What causes economic progress, and why have Americans become so accustomed to it?

As I’ve written before, the belief that next year will be better than the last is a near given in American society. We expect much of the future. We often assume that economic progress will occur regardless of the prevailing political and social trends. But the truth is, economic progress only happens under a very specific set of circumstances.

Robinson Crusoe

First, economic progress occurs only when human beings save and invest.

Consider Robinson Crusoe, alone on an island. Every day, he goes fishing with a rod he crafted from a stick and some line that washed up on shore. He usually catches just enough to feed himself for the day. This continues for years, until one day Crusoe decides to cut his dinner portion in half for a day so he can spend the entire next day crafting a net and still have something to eat in the evening. While this means he must sacrifice satisfaction in the present, it also means he will be catching more fish every day in the future. In fact, once the net is complete he begins to catch enough in one day to feed himself for an entire week. This allows him to store even more fish in order to create bigger and better nets with his time. The result is enough nets to allow Crusoe to spend just a fraction of his time fishing and more time building a better home, growing other foods and improving his quality of life—in other words, economic progress.

Though this is a simple example, the principle holds true no matter how large or complex the economy. Unless we are willing to sacrifice some satisfaction today, our lives won’t be any better tomorrow.

Second, economic progress depends on the existence of private property rights.

    Economic progress only happens under a very specific set of circumstances.

Robinson Crusoe’s investment in the future would be in vain if he was not allowed to keep the fruits of his labor. In fact, if he doubted that he would have control over his nets once he finished them, he would likely not have spent so much time building them—especially if it means sacrificing his present comfort. Of course, this wouldn’t happen to lonely Crusoe, but imagine if a group of 100 people lived on his island and threatened to take away his net every time he started to build one. He’d likely think twice before going hungry one day in order to build a net.

Property rights are an essential ingredient for economic progress. If human beings doubt that the fruits of their labor will remain theirs to use as they wish, they will be less likely to work so hard gathering resources and more likely to consume their resources as soon as possible.

As George Mason University economist Peter Boettke explains:

Recognized private property rights provide the legal certainty necessary for individuals to commit resources to ventures. The threat of confiscation, by either private individuals or public officials, undermines confidence in market activity and limits investment possibilities. Clear property rights tend to make decision makers pay close attention to resource use and the discounted value of the future employment of scarce resources. Absent private property rights, economic actors will tend to be short-sighted in their decision making and not conserve resources over time.

To summarize these two conditions, economic progress requires us to respect both ourselves and our neighbors. We must respect ourselves by investing in our future. We must respect others by allowing them to keep the fruits of their labor (and insisting that they do the same for us). Unless these two conditions are met, sustained economic progress is impossible.

Unfortunately, both of these conditions are under attack in the present day United States. Savings rates are as low as ever, and government policy continues to challenge property rights with each passing year. It’s up to informed citizens (that’s you!) to educate others about the causes of economic progress and fight back against trends—political, religious and social—that undermine its continued existence.