To Relieve Human Suffering, Unleash Economic Growth

Adam Smith, the founder of economics coined the phrase laissez faire, meaning "let do" or "let (it) be." His lesson: to allow for wealth creation and economic growth, government should play a limited role in the economy beyond protecting people and their property, enforcing the rule of law, and settling disputes judiciously.

Yet throughout man's history, the simple idea of laissez faire versus command and control from "our betters" continues to be argued. Today's column looks at the principles of wealth creation and economic growth along with some facts of American economic history. When combined, the debate over the role of government in the economy finds a scientific conclusion like Galileo versus the Pope.

The institutions of society act as a civilizing force separating rational man from barbarism. The fundamental role of the economic institution is to answer the question of scarcity in a world of insatiable self-interested humans. If done so properly, a system of civilized sharing is created.

Success in fulfilling this mission comes in the form of economic growth, otherwise known as increased productivity in meeting the demands (food, clothing, shelter) of more people while simultaneously raising the standard of living for all members of society. The greater the growth the greater the number of people have their needs met. Bottom line, growth enhances, extends, and saves lives.

Economic growth comes from wealth creation. Wealth is created by private ownership of scarce resources or capital that others have determined has value. This capital then has "surplus" value added, via productivity and innovation, and is then traded in the market to meet the demands of others. Until you serve and trade via voluntary exchange, no wealth is created and no economic growth occurs.

Free market entrepreneurial capitalism is the most efficient system yet devised to carry out this process of wealth creation. It functions on five basic principles: freedom, private property, voluntary exchange, competition, and profit motive. This system of principles creates incentives and motivates man to share and ration resources to the greatest good of all. Smith called this process "the invisible hand;" as opposed to the all too visible fist of a commanding elite.

Logic tells us that anything that inhibits wealth creation hurts growth and harms society. So a government that "lets" the economy "be" is vital for life saving wealth creation to function effectively.

Since the Constitution was ratified in 1787, political self-interest and "do something disease" has created an ever expanding government footprint through fiscal/monetary policy, legislation and regulation that has negatively affected economic output. Unfortunately, this government interference has geometrically grown over time with the largest intrusions occurring with the creation of the FED and injection of New Deal and Great Society policies of the progressive movement.

Although we can see continuous growth over our history, it is important to understand two nuanced facts: the economy has grown at lower rates over time, and this unrealized "potential" growth has a cost, that being the pain and suffering of real humans whose faces are unknown and whose needs go unmet.

Statistics show these inhibiting realities in practice. Research comparing the yearly real GDP growth rates (adjusted for inflation in 2009 dollars) show the US economic system has slowly lost efficiencies and its ability to grow over time. Highlights offer some very interesting tidbits into our economic past and present. Hopefully, future policies can reflect on these statistical lessons to focus on wealth creation and growth by shrinking the role of government in the economy.

From 1790 to 1800 the US economy grew 6.31% a year on average which is the greatest decade ever seen in America for wealth creation and economic growth. From 2000 to 2010 the US economy grew 1.66% a year on average, which is the worst decade in US history for economic growth. When the Depression 1930's economy grew 3.07% on average per year, current growth rates are unacceptable.

Since the New Deal in the 1930's when the Federal government became involved in the economy at an unprecedented scale, real GDP growth rates have averaged 3.17% per year. This represents a 29.7 % reduction in growth when weighed against the 4.51% growth average per year produced from 1790-1900.

Growth rates greater than 10% in one year have happened 15 times in US history, but none have occurred since WWII; and 10 of the 15 were prior to 1930's New Deal expansionist policy.

The seven greatest decades for US economic growth (avg./yr.) were 1790's (6.13%); 1940's (6.03%); 1870's (5.55%); 1880's (5.30%) 1850's (5.22%); 1840's (4.67%); and1820's (4.41%). Note: the 1940's were an outlier because of WWII output.

The three greatest years of economic growth were: 1793-94 (13.22%); 1922-23 (13.17%); and 1880-81 (12.50%).

*     From 1790 to 1890 the US economy contracted with negative growth only 4 years; with the worst contraction at -4.59% from a shift in output post-Civil War. The other three years of contraction never exceeded -1.65% and were followed the following year with positive growth.

*     The greatest contractions happened in the 20th century: 1907-08 (-10.81%); 1929-30 (-8.51%); 1930-31 (-12.89%); 1913-14 (-7.66%). The current "Great Recession" of 2008 showed only a -2.78% decline. The prolonged slow recovery shows the government can't help itself but get in the way of growth.

*     Since creation of FED in 1913 to 2010 (97 years) we had 21 negative growth years. Prior to that, from 1790 to 1913 (123 years), we had only 9 negative growth years that averaged only a -3.66% decline in GDP.

*     Real GDP growth rate average by Presidential term: George Washington 6.58%; John Adams 5.48%; Thomas Jefferson 3.33%; James Madison 3.38%; Abe Lincoln 6.02%; Ronald Reagan 3.45%; George W. Bush 2.10%; Barack Obama 1.16%.

*     Economic growth in real GDP per year on average from 2003 to 2013 was 1.70%.

If we truly have compassion for the well-being of others then growth must be our goal. We must be willing to do whatever it takes to enhance wealth creation. Adam Smith offered a laissez faire guide and the nation's history has shown that greater growth rates are possible if the government gets out of the way. It's time to get back to free markets so others can be free from suffering.