James Pethokoukis of AEI says that this is the most important economic chart in Western civilization. I completely agree.

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The concept is so important that no student should receive a passing grade in any economics class—whether in high school or college—unless they can explain why economic growth matters (ideally, every educated Christian would be able to do so too since it has theological implications).

Yet, sadly, few Americans recognize its importance despite the fact, as Pethokoukis notes, that in real terms, the average income of Americans over the past two centuries went from $2,000 per person to $50,000. Pethokoukis credits the change to a shift in thinking: Respect and reward innovators and innovation. He includes a great quote by Deirdre McCloskey on how the West became a business-admiring civilization:

What changed were habits of the lip. It’s not a “rise of the bourgeoisie,” but a rise in other people’s opinion of the bourgeoisie that makes for economic growth — as it is now doing in China and India. When people treat the marketeers and inventors as having some dignity and liberty, innovation takes hold. It was so to speak a shift in “constitutional political economy,” as James Buchanan puts the point. People agreed on the meta-rule of letting the economy go where it will. This contrasted with the earlier mentality, still admired on the left, that treats each act of innovation as an occasion to go looking for its victims. Victims there were, but they were greatly outnumbered by winners. It was ideas, not matter, that made the winners, and brought our ancestors from $3 to over $100 a day.

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  • http://www.facebook.com/people/John-Medaille/695378522 John Médaille

    GDP is not a measure of output, but of costs; the chart is a measure of rising inefficiency. Some examples. More crime means more police, courts, prisons, etc. The cost of security goes up, to be recorded as an “increase” in GDP, even though it may indicate less output (security, in this case) at a higher cost. More women move from the home to the paid workforce; there is an increase in GDP as their formerly non-monetized functions become monetized (means, child care, home maintenance, etc.) There is no increase in the actual number of meals prepared, children cared for, etc., but there is an increase in the cost of these things. Failure to understand this is failure to understand economics and economic measures. Unfortunately, this misunderstanding is widespread, especially among economists.

    This leads to a consideration of the nominal rise in incomes from $2K to $50K, this again is the wrong question. IN the first place, the proper question is the median, not the mean. In the second place, the real question is what do the numbers represent. 100 years ago, $2K might have meant real wealth, while $50K today, in say New York, might mean just hanging on.

    • RogerMcKinney

      The chart is mislabeled. It should be per capita GDP, which is an objective measure of wealth across generations and between countries.

      • http://www.facebook.com/people/John-Medaille/695378522 John Médaille

        That makes no difference to the underlying problem of treating GDP as a measure of growth rather than merely a measure of costs.

      • http://www.facebook.com/people/John-Medaille/695378522 John Médaille

        That makes no difference to the underlying problem of treating GDP as a measure of growth rather than merely a measure of costs.

  • RogerMcKinney

    Yes, it is the most important chart in economics, but few economists know about it, let alone others. I teach econ part time and make a point of presenting the chart each semester. I earned a MA in econ in 1990 and only learned of the chart a few years ago.

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