Economists have a gaping hole in their understanding. Since the study of economics began, no one has yet figured out how prosperity is created. Until now.
In our long history, there have been times when a nation or civilization was prosperous, but those times were fleeting, singular and unrepeatable, for example “the Glory of Rome.” The formula for social prosperity remained elusive.
In my book, Freedom Revealed, I discuss the three foundations of nature, or how the world works: Competition, waste and ease.
A common statement of environmentalists is that there is no waste in nature. If there is no waste, what is the mechanism that eliminates it? The answer is competition.
A mistake economists continually make is discussing competition and waste in a vacuum, as if they are separate and unrelated. In reality they are inextricably connected like opposite ends of a seesaw. Imagine competition on one side with waste on the other. As competition goes up, waste goes down and vice versa.
There is no exception— “Competition Eliminates Waste”— is a rule of nature.
The third foundation of nature is everything moves to ease. This doesn’t mean that nature is easy, rather that everything takes the easier path. This is why we have signs in our national parks that say “ Do Not Feed the Animals.” If animals are offered a free lunch, they take it.
Our big brains have allowed us to create two systems that other animals don’t have, the marketplace and government. When we analyze these two systems we realize that, like nature, the marketplace is a competitive system. Government, on the other hand, is a non-competitive system. Each system has different roles and capabilities.
In the marketplace, competition continually works to eliminate waste. Humans, like most animals, are hard wired to compete. The simple act of learning is a form of competition. As we learn more we can do more, avoid more pitfalls, and generally make our lives easier. Ease is the focus of the marketplace. We trade based on our perceived best interest, or what makes our lives easier.
The elimination of waste and the desire for ease is the foundation of prosperity.
Government, however, plays a role, too.
Humans are social animals and live in groups. The first thing groups do when they form is make rules. Rule-making was the beginning of government.
It doesn’t make any sense to have two or more governments, so government must be singular, meaning non-competitive. The central purpose of government is making laws, rules, and regulations. It is also tasked with enforcing the laws it enacts. Taken together, a framework is formed that fosters and compels government growth.
The marketplace and government are intertwined and overlap. It is the amount of overlap that determines ultimate prosperity. Too little government and we have anarchy, too much government and we have arbitrary power or despotism. The trick is to get the overlap “just right.”
When there is anarchy, there is very little rule of law. A society devolves into one in which only the strong survive. Individuals focus on self-protection. The marketplace is deformed because anything you work for can be stolen.
With too much government the individual is completely subjugated to the whims of a capricious government. People and the marketplace are micromanaged preventing individual thought and initiative. The operation of the marketplace is catastrophically distorted. Competition is replaced by government fiat, destroying any mechanism for waste reduction.
There is a way to get things “just right.” A strong constitution that applies laws equally and protects individuals from the mob, while also limiting the scope and reach of governmental power, gives society a chance at reaching this “Goldilocks” of government.
The Constitution of the United States is just such a document. Our country’s founders were careful to lay out the duties and responsibilities of the legislative, executive and judicial branches of government while creating a unique structure of “checks and balances,” purposefully designed to keep governmental over-reach limited.
This framework prevents major distortions to the marketplace, the engine of prosperity. Competition is allowed to naturally eliminate waste while individuals are allowed to naturally trade based on what makes their life easier.
A positive feedback loop results. Competition spurs innovation, making things better, faster, simpler and easier. Staying in business forces further competition which, of course, eliminates more waste, spurring more trade. The process is automatic and unplanned, leading to greater and greater prosperity.
The Nobel committee has an easy one this time. A question that has befuddled the greatest economists for centuries has finally been answered. Best of all, it’s self-evident.
