How and Why Economies Develop and Grow

Meir Kohn examines How and Why Economies Develop and Grow, and he notes that economies don't typically operate at their full potential:

Let us begin by broadening our definition of economic activity. For the Ricardian theory, economic activity is identified entirely with production — the actual creation of goods and services. But in fact there are two additional economic activities quite distinct from production. One is commerce — trading for a profit the goods and services that others produce. The other is predation — taking by force the goods and services that others produce or trade. Both commerce and predation are economic activities in that each, no less than production, provides a way of making a living.

The existence of these three distinct ways of making a living is particularly clear to students of preindustrial history, because each of the three was then the sole province of a distinct group specialized in that activity. Production was the work of landowners, peasants, and artisans. Commerce was the work of merchants, who were not generally directly involved in production themselves. Predation was the work of specialists in the use of force. Some of the latter were self-employed — various bandits and pirates. But most were agents of governments. Indeed, as we shall see, governments were by far the most important source of predation. Of course, governments also played a vital role in protecting against predation: this too required the use of force. So force, predation, and government were closely intertwined.

The key to a broader and more satisfactory theory of economic progress is an understanding of the effects of these two additional activities — commerce and predation.

Such a theory can be stated quite concisely in the form of two related propositions:

Proposition 1. Commerce promotes production; predation inhibits it.

Proposition 2. Limit predation (get government right), and economic progress will take care of itself.

These propositions go back to Adam Smith's Wealth of Nations:

Smith’s famous dictum: “The division of labor is limited by the extent of the market” is the core of Proposition 1. Proposition 2 is essentially a rewording of the Smith quotation taken as this book’s epigraph: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought by the natural course of things.”