More Pie Please
by Dr. Doug Cardell
If you regularly read my articles, you've read my brief discussions about pies. Several of you have asked for a more thorough discussion, and I am happy to oblige. If you are new to economic pies, here's a quick catchup. Pies are often used in economics to explain the difference between a fixed economy, where everyone shares an economy represented by a pie of a constant size, and a growth economy, where the size of the pie we share constantly grows. History and adaptation have wired humans for adversity and scarcity. For the vast majority of human history, most of the population had grueling lives and barely got by. I don't mean almost getting your cable cut off for non-payment; I mean near starvation and constant adversity much of the time. The exceptions were the rich. The economy was a fixed size; the only way to get a bigger piece of the pie was to take from others. The world hardly changed at all during a lifetime. The rich only got rich at the expense of everyone else. They were the kings and queens and nobles and a few merchant families. Naturally, the ordinary people resented the rich since they were depriving everyone else and contributing very little. Over time, people began to trade and create innovation, but it still took a long time for innovations to happen, lifetimes, because there was no great reward for coming up with one. Whoever invented the wheel probably didn't make much money for the invention. There was no patent office, no way to keep others from building their own wheels by simply copying your design. Between 1500 and 1800, things began to change. Slowly, free-market capitalism developed—the beginning of a growth economy. In this new growth economy, private investment began to spur economic growth. By economic growth, we mean not struggling to get a part of all of the existing wealth in the world, a fixed amount, but by creating new wealth as a result of innovation. In 1474, the Venetian Act codified the patenting process at the beginning of this period and created a system for applying for patents. Europe had the concept of patents; they punished people for theft of what we now call intellectual property. However, it was a haphazard process, but there were no set standards. The Venetian Act meant the patent needed to be for a unique and useful product. This act is when patents first became an incentive to innovate. At first, it didn't create a big surge, but it helped trigger the Renaissance, the rise of creativity in art and science that paved the way for what was to come. In the early 1700s, the first big innovation to change the world by increasing the size of the economy, the pie, was the 'atmospheric engine' invented by Thomas Newcomen. It was the first commercially successful steam engine. It used a piston and cylinder, not unlike an automobile engine today. Newcomen developed it to pump water out of coal mines—this led to Scotsman James Watt, 1765, introducing a far more efficient design. Now, capitalism has entered the picture. Watt needed funds for advanced equipment and expensive parts to make further improvements, so he partnered with venture capitalists to provide the funds for a share of the profits. After Watt was satisfied with his design improvements, he began marketing it in 1774. Watt's success led to others inventing different and better engines. These early venture capitalists started the industrial revolution by funding innovative entrepreneurs. Meanwhile, across the Atlantic, a new country was being created and a new kind of government that encouraged innovation. The United States Constitution Article I, Section 8, Clause B states: "Congress shall have power to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." Three years later, the U.S. had a patent office and issued its first patent to Samuel Hopkins on July 31, 1790. This free country committed to using innovation to grow the economy, which triggered the largest burst of human progress ever seen. Life improved for the first time in human history, first in the U.S. and then worldwide; each decade that passed resulted in more improvement than in previous recorded history. Furthermore, it's been accelerating ever since. It took one hundred twenty years for the first million patents to be approved. Getting to two million only took twenty-four years, twenty-six years to get to three million, another million thirteen years later, then fifteen years, then eight years. Seven years, six years, then four years, and the ten millionth patent came only three years after the nine millionth. On June 19, 2018, the U.S. issued its ten-millionth patent. The first million took 120 years; at the current pace, the subsequent 120 years, ending in 2030 will likely see 14 million in the same amount of time. Innovation coming 14 times faster means life will probably be 14 times better. Free-market capitalism is driving this success. Life in 1500 was not much better than two thousand years earlier for most people. Now, life is 14 times better than only 120 years ago. This growth is the difference between fixed and growth economies. The difference is in what has changed in the last 600 years, particularly the last 200 years. Before 1500, virtually the entire world was a fixed economy. Trade improved things some, but not very much for regular folk. When kings and queens and other royalty acquired wealth, it was at the expense of everyone else. Hence, the legend of Robin Hood. Back then, the rich were exploiters, but now, the rich are primarily self-made innovators who boost the economy for everyone. We can measure this improvement in several ways. One good way to measure the difference is GDP per capita. That is how much, in goods and services, the average person on earth created. That is, how much value could each person create to be shared by all. Think about that for a moment. Every person produces value that is shared by all. Until about 1700, it was less than $100 per year in today's dollars. By 1800, it was closer to $250. For the first time in human history, the pie's size—the world's collective wealth—had more than doubled in a century. By 1900, it had surpassed $1000. By 1950, it was over $3,000; by 2000, it was approaching $7,000; by 2020, it was over 12,000; this year, it is projected to top 13,000. In the last three centuries, the size of the pie as measured by GDP per person has increased to 130 times what it had been for the previous two thousand years. Free-market capitalism funded innovation that increased per-person wealth by an astounding amount. In a fixed economy, the pie only grows in proportion to the population. In a growth economy, the pie grows in proportion to dollars invested in innovation. Capitalists supply those dollars; they risk their own money in hopes of getting a share of the profits, if any. Venture capitalists take big risks with a lot of money. Many have lost fortunes, and many have made them back again and more. They sometimes get huge rewards for taking those risks, but it's the risks they take that power the economy for all of us. They deserve a big reward because they are not taking a bigger piece of a fixed pie; the capitalists are taking a smaller percentage of a pie they baked bigger. For example, let's say the current pie size is 100; now, entrepreneur Smith creates a product that increases productivity by ten percent. Smith makes a profit of 5 in a pie of 100, that's huge, but Smith grew the pie to 110 by increasing productivity, leaving five for everyone else. No one lost, everyone is 5% richer. Who cares how much Smith made if we all get 5% richer? This growth is Robin Hood re-imagined, not robbing the rich to give to the poor but riding the coattails of the wealthy entrepreneurs to provide more for everyone. It's long past the time to stop thinking of wealthy entrepreneurs and capitalists as fat cat exploiters and appreciate their contributions. Those contributions are a necessary part of a positive sum game that is in our long-term self-interest. Recognizing the growth economy, the positive-sum game, for what it is not just better for us but better for all humanity. The more we create for ourselves, the more we make for others. We no longer live in a world of adversity and scarcity. The pie is no longer fixed; the economy is not a zero-sum game where you can only win by making others lose. It is a positive sum game where we all work together to grow the pie with the help of capitalist investors who fund our efforts. As a result, we live in a world of abundance; most of us have riches that the kings, queens, nobles, and merchants of 1500 could not possibly imagine. Take the time to enjoy it. Embrace free-market capitalism and say, "more pie please."
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