Economic growth, development, progress—whatever you call it—is neither inevitable nor impossible. There are lots of examples of economies that continue to struggle with economic growth. And there are many examples of economies that have made rapid progress. What distinguishes the ones that that succeed from the ones that fail is economic policies. Again an operational definition of “good economic policies” will have to do: those that work. Economic policies that most efficiently harness the available resources are those that work. Economists usually categorize resources used in production -– into land, labor, and capital. Of these, human resources is the most critical. It follows then that policies that value human resources are the ones that work.
Economic growth and development is inevitable if human resources are valued appropriately. Conversely, economic growth and development is impossible if human resources are not valued. Let’s underline that: if the set of policies puts human resources center-stage, then the economy prospers. Otherwise it is doomed to fail sooner or later.
Human Resources
What are human resources? Before the advent of the industrial age, human resources definitely referred to human labor alone. Human muscle power augmented to some degree with animal muscle power was an important factor of production. But with advances in science and technology came the increasing ability to harness non-muscle power. There was a shift in the balance of power, so to speak. While the muscles became increasingly less useful, brains began to become more useful in the production process.
There is a sort of poetic justice in this story of the ascendancy of brains over brawn made possible by better science and technology. After all, brains created the science and technology, not brawn. So in our post-industrial age, human resources basically refer to trained human brains. Astonishing isn’t it that a couple of pounds of gray organic matter encased within a human skull can unleash so much power?
The human brain comes up with ideas. More specifically, it synthesizes new ideas by combining existing ideas. There is an hierarchy of ideas. Since each brain is short-lived relative to the life-cycle time of human society, it does not have the opportunity of inventing all ideas and building on them. It has to use the stock of available ideas and add to that stock. To use the stock, it has to know the stock. And to grasp even a small subset of the stock, it needs to be trained. That training is part of the job of education.
To build an economy from scratch, here’s what you do. First, get some land. Add humans. Educate the humans. Set them free. Voila!
Freedom is important. And the most important freedom is the freedom to think and to express the results of that thinking. Then comes the freedom to act. The most important economic act that humans engage in — after production and consumption — is barter, trade or exchange. That’s uniquely human. The rest of economics is an exegesis of those simple but fundamental activities.
Societies that don’t allow people the freedom to think and express themselves, are bound to be poor. And societies that don’t allow the freedom of voluntary trade are poor. India is poor by choice. Somehow collectively India has chosen to restrict freedom – the freedom of inquiry and expression, and the freedom to trade. That is why India is poor.
{This post is an updated version of a post “Stuff and Ideas – Part 2” (Dec 2007).}
Atanu Dey : Life is a Random Draw 
In the 70s even the movies presented a view that Poverty was some kind of virtue and poor people were virtuous just by their being poor. It is incredibly damaging communist/socialist thinking.
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Well written. It explains the core idea properly. But then the question arises why would a society choose to be poor. Also if good economic policies are those that work then why would policy-making be left to untrained brains? What about factoring in a cultural trait of being inclined to be lazy and/or dishonest?
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