The Prosperity Pool

One day, while I was watching Thomas grab one of these Noodles, it struck me that these toys did not exist when I was a boy in the 1960s. Pool Noodles weren’t invented until the 1980s.2 And, even then, it took a while for retailers to assume the risk of offering them for sale. It is probably not surprising that Wal-Mart led the way.

These Noodles are an ideal symbol for an amazing and wonderful—but often ignored—feature of a modern, prosperous market economy. That feature is that such an economy is largely the result of many small innovations, each of which is not very significant but the massive accumulation of which produces our unprecedented modern prosperity.

Suppose that Steve Hartman, the Canadian who invented Pool Noodles, had never stumbled upon the idea for this product. Suppose, also, that no one else would ever have had the idea that Hartman did. How different would today’s world be? Not very. Children playing in pools and the parents watching over them would not sense any great emptiness or dissatisfaction in the experience. Summer fun in a world without Pool Noodles would not be measurably different from what it is in our world with Pool Noodles. And yet, because Pool Noodles are the top selling water toy in North America today, legions of families get pleasure from this product.

With important exceptions, such as antibiotics, commercial air travel, air conditioning, and the Internet, most of the goods and services that define our modern prosperity are akin to Pool Noodles. Each one, individually, adds only a minuscule amount of well-being—or what economists call “utility”—to our total human experience. Each is akin to a drop of water in a large swimming pool: add a single drop of water to a swimming pool and, the laws of physics inform us, the water level of that pool will be higher than it would be without that drop of water. But good luck trying to detect the effect of that single drop of water on the pool’s water level.

Modern society is like a gigantic prosperity pool. This pool is filled gradually, drop by drop, with small improvements in our standard of living. And just as the collection of an enormous number of water drops leads to a much higher water level in a real pool, in the prosperity pool, the collection of an enormous number of prosperity drops creates much higher living standards.

While it is often sensible to discuss a society’s overall level of material prosperity—such as U.S. GDP in 2016—these discussions promote insensibility to the countless tiny components of that prosperity. These discussions can blind us to the reality that our prosperity consists overwhelmingly of many tiny drops of prosperity.

Some Tiny Drops of Prosperity

Look closely around your home. There, you will find rolls of disposable paper towels that make cleaning your kitchen much easier. Those rolls of towels were not invented until 1931. Moreover, unlike Arthur Scott’s original paper towels,3 today’s towels are two- and sometimes three-ply, and they are textured and embossed—all to increase their strength and absorbency. How much poorer would you be if your paper towels were flat and one-ply? Indeed, how much poorer would you be if no one had ever invented disposable paper towels to begin with? Somewhat, but not much.

Continue looking around your home. That can of soup in your pantry can be easily opened by a simple pull on the pull-tab that is now a common feature on canned goods. (When I was young, opening cans always required a can opener.) And the contents of that can are ready to eat, unlike a few decades ago when, to produce edible soup from a can, the consumer had to add water. Of course, these days, you can heat your soup in a microwave oven4 in a fraction of the time required to heat it using a burner on your stove.

You discard the empty can by tossing it into a surprisingly strong and odor-suppressing plastic garbage bag with its own drawstring sewn into the rim around its opening. That drawstring makes handling and sealing a bag full of garbage or recyclables far easier than it used to be, when you had to seal the bag with a twist-tie.

The shampoo in your shower is in a plastic bottle. Fifty years ago that shampoo was likely in a glass bottle. I remember cutting my foot badly, sometime in the early 1970s, on a piece of glass from a bottle of shampoo that I had dropped and broken while I was showering. Fortunately, an inexpensive antibacterial ointment and Band-Aids ensured that the wound had no serious consequences.

That brings me to the medicine cabinet. If you wear contact lenses, chances are they are disposable: you wear them for a few days and then throw them out and replace them with a new, clean pair. And on those nights when you don’t discard your contact lenses, you put them into a saline solution that, unlike in the early 1980s, doesn’t have to be heated to sanitize the lenses for reuse.

Finally, recognize that these visible drops of modern prosperity in your home are only a very small portion of the drops that accumulate in our huge prosperity pool. Most of those drops are, individually, much more difficult to notice than are drawstring-equipped garbage bags and ready-to-eat canned soup. The reason is that most of these drops occur only in factories and other venues of production and distribution.

Consider a shoe-factory manager who reduces production costs by one percent. This improvement, on its own, is a tiny drop indeed. A one-percent decrease in the quantity of resources necessary to produce shoes—and the corresponding fall in shoe prices—will go unnoticed by first-world consumers. But the steady accumulation of small increases in production efficiency over time results in significant savings in resources and, hence, in greater affordability not only of shoes, but also of other goods and services whose supplies are increased by the release of resources from shoe production. If just once each year for a decade, that manager reduces production costs by one percent—and, driven by competition, passes those savings on to consumers—the real price of shoes will fall by about 9 percent in ten years. Yet, as a consumer, you’re unlikely to notice this price drop because it occurs gradually and in small steps and, thus, never captures your attention. While you might notice a one-time 9-percent fall in shoe prices that occurs once every ten years, you don’t notice the same drop in shoe prices that occurs only gradually over those ten years.

Here’s another example. In 1998, I met a man who had once made his living as a trucker. When I met him, though, he was independently wealthy. He earned his relatively large wealth with a relatively small idea. One day, while hauling a load of new heavy-equipment tires, he realized that he was, in his words, “hauling mostly air.” The fact that most of the space in the bed of his truck was, essentially, “full of air” meant that he could fit far fewer tires into his truck than if the tires were flattened during transport. The problem, however, was that no one had yet devised a means of “folding” the tires into a more compact form for transport without compromising the tires’ structural integrity—not, that is, until this man solved the problem of successfully folding tires.

A consequence of this man’s small contribution to our prosperity pool is that each truckload of tires today contains many more tires than was the case a few decades ago. Therefore, the cost of transporting each tire to market is lower—which means that the prices of the products that we now consume are also lower. But, once again, this fall in consumer-goods prices is so tiny that it goes unnoticed. By the same token, had this trucker not improved the efficiency of transporting tires as cargo, we also would not sense the resulting higher prices of consumer items. But the fortunate fact is that the modern world is full of people such as this innovative trucker—people who add their own individual drops to our prosperity pool. Were all such people to stop innovating, the dearth of prosperity in our pool would indeed be noticeable.

Of course such innovations are driven chiefly by the quest for profit. And profit is indeed the reward that successful innovators reap. Yet while the profit that each successful innovator reaps might be huge in absolute terms, it typically is only a tiny fraction of the total social value of the innovations. Looking at technological innovations during the second half of the 20th century, Yale economist William Nordhaus found that only “2.2 percent of the total present value of social returns to innovation are captured by innovators.”5 Each successful innovator, in effect, personally “drinks” only two drops of prosperity for every 100 drops he or she adds to the prosperity pool.

So What?

You get the picture. While our homes do feature some “big” additions to our prosperity, such as laptop computers, smartphones, and drugs to control hypertension, most of our prosperity is the result of accumulations of very small innovations, such as textured, two-ply paper towels and the “folding” of tires being transported as cargo.

It’s easy to overlook advances in our prosperity that occur in such tiny increments. In contrast to the vivid memory I have of switching from writing papers on a typewriter to writing them on a computer, I don’t recall when I first squeezed shampoo out of a plastic bottle or first used a garbage bag with its own drawstring. The absence of the “wow” factor for the typical individual addition to our prosperity pool causes us to take most such additions for granted: we aren’t wowed by what we don’t notice. We would certainly have been wowed if all of these small additions to our prosperity had come about at the same time—as when a swimming pool is filled by using several fire hoses simultaneously. But because these additions to our prosperity pool come individually and not all at once, there’s never a point at which we say “Wow!”

The fact that we don’t notice the steady yet gradual rise in the prosperity pool’s level plays out in at least two different, and not altogether consistent, ways.

On the one hand, insensibility to steady economic growth can make people feel as if their standards of living are stagnating even as these standards are growing. Those who seek a more active role for the state in economic affairs use this inaccurate feeling of stagnation to advance their argument—that is, they use the misperception that ordinary Americans’ material standard of living has stagnated for decades to make their case that the market is working poorly. It’s a small (if illogical) step from this belief to the demand for more government control over the economy.

On the other hand, because our overall volume of prosperity dwarfs each instance of wealth production, each such instance seems as insignificant to our prosperity as does each drop of water to the water level in a swimming pool. Intellectuals and politicians then find it easy to treat business people with contempt. As a former university colleague of mine sneeringly said of a businessman some years ago: “He sells toilet parts!” This philosophy professor could not imagine a more contemptible occupation.

In the grand scheme, of course, the successful wholesaling of plumbing fixtures does not itself make a relatively large addition to our prosperity pool. Ditto for the launch of a chain of frozen-yogurt shops or for the shaving of fractions of a cent from the cost of each dollar’s worth of financial intermediation. Ditto for the successful doing of almost anything in a modern market economy. Yet those who conclude that the miniscule contribution of each individual producer permits policymakers to be indifferent to the lost output and reduced efficiencies that result from government intervention are committing a fatal fallacy of composition. Over the entire range of productive activities, and over several years, the loss of many small drops of prosperity would cause our prosperity pool to be much less full than it would be if markets were left free and if government quit its growing obsession with “redistribution.”

As I recently argued6 on my blog, Café Hayek, ordinary Americans in 2016 likely live better than did American billionaires in 1916. Yet almost no ordinary American today feels that rich. The reason, I believe, is that the growth in our living standards occurs gradually, drip by drip. The resulting insensibility to this gradual growth is an important reason for those of us who celebrate and understand it to keep highlighting its phenomenal reality.