I live in India, and having spent several years in America before returning, I noticed that Americans dominate in nearly every sphere of human activity. For example, the US seems to be blessed with the best musicians, the best sportsmen and sportswomen, the best scientists, and so on.

The significant difference between the two countries, economically speaking, is that the USA is strongly free-market, while in India has had socialist leanings for most of her history.

I don't want to broadly compare the two systems or the two countries right now, or even talk about brain drain. I merely want to know if there is any theory in the free-market framework that says that people with niche talents will have their abilities put to fuller use in a market economy. Is there any logic to the market economy that makes such a thing likely, or even inevitable? I suspect Adam Smith might have something to say regarding this phenomenon.

  • $\begingroup$ Would you consider deleting everything before "I merely want to know if there is any theory in the free-market framework that says that people with niche talents will have their abilities put to fuller use in a market economy."? Otherwise you should support your claims about the US having the "best" in everything. $\endgroup$ – Giskard Jul 22 '20 at 8:23
  • $\begingroup$ Layman's generalization: the USA's hyper-competitive environment seems to produce the best in every field but also the worst in every field. They have a lot more people who are just barely hanging on. $\endgroup$ – user253751 Jul 22 '20 at 11:05
  • $\begingroup$ @user253751: insightful comment but "barely hanging on" is probably an under-statement. $\endgroup$ – mark leeds Jul 23 '20 at 14:12
  • $\begingroup$ @markleeds Some say yes, some say no. Even the worst-off people aren't exactly starving since the government gives them free food, or so I hear. $\endgroup$ – user253751 Jul 23 '20 at 14:34
  • $\begingroup$ true. things are always relative. what is great in one person's eyes, is terrible in another's. perspective probably depends most on experience and expectations. note though that you can get free food and still be living in a cardboard-box !!!!! $\endgroup$ – mark leeds Jul 23 '20 at 18:52

A thought experiment

Let us for a moment suppose that all of the tractors, trucks, fertilizer plants, irrigation systems, shovels and other production equipment (capital goods) used in the US agriculture instantly disappeared and that no food could be imported from abroad. Under these hypothetical circumstances, do you think that all of the expert ballet dancers, sushi chefs, pole vaulters, computer scientists and basket weavers would continue to practice their niche talent? A more likely outcome is that they will revert to subsistence farming like everyone else. Now suppose that all tractors, trucks, fertilizer plants, etc. became twice as efficient, allowing food to be produced at even lower costs. Do you think this will result in an increase or decrease in the number of people who can make a living pursuing their niche talent?

The point is that a country with a large amount of capital goods has an easier time satisfying the basic needs of more people. This allows these people to engage in other activities. We can therefore rephrase your question in the following way:

"Is there any logic to the market economy that makes the accumulation of capital goods likely, or even inevitable?"

As an illustrative example, suppose that you and a couple of friends are stranded on a deserted island and are forced to survive by catching fish with your bare hands. If one day you happen to catch so many fish that you have enough for a week, you may decide to eat them while you construct a fishing rod. This "investment" will allow you to improve your "fish productivity". If you catch so many fish that you have more than you can eat yourself, you might trade some of them to a friend if he promises to build a hut for you. Maybe you loan out 10 fish to another friends so he can build a fishing rod of his own. In return he promises to give you 15 fish at some later date. If the project is a success you might sell off your old rod and fashion a musical instrument out of some coconuts. You can entertain your friends in exchange for fish.

Saving and investing resources in capital goods and voluntarily exchanging goods and services allows you to solve your most urgent problems and to raise your standard of living. You can get away with living from playing coconut music because valuable consumer goods are made readily available by this process.

Now suppose that I declare myself Chief of the island and mandate that fishing rods can only be owned if form 1304-b is filled out and delivered to my hut atop the volcano before summer solstice. Also, they may only be constructed by and bought from my best friend who holds an exclusive patent. Furthermore, anyone catching more than 20 fish per day is required to hand 35% of the excess over to me for my personal use. The rest will be handed to those who did not catch as many that day (no matter how hard they tried). Moreover, to protect hut-builders from exploitation, it is forbidden to pay them less than 100 fish per day to construct housing. Charging "interest" for loaning out fish is also exploitative and forbidden. To enforce these rules, some islanders who could have been engaged in production are recruited to my court and paid with part of the fish-tax I collect. Anyone caught engaging in illegal "black market activities" are put in prison for at least one month.

The example is admittedly cartoonish, but hopefully illustrates why Adam Smith might believe that an unhampered market has an easier time facilitating the build-up of capital goods than one subject to intervention.

  • $\begingroup$ What if you sell the fishing rod in exchange for 35% of the fish your partner catches, forever, and then the island chief sees you lying around doing nothing and mooching off your partner and orders you to catch your own damn fish? Does that increase or decrease productivity? $\endgroup$ – user253751 Jul 23 '20 at 14:35
  • $\begingroup$ (and would you still have built a fishing rod if you'd known the chief was going to do that if you made that deal with your partner?) $\endgroup$ – user253751 Jul 23 '20 at 14:38
  • $\begingroup$ Also I don't see how this answers the question about accumulation of capital goods. $\endgroup$ – user253751 Jul 23 '20 at 14:41
  • $\begingroup$ ... also the question didn't ask about accumulation of capital goods. I wasn't going to downvote this because it still manages to explain "why Adam Smith might believe such a thing", but now I will because I realize that wasn't the question... $\endgroup$ – user253751 Jul 28 '20 at 12:20

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