Monday, December 26, 2011

McCloskey on the Great Fact of Economic Growth

In a characteristically ornate, well-considered, good-humored and provocative essay, Dierdre McCloskey has a lot to say about "A Kirznerian Economic History of the Modern World." This essay was originally presented at the 2010 Upton Forum at Beloit College, which focused on the work of Israel Kirzner. This link is from a post by Peter Boettke at Coordination Problem. The conference proceedings will eventually be available third Annual Proceedings of the Wealth and Well-Being of Nations, although the essays don't seem to be posted on the Upton Forum website yet. Here's McCloskey:

"What I got with a jolt around age 65 was that economic growth since 1800, the Great Fact of an increase of real income per head by a factor of anything from a factor of 16 (using the most conventional statistics in the countries that were richest at the outset) all the way to (if you properly account for improved quality) a factor of 100, had very little to do with routine, Samuelsonian/ Friedmanite/Douglass-Northian adjustment of marginal cost to marginal benefit. That is, mere supply-and-demand efficiency does not explain the modern world. ..."

"The problem with all the economistic explanations lies deep within classical and most of subsequent economic thought: the conviction that shuffling stuff around makes us a little better off, which is true; and therefore that the shuffling makes us as rich as modern people are, which is false. Trade. Transportation. Reallocation. Information flow. Accumulation. Legal change. ... Yet the path to the modern was not through shuffling and reshuffling. It was not by the growth of foreign trade or of this or that industry, here or there, nor by shifting weights of one or another social class. Nor indeed was it by reshufflings of property rights. Nor, to speak of another sort of reshuffling, was it by rich people piling up more riches by shuffling income away from their worker-victims. They had always done that. Nor was it through bosses being nasty to workers, or through strong countries being nasty to weak countries, and forcibly shuffling stuff toward the nasty and strong. They had always done that, too. Piling up bricks and money and colonies had always been routine. ... The new path was not about anciently commonplace theft or accumulation or commercialization or reallocation or conquest of foreign kings or any other reshuffling. It was instead about discovery, and a creativity supported by novel words. In terms of the seven principal virtues, the routine of efficiency that Samuelsonian economists love so passionately depends only on the virtue of Prudence ...  What I am claiming here is that Austrian discovery and creativity depends also on the other virtues, in particular on Courage and Hope. ... As a result, previously unknown inputs were discovered (coal for steam engines; then coke for iron; then natural gas to replace the sickening coke burnt in French kitchens), fresh hierarchies of ends were articulated (in the new political economy, for example, which tended to the democratic end of general vs. privileged prosperity; in the new politics, which tended to the radical end of strict equality), new goods and services were created (black tulips, common stocks, reinforced concrete). All of it was very far from routine Prudence. ...

To put it another way, economics in the style of Adam Smith, which is the mainstream of economic thinking, is about scarcity and saving and other Calvinistic notions ... In the sweat of thy face shalt thou eat bread, till thou return unto the ground. We cannot have more of everything. Grow up and face scarcity. We must abstain Calvinistically from consumption today if we are to eat adequately tomorrow. Or in the modern catchphrase: There Ain’t No Such Thing as a Free Lunch (TANSTAAFL). But over time, taking the long view, modern economic growth has been a massive free lunch. Discovery, not reshuffling, was the mechanism, and the springs were the nonprudential virtues."

All of this and much else in the essay is very well-said, as one expects from McCloskey, but at some level, the posited separation between supply-and-demand efficiency and economic growth seems to me a bit overstated. Yes, basic supply and demand is static and one-time, and economic growth is a dynamic process over time. But at least when I teach supply and demand, I emphasize that the interaction of utility-maximizing consumers looking and profit-seeking producers is an evolving process. Producers are continually attempting to entice consumers, through combinations of new qualities and new products, along with price competition. Consumers are continually seeking a better deal. To me, at least, even the most basic models of mainstream supply-and-demand economics are built on more than penny-pinching Prudence. They are also incorporate discovery, creativity, and even creativity and hope.

I fear that in McCloskey's effort to emphasize this broader perspective, she draws too bright a line between supply-and-demand and the Great Fact of economic growth, and thus veers close to a reductionist or perhaps a mechanistic view that if economic models don't include a specific variable for Courage or Hope or Creativity or Discovery, then the models can't encompass those motivations.  But being reminded of the importance of such concerns and motivations is always useful, and thus McCloskey's bracing and entertaining essay is well worth reading.