Monday, November 19, 2012

Cheap: The Cause of Economic Growth

I've read several articles, like this one from Matt Yglesias, arguing that we don't really know what causes economic growth.

Mr. Yglesias is being too smart by half.

It's obvious what causes economic growth.  First, and obviously, you utilize all your resources.  China has had a great deal of growth by moving underemployed peasants into factories.  However, once that's accomplished, the rest of economic growth is the result of doing more with less: you improve efficiency to do the same task with less wasted or idled inputs, or you substitute expensive inputs with cheaper inputs.

You substitute skilled labor with unskilled labor (deskilling, e.g., the assembly line).
You substitute expensive human labor with cheap mechanical labor (e.g., the shovel for the digging stick).
You substitute expensive energy (e.g., animal muscle power) with cheap energy (e.g., coal).
You substitute expensive land (e.g., urban areas) with cheap buildings (e.g. apartment buildings).

This process of substitution frees up resources for other activities, to the extent that the impossible becomes possible.  Two hundred years ago, no one would have thought that we could carry the greatest musicians in our pocket and have them perform on command.  Compared to a portable orchestra, an mp3 player is ridiculously cheap.  In that case, our economic growth just led us to consume more and more of an ever cheaper format.

Rather than Cheap: the High Cost of a Discount Culture, Cheap is the foundation of economic growth.


Blogger Prof. Roger Kovaciny said...

And you were the one who found the quote that artificial lights is now ten thousand times cheaper than it used to be.

12:46 AM  
Blogger Yoel Natan said...

It's been noted that Chinese factories produce the consumer goods found in Walmart, Menards, etc. They are easy to produce in the sense that once mastered, you then just proceed to make millions of the same item. Now they want to tackle harder things to produce, such as aircraft, pharmaceuticals, financial products, and products that are made in smaller number. That's a big jump from a C or B economy to an A economy. Anyway, if it weren't for manufacturing the more advanced products, the West would be out of business. I read that by 2060, both China and India will have larger GDPs than the US.

1:02 AM  
Blogger Octavo Dia said...

@Yoel Natan

It would be really surprising if China and India did *not* end up with a larger GDP. If you have three times as many people, you'd have to be doing something profoundly wrong to have a smaller GDP.

6:22 AM  
Blogger Noumenon said...

Well, that's one of the nine theories Wikipedia lists for explaining economic growth (Salter cycle). I wouldn't say you've settled the question though.

9:29 AM  
Blogger Octavo Dia said...


No. It really goes far beyond that, as efficiency gains are not sufficient in themselves. For example, eventually you'll reach peak efficiency at producing onion rings from sliced onions. It's only when you go beyond that, and used compressed chopped onions that you can convert waste into a useful product. You can keep getting efficiency gains, but you also need to substitute one thing for another. It kind of wraps together bits of many of the theories on Wikipedia.

9:37 PM  

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