Conclusions about 10 Economic Factors

  • May 24, 2017

    Two notable factors are missing from this series of ten economic factors: aggregate demand and natural resources.

    The dominant thought among academic economists is that aggregate demand for goods and services both by government and consumers drives economic growth. I saw the effects of communism when I visited Poland in the 1970s. There was no end to consumer demand as evidenced by the long lines in front of stores that were lucky enough to receive a new supply of food or other goods. The people longed for virtually every good that Americans took for granted yet this huge demand could not stimulate growth. As always, the government had insatiable thirst for greater spending. Also, the government had unbridled control over wages and virtually all productivity decisions. But the communist economies were anemic. The people lived in fear of their own government. Almost no one had confidence that if they worked harder or smarter to create more valuable goods and services that they would be rewarded. Rewards came from being supportive of the communist party. Free people will find no limit to their desires to prosper. Only extreme government control, regulation, taxation and spending can crush the natural forces that cause economies to grow.

    Natural resources are often cited as a primary driver of economic growth and Saudi Arabian and Kuwait serve as excellent examples of the potential benefits of natural resources such as massive oil reserves. But Venezuela, Russia and Iran provide vivid counter examples of the effects of massive oil reserves. Economies such as those in Taiwan, Singapore, Hong Kong, Japan, Belgium, South Korea and Switzerland are shining examples of vibrant economies with sparse natural resources. While abundant natural resources can establish a foundation to an economy, I believe that long term economic growth is primarily driven by the ten factors identified in this series.

    The Dutch Disease if the name given to the economic observation that the short term benefits of harnessing massive natural resources can be offset in the long run by the Simply put, an economy relying on its advantage in the area of natural resources will lose its competitiveness in other industries and will decay into dysfunctionality.

    Economic-Factor-10

    If this series could be captured in a single word it would be institutions. While individual examples of changes in institutions may be sudden, for most nations institutions change slowly. The trend of institutional changes throughout the world over the last 3-4 decades has been positive. Impoverished nations such as India and China have increasingly solved problems of starvation and disease. Developed nations continue to improve healthcare, expand education, increase lifespans, and control pollution. The recent U.S. Presidential and Congressional elections shows that despite enormous resources having been devoted to polls, almost everyone was taken by surprise by the results. Accordingly, attempts to forecast future determinants of long term economic growth should be “taken with a grain of salt”.

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