April 17, 2021 

AmosWEB means Economics with a Touch of Whimsy!

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KALDOR-HICKS IMPROVEMENT: Based on the Kaldor-Hicks efficiency criterion, the notion that an action improves efficiency if the willingness to pay of those benefiting exceed the willingness to accept of those harmed. In other words, if those gains exceed those losses, or the benefits exceed the costs, then social welfare is improved and undertaking the action provides a net benefit to society. In other words, the winners can, in principle, compensate the losers for their loss, and still come out ahead. The actual compensation, however, is required. A contrasting condition for attaining efficiency is the Pareto improvement.

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We need to pay another visit to Scarcity Stan's Ye Olde Bakery Shoppe and Confectionery Palace. But this is not a social visit, nor is intended for some delectable pastries that will add a few extra pounds to our waistlines. We're here on official economic business. Stan's at wits end. He doesn't know what to do. There's been so much demand for his economic pie, what with society's unlimited wants and needs, that he needs to make it bigger. Our job is to figure out how. While we're doing that, we'll also see how to put our economy on the path to economic growth.

The Answer is Q and Q

As we saw with Fact 1, Our Limited Pie, the only way to increase the size of our pie is to increase the quantity or quality of our resources. The more resources we have, or the more productive are those resources, then the larger is our economic pie. The growth of our economy -- economic growth for those of you making note of the official terms -- thus depends on how much or how rapidly we increase the quantity and/or quality of our resources.

Okay, that's the simple answer for Scarcity Stan and our economic pie. Let's now get into some details, the old nitty-gritty of economic growth, for each of our basic resources -- natural resources, labor, and capital.

Natural resources. In that natural resources are by definition natural, there's not a whole lot we can do to improve the quality of natural resources. Increasing the quantity of our natural resources, however, is a pretty straightforward road to take. We find more resources through exploration. Yet, because we've already populated six of the planet's seven continents, we're beginning to run out of places to explore. Of course, there's the ocean, and perhaps we'll eventually begin using the resources of the moon and other planets. But for now, most quantity increases in natural resource is centered on the technology use to find and extract the stuff. We use more sophisticated detection equipment and dig deeper with bigger shovels.

Labor. The quantity side of labor is also pretty simple -- get more people working. The size of the population and ultimately the number of workers, can be increased through births or immigration from other countries. For obvious reasons the birth route takes a little more time, but both work in the long run. We can also increase the fraction of the population that selling the labor services. The quality side of labor is probably more important for our economy that the quantity. Labor quality is enhanced through human capital, especially education, training, and experience.

Capital. We can increase the quantity of capital by, well, getting more capital. This, however, means that the resources used to make capital can't be used to make other goods that provide immediate consumer satisfaction. Of course, this is our old friend investment. The quality of capital is increased through technology improvements that lets capital produce more output using fewer resources. Research, scientific advances, and engineering breakthroughs are all methods of improving technology and the quality of capital.

You might have detected two common threads running through these three resource categories. One is investment. The other is technology. The best way to increase the quantity or quality of our resources is through some form of investment, either in the acutal number of resources or in the technology behind those resources. That is, we give up some consumer-satisfying goods today in order to increase the quantity or quality of our resources in the future and thus the ability of producing even more consumer-satisfying goods tomorrow.

While assorted types of investment can be important, perhaps the most important is technology. Technology -- our knowledge of how best to transform natural resources in to consumer-satisfying goods -- is a valuable use of investment efforts. Whether we're talking about getting a college education, teaching a new employee how to run a cash register, doing scientific research on farm pest control, or developing a high-speed forklift, these investments divert resources away from other production. A bunch of pointy-headed economists have concluded that most of the growth of the good old U. S. of A. over the past 200 years has been from technological advances that have improved the quality of our resources. Therein lies future growth as well.

Growth is Good, Right?

Expanding our economy's ability to produce consumer-satisfying stuff does a lot of good. When we think about that ever-present problem of scarcity, growth gives us more stuff that satisfies more wants and needs. This is good. This is an important purpose of our lives. This is the whole reason for our economy's existence. How can growth be bad?


Like almost things, especially in the economy, there is good and there is bad. Increasing the quantity and quality of our resources and expanding the size of the economic pie, is not without cost. We've already noted that expanding the pie requires investment and giving up current consumption. There are other costs, other problems, that we should also note:

  • Resource depletion. The blue-green planet we call Earth came with a limited amount of natural resources -- the materials used to satisfy our needs. The more we produce and the more our economy grows, then the less we have left for the future. While we're still doing okay at the moment, eventually we'll either have to find more resources (the moon?), or kick our nasty habit of satisfying wants and needs.

  • Pollution. Not only do we use natural resources to satisfy our needs, when we're through with them, we send it ALL back to the environment as pollution. In fact, every ounce, every gram, every molecule of materials we take out of the environment, will eventually go back often as pollution. The more we produce and grow, the more pollution we'll have.

  • Job displacement. Technology, the guiding light of economic growth, also causes a restructuring of the economy. Workers employed at one job for twenty years may find that job eliminated by new and improved technology. What do we do with a 50-year old who's too young to retire, but too old to retrain?

  • Cultural change. Along with changes in the workplace, economic growth causes changes throughout society. The old ways, the old customs, the old culture, may become seriously outdated with new technologically advanced ways of doing things. This causes a loss of satisfaction for those who grew up enjoying the old ways.

Okay, so what is best to consider in terms of this economic growth stuff?

Economic Growth Tips for the Wise and Wary

  • Don't be left behind by economic growth. When the economy grows, it usually does so unevenly. Some cities, regions, and industries grow more than others. Keep an eye out for those industries and locations that are doing best.

  • Do your part to stay on the growth bandwagon. Invest in your personal economic growth by expanding the quantity and quality of your resources. In addition to helping the economy's pie expand, it will also increase your bank account.

  • Be wary of short-run government policies that adversely affect long-run growth. Sure, there are a lot of bad things that happen in recessions, but let's not cut off our leg to avoid the hurt of a stubbed toe.

  • While short-run sacrifices are needed for long-run growth, we don't want too much sacrifice. All work and no play, all capital and no consumption, isn't good for the economy. If you invest every penny of your paycheck in the stock market, then you'll die of starvation after a paycheck of two.



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Today, you are likely to spend a great deal of time watching infomercials seeking to buy either a T-shirt commemorating Thor Heyerdahl's Pacific crossing aboard the Kon-Tiki or a wall poster commemorating the 2000 Olympics. Be on the lookout for slightly overweight pizza delivery guys.
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