I finished another fantastic book call “The Birth of Plenty: How the Prosperity of the Modern World was Created” by William Bernstein. The book is fantastic but is a long and somewhat academic handling of the subject. Which I love, but will probably preclude it from being on my “Business Guru” list. There is great information in it, but not a lot of actionable ideas for an up and coming business owner.
Mr. Bernstein asserts (which is well supported) that any time four factors come together, economic prosperity follows. Those four factors are:
1. Secure property rights including personal property, real property, intangible property and civil liberties.
2. A systematic procedure for examining the world a.k.a. the Scientific Method
3. Open and available sources of funding – something like our modern capital markets
4. The ability to rapidly communicate information and to transport people and goods
Being a non-academic business person, I was ready to accept this at face value. Anyone that has spent any amount of time in local or even statewide and national politics knows that what businesses really want is for government to provide good infrastructure they can rely on, enforce laws in a transparent and consistent way and then get out-of-the-way so they can experiment and try to make money. Mr. Bernstein obviously gives this idea MUCH more detailed work. He shows, historically, why these things are critical and what happens when you don’t have them. He provides wonderful support for what business owners have said for decades.
For any business owner that wants to expand their mind a bit, I highly recommend this book. My favorite part was Chapter 11 and is the one section that I think I will keep in my mind for a long, long time. I thought I would take this chance to share the ideas of this one chapter here.
In the chapter, Mr. Bernstein explains that there are consequences to economic growth. One of the primary ones being that income inequality is a natural consequence of economic growth. The very nature of economic growth forces it to happen. If you cannot retain what you earn or produce, you have do not have an incentive to produce. If you can keep what you make, you have a powerful incentive to produce more and to try to keep more for yourself. This is even more true, he says, in the technological world, where the output of a highly skilled person can be scaled up almost to infinity by the ability to instantaneously transmit their output across the globe.
But rising income inequality can also have a deleterious effect on the ability of an economy to grow because of the idea of the stakeholder effect. The more stakeholders in an economy (stakeholders being people who have property to protect and have a vested interest in maintaining the rule of law) the better off it is. His example is very simple. In Kansas, all it takes is a local police force to maintain order and protect your property. In Kabul it requires many heavily armed men. That uses up significantly more resources and therefore means the economy cannot be as successful. The obvious offset is that an overly aggressive tax policy (designed to curb these inequalities) also dis-incentives people to produce, because they know that so much of their output will be captured and redistributed.
He talks about the idea of a “stability envelope” within which both competing ideas are balanced. Obviously, the answer is that there is no perfect balance and the challenge of a society is to constantly adjust and correct these things as necessary. I won’t go into too much detail, as I really want to support the author by making you go buy his book! But suffice it to say that it was a fascinating chapter and refreshingly unpoliticized handling of what can be a somewhat touchy topic in some circles.
I thoroughly enjoyed reading this book and I hope that you find the time to check it out it yourself!