Monday, May 27, 2013

(Very) Long-run Economic Problems

            The figure below plots real per capita economic growth over the last 500,000 years.  The dramatic fact is that virtually all of the increase in living standards that humanity has experienced occurred in the last 500 years!  To be sure, there were economic fluctuations prior to that.  Living standards ebbed and flowed with wars, droughts, floods, plagues and so forth, but there was no trend.  One century looked much like the next.  It was not until the scientific revolution that humans begin to understand and exploit natural laws so as to better the conditions in which they lived.  And the impact has been dramatic.  A middle class family today lives far better than royalty of 500 hundred years ago when you consider things such as dentistry, medicine, sanitation, indoor plumbing, dwelling climate control, transportation, and electric lighting and appliances.  Real per capita growth of 1.7 percent per year may not sound like much but compounded over three centuries it leads to an improvement in the standard of living of more than 150 times!

       This fantastic growth, however, does not come without risk.  It allows for dramatic increases in population with associated demands for clean water, fresh air, sufficient sources of energy, and adequate natural resources.  It also means that for the first time human activity is having a measurable impact on the global environment.  What makes these risks new is that they are the result of slow, but steady, compounding.  In response to economic growth and rising population, the global environment does not change noticeably from day-to-day, or even year-to-year, but it keeps changing.  Over the course of a century that change can be dramatic.  This impact of compounding is well known.  What is less commonly appreciated is that it is far from clear that we have developed the social and political institutions necessary to cope with it.  Until the last few centuries all of humanity’s problems were the result of short-term crises that attracted our attention and focused our minds.  It is uncertain how well we will be able to deal with problems that seem almost boring in the short run, but could well threaten our species in the long run.  We have never faced such problems in our evolutionary history.

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