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Dear Reader: I am summarizing the core economics and economic history from The
Bourgeois Era trilogy (University of Chicago Press 2006, 2010, 2016), with some
further thoughts. I want your help in shaping the paper into an article
directed at economists. If you can offer me some dazzling technical bells and
whistles, I will be greatly in your debt.
The version is not to be taken as complete in its rehearsal of the arguments in
the trilogy or in later papers. A core is not the whole apple, or even the most
nutritious part!
The trilogy has more argument and evidence—qualitative and quantitative,
philosophical and empirical, literary and economic.(Besides, it’s cheap on
Amazon.com, and is even in audiobooks, 1,700 pages in 30 hours, read
brilliantly.
What are you waiting for?)
Serious growth happened only after 1800, at first in northwestern Europe, 2%
per capita in PPP conventionally adjusted for inflation, as in the USA
1800–present, and now the world. Its magnitude is enormous, the Great
Enrichment. It was a rise from $2 or $3 a day to over $100, a factor of 30. (I
recently had to explain to a justly famous anthropologist that [(30–1) /
1] x 100 is 2,900%, or about 3,000%. He said that he could believe a factor of
30 . . . but not 3,000%.)The exactitude, of course, is inessential. In Japan
and Finland it was roughly the factor of 30. But it could be the world wide
factor since 1800 of 10 only, about $2 or $3 to $30 a day (to $10,000 a year,
the level of Brazil now, to fix ideas), and still be utterly novel. As a Brit
might say, the Great Enrichment was gobsmacking.
The enrichment was actually much greater than the factor of 30, because price
indices, especially recently,do not adequately reflect improvements in quality,
as was determined in the early 1990s by the Boskin Commission, on which Bob
Gordon served. Consider your cell phone, your auto tires, your medical
treatment—all greatly better, recently. Even economic facts and analyses
are better. (Well, sometimes.) The downward bias from inadequately deflating
money prices for improved quality is not far from 2% per year, which would
double recent growth rates in the rich countries. Its magnitude, novelty,
recency, and location are all crucial to explaining the Great Enrichment,
because together they strongly suggest that there was something deeply peculiar
about Britain in the 18th century,and that afterwards the peculiarity spread to
the rest of the world. Such facts make “run-up” theories such as in
Stephen Broadberry et all look implausible, because they depend on a metaphor
of an airplane taking off, with little else by way of explanation for why the
Industrial Revolution (a factor of 2) happened or, especially, its follow-on
the Great Enrichment (a factor of 20 or 30). Likewise, it is dubious to attach
the Great Enrichment to remote causes within Europe, such as the Black
Death—which originated in China, with similar terrors, and yet yielded no
Great Enrichment there. Also dubious is the Eurocentric belief, prominent in
conservative circles,of some ancient superiority of melanin-challenged Volk
back in the Black Forest. (Did you know, for example, that all European
countries had common law in the Middle Ages, that is, judge-found-and-made, not
legislated or codified?)
The Great Enrichment is the second most important secular event in human
history, second only to the domestication of plants and animals making for
cities and literacy. The scientific problem is its enormous scale, now
spreading, Allah be praised,to the entire world:
[PPP diagram:
Draw a PPP per capita for, say, Britain in 1800 scrunched close to the origin
of Food and All Other Goods. Note that, say, trade cannot cause a factor of 30,
or anything close. Note that the correct PPP now is 30 times larger. ]
The problem is not exactly the Industrial Revolution, which as Jack Goldstone
notes was not unprecedented (Goldstone 2002, 2009). As Joel puts it, what was
bizarre was that growth did not peter out, did not revert to the human fate of
$2 a day since the caves, as had earlier efflorescences such as the
wheat-oil-and wine economy of the early 1st millennium BCE in the eastern
Mediterranean, or the Song Dynasty in China. Real income per head went from
doubling, 1760–1860—very welcome but not entirely unheard of—to
the factor of 30 and more. It was something like five successive doublings, and
more in prospect, as the entire world is liberated, as a Brit would also say,
to have a go. Ordinary people, and some economists, and even a few economic
historians, don’t know it.
Hans Rosling, the late, great Swedish professor of public health, emphasized
how little most people, even very well-informed people, know about the
overwhelmingly good news 1800 to the present, or even 1960 to the present
(e.g., falling birth rates, falling infant death rates, rising literacy). He
surveyed people, in his various audiences to the number of 20,000. They were
embarrassingly less accurate on the whole than monkeys would be throwing darts
at the multiple choice possibilities. And the human experts, with ordinary
citizens, were always biased in a pessimistic, anti-modern direction.
Consider Kenneth Pomeranz, in his fine book with Steven Topik, The World
That Trade Created. Pomeranz and Topik tell many interesting and accurate
stories about the bad side of creative destruction (which comes from any human
progress, not as is often said on the left from “neo-liberalism”).
But they never acknowledge the gigantic improvements coming from it for
ordinary people. Not once. The explanation of the Great Enrichment is people.
Paul Romer says so, as do a few others, among whom are somes tudents I did not
teach price theory to at the University of Chicago. On the other hand, Paul
sets it down to economies of scale, which mysteriously drop down on England in
the 18th century and gradually on us all. Yet China had peace, science, and
enormous cities when Europeans were huddled in small groups inside town walls,
or isolated villae. In particular, it is ideas that people have for
commercially tested betterment that matter. Consider alternating-current
electricity, cardboard boxes, the little black dress,The Pill, cheap food,
literacy, antibiotics, airplanes,steam engines, screw-making machines,
railways, universities, cheap steel, sewers, plate glass, forward markets,
universal literacy, running water, science, reinforced concrete, secret voting,
bicycles, automobiles, limited access highways, free speech, washing machines,
detergents, air conditioning, containerization, free trade, computers, the
cloud, smart phones, and Bob Gordon’s favorite, window screens. Or, more
pointedly, Joel’s of Science.
And the Great Enrichment depended on the less famous but crucial multitudes of
free lunches prepared by the alert worker and the liberated shopkeeper rushing
about, each with her own little project for profit and pleasure. Sometimes,
unexpectedly, the little projects became big projects, such as John
Mackey’s one Whole Foods store in Austin, Texas resulting in 479 stores in
the U.S. and the U.K., or Jim Walton’s one Walmart in Bentonville,
Arkansas resulting in 11,718 stores worldwide. Letting people have a go to
implement such ideas for commercially tested betterment is the crux. It comes,
in turn, from liberalism, Adam Smith’s “obvious and simple system of
natural liberty,” “the liberal plan of [social] equality, [economic]
liberty, and [legal] justice.”Liberalism permitted, encouraged, honored an
ideology of “innovism”—a word preferable to the highly
misleading word “capitalism,”with its erroneous suggestion that the
modern world was and is initiated by piling up bricks and bachelors’
degrees.The claim that liberalism led to innovism is highly testable—for
example, by comparing places with liberal encouragements to those with
oppressive hierarchies, such as England after 1800 with England before 1700, or
by following innovators individually in their lives, in Victorian England, say,
and comparing each with matched individuals in illiberal regimes, in
Shakespearean England, say. Did blacksmiths or the sons of blacksmiths in the
16th century become makers of marine chronometers or of magnetic-electric
coils? No. Some crucial test cases, uncertain in outcome (I invite people who
know them better to set me straight),would be China, Japan, Moghul India, the
Ottoman Empire, all of which had rule of law and peace and enforced property
rights and often better tax systems than England in 1700.Yet they did not
industrialize or, especially, enrich.
Liberalism, in its own turn, came out of the accidents of European
reformations, revolts, and revolutions, in an existing polity of hundreds of
more or less independent political units, such as the Dutch cities in their
Golden Age, or the Kleinstaatereiof Germanpolities even after 1648. The success
of the accidents made people bold—not necessarily and logically, but
contingently and factually. For example, the Dutch Revolt 1568–1648
imparted the idea of civic autonomy against the hegemon of the time, Spain, and
by analogy against other hegemons international and local. For another example,
the initial successes of the English Civil War of the 1640s made ordinary
people think they could make the world anew. For still another example, the
Radical Reformation of Anabaptists, Mennonites, Congregationalists, and later
the Quakers and Methodists let people take charge of their own religious lives,
and by analogy their economic lives. The tiny group of English Quakers made for
Lloyd’s insurance, Barclay’s bank, Cadbury’s chocolate. It was
in the religious case not the doctrines of Calvinism as such (not the
Protestant ethic and the spirit of capitalism) but a flattened church
governance that mattered for inspiriting people. In sum, as one of the
Levellers in the English Civil War of the 1640s, Richard Rumbold, said from the
scaffold in 1685, “there was no man born marked of God above another, for
none comes into the world with a saddle on his back, neither any booted and
spurred to ride him.” It was a shocking thought in a hierarchical society.
In 1685 the crowd gathered to see Rumbold hanged surely laughed at such a
sentiment. By 1885 it was a solemn cliché.
Under a slowly advancing liberalism the people who were allowed to have a go,
went. They reallocated labor and capital to where it was most productive,
yielding routine increases of efficiency. They went to North Dakota in the oil
boom there. They moved from Honduras to the U.S. A classic example in U.S.
history is the Kuznets Effect, the doubling of income moving from agriculture
to industry. (It is dubiously sensible in its magnitude, by the way, because
such a $300 bill sitting unused on the sidewalk is dubious; but if true it is
the main internal instance of routine reallocation; the external one was the
re-peopling of the New World.) Re-patterning of trade, too,was permitted,
instead of blocked, as it had been by guilds and town governments in Europe,
elevated to the national level by mercantilism in the 17th and especially the
18th century, to be challenged hence forth by liberalism—though always
since then under re-challenge by neo-mercantilists, such as Trump. The
resulting yield of efficiency is a fine thing. It is what we teach in
economics. More exactly, we teach the efficiency of untrammeled trade for a
couple of weeks at the beginning of the course, but then devote the rest of the
course to teaching the 108 “imperfections” in the market (not to be
found in the government proposed to offset them, or among the
economist/philosophers in charge of doing so)—monopoly, informational
asymmetry, inadequate aggregate demand, consumer ignorance, and so forth. It
leaves the impression in the students’ minds that their teachers have
collected actual quantitative evidence that the imperfections bulk large in the
economy, and matter agreat deal, even though meanwhile the 3,000% has taken
place (McCloskey 2018a).
But economists and economic historians have known for a long time that
efficiency gains, strictly speaking, and even considering their alleged dynamic
if mechanical effects, are small, that is, Harberger Triangles. Robert Fogel
established it for railways. And many others have used the argument repeatedly.
It is: calculate (the share of industry Tin GDP) x (the percentage fall in
costs in the new part of T) x (the share of the new part in T)=the national
percentage gain in GDP. Thus railways were 10% of GDP, the fall in cost was 50%
on rail lines (compared with old fares by water and wagon), and the share of
railways in all transport was by 1890 was 50%. That is (10%) x (50%) x
(50%)=2.5%, which was Fogel’s finding, though very much not his method.
Here is the problem (pardon the error, which I blame on someone else,of at one
place a downward slope in the opportunity cost! I do know better: McCloskey
1985, Chp. 10.): Note the arrow in the diagram of “Factor of 30 or 100,
1800-present.” That’s where the action is. The railway age accustomed
us to think in terms of capital/output ratios, which students of development
economics were taught in the 1960s. Yet one can also plot the yield on capital
in the absence of commercially tested betterment to make the point, as Keynes
said in 1936, that diminishing returns to investment are sharp. The Great
Enrichmentwas not physical capital accumulation. [Diminishing returns to K
diagram, with math]And it was not human capital, either. The cross-section
yield of human capital implies at most a 50% gain.We are looking for 3,000%.
The key point of methods is that necessary causes, which economists and
economic historians have variously become excited about (property rights,
canals, empire, patents), are not (necessarily) initiating causes. Capital
accumulation is routine in human history,as in the making of paddy fields in
east and south Asia or the broadcasting of barley and wheat seed in medieval
Europe, or for that matter in the massive accumulation of Acheulean hand axes
by the hundreds in archaeological sites. Capital accumulation and many, many
other proffered “factors,” ranging from institutional excellences to
Science, are the gears in a mechanical watch, common to many societies before
1800. For example, China. The motive force is the spring, utterly novel to
Britain (out of the Netherlands) in the 18th century.
The spring was liberalism, the spreading belief, as Robert Burns sang in the
revolutionary year of 1795, that a man’s a man for a’ that: Ye see
yon ? birkie, ? ca'd a lord, ? proud man ? called? Whastruts, ? an' stares, an'
? a' that; ?who ?and?all Tho' hundreds worship at his word, He's but a ?coof
for a' that: ?fool For a' that, an' a' that, His ribband, star, an' a' that:
The man ?o' independent mind? of He looks an' laughs at a' that. What is clear
from studies of productivity change is that Jorgenson and Griliches were wrong
in 1967—productivity change is not reducible to capital accumulation.
Innovism, not “capitalism,” is the point. Many economists and
economic historians have slowly, with difficulty, buried the notion that
thrifty saving and predictable reallocations is the way to massive and colossal
productive forces. In 1960, right when Solow and Abramowitz and Edward Denison
were saying it, too (an economic historian, G. T. Jones, a student of Marshall,
had said it in 1933), Hayek questioned “our habit of regarding economic
progress chiefly as an accumulation of ever greater quantities of goods and
equipment”(Hayek 1960, p. 42).
In 2010 Alexander Field reinforced the original insights of the 1960s with
calculations of productivity change in the United States, showing that
technology was the ticket, not capital accumulation (Field 2010). In 2006 the
economist Peter Howitt had arrived at a similar conclusion from cross-country
studies (Howitt 2005, p. 7). And Romer. And the Great Enrichment did not occur
through improved property rights. For one thing, they didn’t happen.
English, and other law, is ancient (“before the time of Edward I,”
viz. 1272; Pollock and Maitland 1895). For another, improved property rights,
too, are subject to Harberger’s Law. (A long time ago I discovered so in a
study of the English enclosure movement.) For still another, the entire project
of neo-institutionalism is problematic, because lacking serious attention to
shifting ethics and ideology (McCloskey 2017, and numerous chapters in 2010 and
2016). Douglass North used to claim that he was boldly going where no
Samuelsonian dared to go, but in fact he and his followers have re-inscribed
human creativity as Max U s.t. budget lines. It was not resources, e.g. coal.
Among the many frailties of the claim (see McCloskey 2016, Chp. 22), China used
coal anciently, and so did the Romans. The U.S. and Sweden used wood for
decades into the Age of Coal to make its iron, to run its steam engines,to heat
its homes.Nor transport. See Fogel. Nor trade, despite persistent theories
depending on it. See McCloskey 2010 for all these, and McCloskey of the early
1970s against foreign trade as an engine of growth. Nor exploitation,
imperialism, slavery—the new King Cotton School of U.S. history not
withstanding. Nor racial difference. The Great Enrichmentis happening now in
China and India—highly non-European—and is starting to happen in
sub-Saharan Africa.
Nor a hopeless “culture.” Culture can change very fast (contrary to
what economists such as Oliver Williamson assert, the better to avoid having to
learn about it). Even the pioneering liberal economist Peter Bauer doubted that
culture could change much (McCloskey 2018b).The pessimism about amoral familism
in Southern Italy in Edward Banfield’sold and brilliant book is another
example. Nor path dependence, except for the short run. QWERTY—wow, was
that easy to type!—is a myth. Nor the “entrepreneuria lstate”
recently claimed by Mariana Mazzucato, or the internal improvements of the Age
of Jackson, or the Grand Coulee Dam, or the space program, or whatever. The
correct way to test Mazzucato’s argument is one I have proposed to Joel,
and which would make a path-breaking Ph.D. dissertation. Take a literal random
sample of twenty or perhaps fifty industries out of all production, perhaps
5-digit industries (e.g. 11115 Wheat Farming; 32412 Asphalt Paving, Roofing,
and Saturated Materials Manufacturing), and then look carefully into the role
of government in each industry’s historical supply chain of innovations,
taking serious account of the substitutes for government in supply and demand
along the way. Thus platting and road building and sewerage in large urban
projects in China vs. India. In India private provision is often used on large
projects, because the local government is incompetent. It is an instance of the
substitute in supply, showing that governmental action is not initiating or
even necessary. Such a dissertation could also test Joel’s emphasis on the
discourse of Science, considering that many economically important innovations
(containerization again, for example; limited access highways, for another) had
nothing to do with High Science, or low—though a lot to do with letting
ordinary people Have a Go under the gradual extension of “the obvious and
simple system of natural liberty.”Nor the joint effect of all of these,
summed. Not in view of 3,000%.
I can satisfy a little the thirst of my economist colleagues for the argument
here to be put into something closer to what they would consider a conventional
Samuelsonian model. But consider the possibility that production functions,
input-out tables, supply chains, known utility functions, and the rest of the
Samuelsonian apparatus might be ill-suited to an economy of innovism. And
innovism is the economy we have.The function for national product could
be:Q=I(D, B, R)•F(K, sL)in which I is the Innovation function, depending
on D, the dignity accorded innovators, and on B, the liberty of innovators (the
letter L is need for labor), and on R, the rent or profit to innovation. The
Innovation function multiplies a conventional neoclassical production function,
F, depending on ordinary physical capital and land, K,and on raw labor, L,
multiplied by an education-and-skill coefficient, s. There is of course nothing
profoundly mathematical about this way of saying what I am saying. The
“mathematics” is merely a metaphorical language that economists
understand, and which allows me to chat with them about the economic and social
ideas involved without excessive confusion. The reason to separate out the I(.)
function is to stress, as I do after decades of denying it in favor of static
equilibrium analysis, and messing with the ill-named growth theory, that
economic growth depends mainly on Schumpeterian/Austrian/humanomic innovation,
not, as some economists and historians still believe, on
Classical/Marxist/Samuelsonian accumulation. Piling brick on brick. Not,
orthodox economists claim, the spring of the watch, but, they say implausibly,
the gears. Once upon a time we thought that growth depended especially on
physical capital (here 8K) and now some think that it depends on various
versions of human capital (sL). Aside from the historical evidence in the
trilogy against what William Easterly calls “capital fundamentalism,”
Peter Howitt, as I noted, has reported on a recent literature of present-day
cross-country comparisons. He concludes that “more than 60 percent of the
cross-country variation of per-worker GDP is attributable to productivity
rather than to the accumulation of physical and human capital,” and over
90 percent of its growth rate. “Thus it seems,” he argues, “that
almost everything to be explained by the theory lies in the Solow
residual”—the A term of course in Solow’s classic paper of 1957,
here the I(.) function. “This is part of the evidence,” Howitt
continues, “that inclines me towards innovation-based growth theory.”
It seems a sensible conclusion, anticipated by Smith, whose Theory of Moral
Sentiments (1759 [1790]) treats the D variable of dignity,and whose
Wealth of Nations treats the B variable of liberty (amongst a great deal
also about F(.)). Smith believed that the obvious and simple system of natural
liberty (B, but linked with D) was necessary and sufficient for the (admittedly
modest) growth he imagined. Even with so vague a specification as the
unspecified functional form, Q=I(B, D, R)•F(.) some qualitative points
emerge—though without actual measurement our knowledge is meager and
unsatisfactory. In the innovation function, I(.), the term R is what economists
call rent, and other people call profit. It represents in part the routine
incentive to innovate, picking up the $300 bills. Whether routine or not, it
has two aspects, depending on when you are looking at it—whether before or
after innovation, “ex ante” or “ex post,” as economists
after Gunnar Myrdal say, “from the before” or “from the
after,” that is, from the point of view of the outset or the point of view
of the result, Paasche vs. Laspeyres.
I say that R is sometimes “Routine” (a helpful mnemonic to remember
the contrast with the noneconomic and non-routine variables for Dignity and
liBerty. But to the extent that it depends on alertness and the ability to form
an image of the future, it is decidedly not routine. Ex ante it is precisely
“the possible lives they imagine for themselves and their children”
of Robert Lucas’s formulation, expressed in money (that is, expressed in
profane terms, and not mentioning the sacred matters, the animal spirits, such
as the spiritual value of caring for one’s children and
grandchildren—which is a limitation on the economist’s way of
thinking). Such an R viewed ex ante is in part the routine gain hovering before
the eyes of an entrepreneur in Chennai imagining how very rich he could become
if he could introduce air conditioning to the standard of Atlanta. But it is
also the highly non-routine gain of Israel Kirzner’s formulation, such as
what John Ericsson imagined would be gained from introducing screw propellers
into ships. What innovations are imaginable depend on the new devices or
institutions in the offing. (The “offing” is one of numerous nautical
words used as metaphors in English; it means the place beyond the horizon on a
curved earth, at which topmasts cannot be seen but can be imagined.) The
novelties floating in the offing are sometimes said to depend on relative
factor prices, but in a chapter in Bourgeois Dignity on Robert Allen’s
model of induced innovations I’ve noted the frailties of such an argument.
On the other hand, when steam engines with separate condensers became common,
it eventually occurred to many people that they might be made more compact for
the same power at high pressures. It was something that Watt himself realized
but was unwilling to implement, and prevented with his patent until 1800, from
the fear that such engines would be subject to terrible explosions. (So they
were, when applied for example to railways, and to steam vessels which
killedMark Twain’s brother on a paddle wheeler in New Orleans.)
The private R of the entrepreneur’s ex-ante imaginings, however,
dissipates ex post by competition into a social R, imparting an actual,
non-speculative, ex-post height to the I(.) function. If R dissipates too
soon—if it is too easily imitated, or is unpatentable knowledge—then
the incentive to innovate is attenuated. But as has long been realized in
economic thinking, there’s no blackboard formula for institutions or
parameters that optimize R. Once laboriously discovered, the opportunity cost
of another person learning, say, the calculus is zero: Newton and Leibniz (they
disagreed on which of them) should have gotten money credit, the economist
says, in order to evoke the optimal amount of mathematical innovation (the
example shows again, by the way, why macro-inventions are perhaps not best
analyzed as routine matters of monetary cost and benefit). But once the job of
invention is done (the economist then says, switching sides), the optimal price
for copying should be zero—and so the society should promptly stop the
checks just issued to Newton or Leibniz. It’s a paradox, with no general
resolution; it depends. That the NBER charges average cost of reproduction (or
some other fancy) to read its working papers is an example of how little some
economists understand the point.
The situation is that of a bridge. The Brooklyn Bridge was costly to build, and
needed somehow to be financed. But the social opportunity cost of people going
across it was, from May 24, 1884, zero, and so charging tolls to cross (unless
congestion costs) and to pay down the debt is from the economist’s social
point of view irrational. The Age of Innovation was an age of uncompensated
intellectual bridge building on an immense scale.The other arguments in I(B, D,
R), D for dignity and B for liberty, are unpaid externalities. R is unpaid,
too, after its private rewards have been dissipated. But before that time it is
paid in supernormal profits earned in excess of the opportunity cost of the
routine inputs K and sL. When being paid, the rent, R, disturbs the
marginal-productivity rules for distribution, which depend solely on the
routineness of the F(.) function. The manager knows how much to pay workers or
investors if she knows what hiring them will produce. Her knowledge is
disturbed if an R out-of-equilibrium is hanging about. The disturbance provides
one way to measure R, by seeing what financial return is not explained by
routine marginal productivities of K and sL. It is the essential insight of
Jones, Solow, Abramowitz, Denison. The ex-post return of R sloshes around the
social classes, in other words, unsettling the routine distribution by marginal
product—early on it goes to Carnegie; later, by the competition of steel
companies at home and abroad, it goes to hoi polloi. If there was no
dissipation, and no ultimate gain to hoi polloi, innovation would not have a
justification on egalitarian grounds—as in the historical event it surely
does have. That is why ex-post rent from land has been since Ricardo under
persistent ethical attack even from economists. It is the economic puzzle
central to Anthony Trollope’s first successful novel, The Warden (1855):
how to “fairly” distribute between the Warden and his twelve pauper
charges the 400-year gain from rising land rent. The sociology is that large
rents from mere possession of land, the half of national income in the Middle
Ages that went to the dignified classes, tend to create an aristocratic or
priestly society. (The Warden in the novel was a Church of England priest.)
Large (and eventually dissipated) rents from innovation, by contrast, tend to
create a bourgeois society. Honor follows money, of course, and money honor.The
paid/unpaid distinction is why I(.) and F(.) are to be treated separately, and
it justifies at least in mere logic my talk of the Great Enrichment being a
result of massive externalities, free lunches. The F(.) function is routine,
and you can tell whether an economist acknowledges the role of the non-routine
in economic life by how she treats R.
The Austrian economists treat R as unintended discovery; the
Samuelsonians/Chicagoans want to bring R back into a routine of marginal
benefit and marginal cost, that is, to force it back into the economics of a
routine F(.). (Both schools, incidentally, are “neoclassical,” one
out of Menger and the other out of Walras and Jevons, and then Wicksell,
Marshall, and Clark, which shows why “neoclassical” is a poor title
for the conventional Samuelsonians.) Howitt, referring to Mokyr’s
pioneering historical work on the matter, notes that “nations that
experience the most rapid growth are not necessarily those in which people have
the strongest incentives to develop new technologies [in my terms, high
Samuelsonian Rs] but those which have developed the greatest tolerance for, and
capacity to adjust to, the many negative side-effects of economic growth
[namely, the high D and B that accompany a signing on to the Bourgeois Deal].
Those negative side-effects are almost always the result of. . . the
destructive side of creative destruction”(Howitt 2005, p. 10; and Mokyr
1990, p. 179). The high D and B in the Netherlands (before the regenten in the
18th century became a virtual aristocracy and undertook to close off
innovation) and Britain and the new United States made for less reaction, as in
Continental anti-Semitism or French dirigisme protecting this or that industry
of concern to l’État.The variables of dignity, D, and of liberty,
B, have their own dynamics. When expressed as virtue, dignity draws on faith
and justice, who you are and whom you should respect. Liberty by contrast draws
on hope and courage, the courage to be (as the theologian Paul Tillich put it)
and the hope to venture. (Hope and courage do not suffice, I say to the
libertarians.) The rent in prospect or in achievement, R, draws on temperance
(savings for investment) and prudence (rationality, picking up the $300 bills
in plain sight). The seventh of the principal virtues, love of people or of the
transcendent (science, God, the family), affects the other variables
unacknowledged and certainly unpaid, but is not therefore unimportant. John
Ericsson’s great love for the iron-shaper Cornelius H. DeLamater was
important for the inventor’s life and work. Virtues unbalanced, though,
are vices. Dignity, for example, tends to corruption—causing it then to
become sometimes a negative rather than a positive influence on the height of
I(.). The corruption happens if merchants develop into a proud aristocracy, as
they did at Florence, for example, and as the left believes the power elite of
the United States has. Liberty, too, including verbal action, can be dangerous.
Liberty for example can be turned into a negative influence, a politically
expressed envy, if it seems plausible to poor people now equipped with voices
and votes that stealing from the rich is, after all, the most direct way to
cure their poverty. (A New Yorker cartoon back in the 1960s showed a bank truck
pulled up to the curb with the guards handing money out of bags to the people
on the street, one of whom exclaims, “Well, at last the War on Poverty has
gotten under way!”) Over time the I(.) variables of D, B, and R are
entangled (just as K and L are entangled in the conventional F(.) function, as
in their substitutability, complementarity, specific human capital, diminishing
returns). A society, like routine production, hangs together. For example,
dignity for innovation in 1900 depended on earlier liberties and earlier rents
from innovation. Dt=g(Bt–1, Rt–1). Liberated people tend after a
while to get accorded dignity, especially if their liberty results in high
incomes for themselves or, as the acknowledged benefactors of the world, for
the rest of us.
Horace was the son of a freedman. The reverse causation can happen, too, from
dignity to liberty after a while, or (less pleasantly) from dignity to high
rents, as peers and baronets become the honorable chairmen of railway and bank
boards. Likewise the variables in the innovation function, I(.), can have
influences over time on the routine variables in the production function, F(.).
One conventional way to think about it is to imagine the demand curves (the
marginal revenue product curves) derived from the entire expression
Q=I(.)•F(.). The I(.) function in such a derivation would be a
multiplicative term raising the marginal product of capital and of more-or-less
educated labor. The point made earlier about the non-initiating character of
capital can be expressed here by saying that K and sL are elastically supplied
in the long run. Accumulation, whether in physical or human capital, will
therefore depend on the I(.)-altered valuation of its fruits. As I(.) rises in
the Age of Innovation, savings will be found to make the appropriate
investments, because the higher productivity makes R evident and routine.
Likewise, education in technical subjects will respond elastically in the long
run to the demand for them—though what is “technical” varies
with the times, being fluency in Latin in the 17th century (the better to
serve, say, as a diplomat, as Milton did as Cromwell’s Latin secretary),
or fluency with differential equations in the twentieth century, or fluency
with computer simulation in the twenty-first century. The international context
in which innovation takes place matters. From the point of view of a stagnant
economy such as Russia’s in 1850, the imaginable R becomes larger and
larger as the nineteenth century proceeds, finally overcoming in some countries
their low values for D and B—this is a point made by Alexander
Gerschenkron and Sidney Pollard. A place with low dignity for the bourgeoisie,
such as prerevolutionary France, can compensate with high liberty for the
despised class, a high level of B (though in fact it did not, and
French-imagined betterments were therefore then notably aristocratic or
military in origin). And anyway the country slowly gets dragged into the modern
world if it is in the neighborhood of first a militarily and economically
successful Holland and then a militarily and economically successful Britain,
or a militarily and economically successful Japan, which makes obvious the
great magnitude of ex-ante R. The embarrassment of the War of the Spanish
Succession, 1701–1714, in which tiny Holland teamed up with emergent
Britain (and aristocratic Austria on the southern front) to humble the great
and mighty Louis XIV, taught France some of what it needed. Some. The advantage
of algebra, though, is that one can get beyond such existence-theorem,
qualitative, merely philosophical claims and counterclaims, which after all can
justify any pattern of alleged facts whatever. One can get a little
quantitative, and focus on the relative importance of this or that effect, its
oomph. For example, suppose the I(.) and F(.) functions were Cobb-Douglas, that
is, having constant exponents on each variable (you ask why: because it is
mathematically convenient, and because starting with constants is a wise first
step if you have no a priori knowledge of how they would vary, and have no
particular reason to suppose that they vary endogenously). Then taking rates of
change of each variable (using an asterisk, *, to mean “rate of change of
the variable preceding the *”) and using corresponding Greek letters to
mean “elasticities—that is, exponential coefficients—of the
variablefollowing”), yields obviously:Q*=[ dD* + ßB* + ?R*] + [?K* +
?s* + ?L*]If you like to think in logarithms, you can make the same expression
into a log-linear one. In either case it holds without interaction terms only
for small changes in the variables, but can be easily (if lengthily) rewritten
with the interaction terms present. It should be so written if you have an
interest in a particular interaction, for example between K* and
D*—percentage changes in physical capital accumulation and the dignity of
Mr. Moneybags.The equation can be expressed in per-capita form by subtracting
L* from both sides: 12(Q/L)*=[ dD* + ßB* + ?R*] + [?K* + ?s* + (?
–1)L*]One can make all sorts of foxy points with such an equation. (I
repeat: they are merely restatements of what is argued in the trilogy, not
fascinating new insights.) If the skill variable is measured as years of
education, for example, the slope of s relative to years of education would be
quite small, as I said, relative to the massive change to be explained in the
Great Fact, at any rate judging from cross-section studies of returns to
education. A college graduate is not ten times better in contributions to Q
than is a high-school graduate (an insulting hypothesis anyway on its face, and
silly if you have actually known any non-college graduates). It might work out
if college is accurately selecting for a tiny elite of geniuses. But such
screening cannot in fact be done with accuracy, as the history of
Britain’s Eleven Plus Examination showed, or as Einstein’s inability
at first to get an academic job showed. So the equation makes explicit why one
might doubt the force of education. On the other hand, the innovation variables
D and B and even R might themselves be improved by education. You can see
reasons for it, a higher skill level, s, resulting in higher dignity, D,
because of admiration for a skilled bourgeois/-e, or because of a better grasp
of technical matters necessary for innovation; or indeed because instruction in
economics might lead people to admire liberty in economic matters, and achieve
thereby higher B. I say again, however, that the s effect can be and often has
been perverse, corrupting good bourgeois boys by educating them to believe that
the bourgeoisie have no dignity at all, or corrupting good bourgeois girls to
become state bureaucrats devoted to believing that bourgeois liberty is to be
stamped out.
Marx took a Ph.D. degree in philosophy at Jena in 1841. The leader of the
Shining Path Marxists in Peru was a professor of philosophy. A high percentage
of the officers in Hitler’s SS had advanced degrees in the humanities.
German engineers built the gas chambers. Excellent computer engineers enforce
the Chinese censorship of the Internet. Likewise, unless one has assumed, or in
fact measured, economies of scale, which would make the elasticity ? large,
even a large percentage change in K cannot explain what is to be explained in
the rise of income per person. The economies of scale could explain the modern
world if they actually were there in other times and places, too. But
apparently they weren’t present in other times and places, which makes one
wonder, as I have said, why not, if they are supposed to arrive suddenly in
England in 1700. And as actually measured (off the blackboard of existence
theorems), economies of scale prove to be modest, raising the sum of
coefficients in the F(.) variables from the 1.0 of Cobb-Douglas to perhaps 1.1.
For reasons of competition and the marginal productivity theory of
distribution, the share of capital in rewards to factors of production is the
elasticity in question, here ? (strictly in the absence of economies of scale:
and if the economies are small, approximately so). The elasticity is small in
modern economies (on the order of .10 or .20), though larger when land bulked
large. Speaking of land bulking large: when it does not, and the share of L is
therefore high, then the term ? –1 (which is of course negative and
captures simple diminishing returns to labor applied to fixed land) is small,
because ? gets close to 1.0. (Indeed, economies of scale can tip ? –1 into
modestly positive territory, meaning that we are enriched a bit by having more
of us, even without regard to economies of scale in the other, I(.) function).
In a modern economy in which human-capital enhanced labor gets much of national
income for itself, the impact of Malthusian diminishing returns is greatly
weakened by the effect. To put it another way, when the rewards to labor get to
be a higher percentage of national income, the other, labor-related term, ?s*,
which measures the effect of skills, gets higher. The mathematics reflects the
point that human resources become more important than natural
resources—land is buried here in K, but causes diminishing returns only to
the extent that ? –1 is large.
The term was large in the Middle Ages, with only half of national income
accruing to labor, and the rest to land. The move to modern times reduced ?
–1, and therefore the threat from diminishing returns, from 0.5 to 0.1.
Listen up, environmentalists. There is no reason in the facts for the
coefficients in the other, I(.) function to add up to 1.0. On the contrary, a
doubling of dignity might result in a far-more-than-doubling of output, by
encouraging massive innovations. You will doubt that “dignity” can be
measured, but it can be measured perhaps by public opinion polls such as the
Values Survey, or from the prevalence of merchant-innovator heroes in lowbrow
literature, or in the percentage in some textual sample of favorable mentions
of innovation. Mr. Strahan put [Samuel] Johnson in mind of a remark which he
[that is, Johnson] had made to him; “There are few ways in which a man can
be more innocently employed than in getting money.” “The more one
thinks of this, [said Strahan,]the juster it will appear.” [Boswell’s
Life, 27 March 1775, aetat. 66,Everyman ed., I: 532.]Liberty is easier to
measure, and has been, in the surveys of days-to-open-a-business or
ease-of-dismissing-workers now conventional. It, too, need not have a
coefficient constrained by constant returns to scale: the ß coefficient
may by itself be well above 1.0, for example, which is to say that a 50 percent
increase in liberty measured as book pages per capita in the vulgar languages
sold uncensored, say, could easily result in well over 50 percent increases in
national income per head. Economists regard such sociological/political matters
as those summarized in I(.) as relatively constant (or anyway exogenous to
economic matters), and so they focus on F(.). But the larger lesson of the
formalization is that F(.) is nice, and is what economists mainly talk about.
But I(.) was the maker of the modern world. F(.) was the coastline, I(.) was
the tide. And anyway it is economically obvious that what matters is discovery,
“alertness,”as Kirzner put it, a free lunch, not routine
exploration.Take again containerization, invented in 1956 by Malcom McLean in
North Carolina. It was entirely organizational, involving no new physical
principle, no Science, given cheap steel.Or take the modern research
university, invented in Berlin 1810, with Arabic ancestors, by von Humboldt.
Take (please, Lou) sewerage, invented anciently by the Chinese and Romans, but
forgotten in Europe. It was organizational, and based on a false theory of
disease. Crucial to modern building was reinforced concrete, invented in the
1840s by Jean-Louis Lambot on his family’s estate (another non-bourgeois
French inventor), making water troughs and boats out of it, using pieces of
iron and then chicken wire (invented by a bourgeois in England in 1844). Take,
as a case of early High Science, the electric motor, invented by Faraday (the
son of a blacksmith) and many others, which came into its own 80 years later
with generation systems, especially alternating current àla Tesla.
What made Western doctors and hospital non-lethal was penicillin, invented in
High Science in the modern West by Fleming. On the other hand, quite a few
“Western” medical inventions were re-inventions, such as anesthesia
for surgery (Chinese) or aspirin (from willow bark). The transistor and the
printed circuit: was spectacularly Scientific, at which point I emphatically
agree with Joel --that a higher and higher share of GDP comes from High
Science. The question is when it becomes really big. I reckon after World War
I. It’s quantitatively testable, as I said. And accepting Joel’s
argument, with adjustment for its date, gives less and less plausibility to
gloomster predictions of declining innovation—even aside from the
worldwide enrichment yielding millions of new engineers and entrepreneurs. To
test the question, it’s not enough to rest with naming the betterments.
One has to measure their oomphin the whole. §That is, bettering ideas were
massively encouraged by a liberal society. It is a matter of dynamics, not
statics--but dynamics from new ideas, not from mechanical feedbacks (though
these happened, too). Look at the cartoon from the long-running series
“Han Olaand Han Per” during the 1910s and 1920s in Decorah Posten,
the bilingual newspaper of the Norwegian immigrant community. The dialogue is
translated into both languages in an edition from the University of Iowa Press:
One of the running jokes in the strip, as here, is Han Per’s obsessive
inventiveness, sometimes a crazy re-use of older technologies, sometimes the
latest New Thing. During the life of the strip, the editor of the collection of
the cartoons notes, Per tries out with disastrous effect fully sixty new
machines “invented (or bought) by Per.” The cartoonist
“Rosendahl presents him as the undying optimist, trying in every way
possible to mechanize not only the outdoor work of the farmer but also the
indoor work of his wife.”High D and B in the upper Midwest. What matters
is human creativity liberated by liberalism. Innovism, not tricky proposals for
utilitarian nudging, should be the focus of economics.
Economics should become “humanomics,” that is, economics with the
philosophy, history, literature left in. No one would deny that having a free
artistic or scientific community is good for us. Yet then they will deny the
same in the economy. They think, as we Ivy League economists did in the 1960s,
that “fine tuning” is all the economy needs, and that expert
economists from Harvard, Yale, and Princeton can provide it. The danger is a
contempt for the difficulty of creativity in business, or for that matter in
individual life. Max U, slam bang. The monopoly of Max U in Samuelsonian
economics has not been good for our glorious science. We need to honor
scientifically, both in our hypotheses and our scientific practice, the liberal
world of human creation.
(The liberalism in its political aspect, dear readers, is the topic of a book
manuscript, submitted twoweeks ago toYale University Press, For a New and Old
Liberalism: Essays in Persuasion.)
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