One of the most difficult concepts to get across when teaching economics to undergraduates is the idea that economic growth is a matter of the creation of value, and not the creation of new “things.” Scientifically, of course, we never create new things. The number of atoms in the universe is what it is. Even if we think solely in material terms, turning a pile of wood and a box of nails into a ladder doesn’t change the number of atoms. It just rearranges them in a different form.
But even thinking materially this way isn’t enough. The important thing about turning the wood and nails into a ladder is that the new configuration of atoms better serves human wants than does the pile of wood and box of nails. What human activity does is to create value by rearranging the material of the world into configurations that better serve human wants.
Economic progress, and human progress more generally, is not a matter of making more stuff. It’s a matter of finding better ways to arrange the stuff we do have so as to create more and more value. That is why middlemen are important, even though they create nothing physical. They specialize in a particular kind of rearranging—moving things to a place of higher value. It is also one reason I prefer to speak of human or economic progress rather than growth. In some sense we don’t “grow” anything. We rearrange stuff to create value, and it’s that value creation that characterizes human and economic progress.
When Julian Simon said that humanity is the “ultimate resource,” that is what he was talking about. Often that claim is thought to refer to what we might call “invention.” Humans are smart and human minds come up with clever ways of rearranging stuff to create new machines or processes that have not been previously thought of.
Technological advancement is important, of course, but it’s not sufficient to ensure human progress. Inventions aren’t desirable just because we are doing something new and different. They are desirable when they rearrange the material world in ways that deliver value. We want inventions to become innovations that improve lives.
And this is another dimension to the idea of humanity as the ultimate resource. We aren’t just good at coming up with new gadgets. We’re also good at coming up with new gadgets that improve the lives of others. The human ability to imagine not just a new technology, but to see how that technology can create value for others, is the really powerful insight behind humanity as the ultimate resource.
This last point also enables us to see another dimension to Simon’s work that is often overlooked, or misunderstood, by his critics. For humanity’s creativity and inventiveness to be the source of progress, we need to have economic, political, and social institutions that enable us to turn inventions into innovations. History is littered with societies that were, for their time, quite advanced technologically, but that also struggled to turn that technology into improvements in the lives of their citizens. Why the Industrial Revolution and what Deirdre McCloskey calls “The Great Enrichment” happened where and when it did is a function of the interaction between invention and institutions (and I include within the broad notion of “institutions” the ethical norms that McCloskey emphasizes in her work).
Human minds do not automatically create human progress. Those minds require the freedom and feedback associated with the institutions of liberalism in order to turn invention into innovation by rearranging the material world in ways that are more valuable. For example, without a market economy and the signals of prices and profits/losses it provides, we don’t have a way to determine if an invention really will (or did) create value. We need the “test of trade” to know whether any particular arrangement of atoms will make people better off. And inventors need the freedom to try new things without having to compete against privilege or having to ask for permission.
What Adam Thierer and others have termed “permissionless innovation” (and they are using “innovation” as I’m using “invention”) is central to putting minds to work in the service of progress. Markets, the rule of law, the peaceful transference of power, the security of property rights and contract enforcement, and sound money are all among the liberal institutions that are necessary for the ultimate resource to be the source of human progress.
As one example of this point, consider population growth. One of Simon’s most important arguments was that having more people was a good thing. If humanity is the ultimate resource, then more people means more of that resource. More specifically, more people means more minds that can invent and more hands that can produce. And, in a point that Hayek emphasized, more people also means more different people, expanding the range of possibilities that might emerge from human ingenuity and offering an even finer division of labor.
Rather than seeing people as primarily consumers of resources, like little Pac-men chomping our way through the world, Simon’s vision was that people were first and foremost producers. We add more value to the world than we consume, a point that is true not just of population growth through birth rates but of immigration as well.
But, the critics might say, if we look across the world, there isn’t a clear correlation between population, or population growth rates, and economic progress. How can Simon say that population growth is good? What’s missing, of course, is that for population growth to get translated into economic progress we need liberal institutions. It’s those institutions that enable human beings to be primarily creators of value and not just consumers of resources. We always have to eat. The question is whether we are able to produce enough food to feed the population.
The same story is true of turning inventions into innovations. If we want the creative products of human minds to improve people’s lives, we need liberal institutions to make that happen. And at a time when those institutions are under serious threat from both left and right, this point bears real emphasis. Humanity’s role as the ultimate resource is not a given and human progress is not automatic. Again, humanity has always been inventive and creative, but it’s only since the development of liberal institutions and the bourgeois ethos that we’ve been able to turn that inventiveness and creativity into meaningful progress for an ever-growing number of people.
With liberal institutions under threat, it’s worth remembering the ways in which they have enabled the ultimate resource to be the source of human progress, both materially and morally. I will focus on one area that I’ve emphasized in my own work, which is the effects of market capitalism on the status of women. There is no more striking socioeconomic phenomenon over the last 100 years than the ways in which women have become (nearly) equal players to men both in the marketplace and in public sphere more broadly. The data on labor force participation, wages, and educational attainment, among others, bear this out. And while the legal rights that women gained (or, more properly, were no longer denied) were certainly part of a broader extension of liberal notions of equality that encompassed everything from the end of slavery to marriage rights for same-sex couples, the economic forces at work were at least as powerful.
The evolution of marriage from being a partnership of unequals for the purpose of production to a partnership of equals based on love and companionship was significantly driven by the spread of wage labor and work outside the home and the increased wealth it created. Marital decisions no longer depended on the couple’s compatibility for production. Marriage for love became a possibility for an increasing number of people, with one consequence being that the pressure on men to treat women as equals increased significantly. Marriage moved to a more contractual relationship rather than one of pure dominance, and the benefits for women were enormous.
With children no longer needed to work the fields or factories—again thanks to the increased wages industrialization and capitalism made available to adults—parents could educate their children, including their girls. The increased human capital of young women, combined with ongoing economic progress that increased the demand for labor, made the wages available to women that much greater, drawing them out of the household and into the labor market. The decline in family size as children became less necessary as productive assets also freed women, at least on the margin, to participate in the labor market, not to mention reducing deaths from childbirth.
Advances in household technology, which are a great example of inventions becoming innovations, also reduced the time needed for women to be at home and relieved them of the backbreaking labor of doing the laundry or cleaning the house. All of these changes, which were made possible by the combination of invention and liberal institutions, enabled women to both live lives of greater material comfort and to have the time to become full participants in economic and political life.
The washing machine makes an interesting case study here. I have often asked my Economics of Gender class, after we talk about these ideas, which they think was more important to the progress of women: getting the vote or the washing machine? Before the washing machine, doing the laundry of a family of four or five could take two or three days, as nicely portrayed in the BBC series The 1900 House. It also was women’s work, and girls were often held home from school in order to help. The work was also extremely demanding physically, as it still is for many women across the world who don’t have access to washing machines.
The impact of the washing machine is best described in Hans Rosling’s famous TED talk “The Magic Washing Machine.” Rosling does two things particularly well in that talk that relate to my argument here. First, he nicely illustrates the way in which the washing machine ended the backbreaking work that laundry was and is for women who lack one. Second, and more important, he shows us that the consequences of this particular innovation were not just material but moral.
Yes, women lived easier and more comfortable lives, but the power of Rosling’s talk comes at the end, when, after earlier loading the washing machine with clothes, he pulls out books, pointing out that the time freed up by the machine enabled his mother to read, including to her children, and to learn English. “You put in clothes, you get out books.” That is the real measure of human progress that the washing machine brought: It enabled women to have the time to get educated, educate their children, and become full and equal citizens. Economic progress is both moral and material. The improvements in the ways in which women are able to live and the ways in which they are treated by men are the moral gains of economic progress.
But even Rosling does not quite get the full story, as much as I adore that talk. At the end, he very powerfully thanks “industrialization, steel mills, power stations, and chemical processing industries” that gave women time to read books. As great as all of that is, it’s worth noting that he’s still focused on technology (i.e., invention) as the source of that progress. At an earlier point in the talk he comments that “if you give people democracy, they will vote for washing machines.”
What’s interesting here is what he’s missing. We didn’t get washing machines by voting for them, and technology alone isn’t enough. What’s missing is an explicit recognition of the importance of the liberal institutions of the market. We got washing machines because we had markets and their associated institutions, which enabled that invention to become an innovation through competition and the signals of profit and loss. It was also the market, and not the technology per se, that enabled the cost of those machines to be driven down such that 84 percent of U.S. households below the poverty line had one in 2005. It’s competition, guided by the signals made possible by the liberal institutions of the market, that has raised wages and reduced costs and spread washing machine usage to more and more of the planet, improving the lives of women both materially and morally.
Even though Rosling misses this important point, the way he talks about the progress brought about by the washing machine is right on the mark. Economics is not (just) about the material world and material progress. It’s about how human ingenuity in an environment of freedom, thanks to liberal institutions, makes the world a better place morally as well. From the interdependence created by the division of labor and exchange, and the mutual “thank you” that characterizes it, to the way in which free trade among nations promotes peace, economics helps us to understand how liberal institutions free the ultimate resource of humanity to create human progress and a society of cooperation instead of conflict.
The deep lesson of Julian Simon’s work, and one that I hope I’ve emphasized here and elsewhere in my own contributions, is that there’s nothing automatic about human progress. The amazing gains we have seen, and the crucial role of the ultimate resource of human ingenuity in making them possible, are real, but they can only work in an environment characterized by the institutions of the liberal order.
As we concern ourselves more and more with spreading both human progress and the gains in equality that progress engenders to more of the planet, we must foreground the role of liberalism in making that possible. It would be a tragic irony if those who are the most passionate advocates for the greater progress of the poor and historically marginalized managed to, in their understandable zeal to correct historical wrongs, destroy the institutions that have made the very real past progress of those groups possible.
A defense of liberal institutions is needed now more than ever, and Julian Simon’s work, and the work of the previous winners of the Simon Award, will be crucial in providing it.