Chapter 10 of 10
Conclusion: A Remarkable Economic Inheritance
We began this book by studying scarcity. Human wants exceed the resources available to satisfy them, and every society must therefore decide how scarce resources will be used. Economics helps us understand the institutions and incentives through which those decisions are made.
After studying macroeconomics, however, it is worth recognizing something that can easily be overlooked: the economic circumstances in which you are studying these ideas are historically remarkable.
If you live and study in the United States, you inhabit one of the wealthiest societies in human history. You have access to goods, services, technologies, and opportunities that would have been unimaginable to almost every person who lived before you. Food produced thousands of miles away appears reliably in grocery stores. Electricity is available at the flip of a switch. Information from around the world can be accessed almost instantly. Modern medicine treats diseases that once routinely killed young and old alike. Ordinary households possess technologies that emperors and kings could not have purchased at any price.
None of this should be regarded as normal simply because it is familiar.
For most of human history, sustained economic growth was extraordinarily limited. Poverty was the ordinary condition of human life. A poor harvest, disease, war, or political instability could threaten the survival of entire communities. The enormous increases in productivity and living standards experienced over the last several centuries represent one of the great changes in human history.
The United States has been an especially important participant in that transformation.
This textbook has given us some tools for understanding why.
Economic prosperity does not emerge simply because a country possesses money. Printing additional dollars cannot create additional real wealth. Prosperity requires the production of real goods and services.
We represented that productive capacity using:
Countries become wealthier when they accumulate productive capital, develop the abilities of their people, and discover better ways to transform scarce resources into valuable goods and services.
But Chapters 5 and 6 taught us that this process does not occur in an institutional vacuum.
Investment requires confidence that people will be able to enjoy the returns from productive activity. Innovation requires the freedom to experiment. Markets require prices capable of communicating information about scarcity. Entrepreneurship requires the possibility of profit, while efficient resource allocation requires the possibility of loss. Long-run prosperity depends heavily on institutions that protect property, enforce contracts, permit exchange, encourage competition, and provide individuals substantial freedom to make economic decisions for themselves.
The American economic system has never embodied these principles perfectly. No society does.
The United States has experienced recessions, financial crises, unemployment, inflation, discrimination, political mistakes, poor policies, and periods when important economic institutions failed many of its citizens. The existence of extraordinary prosperity does not require us to ignore these problems. Indeed, economics gives us tools for identifying them and thinking seriously about how they might be improved.
But recognizing imperfections should not prevent us from recognizing achievements.
The institutions of the American economy have helped create an environment in which hundreds of millions of people coordinate their activities largely through voluntary exchange. Every day, individuals who have never met one another cooperate through markets. Workers specialize. Businesses invest. Entrepreneurs experiment. Consumers communicate what they value through their purchasing decisions. Prices transmit information. Profits reward successful attempts to create value. Losses redirect resources away from unsuccessful ones.
No individual designed the resulting economic order.
Yet somehow food reaches supermarkets, airplanes cross the country, medicines reach hospitals, millions of workers receive paychecks, businesses obtain capital, and an almost unimaginable variety of goods and services becomes available to ordinary people.
That coordination is easy to overlook precisely because it usually works.
Macroeconomics also teaches us that prosperity can be damaged.
Poor monetary institutions can destroy the purchasing power of money. Unsustainable fiscal policies can impose costs on future taxpayers. Bad institutions can discourage investment and innovation. Restrictions on exchange can prevent resources from moving toward more productive uses. Severe recessions can leave workers unemployed and productive resources idle.
Prosperity therefore should not be treated as something that simply happens.
It depends on institutions, incentives, knowledge, productive behavior, and choices.
You are also inheriting an economy built largely by people you will never meet.
The roads, businesses, universities, technologies, financial institutions, legal traditions, factories, scientific knowledge, and accumulated capital available today are the product of generations of previous effort. Countless people worked, saved, invested, invented, experimented, failed, and tried again before you arrived.
You did not have to invent electricity before turning on a light.
You did not have to discover antibiotics before receiving modern medical care.
You did not have to build the financial system before opening a bank account.
You did not have to create centuries of accumulated scientific knowledge before beginning your education.
You inherited these things.
That inheritance creates enormous opportunity.
It should also create some humility.
The standard of living around us can make prosperity appear inevitable. It is not. History provides many examples of societies that stagnated, destroyed productive institutions, experienced monetary collapse, or allowed political and economic systems to undermine the incentives necessary for prosperity.
Understanding economics therefore carries a responsibility.
You should now be better equipped to recognize the difference between nominal wealth and real wealth, between economic growth and inflation, between a deficit and a debt, between unemployment and labor-force participation, between short-run stimulus and long-run productive capacity, and between policies that merely redistribute existing resources and institutions that encourage the creation of new value.
You should also be more comfortable asking the economist’s most important questions:
What are the incentives?
What is the opportunity cost?
Compared with what alternative?
What happens next?
And what happens in the long run?
Those questions rarely produce simple answers. They do, however, make it harder to be persuaded by simple slogans.
Perhaps the most valuable conclusion from this course is therefore not a particular equation, graph, or policy recommendation.
It is perspective.
The economic world you inhabit is the result of an extraordinary accumulation of capital, knowledge, institutions, and human cooperation. The opportunities available to study, work, create, invest, exchange, and build a life in the United States are easy to take for granted because they surround us every day.
Do not take them for granted.
Appreciating the economic inheritance you have received does not mean believing that the United States is perfect. Gratitude and criticism are entirely compatible. We can recognize what has worked while seeking to improve what has not.
But improvement begins with understanding.
You now possess a set of tools for thinking about how prosperity is created, how it can be disrupted, and how difficult it can be to restore once lost.
Use those tools carefully.
Be skeptical of easy answers.
Think about incentives.
Think about tradeoffs.
Think about the long run.
And occasionally, when you walk into a grocery store filled with food from around the world, use a device containing the accumulated knowledge of generations, or choose among opportunities unavailable to most people who have ever lived, recognize just how economically extraordinary your ordinary life really is.
That recognition is not a reason for complacency.
It is a reason for gratitude—and for taking seriously the responsibility of preserving and improving the institutions that make prosperity possible.