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A Common Misunderstanding of Economic Development

Summary:
One of the joys of cheap, high-bandwidth connections and the ubiquity of smooth high-resolution video on nearly every connected device is being able to watch excellent educational videos – one such producer is Kurzgesagt (idiomatic German for “in short”), a popular YouTube channel. There is an addicting quality to their videos – they are crisp, they use uniform graphics in all their productions, and the narration does a great job at breaking down complex scientific topics and controversies. The channel sometimes veers into the philosophical, with mixed results, and things take a turn for the worse whenever any economic issue is raised. This short article will attempt to point out some of the economic fallacies and unmentioned assumptions contained in their latest video entitle A Selfish

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factory-300x2001One of the joys of cheap, high-bandwidth connections and the ubiquity of smooth high-resolution video on nearly every connected device is being able to watch excellent educational videos – one such producer is Kurzgesagt (idiomatic German for “in short”), a popular YouTube channel. There is an addicting quality to their videos – they are crisp, they use uniform graphics in all their productions, and the narration does a great job at breaking down complex scientific topics and controversies. The channel sometimes veers into the philosophical, with mixed results, and things take a turn for the worse whenever any economic issue is raised. This short article will attempt to point out some of the economic fallacies and unmentioned assumptions contained in their latest video entitle A Selfish Argument for Making the World a Better Place – Egoistic Altruism.

It starts off with giving us what is essentially the Malthusian trap:

Until recently, the vast majority of the world population worked on farms and the total      production of the world’s economy was mostly the total agricultural output. And this output was limited by the fixed size of the land. The total output of the economy did not change a lot year by year. The size of the pie was fixed; the world was a zero-sum game. In such a stagnating world, the only way to get better off is if someone else gets worse off. if you take a bigger piece        of the pie, someone else’s gets smaller. If you want more food, then conquering, plundering, and stealing are great strategies. Your neighbour’s loss is your gain.

This is true only in a very narrow sense, if specific economic conditions are met: namely, that the economy is subject to no changes in prices or factors of production, that no capital accumulation can occur, and that no technological innovation can occur.

Careful to never mention the word “capitalism”, the video goes on to explain that the Industrial Revolution “happened” and that everything changed as a result: “we developed machinery, better crops, and better fertilizers”. Constantly speaking in the passive voice, the video tries to explain this massive change by saying that economic growth changed the world from a zero-sum game to a positive-sum game through innovation. This innovation, according to the video, keeps advancing and keeps increasing our expectations for the quality and quantity of goods and services that we desire.

To borrow from Hans-Hermann Hoppe’s excellent 2015 book A Short History of Man, other than maintaining optimum population which applies mostly to pre-capitalist economic systems, we can only get richer through two main means. Firstly, capital accumulation, i.e., the construction of intermediate “producer” or “capital” goods that can produce more consumer goods per unit time than can be produced without them or goods that cannot be produced at all with just land and labour. It is extremely important to mention that capital accumulation, in turn, has something to do with the lowering of time preference. Secondly, through participation and integration in the division of labour – things do not magically become better, and even furthering innovation in any given field requires the further specialization of labour.

So how did mankind finally escape the horrors of living constantly near subsistence level? Through the very slow accumulation of civilizing cultural norms, constantly testing and tinkering with ideas (i.e., through a Darwinian process, the slow emergence of norms which protected property versus the disappearance of those that did not), time preference slowly became low enough to allow for production of capital goods which further enhanced the process of civilization – a positive feedback loop where time preferences perpetually decrease due to the accumulation of capital, the increase of the relative value of future goods, the further division of labour, and a temporal lengthening of one’s considerations and family affairs.

This emphasis on innovation, while ignoring its prerequisites, is understandable. As Hoppe explains,  technological innovation is necessary but not sufficient to escape the Malthusian trap:

And not just any technological innovation will do. Because hunter-gatherer societies are, as explained, “parasitic” societies, which do not add anything to the supply of goods but merely appropriate and consume what nature provides, any productivity increase within the framework of this mode of production does not (or only insignificantly so) result in a greater output of goods produced (of plants gathered or animals hunted) but rather merely (or mostly) in a reduction of the time necessary to produce an essentially unchanged quantity of output.[1]

Without ever giving a satisfactory explanation as to why innovation occurred, and why it occurred very unevenly throughout the world, the video then challenges the viewer, and sneaks in a giant prescription: “the new positive-sum world has existed for 0.1% of human history and we have yet to get used to it. It has a consequence that feels really unintuitive. In a positive-sum world [capitalist], it’s in your personal selfish best interest that every human on planet earth is well off.”

The gist of the first part of this message is nothing new – in Adam Smith’s 1759 The Theory of Moral Sentiments, and even in earlier works, this type of egoistic altruism is already expounded.

The video continues:

In a positive-sum world, the more people are well-off, the better your own life is. This is because of the nature of innovation; it is fundamentally driven by supply and demand. The supply increases when more people have the freedom and education to contribute. They become inventors, researchers, engineers or thinkers that come up with new ideas. The demand for ideas increases as people get richer, and can pay for new solutions.

This garbled, perhaps metaphorical but misleading use of the notion of supply and demand, does not help the viewer understand what is going on here. They have skipped over all the basics, and are entertaining specific policy prescriptions for how to increase innovation as they see fit – by claiming that improving the lives of those who are worst off has a multiplying effect (eerily reminiscent in tone of Keynes’s multiplier effect), and that this, in turn, would increase the demand for ideas while at the same time making it easier for ideas to be produced. Never mind that they are dangerously mixing the concrete and the abstract – they are correct in their observation that increasing the number of economically able people elsewhere will, in many ways, eventually improve your standard of living – but they leave out the mechanism by which that may be achieved.

The video then poses several hypothetical questions, such as asking the viewer if we could have cured cancer by now if we spent seven times as much on research, and had seven times as many people working on it? Simply put – there is no way to know. At what cost? For which trade-offs? But what we do know is that artificially (by government interference) changing the allocation of resources leads to all sorts of economic distortions, many of which are unforeseen and unforeseeable. The only way to rationally allocate resources is to leave it entirely to the unfettered, voluntary interactions of human beings in a market economy.

In Against Empathy: The Case for Rational Compassion, by Paul Bloom, he argues that we often think of our capacity to experience the suffering of others as the ultimate source of goodness, and that many of the wisest policy-makers, activists, scientists, and philosophers agree that the only problem with empathy is that we do not have enough of it. There lies the flip side of the problem of economic ignorance. Surely, I will take it for granted that the makers and script writers of these Kurzgesagt videos say what they say because of their empathetic drive to make humanity better. But their grave ignorance of even the most elemental notions of economics transforms their prescriptions from well-sounding wishes to a redistributive bureaucratic nightmare with potentially lethal permutations.

We cannot take a little bit from Peter and give it to Paul, and expect no negative effect, and no change in behaviour, and no change in future actions from either the Peters or Pauls. Property rights, incentives, and disincentives are supremely important.  After all, as Murray N. Rothbard has said so eloquently in The Death Wish of Anarcho-Communists (1970), “[i]t is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” This rings even truer for people with specialized training in the natural sciences, yet the fatal conceit is that the wish to impose one’s vision, however well-meaning, due to one’s convictions that he or she knows better.

Perhaps the most embarrassing case of an extremely smart fellow in the hard sciences coming up with nonsense opinions in a variety other fields is none other than Albert Einstein. His support of every government measure, which are each collections of acts of violence domestically, lies in stark contradiction to his otherwise pacifist nature in matters of foreign aggression –  to wit, war. He too, like most of the intellectuals of his time, was enthralled by socialism and even wrote a famous laudatory essay to it, decades after it was proven beyond all doubt that socialism could never work neither in theory nor practice. The charismatic Neil deGrasse Tyson is another one with a seemingly incurable fetish for public funding of whichever pet project he believes has a noble scientific goal, morality and property violations be damned. Without a solid understanding of economics, these otherwise very intelligent people are merely engaged in magical thinking, and express their prejudices by supporting whatever government program which proclaims to fix a problem which suits the intellectuals’ overtly desired ends in theory.

The words “property”, “capital”, and “entrepreneur” appear nowhere in the video; neither are the economic dimensions of time, the structure of production, investment, producers and consumers goods, prices, value, wealth, and many other concepts ever explained.

Though the video never mentions State measures here – in Kurzgesagt’s other videos, they are rather sympathetic to government interference in the market for all sorts of reasons – utility, safety, consumer protection, supposed advancements in research, and the like.

To top it off, the video concludes with a statement that this was a collaboration with Max Roser and Our World in Data, and supported by the Bill and Melinda Gates Foundation. If we put two and two together, the subtext was there in the video – a global tax on the rich and yet another massive, but this time global, redistribution scheme is the only key to a future world utopia, with accessible space bases and a cure for cancer for all. The irony is that these same people accuse those against government intervention in the economy of utopian thinking.

[1]     Hans-Hermann Hoppe (2015) A Short History of Man: Progress and Decline, An Austrolibertarian Reconstruction, Mises Insitute, p. 45.

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