No one knows how prosperity is created. No one. That is, until now.
What we have all missed for the last 200 years is the fundamental change the United States brought to the world. Prior to our founding, the world looked like a pyramid; the kings were on top, and the peasants were on the bottom.
Our Constitution flipped the pyramid upside down; now the people were on top, and the ruler(s) occupied the small area at the bottom. No one was sure it would work because the experiment had never been done before.
In the past, the creation of prosperity was easy to explain: a group conquered its neighbors and stole their gold and resources. This is how all the empires of the past became prosperous. Some, like the Romans, lasted hundreds of years until the burden of empire became too expensive.
But all prosperous empires of the past had one thing in common: the majority of the people remained peasants.
The creation of the United States changed that, but it wasn’t a foregone conclusion.
Historian Henry Adams, when analyzing the new country, wrote, “The man who in the year 1800 ventured to hope for a new era in the coming century, could lay his hand on no statistics that silenced doubt.”
Our country was 10 years old, and our prospects looked bleak.
By 1840, Englishman George Combe wrote, “In no country, probably, in the world is the external condition of man so high as in the American Union. Labourers [in America] are rich compared with the individuals in the same class in Europe.”
Eighty years after our founding, an incredibly short span of time, our GDP equaled the world’s wealthiest nation, Great Britain. By the turn of the century, we were head and shoulders above every other country on earth.
We are well aware of these facts, but no one, including historians, economists, politicians, or any number of intellectual guessers, has ever been able to answer the simple question, “Why.”
Mr. Combe left us a hint, “Labourers are rich.” However, he did not realize he was describing America’s middle class. How could he? There had never been a middle class before.
I am often chided when I make that claim; critics point out that there were middle-class earners in England and throughout Europe. In America, however, it appeared everyone was becoming a member of the middle class.
Instead of a huge lower class and small aristocracy that ran things, the United States was developing a society with a small lower class, a huge middle class, and a tiny upper class. Even in today’s America, an overwhelming majority of people self-identify as members of the middle class.
Now the fun begins. To explain how the middle class came to be, we need to understand how nature works.
A tenet of the environmental movement is, “There is no waste in nature.” If there is no waste, what drives it out? Competition is the mechanism that drives waste out.
Competition and waste are connected. Imagine a seesaw with competition on one side and waste on the other. As competition goes up, waste goes down and vice versa.
Another foundation of nature is “Everything moves to ease.” In national parks, there are signs reading, “Do Not Feed the Animals.” If you feed the animals, they will stop feeding themselves and lose their competitive edge.
When you apply these foundations to the two great systems humans have developed, the marketplace and government, we discover something obvious that everyone has missed.
The marketplace is a competitive system. Competition continually eliminates waste.
Government is a non-competitive system. There is no mechanism for eliminating waste.
The two systems are fundamentally different.
The marketplace happened naturally. We began to trade because it made our lives easier. Trade led to innovation, which led to progress, which resulted in greater ease.
Government, on the other hand, was invented. The Preamble of our Constitution does a good job of explaining why we have government: “[to] establish justice, insure domestic tranquility, provide for the common defense, [and] promote the general welfare.”
We invented government because we saw its potential for making our lives easier.
Both the marketplace and government must work together in a specific way for prosperity creation. The marketplace must be allowed to eliminate waste, and the government must support its operation.
Anarchy, or too little government, is survival of the strong. People become focused on protecting themselves and their possessions. Arbitrary power, or too much government, means the marketplace is rigidly controlled. Competition is stifled, crippling innovation.
In both cases, the marketplace is distorted and cannot operate efficiently. Both anarchy and arbitrary power lead to an impoverished society. It is impossible to have prosperity without a freely operating mechanism to eliminate waste.
At our founding, America had a long tradition of the “Rule of Law,” inherited from the British. Anarchy was not the big concern. Falling into arbitrary power was.
The very purpose of government — to make and enforce laws, rules, and regulations — is a perfect recipe for creating arbitrary power. We were the first nation on earth to consciously limit the size and scope of government in an attempt to avoid this fate.
As our “grand experiment” started, we had a strong “Rule of Law,” a constitutionally limited government, and a population that had a completely different mindset from the rest of the world.
In America, if something had to be done, the people just did it. Unlike Europe, normal everyday people were thinking, trying, failing, falling, picking themselves up, and trying again.
The largest segment of our population was spurring the growth of knowledge. More knowledge led to a need for more education, which drove further innovation and invention.
A radical new belief took hold, that tomorrow could be better than yesterday, and that by participating in the marketplace, the common man could be part of wealth generation. No longer were we doomed at birth to a future life of poverty.
The “middle class conveyor,” a mechanism for moving parts on an assembly line towards a whole product, became a way of lifting people from poverty to affluence. It became a permanent, repeating mechanism for prosperity creation, not only at our beginning, but for future generations to come.
At the end of the Constitutional Convention, Benjamin Franklin warned of the fledgling new republic, “If you can keep it.”
The rules for prosperity creation have been forgotten but are now being recovered. They must now be re-taught to the public. You can’t fix a system if you don’t know how it works.
We must change our focus from a “government-centric” to a “marketplace-centric” country. Waste must be eliminated for prosperity, and that can only happen in the marketplace. It is not easy to change the momentum of a nation that has lost its way. There is much work to do for our republic, if we want to keep it.
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