Even amongst promoters of a free market system, there is a mistake in thinking that technology is the primary driver of economic progress. Advancing technology is incredibly important, but it has to work hand-in-hand with capital investment in order for it to mean anything.
Murray Rothbard wrote on this subject in his book Man, Economy, and State. He refers to Mises on this point.
“The relative unimportance of technology in production as compared to the supply of saved capital becomes evident, as Mises points out, simply by looking at the “backward” or “underdeveloped” countries.30 What is lacking in these countries is not knowledge of Western technological methods (“know-how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect. The African peasant will gain little from looking at pictures of American tractors; what he lacks is the saved capital needed to purchase them. That is the important limit on his investment and on his production.“
Again, this isn’t to say that technology is not important. It’s just to say that it is virtually useless without capital investment. The technology comes with capital investment. To get capital investment, you typically need a society that generally respects property rights and voluntary trade.
You can have some capital investment in a more socialist society, but it will be minimal in comparison, and the capital investment will be a misallocation. Resources will go towards things that are not necessarily a priority for consumers.
Capital investment comes from savings. If you are going to invest, then you first must save. Even if you are just investing your labor, you are still saving in a sense beforehand. If you are going to spend a week to work on a project, you essentially have to have access to food and water, and probably a shelter. You need savings to sustain yourself if you are not working on something that immediately rewards you with basic necessities.
Prospering Quickly
It is a curiosity that, right around the end of the 18thcentury, parts of the world started prospering as never before. It was around the start of the new United States of America, but that is not the primary reason for the economic growth that occurred. After all, taxation was actually very low in the American colonies under British rule.
It was certainly a period that had a great degree of economic freedom as compared to most other points in history. Without this relative economic freedom (including in Great Britain), the Industrial Revolution probably wouldn’t have happened, or else it would have taken a much longer time to go through.
The economic growth that began around 1800 was sort of like a vehicle being pushed, or a giant boulder. Once you get it going, you get some momentum.
Maybe there was 1% growth in the year 1500 somewhere. But 1% of almost nothing is almost nothing.
The people who lived in the year 1800, even in the United States and Britain, had more in common with people from 1800 years ago than they would with people today. The world is a completely different place, and mostly for the better.
The year 1900 was a lot different than 1800, and the year 2000 was a lot different than 1900. All three of these time periods are hard to compare with each other because of the extraordinary changes. It really is a hockey stick graph where the standard of living was fairly constant for thousands of years before shooting upwards just over the last couple of centuries.
If an economy grows by 5% per year, this means that the economic output doubles approximately every 14 years (using the Rule of 72). This is an unbelievable advancement. Imagine your living standards doubling every 14 years. This means a quadrupling after 28 years. Compounding interest calculations work for economic growth in a society too.
Even at 2% growth, that is a doubling every 36 years. This means that every generation will be twice as rich as the one before.
Capital Investment with Today’s Technology
Even though I have stressed that capital investment is the key factor, it is easier to catch up in today’s world with today’s technology. As Rothbard described, an African peasant doesn’t gain much by looking at a picture of a tractor if he lacks the saved capital. But in today’s world, if that same African peasant gets a taste of freedom, he can prosper much more quickly than someone could have 100 years ago.
We live in a global economy. Any place that adopts a relatively free market economy will see capital investment pour in. The technology automatically comes with it. The capital investment will quickly raise the living standards of the people living there. The African peasant doesn’t need to be able to build a tractor or buy and own a tractor. He can use the tractor owned by a capitalist, even if the capitalist is from another country. The person using the tractor is worth more if he can use it competently. Someone with a tractor, even if he doesn’t directly own it, is far more valuable than someone working on a farm with a shovel or with his bare hands.
The same will hold true for any capital equipment, assuming that there is market demand for the product that the capital equipment helps produce. If a poor person in a poor country is given a computer and a little training, he can help fulfill a need somewhere. If you go on a site such as Fiverr, you can find someone in Ukraine to design a book cover. You can find someone in Egypt who can edit your videos.
There are many stories about poor countries that have been able to prosper quickly. Hong Kong emerged as an economic powerhouse after adopting a relatively free market system after World War 2.
Perhaps the most amazing example, and certainly the biggest, is China. While it is certainly not a free market economy, it is much freer than it was under its economic system of communism. The agriculture sector was freed up to some degree in 1979, and it set off a wave of liberalization policies.
It is incredible how prosperous the Chinese have become. It is still a centrally-planned economy to a large extent, and there are major problems that exist, but we can’t ignore the vast improvement. Even if there are massive misallocations, at least there are resources to misallocate. It is better to have bridges to nowhere and empty cities than it is to have virtually nothing. Some of the Chinese prosperity may be an illusion, but some of it is very real. I can’t imagine there are many Chinese people who would trade today for 1979.
Technology has continued to advance in our world, despite massive government interference everywhere. Just imagine how incredibly wealthy we would be if the governments around the world were a fraction of the size.
If government were just cut in half everywhere (regulations, taxes, spending, inflation), then our living standards would explode upwards. If you had a much greater degree of savings and capital investment, coupled with today’s technology, our wealth and living standards would rise to a degree that is probably unimaginable by most.
If our world can avoid any major world wars, and we can keep governments in check, then our living standards will continue to increase. It won’t be straight up though. There will be some setbacks.
If government interference is scaled back, then our living standards could explode. The people living in the year 2100 will barely recognize life in the year 2000. If technology really advances, then maybe some of us will still be alive to see it.