Real growth, prosperity and the standard of living

The first post (http://layconomics.blogspot.com/2009/09/why-layconomics.html) necessitated the definition of "real" growth. As we saw, increases in asset values in terms of monetary units do not automatically translate to the prosperity of a society. However, since all transactions are defined by money changing hands, prosperity has become synonymous with the amount of money circulating in a society.

However, money is useful only if there are tangible goods available to be purchased with it. Imagine a scenario where a natural disaster suddenly wipes out food supplies in a region. The amount of money circulating in the region remains the same, yet people still starve because they no longer have any food to buy with that money. So, we can conclude that it is not money but, goods circulating in a society that are an indication of its prosperity.

To drive home the point further and also to understand "real" growth, let's travel back in time to when societies were primitive, the concept of money did not exist and people relied on simple barter to obtain goods and services.

Let's consider two villages A and B, consisting of three people each. Let's assume both villages have equal access to natural resources, and let's further assume that environment is not a factor in determining the standard of living in both villages.


In Village A, each resident is only capable of hunting food for him/herself everyday. Each person's entire day is spent searching for prey, tracking it and finally killing it. This provides him with one meal for the day.


In contrast, in Village B consisting of members B1, B2 and B3, B1 has discovered agriculture and farming and therefore s/he is able to provide food for the entire village. B1 agrees to share the food with B2 and B3 provided they give him/her something in exchange for it. B2 and B3 end up doing the following:

1. B2 discovers a way to spin cotton and make clothes for all three people in the village


2. B3 discovers a way to put branches together and build shelters for all three people in the village

Now,

1. B1 trades food for clothes with B2 and food for shelter with B3
2. B2 trades clothes for food with B1 and clothes for shelter with B3
3. B3 trades shelter for food with B1 and shelter for clothes with B2
4. All three residents of village B enjoy food, clothes and shelter

So, by being able to produce not just for themselves but also for others and engaging in the exchange of goods, people in village B have experienced "real" growth and now enjoy a much higher standard of living than the people in village A. One might even say that people in village B are more "prosperous" than those in Village A, since, not only do they have enough food to eat but also clothes, shelter and some leisure time. Also, since every member in village B produces goods for 3 times as many people, one can also say that the gross domestic product (GDP) of village B is three times that of village A.

Therefore, the main ingredients of prosperity are (it's not money!):

1. Availability of natural resources
2. Productivity and specialization
3. Exchange of goods and services

In this post, we hope that we were able to explain growth and prosperity in simple layman terms. In the next post, using similar examples, we will try to get our hands around other economic terms like "recession" and "stimulus". So, stay tuned!

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