink, with an accompanying efficiency loss). To maintain the optimal level of income per person, then, the population must no longer grow but remain stationary. Only one way exists for such a stationary society to further increase real income per head or to grow in size without a loss in per capita income: through technological innovation, i.e., by the employment of better, more efficient tools made possible through savings brought about by the abstention from leisure or other immediate consumption. If there is no technological innovation (technology is fixed), the only possible way for the population to grow in size without a concomitant fall in per capita income is through taking more (and possibly better) land into use. If there is no additional land available and technology is fixed at a ‘given’ level, however, then any population increase beyond the optimal size must lead to a progressive decline in per capita income.
This latter situation has been referred to also as the “Malthusian trap.” Ludwig von Mises has characterized it thus:
The purposive adjustment of the birthrate to the supply of the material potentialities of well-being is an indispensable condition of human life and action, of civilization, and of any improvement in wealth and welfare. ... Where the average standard of living is impaired by the excessive increase in population figures, irreconcilable conflicts of interest arise. Each individual is again a rival of all other individuals in the struggle for survival. The annihilation of rivals is the only means to increase one’s well-being. ... As natural conditions are, man has only the choice between the pitiless war of each against each or social cooperation. But social cooperation is impossible if people give rein to the natural impulses of proliferation.2
It has been already described and explained (in the previous chapter) how all this worked out in hunter-gatherer societies. It is conceivable that mankind had never left the seemingly comfortable hunter-gatherer lifestyle. This would have been possible, if only mankind had been able to restrict all population growth beyond the optimal size of a hunter-gatherer band (of a few dozen members). In that case, we might still live today very much like all of our direct forebears had lived for tens of thousands of years, until some 11,000 or 12,000 years ago. As a matter of fact, however, mankind did not manage to do so. The population did grow, and accordingly increasingly larger territories had to be taken into possession until one ran out of additional land. Moreover, technological advances made within the framework of hunter-gatherer societies (such as the invention of bow and arrow some 20,000 years ago, for instance) increased (rather than decreased) the speed of this expansionism. Because hunters and gatherers (like all nonhuman animals) only depleted (consumed) the supply of nature-given goods, but did not produce and thus add to this supply, better tools in their hands hastened (rather than delayed) the process of territorial expansion.
The Neolithic Revolution, which began about 11,000 years ago, brought some temporary relief. The invention of agriculture and animal husbandry allowed for a larger number of people to survive on the same, unchanged quantity of land, and the institution of the family, in privatizing (internalizing) the benefits as well as the costs of the production of offspring, provided a new, hitherto unknown check on the growth of population. But neither innovation brought a permanent solution to the problem of excess population. Men still could not keep their pants up, and the greater productivity brought about by the new, nonparasitic mode of production represented by agriculture and animal husbandry was quickly exhausted again by a growing population size. A significantly larger number of people could be sustained on the globe than before, but mankind did not yet escape from the Malthusian trap—until some 200 years ago with the beginning of the so-called Industrial Revolution.