Where does economic wealth and abundance come from? I think there are two primary sources: Production and trade.
Production is quite obvious to most folks. The earth furnishes us with an abundance of raw materials but through human labor, the resources are transformed into something useful. The most ancient form of wealth creation goes back to cultivating and herding. Learning how to cultivate crops and breed animals led to greater quantities of food. Eventually there was an excess over the population’s needs. This freed some of the population to pursue cultic religious rituals, organize armies, create art and music, to become artisans, and to build cities. Even so, agriculture was the foundation of societal wealth and agriculture requires land. Therefore, throughout most of recorded history, land has been the primary measure of wealth.
In the ancient world, if you wanted more wealth, then you had to annex more land. That generally meant taking it from someone else. Land is a fixed quantity. It is a zero-sum game. If we are unequal in our distribution of wealth, then my surplus matches your deficit. Certainly the Greeks, the Romans, and other ancient empires engaged in trade but that trade was limited to a slim minority at the top of the social pyramid. Wealth was considered illegitimate in the Greco-Roman world unless it was amassed through agriculture.
About 300 years age humanity stumbled upon the idea of labor specialization combined with trade; a tipping point if you will. This idea was not invented by Adam Smith. He just observed what was already happening and described it well.
Awhile back I heard Dr. Jay Richards use his example of “The Trading Game.” Richards describes his experience playing the game in the sixth grade. Each student was randomly distributed an item of approximately the same economic value (About $1). Each student was instructed to rate how much they valued what they had received from 1 to 10, with 10 being the highest value. Richards received Barbie trading cards, which he ranked as a 1. Then the students were placed in groups of five and allowed to trade with each other. Richards found a girl with a paddle-ball and they traded to each other’s satisfaction. The students recorded their values again. Finally, they were allowed to trade with anyone else in the room. When the trading was finished, the students wrote down the value of the item now in their possession.
If you added up the students’ ratings at the start of the game and compared them to the sum of the students’ ratings at the end of the first trade, you would find that the sum for the class was higher than it was at the beginning. The sum would be higher still after the second round of trade. Furthermore, no one would have an item of lesser value at the end of the game than the one they started with. There were rules to these exchanges. There was no theft or intimidation allowed so there was no way to go lower than the value of the starting item. Often in these games, everyone’s value goes at least a little higher. “Societal wealth” is expanded purely through trade.
Specialization of labor accelerated the importance of wealth generated through in trade in a couple ways. First, specialization led to improved product quality. Second, it led to much higher productivity by any given worker, lowering the price of goods. High quality and low price in one area fueled a cycle of others specializing labor in their industries, thus driving productivity higher and prices lower. Trade became evermore profitable because it became so much cheaper to exchange with others than to produce everything yourself. Of course, what sent this process into the stratosphere of productivity was the advent of combustion powered machines. They expanded per capita productivity exponentially. The infrastructure and transportation innovations this made possible (and later information technologies) expanded the importance of trade by even greater magnitudes.
To give some sense of the magnitude of change, economist Brad DeLong estimates that the average worldwide per capita income in real dollars rose from $90 in 12,000 BCE to $180 in 1750 CE. Between 1750 and 2000, per capita income rose from $180 to $6,600. This was during a time when the world population grew from less than one billion to more than six billion. The percentage of the world population estimated to be living on less than $1 per day was 84% in 1820, but it is now between 15-20% and falling.
Economics is no longer a zero-sum game. Land in fixed quantities is no longer the driving issue. Worldwide abundance beyond the wildest dreams of the ancients’ is now possible. Many fret over global economic growth, worrying that we will exhaust global resources. However, commodity prices have been declining steadily from 1862 (when reliable records were first kept) to the present and economists see no end to the decline in sight. Declining prices means the supply is sufficient for the foreseeable future. Recycling and renewable resources should eventually make global abundance permanently sustainable.
We need to think of economics more in the sense that we think of relationships. I see someone who is alone and overlooked. I have an abundance of friendships and social networks. What is my response? Feel guilty about my abundance and then try to distribute my friends to the lonely so that I live only a bare level of relational subsistence? No. I extend hospitality. I invite the lonely person into my network of relational exchange where he comes into abundance. My wealth of relationships increases as well. Yet when it comes to economic wealth we often default to zero-sum thinking, believing that if we live on just enough to survive and give away the rest we are doing God’s will. We end up viewing the poor purely as units of consumption rather than seeing them as people called into abundance and relationship who can increase the abundance of others through production and exchange.
Next we will look at the three primary ways we use wealth and how they interrelate.