[Continued from the previous post on Stuff and Ideas.]

Economic growth, development, progress—whatever you call it—is neither inevitable nor impossible. There are lots of examples of economies that continue to struggle with economic growth. And there are many examples of economies that have made rapid progress. What distinguishes the ones that that succeed from the ones that fail is economic policies. Again an operational definition of “good economic policies” will have to do: those that work.

Is there a succinct characterization of economic policies that work? I believe there is. In general, economic policies that most efficiently harness the available resources are those that work. Economists usually categorize resources used in production – and production is central to an economy as I argued in the last piece – into land, labor, and capital. Of these, I think human resources is the most critical. If you grant that, then the conclusion is that policies that value human resources are the ones that work.

Economic growth and development is inevitable if human resources are valued appropriately. Conversely, economic growth and development is impossible if human resources are not valued. Let me repeat that: if the set of policies puts human resources center-stage, then it is most likely to work. Otherwise they are doomed to fail sooner or later.

So what are human resources? Before the advent of the industrial age, human resources definitely referred to human labor alone. Human muscle power augmented to some degree with animal muscle power was an important factor of production. But with advances in science and technology, came the increasing ability to harness non-muscle power. There was a shift in the balance of power, so to speak. While the muscles became increasingly less useful, brains began to become more useful in the production process.

There is a sort of poetic justice in this story of the ascendancy of brains over brawn made possible by better science and technology. After all, it was brains that created the science and technology, not brawn. So now in this post-industrial age, human resources basically refers to trained human brains.

Astonishing isn’t it that a couple of pounds of gray organic matter encased within a human skull can unleash so much power?

But enough of beating around the bush. Let me cut to the chase. The human brain comes up with ideas. More importantly, it synthesizes new ideas by combining existing ideas. There is a hierarchy of ideas. Since each brain is short-lived relative to the life-cycle time of human society, it does not have the luxury of inventing all ideas and building on them. It has to use the stock of ideas and then add to the stock. To use the stock, it has to know the stock. And to grasp even a small subset of the stock, it needs to be trained. That training is part of the job of education.

So here are the steps for building an economy from scratch. First, get some land. Then add humans. Educate the humans. Let them free. Voila!

My core belief is that the most important freedom is the freedom to think and express the results of their thinking. Then comes the freedom to act. And what is the most important act that humans engage in society in the economic sphere? I believe it is the act of trading.

The rest is details.

Societies that don’t allow people the freedom to think and express themselves, are bound to be poor. And societies that don’t allow the freedom of voluntary trade are poor.

India is poor by choice. Somehow collectively India has chosen to restrict freedom – the freedom of inquiry and expression, and the freedom to trade. That is why India is poor.