Date Written: 2/28/2023
Question: Describe the process by which the market economy tends toward an improvement in the standard of living.
In modern times many people believe that governments are responsible for the rise in the standard of living. They think governments must steal from the rich to give to the poor. However, this is a common misconception. This isn’t actually how the standard of living rises. Businesses operating under the free market are what truly raise the standard of living.
The process is quite simple too. Businesses save and invest the money they earn, so that they can buy capital goods. Capital goods are anything that is used to produce consumer goods like a machine on an assembly line. These capital goods allow the laborers to be more productive, so they can produce more consumer goods. Now that there are more consumer goods the prices of these goods goes down. With the lower prices more people will be able to get their hands on the goods thus rising the standard of living. In simplest terms, when businesses produces a larger quantity of stuff more people can get that stuff.
For the sake of the argument, let’s say a business doesn’t want to save and invest in capital goods to become more productive, thus not raising the standard of living. Then this business is doomed to fail because all of its’ competitors will be striving to become more productive. So that they can lower the price of their goods. Which in turn makes more consumers want to buy from them, which makes them more money. Any lazy business that isn’t seeking to improve production will be put out of business by its’ competitors. So the standard of living continues to rise.
Government’s Affect on the Standard of Living
Believe it or not, governments that try to raise the standard of living actually inhibit it. When governments try to raise the standard of living they do it by stealing from wealthy businessmen and giving the money to the poor. This might immediately benefit the poor, but it hurts them in the long term. Now that the businessmen have less money it is much harder for them to invest in capital goods. If they can’t invest in capital goods, then their businesses don’t become more productive. If their businesses don’t become more productive, then they won’t lower prices and less people will be able to use their goods. With less goods available the standard of living will stagnate or decline. It may seem like government action rises the standard of living, but in reality it only slows it.
A Hypothetical Example
To further prove that businesses are what raise the standard of living let’s consider a thought experiment. Imagine that martians came and took all of the capital goods on Earth. (This includes our rocket ships, so we cannot chase them.) All of our machines and tools are gone. We can only produce things with our own hands now. Everyone would be vastly less productive probably around 1/100 of what they used to be. Everyone would have to work an exhausting schedule to just get the means of existence because people earn less when they produce less.
So how would we get out of this pitiful state? Should governments steal from the rich and give to the poor? Obviously this wouldn’t accomplish much. The problem isn’t that the rich people are hoarding things. The real problem is that there simply is a much smaller quantity of stuff in general, so everyone, including the rich, have way less. The only way for the standard of living to rise is for businessmen to invest in and invent capital goods. With the return of capital goods laborers will be more productive and more goods will become available. As before, with more goods on the market prices will go down and more people get the goods. This is the process that raises the standard of living. Government action would only slow the improvement of the standard of living (as explained above).
In conclusion, the standard of living isn’t raised by government action. It’s raised by business becoming more productive and increasing the supply of goods. With more goods in existence the standard of living truly rises.
Sounds about right.