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When Ideas Start Having Sex

mccloskey

The internet gave rise to Google and Facebook. The iPhone gave rise to Uber. The ideologies are important only to the extent that they facilitated ideas. Our current development is less dependent on assets and physical capital than ideas. We grow in spite of institutions, not because of them. In fact many of the new ideas render our institutions increasingly irrelevant.

This is one of those articles rich with analysis and thus hard to excerpt- so please link to the whole article.

from the Wall Street Journal, Deirdre McCloskey writes How the West (and the Rest ) Got Rich-This essay is adapted from her new book, “Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World,” published by the University of Chicago Press.

What caused it? The usual explanations follow ideology. On the left, from Marx onward, the key is said to be exploitation. Capitalists after 1800 seized surplus value from their workers and invested it in dark, satanic mills. On the right, from the blessed Adam Smith onward, the trick was thought to be savings. The wild Highlanders could become as rich as the Dutch—“the highest degree of opulence,” as Smith put it in 1776—if they would merely save enough to accumulate capital (and stop stealing cattle from one another).

A recent extension of Smith’s claim, put forward by the late economics Nobelist Douglass North (and now embraced as orthodoxy by the World Bank) is that the real elixir is institutions. On this view, if you give a nation’s lawyers fine robes and white wigs, you will get something like English common law. Legislation will follow, corruption will vanish, and the nation will be carried by the accumulation of capital to the highest degree of opulence.

The capital became productive because of ideas for betterment—ideas enacted by a country carpenter or a boy telegrapher or a teenage Seattle computer whiz. As Matt Ridley put it in his book “The Rational Optimist” (2010), what happened over the past two centuries is that “ideas started having sex.” The idea of a railroad was a coupling of high-pressure steam engines with cars running on coal-mining rails. The idea for a lawn mower coupled a miniature gasoline engine with a miniature mechanical reaper. And so on, through every imaginable sort of invention. The coupling of ideas in the heads of the common people yielded an explosion of betterments.

Why did ideas so suddenly start having sex, there and then? Why did it all start at first in Holland about 1600 and then England about 1700 and then the North American colonies and England’s impoverished neighbor, Scotland, and then Belgium and northern France and the Rhineland?

The answer, in a word, is “liberty.” Liberated people, it turns out, are ingenious. Slaves, serfs, subordinated women, people frozen in a hierarchy of lords or bureaucrats are not. By certain accidents of European politics, having nothing to do with deep European virtue, more and more Europeans were liberated. From Luther’s reformation through the Dutch revolt against Spain after 1568 and England’s turmoil in the Civil War of the 1640s, down to the American and French revolutions, Europeans came to believe that common people should be liberated to have a go. You might call it: life, liberty and the pursuit of happiness.

To use another big concept, what came—slowly, imperfectly—was equality. It was not an equality of outcome, which might be labeled “French” in honor of Jean-Jacques Rousseau and Thomas Piketty. It was, so to speak, “Scottish,” in honor of David Hume and Adam Smith: equality before the law and equality of social dignity. It made people bold to pursue betterments on their own account. It was, as Smith put it, “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.”

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Good Enough

from Martin Conrad at Barron’s; Finding the Path to Enrichment

Smith argued that man was an economic animal who, by his bargaining and exchanging in the marketplace, could benefit from the diverse talents and genius of all his fellow men. This led to his seminal theory that the most important source of wealth of a nation is not gold, silver, money currency, or even its land or natural resources, but “the skill, dexterity, and judgment” of its labor force.

We see this illustrated today by wealthy nations, such as Switzerland and Singapore, that possess modest amounts of land or natural resources but have grown rich by having educated, trained, productive labor forces.

Smith’s theories and observations also began the destruction of slavery, a universal institution throughout all of history. He destroyed the self-interest that motivated slavery by showing that economies based on it could not profitably compete with those based on a free, motivated, trained labor force.

These principles that enabled much of the world to escape its traditional Malthusian trap still show their power. In 1950 oil-rich Venezuela was more than three times as rich per capita as South Korea. Yet by 2011 this relation was nearly reversed as capitalist South Korea’s per capita GDP was nearly three times that of Hugo Chavez’s Venezuela, despite several years of $100-a-barrel oil.

This most practical, effective utopian philosopher has been so successful because his system works well with people — not as they morally should be, nor as he wanted them to be, but for people just as they are, which was good enough. Adam Smith described the way to harness intellectual capacity and instinctual ambition for the common good. We live and thrive today in mostly his world.

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The Wall of Worry

an excellent post from Scott Grannis at Calafia Beach Pundit, The Bad news is why I am optimistic

Grannis is one of my favorite economics bloggers- and one of the few that seems to combine a sense of harsh reality with a sense of optimism. He is strongly data driven yet retains a human element in his analysis.

excerpt:

As I noted some years ago, all the spending and borrowing that was supposed to “stimulate” the economy was essentially flushed down the toilet. Since 2009 we’ve conducted a laboratory experiment in the power of government spending to grow the economy by stimulating demand, and the result is proof that Keynesian theories are destructive, not stimulative. Neither government spending nor easy money has the power to create growth out of thin air, but politicians want to convince you that they do. The economy is weak today because we have wasted many trillions of dollars on transfer payments that only create perverse incentives to work less.

The biggest negative of them all is that the US economy is not nearly as large and as healthy as it could or should have been, had policies been better designed. This has been the weakest recovery in post-war history, and by a lot. If the economy had rebounded from the Great Recession with the same vigor it displayed in every post-war recovery, national income would be almost $3 trillion higher than it is today, as the chart above illustrates. Per capita income would be almost $9000 higher, and a family of four would be making $35K more every year. That’s real money, and it explains why the electorate is so upset these days with the establishment.

HKO

I guess his reasoning is that it is more likely to get better than to get worse.  One can err from excessive pessimism as much as excessive  optimism and the effect on your investments would be worse.

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Selective Free Enterprise

billsimon

I watched with incredulity as businessmen ran to the government in every crisis, whining for handouts or protection from the very competition that has made this system so productive. I saw Texas ranchers, hit by drought, demanding government-guaranteed loans; giant milk cooperatives lobbying for higher price supports; major airlines fighting deregulation to preserve their monopoly status; giant companies like Lockheed seeking federal assistance to rescue them from sheer inefficiency; bankers, like David Rockefeller, demanding government bailouts to protect them from their ill-conceived investments; network executives, like William Paley of CBS, fighting to preserve regulatory restrictions and to block the emergence of competitive cable and pay TV. And, always, such gentlemen proclaimed their devotion to free enterprise and their opposition to the arbitrary intervention into our economic life by the state.  Except, of course, for their own case, which was always unique and which was justified by their immense concern for the public interest.

From William Simon’s  A Time for Truth, as quoted in Robert Higg’s excellent volume Crisis and Leviathan (1987).  Simon was Secretary of the Treasury under both Nixon and Ford.

Higg’s thesis was that the crisis of WW I and WWII engaged the government in such mobilization that its growth met little resistance.  Government power ratcheted up during these crisis and never returned to their pre-crisis level.Some companies benefited so much for that period and the ensuing dramatic growth in the military industrial complex that the government controlled mixed economy became accepted by business and made peace with their government partner and even sought to use it their advantage.

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Policy Under False Pretenses

perry

from Mark Perry at Carpe Diem,  New BLS data show that for all ‘chief executives,’ the ‘average CEO-to-average worker pay ratio’ is less than 5-to-1

For the sample of 20,620 CEOs reported by the BLS, their average pay increased only 2.1% in 2015, from $216,100 in 2014 to $220,700 in 2015. In contrast, BLS data show that the average pay of all full-time workers increased by the same 2.1% last year to $48,320 from $47,320 in 2014. Therefore, the average worker last year saw an increase in their pay that was exactly the same increase in pay for the average CEO. Over the last decade, the average annual increase in CEO pay of 3.3% is only slightly higher than the average annual increase of 2.5% for workers in all occupations.

In contrast to the more sensational reports we’ll hear about in May from the AFL-CIO, there’s no “skyrocketing of CEO pay” when we consider all CEOs, and the Average CEO-to-Average Worker Pay ratio is less than 5-to-1, nowhere near the 400-to-1 ratio the AFL-CIO is likely to report in a few months for a small, elite group of CEOs that excludes 97.6% of all CEOs in the US. The chart above shows that the pay gap between CEOs and the typical worker has remained remarkably stable and flat for the last decade, and shows no upward trend that could be described as “skyrocketing.”

HKO

This is a common form of distortion in data used to enact policies under false pretenses.    It is also a common case of journalistic malfeasance that such distortion are rarely countered is most mass market media.