3.8 Conclusion: The big economic picture
For most of human history, living standards remained at a low level, with temporary ups and downs associated with variations in weather, disease, and war.
Beginning in the 1800s, rising average material living standards became a continuous feature of economic life in many countries, but today one in ten people in the world still lives in extreme poverty. There are vast differences in income between and within countries and across individuals.
Capitalist institutions—private property, markets, and firms—have facilitated the continuous technological revolution and rapidly rising living standards by encouraging innovation and adoption of new technologies. The dynamism of capitalism depends on the interplay of economic and political factors, especially the effective enforcement and implementation of laws and regulations that support property rights, markets, and competition between firms.
Many of the most important technological developments of the twentieth century, from cars and airplanes to refrigerators and personal computers, have relied on carbon-based energy. Others, like plastics and chemical fertilizers, lead directly to ecosystem damage. The exponential increase in output has come with environmental costs: each year we emit more carbon dioxide (CO2), which sits in the atmosphere and accumulates over time. As a result, average temperatures in each year of the twenty-first century have been higher than at any time in the previous millennium.
We will see in later chapters how governments can address some environmental problems by directly regulating the amount of emissions or other environmental damages or by organizing local communities. Technological progress can also reduce the cost of goods and services to help us manage climate change and biodiversity losses. For example, recent advances in technology have vastly reduced the cost of wind, solar, and other renewable sources of energy.
Skill and learning objectives
- Using data to describe and understand the world
- Reading and comparing information in graphs with data
- Defining terms
- Understanding the difference between causality and correlation
- Explaining a causal mechanism
- Computing a growth rate
- Understanding the strengths and limitations of using economic data
- Gaining reading comprehension (difficult material)
Concepts to be learned
- Gross domestic product (GDP) per capita and living standards
- Technological innovation and the Industrial Revolution
- Capitalism as an economic system
- Institutions as rules of the game—the three institutions of capitalism: private property, markets, and firms
- Political systems and the varieties of capitalism
- Correlation and causation
- Income inequality
Seeing the Principles in Action
| Principle | Example | Everyday Economics |
|---|---|---|
| Interdependence principle | Economic outcomes in a capitalist economic system depend on the choices made by households, firms, and the government within the limits of property rights and market competition. | Think about an outcome in your life that depends on the choices made by a firm. How does your outcome depend on the firm’s decision? How does the firm’s outcome depend on your decision? |
| Doing the best you can principle | The owners of capitalist firms in capitalist economies do the best they can by maximizing their profits. | When you do the best you can in your studies, what do you seek to maximize? |
| Rules of the game principle | The rules of the game of the political system within which capitalist institutions operate influence the size of the gains from cooperation, and how those gains are divided in the economy—that is, the economy’s distribution of income. | Think about how you experience the political system in your daily life. For example, have you voted on policy initiatives? Does your school receive government funding? Do you receive any direct government transfers? |
| Trade-offs and opportunity costs principle | There can be a difference in economic outcomes between capitalist and centrally planned economic systems. During the second half of the twentieth century, people living under capitalist institutions in West Germany had higher average incomes than those living under central planning in East Germany (see Data Extension 3.4). | Have you or do you know someone who has chosen to migrate to another state or another country? What do you think made them decide to migrate? How do you think they evaluated the choice of migrating against alternative options? |
| Principle of gains from cooperation and conflict of interest | The cooperation of large numbers of workers within firms can increase an economy’s productivity and living standards, but conflict over the distribution of those benefits remains. While productivity has increased and poverty has declined drastically over the last century, vast differences in income persist between and within countries, as well as among individuals. | Think about a time when you worked as part of a team to complete a school assignment, for example, preparing and delivering a presentation, or researching and writing an essay. Was the completed assignment better than if you had worked on your own? Were you satisfied with how the grades for each team member were determined? |
| Principle of individual and societal interests | The way we produce our livelihoods under capitalist institutions allows individuals to access more material goods and machines than seemed possible a century ago; yet, the process has involved using up, degrading, or destroying our natural environment. | Think of a technology or machine that you use regularly. Now, find out how the production and regular use of the technology or machine uses up or degrades our natural environment. Do you think the added individual benefits to all users of the machine compensate for its estimated long-term impact on our shared natural environment? |
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