I have two ways to present this one. I can go mathematical or nonmathematical. I think if I went mathematical, I would lose many of my readers. Here goes.
I have blogged before that we need to consider economics as driven by at least two major elements and those are the exploitation of natural resources and personally produced value added. The problem with Econ 101 as taught in our colleges and universities is that they only consider personal value added. They all think that wealth is the product of value added labor and thus all you need to do is to be smart and work hard. They forget about the guy who has an oil well in his back yard and got rich that way. The other thing is that economics is not based on "trends". It is based on events and the time period as they play out. The discovery of atomic power and the transistor were "events". All that has happened after that is a period when they "played out". Most people see "trends" as something that has no cause and continues for ever. In economics, that is not the case. Are you with me so far?
First, look at the USA and the new world discovered by Columbus. This place was loaded with natural resources that had not yet been exploited. The rate of exploitation started fast on a per person basis, but that high rate could not continue indefinitely. At some point as the number of people who were gaining their wealth by the exploitation of natural resources equalized. At this point the net change in wealth per person was zero. Think about it this way. If the rate of exploitation of natural resources was growing at 25% and the rate of the growth in population was only 10%, then the rate of wealth increase per person would be 15%. People were getting richer on average and these people were not the smartest people in the world either. They were miners, trappers, loggers, whalers and farmers.
As you might expect, this event has been playing out since Columbus discovered the New World. The total value of natural resource exploitation may have continued to increase in absolute numbers, but on a per person basis it has gone down. New immigrants use to be able to get 160 acres of good farm land for free. That would be worth over a million dollars today. The land just might have a bunch of oil under it as it did in Oklahoma and Texas. How would that be for a free gift? How wealthy do you think those free natural resources would make you today? Are you starting to see how the exploitation of natural resources can be a major source of personal wealth? The problem we have is how to keep the concept working to increase our per person wealth. We have to figure out how to continue to increase the rate of exploitation of the natural resources faster than the growth in the number of people who share in those natural resources. Simple isn't it? If that is the case, why don't we hear this in our Econ 101 classes? That is another problem.
The unique character of natural resource exploitation is that it is very difficult for people around the world to compete with you, if they do not have natural resources themselves and most do not. They might have a bunch of people, like Africa, but they do not have the natural resources. In the case of value added economics, the whole world is out there to compete with you. Look at China as an example. They have billions of people who are smart and hard working and can undercut the price of almost anything that we could make and I mean anything. High technology is not a defense either. Most of the worlds computers are made in China. We might sell them some oil or soy beans from our exploitation of our natural resources, but they will not be buying our TV sets or computers in exchange. Our valued added wealth generation is worth no more than that of China on a per person basis. As an example, compared to the rest of the world, our value added worth use to be worth $1.00 and now it is only worth $0.50 or the same as that for people any other place in the world. We can't change that, so start getting used to it!
What we have here in the USA has been a slowing of the growth in the per person value of our natural resource exploitation while the value of our added value per person has gone down. When you add these two elements together we have what you now see. The USA is getting poorer. Look at the numbers for median family income or median family net worth and you will see that both of these has been going down. The size of the pie may have gotten a little bigger, but the number of mouths has grown even faster. Further, I do not see any way that we can significantly increase the rate or value of our value added labor. It is going to continue to do down as more poor countries join the world wide value added economy. Thru political policy, we might be able raise the wealth level of those at the very bottom by lowering the wealth of those at the top, but we can not raise the median. The other thing about a quick fix political solutions is that they will actually reduce the rate of growth or the size of the pie as the number of mouths continues to grow faster.
The bottom line is that if we want to just retain our current level of median wealth, we will have to prevent growth in population and that means bringing immigration down to almost "zero". Things like education, at best, will only keep us even. Hungry people around the world will not be sitting on their hands when it comes to education and technology. The USA does not have a monopoly on intellect. Darwin passed that out very evenly around the world. Sorry, but we really only have one strategy that has any chance of working for our children and grand children and I think that by now you have figured that out. Now, do you have the guts to do what you know needs to be done?
I have blogged before that we need to consider economics as driven by at least two major elements and those are the exploitation of natural resources and personally produced value added. The problem with Econ 101 as taught in our colleges and universities is that they only consider personal value added. They all think that wealth is the product of value added labor and thus all you need to do is to be smart and work hard. They forget about the guy who has an oil well in his back yard and got rich that way. The other thing is that economics is not based on "trends". It is based on events and the time period as they play out. The discovery of atomic power and the transistor were "events". All that has happened after that is a period when they "played out". Most people see "trends" as something that has no cause and continues for ever. In economics, that is not the case. Are you with me so far?
First, look at the USA and the new world discovered by Columbus. This place was loaded with natural resources that had not yet been exploited. The rate of exploitation started fast on a per person basis, but that high rate could not continue indefinitely. At some point as the number of people who were gaining their wealth by the exploitation of natural resources equalized. At this point the net change in wealth per person was zero. Think about it this way. If the rate of exploitation of natural resources was growing at 25% and the rate of the growth in population was only 10%, then the rate of wealth increase per person would be 15%. People were getting richer on average and these people were not the smartest people in the world either. They were miners, trappers, loggers, whalers and farmers.
As you might expect, this event has been playing out since Columbus discovered the New World. The total value of natural resource exploitation may have continued to increase in absolute numbers, but on a per person basis it has gone down. New immigrants use to be able to get 160 acres of good farm land for free. That would be worth over a million dollars today. The land just might have a bunch of oil under it as it did in Oklahoma and Texas. How would that be for a free gift? How wealthy do you think those free natural resources would make you today? Are you starting to see how the exploitation of natural resources can be a major source of personal wealth? The problem we have is how to keep the concept working to increase our per person wealth. We have to figure out how to continue to increase the rate of exploitation of the natural resources faster than the growth in the number of people who share in those natural resources. Simple isn't it? If that is the case, why don't we hear this in our Econ 101 classes? That is another problem.
The unique character of natural resource exploitation is that it is very difficult for people around the world to compete with you, if they do not have natural resources themselves and most do not. They might have a bunch of people, like Africa, but they do not have the natural resources. In the case of value added economics, the whole world is out there to compete with you. Look at China as an example. They have billions of people who are smart and hard working and can undercut the price of almost anything that we could make and I mean anything. High technology is not a defense either. Most of the worlds computers are made in China. We might sell them some oil or soy beans from our exploitation of our natural resources, but they will not be buying our TV sets or computers in exchange. Our valued added wealth generation is worth no more than that of China on a per person basis. As an example, compared to the rest of the world, our value added worth use to be worth $1.00 and now it is only worth $0.50 or the same as that for people any other place in the world. We can't change that, so start getting used to it!
What we have here in the USA has been a slowing of the growth in the per person value of our natural resource exploitation while the value of our added value per person has gone down. When you add these two elements together we have what you now see. The USA is getting poorer. Look at the numbers for median family income or median family net worth and you will see that both of these has been going down. The size of the pie may have gotten a little bigger, but the number of mouths has grown even faster. Further, I do not see any way that we can significantly increase the rate or value of our value added labor. It is going to continue to do down as more poor countries join the world wide value added economy. Thru political policy, we might be able raise the wealth level of those at the very bottom by lowering the wealth of those at the top, but we can not raise the median. The other thing about a quick fix political solutions is that they will actually reduce the rate of growth or the size of the pie as the number of mouths continues to grow faster.
The bottom line is that if we want to just retain our current level of median wealth, we will have to prevent growth in population and that means bringing immigration down to almost "zero". Things like education, at best, will only keep us even. Hungry people around the world will not be sitting on their hands when it comes to education and technology. The USA does not have a monopoly on intellect. Darwin passed that out very evenly around the world. Sorry, but we really only have one strategy that has any chance of working for our children and grand children and I think that by now you have figured that out. Now, do you have the guts to do what you know needs to be done?
