The Wealth of a Nation

In a recent poll, 80% of the respondents regarded economic issues as the determining factor in terms of how they will vote in the upcoming elections1. As I mentioned before, this means that the candidate who convinces the electorate that his policies offer the best route to America’s prosperity will win the 2012 general election. But before we examine the policies of individual candidates, perhaps we can come to some sort of consensus on how we will evaluate America’s prosperity. In other words, what are the indicators that will cause us to proclaim, “America is the most prosperous nation in the world”? And upon determining what those indicators are, perhaps we can use the same criteria to answer a more fundamental question – How effective has our model of capitalism been in helping us achieve the prosperity we seek? How effective is it likely to be in the future? (I will leave this topic for future posts).

At the peak of the recent recession in March 2009, the S&P 500, which is an index of 500 different stocks capturing 75% coverage of US equities, closed at 676.53 points2, a 13-year low. This number is even more striking considering that in October 2007, the S&P had recorded its highest ever close, at 1565.15 points2. Observing that the index had shed more than 56% of its value in less than 18 months, everyone agreed that the economy was in a woeful state. This morning, I noticed that the S&P opened at 1316.16 points, which is just 16% shy of the record high it posted in 2007. Given that the stock market has recovered most of its losses, should we conclude that the state of the economy is healthy again? Let us consider another example. The most commonly used indicator of the economic progress of a nation is the Gross Domestic Product (GDP), which is the market value of all the goods and services produced in a given country. In 2010, US GDP was valued at about $14.6 trillion, the largest in the world (by comparison, China’s GDP, which is the second largest, was $5.9 trillion)3. More importantly, the GDP of the United States in 2010 grew by 3% compared to 2009, which is similar to its annual growth rate in 2005, when the economy was supposedly humming3, 4. Are these numbers persuasive enough to nullify the economy as a deciding factor in the upcoming elections?

If the answer in both cases is “NO” (which, I assume, it is), we should ask ourselves why this is. Perhaps it is because we are satisfied not by economic growth alone, but when this economic growth correlates with an increase in our standard of living. In other words, it is not sufficient for our economic system to be successful by itself; it should also be a success socially (at least to some extent). For instance, our assessment of the economy is more likely to be favorable when growth is coupled with a significant reduction in unemployment, which today stands at an abysmal 8.5%, or with a reduction in the number of people living below the poverty line, which was 15.1% of our population in 20105. Likewise, we are more likely to be satisfied if our economic system enhances our ability to get a better education, makes health care more affordable, and improves the quality of our living conditions and our natural environment.

Writing in the dawn of a new social order, Adam Smith remarked that the wealth of a nation consists not of gold, silver or its hoard of treasures, but of the goods that all the people of a nation consume6. Wouldn’t our ability to consume increase if we were less poor, and more educated, healthy, and employed? Everyone who thinks so should use these criteria as yardsticks to measure the strength of the economic policies of our candidates in the upcoming elections.

References

1. Rasmussen Reports (2011).

2. The Wall Street Journal.

3. The World Bank.

4. Trading Economics.

5. CIA (2012). The World Factbook.

6. Heilbroner, R. L. (1999). The Wordly Philosophers: The lives, Times and Ideas of the Great Economic Thinkers.

Democracy and Capitalism: melding two systems of liberty

Wrote Thomas Jefferson in The Declaration of Independence, “we hold these truths to be self-evident: that all men are created equal; that they are endowed by their Creator with certain inalienable rights; among these are life, liberty, and the pursuit of happiness; that to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed”1, and on these principles was ushered the first stable democracy of the world into existence. “Four score and seven years” later Abraham Lincoln would ratify the same principles in his immortal Gettysburg address by defining American democracy as a “government of the people, by the people, for the people”.

But if every individual engages freely in the pursuit of their own happiness, how could society ensure the completion of its tasks? For most of the history of civilized man, social tasks were realized either by tradition (for instance, the caste system in India) or through the authoritarian edicts of kings (such as in pyramid-building Egypt and the Roman empire). Obviously, neither system would work in a self-governing society. A new social order was required, and it would gradually emerge from the workings of what we call the market system. The framework of this new social system is that everything that we can imagine as necessary either for our survival (food, clothing, shelter, medicines), or for improving our standard of living (education and our inexhaustible sources of entertainment), has its own value, i.e. its price. To satisfy this price, individuals employ their skills and services “freely” (those skills and services also have their price). However, when the services offered by several individuals coincide, competition ensues. The ultimate result of this competition is the provision of goods (1) in the quantities that society wants, and (2) at the price that society is willing to pay for them. In this way, wrote Adam Smith in his remarkable treatise titled The Wealth of Nations, the “invisible hand” of the market steers “the private interests and passions of men” in a direction “which is most agreeable to the interest of the whole society”2. He called the market system, known today as capitalism, “the system of Perfect Liberty”.

And so, based on these core principles, it seems like a good idea that democracy should be wedded to capitalism in a society that seeks prosperity. As a testament to this idea, 18 out of the 20 countries with the highest GDPs (gross domestic product) in the world have representative democracies and capitalist economies (China and Iran being the exceptions) 3. Also, more than 123 out of 192 countries in the world (as of 2007) were electoral democracies, and an overwhelming majority of countries (democracies or not) have capitalist economies. The point to note, however, is that although a majority of countries have capitalist economies, the flavor or style of capitalism in the United States is quite different from those of Germany, Japan, Norway, Canada, and France. Likewise, the democratic system of the United States varies significantly from that of Britain, or that of India.

Because the 2012 general election is being set up as critical for the “soul of America”, let us be clear about what aspect of “America’s soul” are we discussing here. For starters, candidates from neither party believe in dismantling either democracy or more relevantly, capitalism. Rather, the debate is about how effective our specific model of capitalism is. Does it adequately provide our society with the goods and services it wants, at the prices that we are willing to pay? What are the social tasks we need done and does our economic system ensure the completion of these tasks? Does our economic and political system give individuals in our society sufficient opportunities to develop, and then employ their skills and services freely to meet their needs? My hope is that each candidate will clearly enunciate the initiatives they will take to address these questions.

References

1. Peterson, M.D., ed. (1977). The Portable Thomas Jefferson.

2. Heilbroner, R.L. (1999). The Wordly Philosophers: The lives, Times and Ideas of the Great Economic Thinkers.

3. CIA (2012). The World Factbook. https://www.cia.gov/library/publications/the-world-factbook

Initial Questions

On the eve of this presidential election year, I spent some time watching the debates organized to decide the nominee from the Republican Party. What struck me most about these debates was the attempt by the candidates to frame this election as being about the philosophy on which America was founded and about either preserving that philosophy, or fundamentally altering it. Whether the outcome of this particular election will be so consequential is anyone’s guess, but these attempts inspired me to examine and clarify my own political and economic views. Given the prevailing economic conditions, this election will likely be won by the candidate who can most effectively convince the voters that their economic vision offers the best path towards prosperity. However, the purpose of this blog is not so much to endorse the views of one candidate/party over the other (although I will endorse a candidate who best represents my views), as it is to independently determine answers to such questions as: What generates the wealth of a nation? Who are the job creators of this nation and why aren’t they rescuing us from this recession? What are the functions of the federal and state governments in this economy and what should their roles be? How does our government work, and how should it work? What is the role of America in the world? I feel that a deeper understanding of these and other issues will enable us to be more discerning about our choices and perhaps, even direct our elected representatives to more accurately execute our will.