If you had to do everything yourself (feed yourself, clothe yourself, shelter yourself), you would be very much poorer than you are now. The ability to specialise and the ability to access resources beyond your immediate vicinity enormously increases your resource use possibilities.
(This, btw, is why "food miles" is such utter crap. It is just a revamping of the late C19th/early C20th "local food" movement. As it was back then, it is richer folk sneering at the only way lower income folk can get cheap food.)
The ability to specialise and to access resources beyond your immediate vicinity relies on transactions. The easier it is to transact, the greater the resource use possibilities. Which is why reduction in transaction costs has been such a key feature in the evolution of mass prosperity. Institutional structures which generate lower transaction costs have tended to be advantaged over those that generate higher transaction costs. More transactions, more resource use possibilities, mean greater social capacity and higher levels of general prosperity.
The trouble is, blocking certain sorts of transactions can be a great way to create or defend privilege. Various forms of social mercantilism restrict the ability to transact, or the ease of transacting, to favoured groups: such as requiring (expensive or time-consuming) official permission. Latin America, for example, has long been bedevilled by that sort of social mercantilism. As has the Middle East (pdf). Such social mercantilism both generates jobs for officials (and possible bribe income) and allows some groups to be advantaged over others.
One sees the same privileging by restricting the ability to transact in many European labour markets: hence high unemployment rates, particularly among young workers. This is a particularly severe problem in Spain.
This is a game that generates problems, particularly for welfare states. Not only does restricting the ability to transact lower the level of economic activity, thereby decreasing the revenue for government; it also increases the reliance on welfare services, raising the expenses for government. Sure, public employment and welfare dependence can be a voter-and-activist base, but one runs into problems of sustainability.
The success of the Australian public policy model has been crucially based on making transacting easier and targeting welfare more precisely, creating a far more sustainable welfare state. A low tax, low debt, low unemployment, high income growth, high low-income growth, public policy model.
Central to this success has been macroeconomic stability founded in a clear monetary policy target. The target is an average of 2-3% inflation over the business cycle. That means that, if output surges, the Reserve Bank (RBA) tightens policy; if output falls away, the RBA loosens policy. In other words, using the MV = Py equation, if y [output] surges, the RBA puts downward pressure on P [prices]; if y falls away, the RBA eases so that growth in P increases.
In other words, the RBA acts to stabiliise growth in Py (or GDP in money terms: i.e. NGDP). Which means it stabilises growth in spending, hence income (since income is just someone else's spending). Stable income growth means a higher transaction path.
Money is a transaction good. In Australia, monetary policy encourages stable growth in transactions. Monetary policy thus allows money to perform its function of being used in transactions, based on stable expectations of income growth.
The RBA does not treat minimising growth in P as the only thing to worry about. In particular, it does not play games with expectations; it does not suddenly shift its intended growth rate in P without telling folk, as the US Federal Reserve [Fed] disastrously did. Nor does it regard driving down income growth to keep growth in P low good policy, as the European Central Bank did, creating the European income, and thus debt, crisis. In Australia, money supply reacts to changes in money demand so as to keep stable growth in income by providing a stable framework for expectations about future income.
Which makes it a lot easier to keep public debt down, since income growth is relatively stable.
What is undermining European welfare states, particularly in Mediterranean economies, is a double "whammy". First, structural failures which restrict the ability to transact (and so the number of transactions); putting downward pressure on government revenue and upward pressure on expenditure. Second, monetary policy failure; so that preserving the "value" of the Euro is regarded as much more important than the level of its actual use in transactions. The mindset which declares the value of money is more important than its level of use.
To summarise the failure of European policy (and the failures of the Fed): it's transactions, stupid. And to summarise the success of Australian policy: it's transactions, of course.
Indeed, the greatest failures of Australian policy are in indigenous policy (with massive social failure in indigenous communities) and land use policy (creating way over-priced [pdf] housing). In both cases, restrictions on transacting are at the heart of the failure. Really, it's transactions, stupid.
Defensive Education, by Bryan Caplan - Arnold Kling pointed me to Lester Therow's 1972 *Public Interest *piece on "Education and Economic Equality." In Therow's lingo, the "wage competition vie...
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