The root causes of national economic growth are most often explained by people's irrational optimism, or lack of same, and the businessmen's equally irrational courage and enterprise. The whole world is waiting with bated breath on the summaries of the U.S. Christmas shopping.
But the supply and demand, which is the driving forces of economic growth, can be analysed rationally.
Keynes explained to us, that the nation, the society, is a huge factory, which produces "goodies", that is, goods and services, all the things that customers want, ranging from houses and vacuum cleaners to restaurant visits and entertainment. After end of work all factory employees are transformed to customers, who demand the factory's products.
The supply of the society-factory follows a normal increasing supply curve. The more customers want the products, the more they will pay, the more the factory want to produce.
Consumer demand follows a normal decreasing demand curve. For the first and most basic consumption, they will be ready to pay a high price. When their basic needs are fulfilled, customers will only buy, if the price is low.
Then, where the two curves intersect each other, is the current production of goods in the society-factory, the economy's current activity level. Keynes' point was and is, that there is no reason to believe, that this intersection point automatically represents full employment. It would be a unique case, if the two curves by themselves cut each other at just the production level, which represents full employment. Achieving the political goal, "full employment", requires deliberate political initiatives, he told. In general, we must create more economic activity in the society to create employment.
But the technical and social developments can make it increasingly difficult to achieve the goal of full employment. Even the most talented politicians and the most sophisticated political initiatives may in the long run meet their limitations. Because there are two causes behind economic growth, and this is the technical production capabilities and the consumer demand. And while production most likely will become more rational, automatic and hence less labour intensive, we must realise, that there are limits for consumer demand. The human needs are not infinite and insatiable, as some have assumed.
The concept of "national economic locomotives" is well suited to explain the growth in the number of business opportunities and hence the growth in the aggregate supply.
The invention of the steam engine was one of the first national economic locomotives. It was the technical basis for new products and new services. It created the opportunity for growth in the volume of economic transactions, representing economic growth.
When the steam engine was invented, it opened up many new business opportunities. It became possible to travel much more quickly and conveniently, than it had been before, with railway and steamship. Many people realized, that they actually needed this. It became possible to produce cheap textiles in an unprecedented volume. The invention opened the door for major new opportunities. Steamrollers, cranes and excavators made major construction works possible. Titanic and other big ships were built, the Suez Canal was constructed, steam-powered machine factories were built, production of chemical fertilizers became possible and much more.
All these new business opportunities, was exploited because it showed up there was demand for the products. More money was earned and spent. National income increased and the nations became richer. Explosion engine was the next national economic locomotive. It created additional product opportunities, cars and airplanes. People realized, that they had actually needed to drive and to fly. Before they did not know. The new business opportunities were exploited, and the nation's total income increased again.
Electricity was a national economic locomotive, which created a new wave of business opportunities. The new invention was combined with the already existing technology in factories, cars and planes. Electricity made many new opportunities possible like, telegraph, telephone, electric powered devices, lighting and hydropower.
Plastic was also a national economic locomotive. The new materials were combined with the already existing product opportunities and also created itself numerous business opportunities. Again a technical innovation made growth in the nation's economic activity and thus the total income.
The computers have been the latest national economic locomotive, which created new business opportunities, growth and hence increased national wealth. All previously introduced products were combined with computers in one or another way. Consumers realized, that they simply had to have a computer in their home.
The twentieth century has been unique in world history. In a historically furious pace one great invention after another had come into existence. Never before in history has the technology developed so fast, and never before had the western nation's economies enjoyed such a growth.
We have a strong and optimistic belief, that development will progress just as fast in the future as in the past, we believe in progress. We believe, that there will be a steady and endless stream of new inventions.
When we think about the latest inventions in hydrogen storage, and the pace of construction of broadband networks, we have to acknowledge, that there may still be many pages of the nature's great lesson book in physics, which we not yet have opened. But it might be possible to open in the future.
But many of these new inventions represents mainly a replacement of an outdated technology with a new and better, in the same way as diesel engines and electric motors have replaced steam engines; Hydrogen will replace gasoline; and broadband will replace phones and so on. New inventions will not necessarily imply a significant expansion in the number of economic transactions in the society. In the long run, they will not necessarily boost the economic growth and thus increase job opportunities. In fact, it is most likely, that a high-tech development will actually reduce the number of jobs in the society.
Some textbooks in economics claim, that human needs are infinite and insatiable, they can cite for example "Say's Law". However Say do not say anything about this, only it is a tacit preassumption for his law, that the human needs are endless and without limits. Only if this is true, it will be possible to expand the economy endless and forever, that is, as long as there are new technologies, new national economic locomotives, which can provide a basis for new products and hence new business opportunities directed against the insatiable demands.
But it is not so. The human needs are not infinite and insatiable.
The Nation is a huge factory, which produces "goods", and offers them on the market. "Goods" is any kind of products and services.
When the community factory workers check out at the end of the working hours and leave through the gate, they will be turned into customers. Their desire to buy "goodies" for the salary and the profit, which they have received, makes up roughly, the economy's total demand.
If you look at the individual product, the individual good, it's easy to realize, that the need for this product is not endless and a family will work hard for their first car. They will be willing to give up other benefits in order to afford it. They will refrain from restaurant visits and holiday travels. The next car, "wife's car", will a family only buy for special reasons, and car number three in the family very few will acquire, they will only buy it, if they really can't find other ways to use the money. Most would probably prefer to put the money in the bank instead.
A family would be willing to give up many other benefits to get its own house, a house of an appropriate size of, let's say 150 square meters, depending on family size. But the need for additional square meter is decreasing with more living area. The need for roof over the heads, the first 50 square meters, is stronger than the need for the last marginal square meters, when for example they already have 200 square meters. A married couple without children will find a house of 200 to 300 square meters unmanageable. All these useless rooms, which they never enter, filled with things, which they do not use.
But the need for total goods are also decreasing with to the number of products a family already has acquired. Because it takes time to consume and enjoy "goods", a day has only 24 hours, and the lifetime of man is limited.
The consumers use approximately 8 hours a day to sleep in a tasteful bed with some good quality bedding. It takes also a few hours to eat some really healthy and delicious food, possibly with a good bottle of wine. Some hours are used to driving to and from work in a new and smart car. About two to three hours a day the family spends in front of its new high-definition flat screen TV. Before bedtime, they can visit the Internet with their modern high-speed computer using the new broadband connection.
But when the consumer now have chosen to enjoy life in full, and use his hours time to enjoy all these products and good things, it becomes difficult for him also to find time to ride on the 12 gears carbon fibre racing bike, which he consider possibly to buy, or play golf with a titanium set of golf clubs, which he happen to know, that some of his colleagues have got.
It is obvious and logical, that the need for the last marginal goods are decreasing with increasing volume, not only because consumers can't afford to buy an unlimited number of products, but especially because they do not have time to consume them. Because the day has only 24 hours, and the lifespan of man is limited. Therefore, it is not true that "the human needs are infinite and insatiable".
In developed countries, the most urgent and basic needs are already satisfied. All have housing, food, television and telephone, and most have cars and computers.
Therefore, it is relatively difficult for politicians and businesses in the western countries to further push forward national economic growth with new business opportunities. This is the basic reason, why the Western European nations may not achieve significant growth rates, and why they have difficulty getting rid of unemployment.
In poorer countries such as China and India live millions and millions of people, who still have strong basic needs, which it is technically and commercially possible to satisfy with existing well known technologies, this means with the existing national economic locomotives. Millions of people in these countries dream of better housing, more food, televisions, cars, telephones, computers and holidays. Growth is also driven by demand, and therefore governments there can achieve much higher growth rates, than the governments in the developed nations can.
So the fact is that even new technologies might be invented in the west, which can be the base for new types of products, it can never the less be difficult to achieve significant growth rates. Because customers already have their hands full with consuming the existing products, and do not have time for more, because days are only 24 hours, and mans lifespan is limited . And, of course, new types of products and technologies will push others into the periphery, and for this reason the total demand and employment will not rise significantly.
Only new, very strong national economic locomotives will be able to regain the strong growth rates in the developed nations. It must be technologies, which touch very deep and fundamental human needs. One can imagine medicines against deadly diseases or life-prolonging drugs; Fertility treatments, which select the most genetically promising embryos, so that the resulting children will be strong, beautiful and intelligent. This, there will be demand for. Because that is, what we humans deep in our hearts want with burning desire; To be free from deadly diseases, a long life and beautiful, strong and intelligent descendants.
But then what? Should we just accept, that in the real long run, there is nothing, we can do. The group of unemployed inevitably will become steadily bigger. Will the future be, as imagined in some science fiction movies. A few privileged will make up a small group of honest citizens, who have jobs and thus identity, a interesting day and a feeling of meaning in their lives. However the majority will consist of a frustrated and restless underclass, who shouts for bread and circus?
The main problem will be the concept of "Transferred Income". Will it really be possible to finance transfer payments in order to support an increasingly bigger part of the population? In the really long run it will be, let's say, more than 50 to 60 percent of the population. Most likely it will involve income taxes about 70 to 80 percent. It will properly be regarded as pure robbery, and it would not be manageable.
We want benefits for the poor and unemployed for ethical reasons, because we think, it is a pity for our less fortunate countrymen, who are not themselves capable of generating income. But we also want transferred income of economic reasons; it is absolutely essential to sustain the demand for the society-factory's production of goodies. Reduced demand will lead to job cuts, further decreases in demand, more layoffs and so on, all the way down to the bottom.
It is true that if we give a poor man and a rich man each a marginal amount of money, then the poor man will create demand far more effectively than the rich man. He will buy grocery, restaurant visits, beer, cigars and taxi fares. He will in general boost the economy. The rich man's marginal monetary unit will not in the same way support the demand for the nation's products, he would probably prefer to invest in a few shares more, buy an expensive foreign car or take an extra vacation in the southern countries.
Once I was sitting in a site hut, and we discussed taxes.
One of my colleagues said: "I pay 90 percent to the tax"
"It was quite a bit," we replied.
"Well," he said, "I give all the money to my wife, and she lets me keep a few hundred for myself." He was quite happy with this arrangement. " (In Danish "tax" and "honey" is the same word, "skat" )
But it reflects exactly the problem with transferred income. We would be happy to transfer income to people, with whom we feel emotionally connected. But to have confiscated more than half of the salary in an entirely anonymous and impersonal way, knowing that this money will be transferred to persons, whom we do not know, who perhaps speak perhaps a different language, and who are probably not even grateful; This would really feels like robbery.
We should consider how we could strengthen and expand the emotional relationships in the community, like family, friendship and neighbourhood. Income transferred along these channels will be much more acceptable. It is the only way forward in the really long run.
Our own ancestors in antiquity and the ancient Greeks and Romans also in general had no jobs even they had no welfare state. Just as we now have machines to the hard work, they had slaves to toil the fields. Perhaps we should study how they made their income distribution to work, and how they got identity, intensity and meaning in life without having a real job.
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