The Science of Economics, by Fred Foldvary
1. Environmental effects of population
Populations merits a separate chapter because one of the major
social phenomena today is the rapid increase in the human
population on earth, and secondly, because the effects of the
increase are controversial due to its complexity. The figures for
population growth are indeed startling. From 1990 to 2025, the
world's population will have increased by 3.2 billion, with
projections that the peak will be from 11 to 14 billion people.
However, figures on their own do not tell us the full story.
We can begin by separating the environmental from the purely
The environmental effects, keeping other things equal are
largely negative. First, human populations crowd out wildlife,
destroying its habitat and competing for sites and food. Secondly,
with more people there is greater competition for areas of natural
beauty, which are mostly fixed in supply. There is only one
Yosemite National Park, and only so many miles of good beaches.
More people implies either greater crowding or else a higher
The effects on wildlife can be dealt with by, first,
establishing wilderness reserves where there is little or no human
activity other than camping. This can be done both by government
and by private initiative, by buying and preserving land, as the
Nature Conservancy and other conservation organizations are doing.
If there is CCR, the community collection of land rent, then such
reserves would also pay the rent charge, but the government in turn
would spend that rent on the reserve, to preserve it, so the
payments can cancel out.
In addition, as noted in Chapter 13, any destruction or using
up of wildlife and the world's genetic endowment would be subject
to a charge, which would reduce the damage. Another approach would
be to also permit the private ownership of wildlife, such as
whales, and then the owners would be legally entitled to
compensation for any destruction of the wildlife and would receive
the revenue from its sale. Humanity as a whole or some community
would also have a residual ownership, so the owners themselves
would be subject to charges for the destruction of wildlife and
2. The economics of population
The general belief persists that wage levels, especially in
the less developed countries, are the result of a population that
is growing too fast.
Thomas Malthus fathered the doom-laden demography thesis: that
unrestrained population growth leads to poverty and hunger. His
conjecture was that population tends to grow geometrically, since
with a certain percentage annual population growth, it keeps
doubling in the same time period. But, according to his
projection, the growth of agriculture is arithmetic, growing by the
same absolute amount during each time period. For example,
population may grow like 10, 20, 40, 80, while agriculture grows
like 10, 20, 30, 40. Without birth control, population runs into
the limits of natural resources and gets controlled by deaths.
David Ricardo contributed to the explanation: an increase in
population will lead to migration to lands with lower productivity,
lowering wages, as discussed in Chapter 2. Henry George pointed
out that the land tenure system also affects the margin of
production, since if land is used suboptimally, the margin will be
less productive than needed for that population. But George went
beyond this to show that the Malthusian scenario does not
necessarily hold. An increase in population can also have
increasing returns, boosting per-capita output with better
organization and a finer division of labor. More knowledge and
technology can be used, as greater populations result in economies
of scale with mass production.
If the earth were running out of natural resources, the price
of commodities such as metals and grains would be increasing.
Instead, their prices relative to manufactured goods has decreased.
Population has negative effects on the natural environment, but it
is by itself not necessarily an economic problem. Also, the
evidence shows that as people become wealthier, they tend to want
fewer children, so the best antidote to excessive population growth
is economic growth that increases family incomes.
3. Economic growth and development
Economic growth is an increase in the total output in an
economy. Economic development is an increase in the material
standard of living in an economy or an increase in the capital
goods of an area. Development is usually measured as per-capita
gross domestic or national product, but if the development is
highly unequal, per-capita income can increase without affecting
much of the population. A more refined measurement of economic
development is per-capita income divided by an inequality index,
such as those discussed in Chapter 9.
Three key problems in less-developed countries (LDCs) are
poverty, unemployment, and environmental destruction. Out of the
gross global product of US $20 trillion (thousand thousand million)
in 1990, less than $3.4 trillion was generated in less-developed
countries (Todaro, 1994, p. 39). Agriculture has been measured as
35 times more productive in North America as in Asia and Africa (p.
51). The elimination of these gaps is the principle aim of
economic development. There are also internal gaps in many LDCs,
which often have a more modern sector in the cities and a more
traditional, lower-wage agricultural sector.
The conventional theory of economic development centers around
the Harrod-Domar growth model, which emphasizes the additions to
the stock of capital goods. There is some capital-output ratio, k
= K/Y, so that a certain increase in capital goods K will induce an
increase in output Y. There is also some proportion s of national
output that is saved and therefore invested rather than consumed.
Therefore, the growth rate (annual change in Y divided by Y) is
equal to s / k, the proportion of income or output saved (s)
divided by k. The implication is that development depends on how
much capital is added each year.
Much developmental aid followed this theory, pumping massive
amounts of capital into the Third World to build dams, roads, steel
mills, factories, as well as machinery, resulting in colossal
national debts to foreign banks and international lending agencies
such as the International Monetary Fund and the World Bank. The
problem, of course, is that capital goods are heterogenous, and
there is no uniform capital/output ratio. A gigantic dam will also
disrupt the lives of hundreds of villages, destroy forests, and
flood a great deal of farm land, and its expected life is often far
less than originally projected, due to its filling up with silt.
Many of these projects, being government to government, are subject
to political influences at both ends, not to speak of funds being
siphoned to corruption. Also, capital goods require complementary
human capital, skills in using them. But a key problem in this
model is also that it omits the role played by land in development.
The causes of these problems in LDCs are the same as in the
more-developed countries (MDCs), but more evident due to the
prominence of primary industries: agriculture, fishing, and mining.
The typical land tenure in LDCs is the ownership of much of the
land as large estates by a few land owning families, who are
closely connected with the military and government. The farmers
typically rent or own small plots of land, and often must
supplement their subsistence crops with income earned in commercial
plantations, where coffee, bananas, and other crops are grown for
export. Women are usually dominated by men, who control much of
the property. Wars, and civil strife, and oppression have made
sheer survival the main priority of many of the people in these
countries, as malfunctioning economies feed political instability,
which then prevents development.
LDCs have less capital and less technology, but this can be
remedied by investment. But the governments of most LDCs have
placed barriers against investment. High taxes, legal
restrictions, complicated permit requirements, and massive
bureaucratic procedures have stifled domestic and foreign
enterprise. Often, corrupt government officials require a bribe to
obtain a permit. Some governments impose costly and time-consuming
visa requirements for foreign visitors, or make travel impossible.
Unemployment in LDCs as in MDCs is caused by such barriers between
labor and resources. In many cases, people are not officially
listed as employed, but work anyway in the informal or underground
economy, without paying taxes and bribes or getting permits.
In Eastern Europe and in some LDCs, organized crime plagues
enterprise, making businesses pay protection money. The
government, including members of the police and border guards, are
often allied with the racketeers and share in the loot. A truly
free economy cannot be established unless such crime and looting is
As explained in Chapters 2 and 9, poverty is caused by low
wages at the margin of production - low productivity on the worst
land being used. The remedy is to both increase productivity at
this margin and to move the margin towards more productive land.
The community collection of the land rent will induce the most
productive use of land, so that the margin will be at the best
available unused land. The removal of taxation on labor and
enterprise will then enable workers to keep the full product of
their labor and will encourage investment in more productive
enterprise. The removal of restrictions will also enable farmers
and small business persons to obtain credit and create enterprises.
Those countries which have developed have had relatively
free-market oriented policies grounded initially in land reform.
Japan in the 19th century and Taiwan after 1950 removed the old
aristocracy and turned land over to the farmers, combined with a
substantial tax on the land rent. As Fred Harrison (1983, p. 154)
states, "within two decades Japan had completed the transition to
modern economic growth and was ready to take on all comers!" Land
rent was used to develop the infrastructure, which further
increased productivity and rent. Funds from agriculture were used
to develop export-oriented industry. This is essentially the
economic model and theory of the French physiocrats of the 1700s
(see Chapter 19), who originated the first model of economic
development, a model that in its essential elements has had the
best actual success.
The engine of development is the desire of individuals to
improve their lives. The prerequisite to development is therefore
the establishment of a pure market economy, where labor has equal
access to natural resources and is able to keep its product, thus
having the incentive to invest much of it for future gains. With
freedom also will come a sea of foreign investment seeking the most
And of course, those peoples who do not wish to change their way of life, particularly the primal and tribal peoples in the rain forests and the nomads of the deserts and dwellers of the Arctic - they have the right to continue their cultures unmolested by the onslaught of commercial nature-wreaking development. Human beings did not start out poor, hungry, needing development. Primal man had natural wealth from the bounty of nature. Only after humanity turned to agriculture and conquerors took the land did the brave hunter become a lowly peasant working for a wage pittance from dawn to dusk while the lord dined on wine and game hens under chandeliers. Only after the descent to serfdom does development beckon with the promise of increasing productivity. And then, unless workers are liberated from bureaucracy and taxation, and unless the yields of land are shared by the community, the road of development will be a long, hot, stony journey.