Keys Economic Prosperity

What is Economic Prosperity? The text points to 12 keys that ultimately lead to economic prosperity, or progress. The 12 keys are human ingenuity, private ownership, gains from trade, invisible hand principle, profits and losses, competition, entrepreneurship, link between productivity and earnings, innovation and the capital market, price stability, international trade, and government and the environment for prosperity. Each of the 12 keys will be identified and discussed throughout this paper.

The first thing is defining economic prosperity and how it relates to the world in which we live. Economics is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants (http://www.investopedia.com/university/economics/). Prosperity is an economic state of growth with rising profits and full employment. Simply put, individuals choose how they will best utilize resources based upon increase or decline in profit or as it relates to scarcity. Scarcity is "the fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like" (Economics Private & Public Choice, 11th edition, page 6). The textbook speaks of "The Economic Way of Thinking", and this way of thinking is all about how incentives alter the choices people make (page 3). Human ingenuity demonstrates economic prosperity.

Human Ingenuity, the first key, states that economic goods are the result of human ingenuity and action; thus, the size of the 'economic pie" is variable, not fixed. The creation of wealth occurs in a society when participants contribute to the economy. Each individual is unique and can offer goods and services that will not only benefit that individual, but also contribute to the greater good of society. The text points out very clearly that 'in a market economy, a larger income for one person does not mean a smaller income for another" (page 48). The earning potential created by this example not only benefits one individual but quite possibly many individuals. For instance, I could own a multibillion dollar business where I created the idea and the concept is mine. In order to proceed with this business, I need to employ certain types of people to help my business remain a profitable enterprise. I have created wealth for myself along with creating wealth for my employees, thus making it possible not only for myself to have a slice of the "economic pie", but also for others to participant and or contribute. The multibillion dollar business is mine, and the right to do whatever I want to do is highlighted in the second key, private ownership.

Private ownership provides people with a strong incentive to take care of things and develop resources in ways that are highly valued by others. Private-property rights consist of three things:

"(1) the right to exclusive use of the property (the owner has sole possession, control, and use of the property including the right to exclude others); (2) legal protection against invasion from other individuals who would seek to use or abuse the property without the owner's permission; and lastly (3) the right to transfer, sell, exchange or mortgage the property" (page 35).

As the owner of this multibillion dollar business, I have the right to do anything I choose, as long as it does not attack or violate the rights of others. The motivation behind the choices I or any other individual property owner make is derived from an incentive base premise. The premise is the right to choose between personal advantages from doing what I choose or between the overall advantages of providing something that is both beneficial to me as well as to others. There are enormous opportunities to gain from specialization and division of labor.

Gains from trade makes it possible for people to generate more output through specialization and division of labor, large scale production processes, and the dissemination of improved products and production methods. The value created by trade, "is that it allows goods to be moved from people that value goods less to people who value them more" (page 45). The extraordinary thing about trade would be that higher levels of output are generated which then creates better productivity in workers. The individual property owner trades salaries with employees who specialize in various aspects of the business to produce or perform at greater levels than what the individual property owner could have performed without persons who specialize in certain areas. The dissemination due in part to division of labor allows for productivity to be increased, thus resulting in higher profits and higher incomes to be shared by all. The invisible hand principle is now prevalent in the market place.

The invisible hand principle states: "the tendency of market prices to direct individuals pursuing their own interest to engage in activities promoting the economic well-being of society". This principle is so universal that most individuals don't realize it is happening all around them. Supply and demand help fuel this concept. Take for instance the orange growers in Florida. If they have experienced fair weather conditions and their crops are thriving, the prices of oranges tend to be quite affordable, even cheap. The grocer can sell them at 10 for a dollar, and everyone is able to maintain a fair standard of living. Let's say a natural disaster such as a hurricane occurs and the farmers in Florida lose a significant portion of their orange crop and the price of Florida oranges skyrockets to $2.99 per bag (10 in each bag). The consumer of Florida oranges now has to decide what he/she will have to give up to continue buying Florida oranges, or whether or not California oranges are as tasty as Florida oranges. The invisible hand principle is in practice, "market prices register information derived from the choices of consumers, producers, suppliers, and provides each of them with information needed to make wise decisions" (page 79). Inclement weather can have a tremendous effect on profits and losses in many businesses, especially those in agriculture.

Profits direct producers toward activities that increase the value of resources; losses impose a penalty on those who reduce the value of resources. The best determinant to describe whether a profit is in effect is based upon value. If consumers are willing to pay higher prices for products, they do so because they value the product, and if enough consumers value a product then the producer of that product has a greater chance of netting a profit. The flip side of profit is loss. "Losses occur when the revenue derived from sales is insufficient to cover the cost of producing goods or services" (page 66). A decrease