Production

The primary purpose of production is consumption. Economic activity is by definition the production and consumption of goods and services. Except for the special case of the so-called “Robinson Crusoe” economy (an economy in which there is only one person who has to necessarily be self-sufficient) every real economy involves exchange or trade. The ability to trade what one has produced for things that one wants to consume generates wealth and increases welfare.

You can of course restrict your consumption to only those things you produce, but you will have a Hobbesian existence: “solitary, poor, nasty, brutish, and short.”

Exchange

Exchange makes possible the creation of wealth through division of labor and specialization, two intimately connected concepts. Surgeons operate, bakers bake, brewers brew, carpenters build, architects design, programmers code, … ad infinitum. The ability to exchange decouples production and consumption. Crusoe’s production and consumption are rigidly linked. In our case, we don’t produce any of the things we consume, and don’t consume what we produce. Continue reading “Competition in Free Markets”

If by capitalism one means “free market exchanges and production through the use of privately owned capital”, then indeed capitalism destroys jobs — those jobs that are made redundant by increasing the productivity of labor.

Imagine an economy which only produces food, and the only input to food is labor. Further imagine that the productivity of labor is such that on average, one persons’s labor produces only one’s person’s demand for food. In that economy, all the jobs will be in food production.

Now imagine someone invents a machine (that’s capital — a produced means of production) that doubles the productivity of labor. Let’s call it the Great Invention. Now only half the workers are required to produce food for everybody. That’s destroyed half the existing jobs in our economy,

After the Great Invention, half the labor of the entire economy can now make clothes. Clothes were not available to anyone before the Great Invention. Now the clothes makers can trade some of their clothes for food. There are jobs for people making clothes, and on average the consumption bundles includes both food and clothes.

More great inventions follow that make both food and clothes production more efficient. Further loss of jobs from food and clothes production. But now some labor can be devoted to making shelters. Fewer jobs in food and clothes production but more jobs in shelter construction. You get the picture.

The main point is that it is not jobs that we are primarily interested in. What matters is production. And production matters because we are interested in consumption. Were the world so that everything we need fell like manna from the heavens. In that world, we wouldn’t need to work at jobs. We’d spend our time like the lotus eaters of Greek mythology.

The Industrial Revolution released the power of human ingenuity and created wealth (stuff that we value) unimaginable to our ancestors. Untold number of old jobs were lost, and in exchange we gained leisure, and all manner of stuff what we enjoy — from smartphones to air travel to medical services and comfortable homes. That’s capitalism working its magic.

Here’s how rich we have become:

That per capita GDP growth becomes all the more astonishing when you consider that the world population has exploded around 20 times what it was in the 14th century CE.

That, ladies and gentlemen, friends and colleagues, boys and girls, is the amazing truth about the world we live in. Three cheers for capitalism.