Chapter 1

1.5 Economic Progress

last revised/edited 11/2010, minor editing 6/’16, 4/’17

1.5.1 Conditions fostering change and progress
1.5.2 Incentives for progress; large versus small economic units
1.5.3 Comparison of different developments
1.5.4 The importance of how money is allocated

1.5.1 Conditions fostering change and progress
Changes take place in most places most of the time. We call changes progress if considered “good”. Progress does not equal growth: quantity of production may decrease. To be considered progress, changes should be ethical and improve the quality of life of present and future generations.
Cultural factors often interfere with progress, and poverty is a strong disincentive to take risks through innovations. For progress to occur, several factors are valuable: cultural attitudes and values must allow change; potential innovators must feel able to set resources aside for experimentation and risk taking; and innovators should be fairly knowledgeable, intelligent and insightful. Factors that encourage progress include fairly comprehensive education of both sexes, basic health care, fairly even distribution of resources, and cultural morals that allow trust and cooperation among strangers. In addition, religions must not interfere with science teaching and the pursuit of global ethics and human rights.
Inventions build on previous achievements. For example, train car and automobile designs were based on horse drawn carriages. Train and automobile designs were only gradually adapted to the very different principles of engine-driven locomotion. New building materials are typically used to imitate designs adapted to older materials. Ideally, inventors take much time to develop ideas through many steps, working with specialists of other fields, and building multiple models and prototypes before mass producing applications of the invention.
The value and potential applications of inventions are, at first, rarely obvious. Many inventions were not utilized, forgotten, and later reinvented. Open-minded societies may experiment with innovations. Contact with different cultures stimulate progress, both scientifically-technologically and in the humanities. External changes, including climate changes, force people to seek ways of adapting. The Indian economist Amartya Sen stresses the importance of freedom: people of both sexes being their own (free) agents, as consumers, employees and entrepreneurs.
Major environmental changes, e.g. associated with degradation of soils, destructive overuse of important resources, overpopulation and consequent migrations may stimulate inventiveness, e.g. early homo sapiens had to adapt when emigrating from tropical Africa into all continents. However, a people may stay true to their religion and tradition even while climatic changes and lack of needed resources destroys the basis of their culture, e.g. the Vikings in Greenland (compare Collapse, by Jared Diamond).
Jared Diamond (in Guns, Germs and Steel) describes how civilizations’ development was much helped by contacts between cultures and copying of ideas and inventions1. There was precise copying of inventions and reinventing what was observed from a distance. Others’ inventions inspired new ones. Civilizations that did not incorporate new ideas quickly enough were usurped. It appears that populations within very large continuous climatic/geographic areas and good food production developed faster than isolated small groups, because more ideas were developed and shared. Particularly in much of Eurasia, including North Africa, there was a balance between competition and sharing of ideas. Authoritarian governments may strangle progress, but their civilization may later be subjugated or usurped, if progress is prevented.

1.5.2 Incentives for progress; large versus small economic units
There are two widespread beliefs:
1. profits are vital incentives for scientific and technical progress;
2. capitalism and large scale economies are needed for rapid economic growth.
Both are incorrect.
Most scientific and many technological advances were achieved by researchers in public and private universities. Many engineers and researchers work in private companies as salaried employees. They rarely share profits that are derived from their work, and patents of their inventions belong to their employer. Researchers, managers, and production workers often work efficiently in small or large, public or private institutions. The military and space industries of the former Soviet Union developed very rapidly and were competitive with Western adversaries. Public institutions in Europe, such as schools, universities, rail and utility systems are superior to many private corporations.
Small and very small enterprises have been very important in the development of modern economies, particularly in the small European countries such as Switzerland. Small companies often became extraordinarily sophisticated, creating highest quality consumer products, specialized tools, and components that are used in industries worldwide. Small enterprises of Switzerland, Sweden, etc. compete internationally in spite of high worker salaries, partly because they can better adapt, have a less cumbersome administrative structure, and treat workers better than huge corporations. Through most of the twentieth century, these and other European countries had also consistently lower unemployment than the USA but were able to stay competitive2.
A system of small, interacting family and worker-owned enterprises is similarly efficient as large corporations that own many plants and control suppliers of product components. Large corporations often decrease the quality of life in small communities: they destroy local businesses, drain resources, move well-paid work to metropolitan areas, and create poorly paid, monotonous jobs. In spite of these problems, financial and political institutions usually favor large corporations.
The inflexibility of large corporations may be a major factor in capitalism’s instability. Corporations mass produce to be profitable, and they spend much on advertisements in order to encourage sales. They often produce goods that were previously not available and that are not considered essential. When people perceive uncertainty, they stop buying many offered products. Investors’ and financial institutions’ overreacting may lead to a recession.
Good schools that are adapted to local conditions and needs and apprenticeships are the foundation of a valuable workforce. Treating workers well leads to a stable workforce and raises the productivity of individual workers.

1.5.3 Comparison of different developments
When studying economic progress in the decades of the twentieth century, it becomes obvious that very different economic systems showed comparable progress in sciences and productivity while some, for no apparent reasons, developed much more slowly. In the time period between WWI and the seventies, countries that showed mostly rapid economic development were politically and economically extremely divergent and included most Western European countries, the USA, the Soviet Union3, China, Japan, and some other East Asian countries. Development was much slower in most other parts of the world, notably in Latin America. While the USA is “most capitalistic,” Western Europe shows many varieties of “mixed economies,” the USSR was a centralized economy with virtually no free markets, and modern Japan was once referred to as “the only communist nation that works.”4 Particularly striking comparisons may be made between Chile, Sweden, Argentina and the USA. Chile and Sweden had much in common; Argentina and the USA had similar economies. All four countries were in a comparable state of development at the beginning of the twentieth century. Sweden and the USA both developed rapidly though in very different ways, while the South American countries developed slowly.
Economies greatly benefit from reasonable legal structures with efficient administrations, without prohibitive fees and free of significant corruption. “Soft states” were described by Gunnar Myrdal5. Hernando De Soto6 focused on the unworkable property laws and bureaucracies, as found in most Third World and former communist countries. The consequence of these inadequacies are low efficiency and very slow progress in spite of skills, education, and diligence of the poor.
Education is very important in economic development. Good language skills allow sophisticated communication, for instance when teaching a new worker. The use of symbolic and abstract terms allows efficient complex reasoning. The humanities broaden perspectives. Mathematics, physics, and chemistry help in many problem solving tasks and are the basis of engineering. Learning multiple languages and being bi-cultural leads to additional benefits.
The USA has had a less qualified workforce than Europe and East Asia but it has several of the best universities in the world and has been benefitting greatly from a brain drain. More than any other industrialized country, the USA has been depending on highly educated academicians from Europe, East Asia and the Third World; some stayed for extended times in the USA, millions immigrated.
The allocation of money is important: for the development of a region, people must be willing to invest their savings locally; people who have the capacity to improve agriculture and industries need savings. Most savings of poor regions move to metropolitan areas, and savings from poor countries are usually invested abroad, unless governments prevent it.

1.5.4 The importance of how money is allocated
The allocation of money may be economically more important than the fundamental economic philosophy. In the USA and the former Soviet Union, much money was allocated to the military industrial complex, which hurt the civilian industries, particularly in the latter. Many Third World countries develop slowly because of high military expenditures. Particularly in the past, costs of palaces, cathedrals, temples, etc. impeded development.
In the USA, many people are poor and benefit only marginally from the economic achievements. Not enough money is allocated for basic education and the creation of good work places. Many workers are inadequately educated, and many remain under- or unemployed. Because of unemployment, competitive salaries are relatively low. Too little financial resources are allocated for poor families7: people are not properly compensated for raising children and taking care of the sick and elderly. Unemployment or disability incomes are kept very low. There are resources and homeless skilled workers, but they have no money to build their own homes. As many people cannot afford valuable goods and services, production is hampered, operating far below capacity.
In the former Soviet Union, too much money was paid to the workers-consumers while civilian producers did not receive adequate money to increase quantity and improve quality of production. In addition, there was no incentive to improve quality, since most goods were continuously in short supply. People had to stand in line to buy food and household items; durable goods had to be ordered years in advance.
Modern governments generally avoid directing industrial research and development. Many industrial developments are obviously shortsighted and strictly profit driven. They ignore needs of society and foreseeable long-term consequences of their actions. Good democratic, mixed economies make efforts to allocate resources to improve quality of life rather than quantitative increase in production.
Priorities in government services are extremely important with regard to improvements in quality of life, as, for instance, expressed in vital statistics. In Britain, life expectancy increased most during the decades of WWI and WWII. During those times, it was politically imperative to take care of the basic needs of the poor. Thanks to its socialist government, the very poor Indian state Kerala has vital statistics rivaling highly industrialized countries8.
1 Diamond, Jared: Guns, Germs, and Steel; the Fates of Human Societies, with a new afterword about the modern world, 1997, 1999, Norton, Chapters 10, p.176ff and 18, p.354ff.
2 Robert Heilbroner: Visions of the Future, p.105.
3 The Soviet civilian economy developed relatively fast but that was hardly surprising considering that it started at a very low level and the Soviet industries could copy the West European products. However, adding the military industrial complex and space accomplishments, there was rapid growth.
4 The Wall Street Journal,1/30/89, page 1.
5 Gunnar Myrdal: The Challenge of World Poverty, A World Anti-Poverty Program in Outline, Pantheon 1970, p. 208ff, and Asian Drama, An Inquiry Into the Poverty of Nations, Pantheon 1968, p. 66f, and many other references.
6 Hernando De Soto: The Mystery of Capitalism, Why Capitalism Triumphs in the West and Fails Everywhere Else, Basic Books 2000. The main finding of this study: poor, even middle-class people build and create some wealth, outside the legal property system, since these are unworkable (expensive, unnecessarily complicated, very slow). People then cannot use their property as collateral to get loans, theirs is “dead capital”.
7 In the USA, women giving birth have no privileges other than possibly parental leave that fathers may be equally entitled to. Poor women often have to turn a few weeks old babies over to cheap child care centers to work in one or multiple jobs. This may be the main reason why in the USA there is high infant mortality specifically in the 2-12 month old range and affecting disproportionately poor families (not related to ethnicity or other factors).
8 Amartya Sen: Development as Freedom, Knopf 1999, p. 46ff, 49ff, [In the 1990s, vital statistics of Kerala’s average population were better than those of the poor in the USA.]

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