Independence, imagination and economics

Published 3:00 am Friday, June 30, 2017

We rightfully celebrate Independence Day.  America’s founding generation demonstrated courage in fighting for independence against the greatest superpower of the time, and wisdom in establishing a republic to ensure that our government served the people, not the other way around.  The signers of the Declaration of Independence could have faced the gallows if the revolution had failed.  They also possessed amazing imagination, an important trait for the economy today.

The Revolution also, but less obviously, required imagination.  England was arguably the freest and most prosperous nation to that point in history.  The American colonies largely shared England’s freedom.  Our founders feared, based on their careful study of history and political theory, an emerging tyranny under King George III.  They could see in their mind’s eye the threat to and value of securing freedom by founding an independent nation.

Life was pretty good in the colonies, so the founders needed a vivid vision of how independence would be valuable enough to make fighting England seem worthwhile.  That vision had to sustain them through years of battles, hot summers, and brutal winters, and through times when victory seemed unlikely.

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Economic progress depends on us being capable of imagining how our actions today will make tomorrow better.  Consider the immigrants who came to America, or the pioneers who settled the West.  Immigrants from Europe faced a lengthy and expensive voyage, with typically cramped, dirty and smelly accommodations, and real risks of disease and shipwreck (even with the “unsinkable” Titanic).  A wagon train to Oregon or California involved hardship and danger as well.

Entrepreneurs start new businesses and bring new products and services to the market.  These innovations provide most of our country’s economic growth.  An entrepreneur must imagine something which does not yet exist, and then envision how to make this happen.  Henry Ford imagined average Americans driving cars, and quit his job as an engineer to try to make this happen.  His Detroit Automotive Company, however, promptly went bankrupt.  Thanks to his vision, Mr. Ford persevered, and the Ford Motor Company changed America.

Imagination also factors in our lives.  Economists worry about whether people plan adequately for the future; for example, I recently wrote about many Americans’ seemingly inadequate retirement savings.  Often economists see such poor decisions as resulting from people placing too little weight on the future relative to the present.  But it is also an imagination problem.  We can’t imagine vividly enough how much better life would be if we completed that degree, lost weight, or had more savings.

Imagination affects how we think about the economy.  Economists generally believe that people must be paid higher salaries to do dangerous and unpleasant jobs like coal mining.  The resulting compensating wage differentials radically change how one sees the economy working.  For example, we surely need government regulation to make coal mines safer, right?  But if mining companies must pay workers compensating salaries, improving safety will lower salaries and can increase profit.  And lower salaries resulting from safety regulations can make coal miners who don’t mind risk worse off.

When economists explain compensating wage differentials in public policy discussions, we frequently get hostile pushback.  People raise objections like, West Virginians have no option other than working in the coal mine.  Residents who feel lucky to work as miners will not demand extra compensation to brave the dangers of cave-ins, explosions, and breathing coal dust.  And yet objectors never assert that the miners are slaves of the coal companies.  The policy disagreement consequently boils down to whether we think that Americans can imagine alternatives.

The market offers exciting opportunities, limited really only by our imagination.  The internet and YouTube allow people to earn a living doing things like offering fantasy football advice and posting videos of themselves playing video games.  Perhaps the best way to honor the American Revolution is for us to use our imaginations to exploit the incredible opportunities which freedom affords us today.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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