Today we turn our attention to economic growth and wealth.
Wealth makes possible the development of new technologies as well as making existing technologies more affordable and efficient. Amassing wealth into large enterprises is what makes it possible to achieve the economics of scale that are so critical to being cost effective in some industries. (Barber shops don’t need economies of scale but industries like auto manufacturing or petroleum refining do.) Wealth makes it possible to fund such large scale ventures. Wealth also makes it possible to set aside a portion of the labor force and raw materials for research and development.
Economic growth and wealth enables people to purchase goods and services that will improve their physical, mental, and spiritual lives, thus improving human capital. As necessities recede as a percentage of people’s income, more wealth is available for savings or for use in whatever other activities and goods one may be drawn to including further education and improved health.
People with better diets are more productive and generate more goods and services, increasing wealth. They can work more hours in given timeframe, they have greater mental acuity while they are working. They are able to be effective at problem solving and innovation. Because they live longer, they also can have more productive years.
Education and experience with technologies increases innovation. This, combined with healthy social networks, gives people the resources to persevere through adversity.
Wealth can be achieved by one of two means. First, someone becomes more productive and is therefore able to garner higher compensation for work. Human capital inputs accruing from technological advances and the knowledge of how to use technology, dramatically increases individual productivity. Simple tools relating to hunting and agriculture were among the first technologies we know of. Modern technologies are still essentially extensions of the human mind and body but they radically amplify the impact of human actions, making people far more productive than they would otherwise be. That high level of productivity is what generates greater income.
Second, wealth is generated when the cost of goods declines relative to income. Someone spending less money for the same amount of goods and services becomes more wealthy. Similarly, quality improvements to products without cost increases relative to income, also generates more wealth.
Arrows L and M (Trade)
The formation of markets allows for greater specialization in economic behavior. It also integrates and synchronizes a larger number suppliers and buyers. Both end up improving efficiency and economic growth.
Greater economic production and excess food supplies create the opportunity for trade with other societies.
Finally, we turn to the fifth component in the cycle of prosperity, namely trade: