The prosperity of a nation's economy depends on many factors. These include its resource base, both natural and human; its stock of knowledge and ability to apply it to produce goods and services; and the quality and effectiveness of its institutions - both public and private.
At first blush, a nation's natural resource base would appear to be of primary importance. But a closer look indicates that a nation's natural resource base is of secondary importance.
Switzerland is a small, land-locked nation with no mineral wealth. Its agricultural land is limited - much of it untillable on steep Alpine slopes. Its main natural resources are water power and spectacular scenery. Yet it is among the world's most prosperous nations, its people enjoying high living standards.
In contrast, Nigeria is an oil-rich nation. The Democratic Republic of the Congo is rich in copper and other minerals. But neither of these nations has converted this wealth to general prosperity for its people. Another African nation, Botswana, has used its diamond wealth to raise its living standards and is acclaimed as an African success story.
The Middle East has done better with its oil wealth. A half century ago, Oman was among the world's least developed countries. But its current ruler, Sultan Qaboos, used Oman's oil wealth to build roads, schools and universities, and hospitals.
It's advantageous to have oil, gold, and diamonds. But a rich natural resource base does not ensure broad-based economic prosperity.
Norway has declared its oil wealth to be a national treasure be used for the benefit of its entire population, and has invested oil revenues for the benefit of future generations.
It might be tempting to suggest that it is a nation's human capital, including its stock of scientific and technical knowledge that is key to determining a nation's prosperity. But again, this is an unsatisfactory explanation.
For example, are people living north of the Rio Grande any harder working than those south of the river? Of course not - ask any employer who hires labor to work our nation's fields, farms, and packing plants. Are American engineers, scientists, businessmen, and professors any more competent than adequately trained professionals of Mexico, Africa, or any other location? Of course not.
Technically competent people are found the world over. The stock of scientific and technical knowledge is widely available. So, what then differentiates the prosperity and success of nations?
The answer lies, broadly speaking, in a nation's institutions - those of business, government, education, professions, arts, the media, and all the rest - how they function and how they interact. This is augmented by a nation's collective values, attitudes, ethics, and codes of conduct, some it legislated and some of it informal, and even implicit. In short, it's "the system," how society is organized and the degree to which all citizens are included, fostering a sense of nation and common good.
Okay, this sounds sort of "squishy." Let's get more specific.
Increasing income inequality in America is a fact of life. Only those who don't want to believe it will deny it. Others admit to inequality but deny that it is a problem. And even some who admit that it is a problem insist that there is nothing that can or should be done about it through public policy. And even those who agree that it's a problem that can and should be remedied disagree as to cause and remedy.
It is tempting to chalk it up to increased greed. Are today's super-rich any more greedy than those of decades past? Has human nature changed?
With apologies to creationists who believe the human race is only 6,000 years old, our human gene set has evolved over millennia. We are still running around with Stone Age gene sets that could not have changed in a few decades.
So, what has changed during the last several decades? It's our institutions that have changed, in some ways for the better and in other ways not so good. Our changing institutions have created conditions that foster increased income inequality. Let's take a closer look.
The period following WWII was a period of a generally rising prosperity. Ground-pounding infantrymen who never dreamed of college became college-educated through the GI Bill. Factory workers could buy a house and support a family, thanks to strong labor unions and an expanding economy. CEO salaries were about 70 times that of the average worker. It ushered in the "Golden Age of Capitalism."
Some things were not so good. African Americans with honorable war-time service returned to the same discrimination they endured before the war. They were even banned from professional sports - a situation that seems incredible and intolerable by standards of today.
Enter Jackie Robinson and Brooklyn Dodger owner Branch Rickey. One can quibble whether it was Rickey's benevolence, pragmatic self-interest, or some combination, but the point is that our athletic institutions changed, for the better in that sense, all will agree.
The Civil Rights Act of 1964 significantly changed private and public institutions as well as voting patterns.
Following the Golden Age of Capitalism, economic and political institutions changed, but not necessarily for the better. The salaries of CEOs rose dramatically, both in absolute and relative terms compared to those of the average worker. CEOs were once praised for retaining workers during recession. Now they are praised for being "courageous," by cutting workers during recession. Reduced labor costs, boosts short run profits and stock prices, further raising CEO salaries based on stock options, and, of course, pleasing Wall Street. Labor unions have lost their clout.
In short, business, financial, and labor institutions changed, resulting in different outcomes, including increasing disparity of wealth and income.
institutions comprising "the system" that once produced widespread American prosperity have and are changing in ways that threaten future prosperity for all - and even threatens our democracy as we know it - or once knew it.
Next week: Our changing economic and political institutions.
- John Waelti of Monroe is a retired professor of economics and can be reached at jjwaelti1@tds.net. His column appears each Friday in The Monroe Times.
At first blush, a nation's natural resource base would appear to be of primary importance. But a closer look indicates that a nation's natural resource base is of secondary importance.
Switzerland is a small, land-locked nation with no mineral wealth. Its agricultural land is limited - much of it untillable on steep Alpine slopes. Its main natural resources are water power and spectacular scenery. Yet it is among the world's most prosperous nations, its people enjoying high living standards.
In contrast, Nigeria is an oil-rich nation. The Democratic Republic of the Congo is rich in copper and other minerals. But neither of these nations has converted this wealth to general prosperity for its people. Another African nation, Botswana, has used its diamond wealth to raise its living standards and is acclaimed as an African success story.
The Middle East has done better with its oil wealth. A half century ago, Oman was among the world's least developed countries. But its current ruler, Sultan Qaboos, used Oman's oil wealth to build roads, schools and universities, and hospitals.
It's advantageous to have oil, gold, and diamonds. But a rich natural resource base does not ensure broad-based economic prosperity.
Norway has declared its oil wealth to be a national treasure be used for the benefit of its entire population, and has invested oil revenues for the benefit of future generations.
It might be tempting to suggest that it is a nation's human capital, including its stock of scientific and technical knowledge that is key to determining a nation's prosperity. But again, this is an unsatisfactory explanation.
For example, are people living north of the Rio Grande any harder working than those south of the river? Of course not - ask any employer who hires labor to work our nation's fields, farms, and packing plants. Are American engineers, scientists, businessmen, and professors any more competent than adequately trained professionals of Mexico, Africa, or any other location? Of course not.
Technically competent people are found the world over. The stock of scientific and technical knowledge is widely available. So, what then differentiates the prosperity and success of nations?
The answer lies, broadly speaking, in a nation's institutions - those of business, government, education, professions, arts, the media, and all the rest - how they function and how they interact. This is augmented by a nation's collective values, attitudes, ethics, and codes of conduct, some it legislated and some of it informal, and even implicit. In short, it's "the system," how society is organized and the degree to which all citizens are included, fostering a sense of nation and common good.
Okay, this sounds sort of "squishy." Let's get more specific.
Increasing income inequality in America is a fact of life. Only those who don't want to believe it will deny it. Others admit to inequality but deny that it is a problem. And even some who admit that it is a problem insist that there is nothing that can or should be done about it through public policy. And even those who agree that it's a problem that can and should be remedied disagree as to cause and remedy.
It is tempting to chalk it up to increased greed. Are today's super-rich any more greedy than those of decades past? Has human nature changed?
With apologies to creationists who believe the human race is only 6,000 years old, our human gene set has evolved over millennia. We are still running around with Stone Age gene sets that could not have changed in a few decades.
So, what has changed during the last several decades? It's our institutions that have changed, in some ways for the better and in other ways not so good. Our changing institutions have created conditions that foster increased income inequality. Let's take a closer look.
The period following WWII was a period of a generally rising prosperity. Ground-pounding infantrymen who never dreamed of college became college-educated through the GI Bill. Factory workers could buy a house and support a family, thanks to strong labor unions and an expanding economy. CEO salaries were about 70 times that of the average worker. It ushered in the "Golden Age of Capitalism."
Some things were not so good. African Americans with honorable war-time service returned to the same discrimination they endured before the war. They were even banned from professional sports - a situation that seems incredible and intolerable by standards of today.
Enter Jackie Robinson and Brooklyn Dodger owner Branch Rickey. One can quibble whether it was Rickey's benevolence, pragmatic self-interest, or some combination, but the point is that our athletic institutions changed, for the better in that sense, all will agree.
The Civil Rights Act of 1964 significantly changed private and public institutions as well as voting patterns.
Following the Golden Age of Capitalism, economic and political institutions changed, but not necessarily for the better. The salaries of CEOs rose dramatically, both in absolute and relative terms compared to those of the average worker. CEOs were once praised for retaining workers during recession. Now they are praised for being "courageous," by cutting workers during recession. Reduced labor costs, boosts short run profits and stock prices, further raising CEO salaries based on stock options, and, of course, pleasing Wall Street. Labor unions have lost their clout.
In short, business, financial, and labor institutions changed, resulting in different outcomes, including increasing disparity of wealth and income.
institutions comprising "the system" that once produced widespread American prosperity have and are changing in ways that threaten future prosperity for all - and even threatens our democracy as we know it - or once knew it.
Next week: Our changing economic and political institutions.
- John Waelti of Monroe is a retired professor of economics and can be reached at jjwaelti1@tds.net. His column appears each Friday in The Monroe Times.
