Arnold Kling  

Interview with Gregory Clark

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Fun History Fact of the Day... Uncertainty and Bias...

He says


The book challenges the modern orthodoxy of economics - that people are essentially the same everywhere, and with the right set of institutions, growth is inevitable - in three ways. First by showing that there were societies like medieval England where the institutional structure provided every incentive for growth, yet there was no growth. Second by pointing out that by objective measures the institutions of many highly successful modern economies, such as in Scandinavia, provide much poorer incentives to individuals than those of very poor economies. And lastly by showing that in the long run economic institutions that would prevent growth tend to get replaced endogenously by ones that are pro-growth.

Let me take a stab at defending the conventional wisdom.

1. I think that the time pattern of economic growth--nothing discernible for centuries, then a relatively rapid and dramatic increase--is a problem for just about any theory. How many of the usual explanatory variables are going to show such a pattern? Institutions are unlikely to remain constant for years, and then change (remember that for institutional economists, institutions are not just the formal characteristics of government; they are the habits and conventions that are deeply embedded in the society at large). But human qualities--the characteristics that are debatably cultural or genetic--are at least as unlikely as institutions to follow a path of stability interrupted by rapid evolution.

This reminds me of the Solow paradox. Remember that in 1987, Solow said that we see computers everywhere but in the productivity statistics. Well, 15 years later, productivity was soaring, and computers were on that phenomenon like white on rice. Looking back, you could calculate that total computing power in the economy in 1987 was infinitesimal compared with what came later. Once computers became powerful enough and pervasive enough, visible productivity gains soon followed.

Maybe the same story applies to the Industrial Revolution. The fast-growing sector, in this case textiles, may have been growing at a high rate all along. But starting from a low base, even if you double every twenty years, you don't affect the economy. Once the fast-growing sector reaches 3 or 4 percent of GDP, its rapid growth rate starts to have a visible effect on the overall growth. After a few more doubling times for the fast-growing sector, it becomes obvious that this sector is driving overall productivity.

2. A high standard of living in Scandinavia is not necessarily a refutation of institutional economics. Although their institutions are more anti-growth than ours in the dimensions of personal tax rates and labor market regulation, there may be other relevant dimensions (corporate profit taxes?) where our institutions are more anti-growth than theirs. The net differences may not be large.

3. The argument that bad institutions get replaced in the long run is not horribly devastating to institutional economics. One would hope that bad institutions do get replaced, although reading The Bottom Billion or Let My People Come is a reminder of how long the long run can be. In the less-than-long run, bad institutions are so entrenched that immigration is the fastest path to upward mobility.

For discussion: one element of the contemporary U.S. economy is a high participation rate for women in the labor force relative to, say, 1920. Does this reflect

(a) changes in the genetic or cultural makeup of women
(b) changes in technology
(c) changes in institutions (families, colleges and universities, employers, and government regulations)

I would not want to put a weight of 100 percent on (a) and 0 on the other factors. Similarly, I would not want to put a weight of 100 percent on Clark's theory that changes in the genetic or cultural makeup of men produced the Industrial Revolution.


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CATEGORIES: Economic History



COMMENTS (7 to date)
Matt writes:

Arnold, I loved the explanation for the sudden appearance of technology, makes sense, its linear, and is probably proved somewhere.

Nathan Smith writes:

I could be wrong, but the last time I looked at the statistics, a couple of years ago, the rise in productivity growth starting in the late 1990s was unique to the United States. Other industrialized countries mostly didn't experience it.

If I'm right about that, I think it punches a big hole in the "computers caused the productivity acceleration" story. Computers aren't specific to the US. Western Europe and Japan are almost as wired as America.

So what else could have cause the productivity acceleration? One candidate: welfare reform. The mechanism is perfectly clear: with the social safety net largely removed after 1996, people were more scared of what would happen to them if they lost their jobs. Fear made them work harder. No comparable policy change occurred in Europe, so there was no productivity acceleration there.

Another bit of support for this hypothesis can perhaps be teased out of William Lewis's book The Power of Productivity. Lewis thinks most of the productivity acceleration occurred in the retail and wholesale sectors. Retail in particular is the most intensive employer of low-skilled labor-- of the kind of workers for whom the removal of welfare might have been directly relevant to their lives-- in the economy.

Patrick writes:

There is ample evidence that information technology was and is behind the surge in productivity. The problem in Europe and Japan is that these productivity gains cannot be realized in an ossified economy. You don't just sprinkle computers onto a company like pixie dust and expect more output from your input. The company must change the way it operates, and that usually means layoffs. The European unions don't like that, so they're stuck. In the case of Japan, a mess of regulations keeps the domestic economy full of inefficient small-scale retailers and distributors. That's their version of the welfare state. Big box retailers just can't get a foothold, and the powers that be seem to want it that way, at least for now.

Nevertheless, I've heard that productivity growth may be accelerating in Sweden and other Nordic countries. I can see why: high taxes probably impede the functioning of labor markets less than regulations, and the Nordic countries tend to favor the former while the other Western European countries favor the latter.

shayne writes:

"First by showing that there were societies like medieval England where the institutional structure provided every incentive for growth, yet there was no growth."

The effects of any number of growth-tolerant or pro-growth institutions can (and are) negated by other artifacts. In this case (medieval England/Europe), the effects of such institutions were probably negated by the the very real possibility of having all assets forfeit to the crown, in many cases, on a whim.

It should be noted that, prior to WWI, all significant national economies - save one - were ruled by monarchs or the equivalent. Many productivity growth era's in Europe, for example, were highly correlated with monarchs who refrained from, or were restrained from, applying their royal prerogative of demanding forfeiture, although the prerogative still existed.

To illustrate the concept, England and the nations such as Canada and Australia which claim allegiance to the British crown still require Royal Assent from the crown in order to complete their parliamentary processes and enact law.

Lord writes:

I am reminded of how profitable the wool trade was from late medieval times onward.

Mr. Econotarian writes:

Johan Norberg points out that you can't compare today's Scandanavia with that of yesterday...

http://www.johannorberg.net/?page=articles&articleid=45

But in a few decades in the mid-1800s, a group of classical liberal politicians gave Sweden religious liberty, freedom of speech, freedom of movement and economic liberty, so that people could start their own businesses and buy and sell freely on the market. Free trade made it possible for Sweden to specialize in what we did best, such as the timber and iron industries, and exchange it for that which we produced less well, such as food and machinery.

The result was economic growth and industrialisation, which made it possible to increase well-being and invest in education and health care. Between 1860-1910 the manufacturing wage increased 170 per cent, much more than in the period after. Swedish life expectancy increased ten years and infant mortality declined rapidly. Sweden was not a welfare state, it was more of a minimal state. Until the first World War, the Swedish public sector did not spend more than 6 per cent of GDP!

Troy Camplin writes:

1) We typically look at things linearly, but the description here of growth as "flat" for a long time, followed by accelerated growth sounds exponential to me. In the beginning, exponential growth always looks flat.

As for the idea that the genetic or cultural makeup produced the Industrial revolution, I would say absolutely not for the genetic argument, and I would rephrase "cultural" to say "psychosocial complexity." The Industrial Revolution -- the Modern Era in general -- occured because a lot of people in Europe entered a new stage of psychosocial development that was more complex than that of Medieval Europe. This is a theory developed by the psychologist Claire Graves, and developed further by Beck and Cowan in their book "Spiral Dynamics."

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