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Invisible Wealth: The Hidden Story of How Markets Work
Originally published in hardback in 2009 as: From poverty to prosperity: intangible assets, hidden liabilities and the lasting triumph over scarcity.
334 pages, Kindle Edition
First published April 25, 2009
12 people are currently reading
180 people want to read
About the author
Arnold Kling
17 books40 followersAmerican economist, scholar, and blogger. He is an Adjunct Scholar for the Cato Institute and a member of the Financial Markets Working Group at the Mercatus Center at George Mason University. He teaches statistics and economics at the Berman Hebrew Academy in Rockville, Maryland.
Kling received his Ph.D. in economics from the Massachusetts Institute of Technology in 1980. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986. He was a senior economist at Freddie Mac from 1986-1994.
Kling received his Ph.D. in economics from the Massachusetts Institute of Technology in 1980. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986. He was a senior economist at Freddie Mac from 1986-1994.
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Displaying 1 - 18 of 18 reviews
December 29, 2009
This was the best book I read all year. The main idea here is that traditional economics (Economics 1.0) is poorly equipped to deal with some of the most important aspects of the modern economy. Traditional economics focuses on inputs such as goods and land, factoring in areas like innovation or risk only as afterthoughts. Traditional economics focuses on these inputs because it has become heavily math-centric, and goods and land are easier to calculate than innovation, risk, social capital, or quality of legal institutions. Kling and Schulz argue for a new economics (Economics 2.0) in which economists embrace these new factors.
There arguments are highly compelling. Most books like this have one idea and the authors spend 200-400 pages repeating it and applying it to different situations. Kling and Schulz avoid this trap by interviewing a host of top economic thinkers from Paul Romer to Bill Easterly to William Lewis. Instead of repeating their one idea over and over, each chapter brings a new economist, who shares his big idea.
I really enjoyed the use of interviews as a literary tool. Rather than one author trying to explain his ideas in expository form, the interviews provide a give-and-take, an exchange of ideas, and a conversational tone. I hope to read more books in this format in the future.
I can't decide whether Kling and Schulz's work suggests an entirely new paradigm or not, but I found their ideas compelling and highly persuasive. I would recommend this book to anyone.
There arguments are highly compelling. Most books like this have one idea and the authors spend 200-400 pages repeating it and applying it to different situations. Kling and Schulz avoid this trap by interviewing a host of top economic thinkers from Paul Romer to Bill Easterly to William Lewis. Instead of repeating their one idea over and over, each chapter brings a new economist, who shares his big idea.
I really enjoyed the use of interviews as a literary tool. Rather than one author trying to explain his ideas in expository form, the interviews provide a give-and-take, an exchange of ideas, and a conversational tone. I hope to read more books in this format in the future.
I can't decide whether Kling and Schulz's work suggests an entirely new paradigm or not, but I found their ideas compelling and highly persuasive. I would recommend this book to anyone.
Read
September 14, 2016Recently I found myself rooting around the in archives of sites like Let A Thousand Nations Bloom and Distributed Republic and I selected a few recommended titles about the frontier of economics, politics and soft institutions (culture, legal norms, etc.) looking for answers to these questions mentioned in an earlier post:
Why do political borders and different legal systems seem to have such disparate impacts on economic development?
Which follows which, the culture/political system or the economy?
How sound is the idea of “competition amongst governments” and why don’t we see more countries’ policies moving toward a “developed” mean?
Invisible Wealth proved helpful in thinking more deeply about the first two questions, but it really didn’t offer any insights on the third question. The book is a mixture of introductory lessons on concepts from “Economics 2.0” intermixed with interviews from numerous academic economists who have done research in the field of the interplay between economic development and social institutions. The strongest parts of the book are the interviews with the economists. The introductory lessons suffer from too many mixed metaphors (hardware/software layer, Malthusian meadow/food court, innovation as the heart of the economy) and the insistence on delineating economic ideas as part of 1.0 or 2.0 thinking seems contrived and forced, not only because there is no existing group of economic thinkers who so identify themselves as adhering to one system of ideas or the other, but also because there is an entire school of thought, the Austrian school of economics, which recognized the importance of both 1.0 and 2.0 concepts and successfully integrated them decades ago, but which gets no spotlight aside from the consistent mentions amongst the interviews of the importance of the work of FA Hayek as an exemplar.
Briefly, Economics 1.0 is supposedly Classical Economics, which sees all economic issues in terms of the three basic inputs of land (original, unprocessed resources), labor (the effort and ingenuity of human beings interacting with those resources) and capital (the factors of production generated by mixing land and labor for future production). E1.0 is obsessed with equilibrium and static economic models, which are amenable to mathematical and statistical analysis. In contrast, Economics 2.0 acknowledges the important role of entrepreneurs in managing change and dynamism in the economy. Sadly, the authors neglect the ultra-important dimension of TIME and the role this plays in production and the coordinating activities of entrepreneurs… which is why the Austrian school again seems incredibly advanced compared to this offering and might be categorized as Economics 3.0. But even ignoring time, E2.0 is a big advance on E1.0 in acknowledging change as not only a real phenomenon of economic systems that is neglected by E1.0, but also the central element of economic development and growth. For development to take place, change must occur, and for change to occur, there must be actors with an interest and incentive in causing the change.
This shifts the analysis from studying the mineral resources or accumulated capital of a community, to studying the existence and behavior of entrepreneurs as innovators improving economic outcomes for everyone. The question begged then is, “Why do some economies have a lot of entrepreneurs, or very talented ones, while others have none or poor ones (or corrupt ones who get wealthy making people worse off)?” And for an answer to that question, one must explore the role of institutions.
With institutions, whether we’re talking E2.0 or E3.0, it’s clear that the science is still developing on which institutions are important for development, what role they play and how they can be successfully built (a significant meta-problem, because often there is feedback between a poor economy and difficulty building strong institutions and so on). There are also so many potential institutions to consider that the analysis can quickly get complicated, for example:
Property rights (how to define, how to enforce, what can/can’t be owned and by whom)
Legal norms (ie, tendency to rule a certain way in a certain type of case)
Legislation (ie, “the law” that will be enforced, including civil, criminal and regulatory policies)
“Culture” (accepted behaviors, social expectations, traditions, ideals, even aesthetics)
History (this is an odd one because it is so intangible and uncontrollable, but the history that each community comes from has a real effect on shaping other institutions and thus economic outcomes)
IQ (more on summary findings from Hive Mind below)
Religion
The family
I think this is why the interview portions of the book really shine. It is here that we get a lot of competing theories of development and which institutional factors are most important and why. They not only highlight how unsettled this part of economic or social science is, but also they provide outstanding examples of how critical each of these factors can be. And there is a clear distribution of insight and intelligence demonstrated by these interviews as well– while almost all of the interviewees have earned numerous awards and accolades, including Noble Prizes, for their economic work, several stand out as innovative giants while others seem to trade in the same, tired old statist fallacies of yore. What follows are some of the quotes I thought were most fascinating.
Robert Fogel
RF emphasized the role of technology in development, because as he says, “technological advance is the basis for all economic growth.”
One measure of economic development he suggested was looking at life expectancy. A rising life expectancy implies that people are able to produce sufficient resources to protect themselves from basic environmental and health risks. However, in looking at the historical data, there is an interesting trend in early industrial European societies by which rural populations maintained higher life expectancies than urban dwellers until around the turn of the 20th century. He blamed this on changes in technology, because
when you walked around in New York City, you were breathing pulverized horse manure, a much worse pollutant than the exhaust of automobiles
That idea grabbed me, both because it is vivid and disgusting, but also because it highlights that economic development is fraught with risk and even though the “ultimate” destination of economic development might be a less toxic technology like automobiles, the “path” along the way might include way points with more toxic technology (pathogen-laden pulverized horse manure) which is worse for health outcomes than taking your chances with subsistence-level existence in the countryside. A question I had which wasn’t explored in the discussion is why a.) city municipal services failed to keep the volumes of horse manure out of the streets as part of a sanitation program or b.) why market entrepreneurs didn’t collect and sell this “fertilizer” back to the countryside? It could be a technological problem within a technological problem.
Fogel also emphasized that the rate of technological change appears to be increasing in industrial economies:
it took four thousand years to go from the invention of the plow to figuring out how to hitch a plow up to a horse… it took 65 years to go from the first flight in a heavier-than-air machine to landing a man on the moon
Now, the example is cherry-picked and there are probably still a lot of technologies we’re using that are 10,000 years old (for example, if we ever primarily grow crops indoors, one could say “It took us 10,000 years to go from growing crops outdoors, to figuring out how to grow them indoors”, which seems like a really long time to figure out what will at that point be a best practice idea) but it still has impact.
He also mentioned the importance of economic development for the well-being of the aged:
you need to have a successful and rapidly growing economy in order for standards of living for the elderly to improve
I think this is true because the savings of the elderly need to earn an increasing return in real terms for their standard of living to improve without being forced to consume their capital, which puts a fixed timeline on their survival once they run out of capital entirely. And the only way their savings can earn a greater real return over time is if the entire economic pie is growing. It’s an interesting example of the connection between economic growth and and humane conditions.
Robert Solow
RS highlighted the complexity of the problem of solving poverty in poor countries:
Without appropriate institutional infrastructure, without the right local incentives, without complementary human capital, aid and investment will be wasted… poor countries are not only poor in capital, they are poor in the factors that make for “total factor productivity”
This is a direct application of E2.0 thinking contrasted with E1.0 thinking. The E1.0 aid crowd believes that if you just redistribute enough of the world’s wealth to the poor countries, they’ll be able to escape poverty. But RS emphasizes that they’re not just poor in terms of resources but also in terms of institutions which allow them to manage and develop resources. If this is true (and I think it is), it certainly gives one pause before hitting the “Donate to Charity”-button.
Paul Romer
PR focused on changes in technological systems and the economic impact that comes from replacing an old technology with a new one:
We didn’t get that much more light by producing hundreds of thousands of candles per person, but by switching from candles to gas
He also discussed the way technological development may improve our capacity to make further discoveries,
it may be inherent in the process of discovery that the more we learn the faster we can learn
and the impact that improvements in institutional technology have allowed us to harness those discoveries with greater efficiency:
the modern university and research system was designed not to create property rights but to lead to the rapid dispersal of new information; academics were rewarded based on the priority with which they disclosed information, so that the first person to disclose gets all the professional credit for discovering something new
[…]
what we’ve done is created better institutions over time, so that we now exploit the opportunities for discovery much more effectively than we used to
The most important insight from his interview was that growth requires change, and change creates “winners” and “losers”, and it’s easy for the losers to become a special interest group and lobby the government to arrest the change:
everyone wants growth but nobody wants change, and you’ve got to have both or you’ve got to have neither… change accompanies growth… when you have change, there will inevitably be winners and losers… we can’t let a small group of losers — either absolute losers or relative losers — stop the process of growth that will benefit most people going forward
Incidentally, this is why countries pursuing socialist policies stagnate. Socialism is a policy that preserves the status quo and tries to equalize outcomes that are created by change. Inevitably, equalizing outcomes ends up stopping the change itself and thus stagnation sets in.
Joel Mokyr
JM was actually one of my favorite interviews, so I will quote him extensively.
First, he talked about the reasons why humanity has gotten increasingly technologically advanced over time:
inventions are made when there is a minimum epistemic base… you cannot build a nuclear reactor by accident… but you can invent aspirin quite serendipitiously, without having the faintest clue about how it works
[…]
We invent something, and sometimes we know a little bit about how it works, sometimes we know nothing, sometimes we know quite a bit, but in all cases, as we use it more, the epistemic base gets wider.
This technological advancement requires time, and a bit of luck, because
the only way we can think about technology is in evolutionary terms… a kind of science that makes no predictions
That’s also a really interesting idea because some economists have claimed that “science is prediction” and thus any economics which does not concern itself with empiricism and making valid predictions is not scientific. But here we have two examples (evolution, and technology) of sciences where prediction is not possible. Does that mean they are not scientific?
Later, JM goes into an explanation of the way changing technology led to economic development, and the way economic development impacted institutions and social ideas, and then the way this fed back into attempts to limit technological development and, by extension, economic development:
If you look at Europe in 1650 or 1700, what you see is a very sophisticated set of economies. They have just basically finished exploring the rest of the world, and there has been great deal of commerce and trade — joint stock companies are emerging, insurance is emerging. This is a fairly sophisticated commercial economy. The problem is, there are lots of special interests trying to get exclusionary arrangements that are good for them but bad for the economy. This is a system in which property rights are well defined and enforced, as Douglass North loves to say, but also rather distortive in the sense that you have lots of exclusionary arrangements. In other words, for the economy to function well, you don’t just need good property rights, you also need what we could call, somewhat vaguely, “economic freedoms.” You need labor mobility; you need to get rid of guilds; you need to get rid of monopolies, both local and global; you need to get rid of all kind of regulations; and above all, you need free trade. And if you don’t have that, you’re going to end up in a society that will not be able to grow.
Nowadays we have a different term for this. We call it corruption. We always say, look at countries like Russia or the Central Asian nations — these countries will never have good economies because they are corrupt. But corruption is really just a special form of what we call, in economic jargon, “rent-seeking.” I argue in my book that one of the things that happens in eighteenth-century Europe is a reaction against what we today would call rent-seeking, and that this, to a great extent, is what the Enlightenment was all about. The Enlightenment wasn’t just about freedom of religion and democracy. It wasn’t to be about democracy at all, but never mind that. It was about freedom of religion, tolerance, human rights– it was about all of those things. But it was also a reaction against mercantilism, and you find that attitude in certain people who were very important in the Enlightenment. Above all, of course, the great Adam Smith.
[…]
when you look at the few places in Europe where the Enlightenment either didn’t penetrate or was fought back by existing interests, those are exactly the countries that failed economically [Spain, Russia]
This is definitely a different take on the Enlightenment than I have come across before, but it makes a lot of sense to me and seems to do a good job of integrating economic, technological and political phenomena of the time period!
nobody has held technological leadership for a very long time… technology creates vested interests, and these vested interests have a stake in trying to stop new technologies from kicking them out in the same way that they kicked out the previous generation
That is the feedback loop mentioned earlier, and why the Enlightenment might have been a reaction against a vested interest reaction.
Cardwell’s Law: the more open the world is, the more free trade, the more ideas and people can move from one country to another, the less likely it is that technological progress will come to an end
This idea gives hope that there is a case for rational optimism assuming liberal social institutions around the world.
if you change the institutions but don’t change the culture, you’re not going to change the institutions
[…]
the degree to which we hold fast to the wisdom of earlier generations is an incredibly important element in how innovative a society is, because if you think about it, every act of invention is an act of rebellion
This suggests that “conservativism” as a social policy might lead to stunted economic development, depending upon when marks the beginning of what traditions and systems one is trying to conserve. It also highlights the problem that RS mentioned, namely, that there is complex interactivity between social institutions which enable economic growth and it’s possible that a “backwards” culture could interfere with or limit the effectiveness of “progressive” social institutions as a whole, so it’s not as simple as, say, invading a country and giving them a modern political constitution (ignoring the obviously negative social impact of a war!)
And this might seem like a throwaway quote, but I thought it was interesting:
Over most of history people have not voted their pocketbooks — Marxists included.
Thankfully! Because if they did, or do, then it will be truly hopeless to expect any kind of reform ideology to take place in the face of billions of people who could “vote their pocketbook” and keep instituting handout systems that impoverish everyone.
William Easterly
WE focused on the appropriateness of specific institutions to solving specific problems, namely, the planner-mentality to solving poverty. He looks at poverty as a circumstance created by a lack of innovation, and he identifies planning as a practice which is anti-thetical to innovation. Thus, planning can not solve poverty:
Planners think that the end of poverty requires a comprehensive, administrative solution. They’re trying to do something that’s a lot like central planning in the old, Soviet-style economies, in the context of poverty reduction.
[…]
It’s as if central planning has been totally, mercifully extinguished everywhere else except [in the areas with] the world’s desperate, poorest people, who can least afford such a dysfunctional solution to their problems — [areas] where it would be much better to imitate the mentality of free markets, which are all about giving financial incentives and motivating people to meet consumer needs.
[…]
corporate planning is just about scaling up a solution after you find something that works… you can’t use planning to find what works
William Lewis
WL, like JM, emphasizes the way that institutions can be used to enable and unleash innovative forces, or to restrict and restrain them. He also talks about attitudes of people in the industrialized West who are trying to create panacea solutions for people in poor countries:
Just because people are not educated does not mean that they are incapable, which is a mistake educated people in the West often make.
He points out that if the opposite were true, poverty would be a necessary part of the social landscape for much of the world for at least the next 50 years while several generations of people are being educated. But this wasn’t the pattern of development in the industrial countries before they obtained their industrial development and he doesn’t think it’s a good assumption for the remaining non-industrial countries as well.
No producer – no producer – has ever asked for more competition. So these domestic producers are really the secret enemies of globalization and they are exerting a lot of influence against it.
There’s that feedback loop! And it gives us an insight into the truth of protectionist policies, which don’t enable development but rather enable special interest groups to profit patriotically.
[Gordon] Wood showed t
Why do political borders and different legal systems seem to have such disparate impacts on economic development?
Which follows which, the culture/political system or the economy?
How sound is the idea of “competition amongst governments” and why don’t we see more countries’ policies moving toward a “developed” mean?
Invisible Wealth proved helpful in thinking more deeply about the first two questions, but it really didn’t offer any insights on the third question. The book is a mixture of introductory lessons on concepts from “Economics 2.0” intermixed with interviews from numerous academic economists who have done research in the field of the interplay between economic development and social institutions. The strongest parts of the book are the interviews with the economists. The introductory lessons suffer from too many mixed metaphors (hardware/software layer, Malthusian meadow/food court, innovation as the heart of the economy) and the insistence on delineating economic ideas as part of 1.0 or 2.0 thinking seems contrived and forced, not only because there is no existing group of economic thinkers who so identify themselves as adhering to one system of ideas or the other, but also because there is an entire school of thought, the Austrian school of economics, which recognized the importance of both 1.0 and 2.0 concepts and successfully integrated them decades ago, but which gets no spotlight aside from the consistent mentions amongst the interviews of the importance of the work of FA Hayek as an exemplar.
Briefly, Economics 1.0 is supposedly Classical Economics, which sees all economic issues in terms of the three basic inputs of land (original, unprocessed resources), labor (the effort and ingenuity of human beings interacting with those resources) and capital (the factors of production generated by mixing land and labor for future production). E1.0 is obsessed with equilibrium and static economic models, which are amenable to mathematical and statistical analysis. In contrast, Economics 2.0 acknowledges the important role of entrepreneurs in managing change and dynamism in the economy. Sadly, the authors neglect the ultra-important dimension of TIME and the role this plays in production and the coordinating activities of entrepreneurs… which is why the Austrian school again seems incredibly advanced compared to this offering and might be categorized as Economics 3.0. But even ignoring time, E2.0 is a big advance on E1.0 in acknowledging change as not only a real phenomenon of economic systems that is neglected by E1.0, but also the central element of economic development and growth. For development to take place, change must occur, and for change to occur, there must be actors with an interest and incentive in causing the change.
This shifts the analysis from studying the mineral resources or accumulated capital of a community, to studying the existence and behavior of entrepreneurs as innovators improving economic outcomes for everyone. The question begged then is, “Why do some economies have a lot of entrepreneurs, or very talented ones, while others have none or poor ones (or corrupt ones who get wealthy making people worse off)?” And for an answer to that question, one must explore the role of institutions.
With institutions, whether we’re talking E2.0 or E3.0, it’s clear that the science is still developing on which institutions are important for development, what role they play and how they can be successfully built (a significant meta-problem, because often there is feedback between a poor economy and difficulty building strong institutions and so on). There are also so many potential institutions to consider that the analysis can quickly get complicated, for example:
Property rights (how to define, how to enforce, what can/can’t be owned and by whom)
Legal norms (ie, tendency to rule a certain way in a certain type of case)
Legislation (ie, “the law” that will be enforced, including civil, criminal and regulatory policies)
“Culture” (accepted behaviors, social expectations, traditions, ideals, even aesthetics)
History (this is an odd one because it is so intangible and uncontrollable, but the history that each community comes from has a real effect on shaping other institutions and thus economic outcomes)
IQ (more on summary findings from Hive Mind below)
Religion
The family
I think this is why the interview portions of the book really shine. It is here that we get a lot of competing theories of development and which institutional factors are most important and why. They not only highlight how unsettled this part of economic or social science is, but also they provide outstanding examples of how critical each of these factors can be. And there is a clear distribution of insight and intelligence demonstrated by these interviews as well– while almost all of the interviewees have earned numerous awards and accolades, including Noble Prizes, for their economic work, several stand out as innovative giants while others seem to trade in the same, tired old statist fallacies of yore. What follows are some of the quotes I thought were most fascinating.
Robert Fogel
RF emphasized the role of technology in development, because as he says, “technological advance is the basis for all economic growth.”
One measure of economic development he suggested was looking at life expectancy. A rising life expectancy implies that people are able to produce sufficient resources to protect themselves from basic environmental and health risks. However, in looking at the historical data, there is an interesting trend in early industrial European societies by which rural populations maintained higher life expectancies than urban dwellers until around the turn of the 20th century. He blamed this on changes in technology, because
when you walked around in New York City, you were breathing pulverized horse manure, a much worse pollutant than the exhaust of automobiles
That idea grabbed me, both because it is vivid and disgusting, but also because it highlights that economic development is fraught with risk and even though the “ultimate” destination of economic development might be a less toxic technology like automobiles, the “path” along the way might include way points with more toxic technology (pathogen-laden pulverized horse manure) which is worse for health outcomes than taking your chances with subsistence-level existence in the countryside. A question I had which wasn’t explored in the discussion is why a.) city municipal services failed to keep the volumes of horse manure out of the streets as part of a sanitation program or b.) why market entrepreneurs didn’t collect and sell this “fertilizer” back to the countryside? It could be a technological problem within a technological problem.
Fogel also emphasized that the rate of technological change appears to be increasing in industrial economies:
it took four thousand years to go from the invention of the plow to figuring out how to hitch a plow up to a horse… it took 65 years to go from the first flight in a heavier-than-air machine to landing a man on the moon
Now, the example is cherry-picked and there are probably still a lot of technologies we’re using that are 10,000 years old (for example, if we ever primarily grow crops indoors, one could say “It took us 10,000 years to go from growing crops outdoors, to figuring out how to grow them indoors”, which seems like a really long time to figure out what will at that point be a best practice idea) but it still has impact.
He also mentioned the importance of economic development for the well-being of the aged:
you need to have a successful and rapidly growing economy in order for standards of living for the elderly to improve
I think this is true because the savings of the elderly need to earn an increasing return in real terms for their standard of living to improve without being forced to consume their capital, which puts a fixed timeline on their survival once they run out of capital entirely. And the only way their savings can earn a greater real return over time is if the entire economic pie is growing. It’s an interesting example of the connection between economic growth and and humane conditions.
Robert Solow
RS highlighted the complexity of the problem of solving poverty in poor countries:
Without appropriate institutional infrastructure, without the right local incentives, without complementary human capital, aid and investment will be wasted… poor countries are not only poor in capital, they are poor in the factors that make for “total factor productivity”
This is a direct application of E2.0 thinking contrasted with E1.0 thinking. The E1.0 aid crowd believes that if you just redistribute enough of the world’s wealth to the poor countries, they’ll be able to escape poverty. But RS emphasizes that they’re not just poor in terms of resources but also in terms of institutions which allow them to manage and develop resources. If this is true (and I think it is), it certainly gives one pause before hitting the “Donate to Charity”-button.
Paul Romer
PR focused on changes in technological systems and the economic impact that comes from replacing an old technology with a new one:
We didn’t get that much more light by producing hundreds of thousands of candles per person, but by switching from candles to gas
He also discussed the way technological development may improve our capacity to make further discoveries,
it may be inherent in the process of discovery that the more we learn the faster we can learn
and the impact that improvements in institutional technology have allowed us to harness those discoveries with greater efficiency:
the modern university and research system was designed not to create property rights but to lead to the rapid dispersal of new information; academics were rewarded based on the priority with which they disclosed information, so that the first person to disclose gets all the professional credit for discovering something new
[…]
what we’ve done is created better institutions over time, so that we now exploit the opportunities for discovery much more effectively than we used to
The most important insight from his interview was that growth requires change, and change creates “winners” and “losers”, and it’s easy for the losers to become a special interest group and lobby the government to arrest the change:
everyone wants growth but nobody wants change, and you’ve got to have both or you’ve got to have neither… change accompanies growth… when you have change, there will inevitably be winners and losers… we can’t let a small group of losers — either absolute losers or relative losers — stop the process of growth that will benefit most people going forward
Incidentally, this is why countries pursuing socialist policies stagnate. Socialism is a policy that preserves the status quo and tries to equalize outcomes that are created by change. Inevitably, equalizing outcomes ends up stopping the change itself and thus stagnation sets in.
Joel Mokyr
JM was actually one of my favorite interviews, so I will quote him extensively.
First, he talked about the reasons why humanity has gotten increasingly technologically advanced over time:
inventions are made when there is a minimum epistemic base… you cannot build a nuclear reactor by accident… but you can invent aspirin quite serendipitiously, without having the faintest clue about how it works
[…]
We invent something, and sometimes we know a little bit about how it works, sometimes we know nothing, sometimes we know quite a bit, but in all cases, as we use it more, the epistemic base gets wider.
This technological advancement requires time, and a bit of luck, because
the only way we can think about technology is in evolutionary terms… a kind of science that makes no predictions
That’s also a really interesting idea because some economists have claimed that “science is prediction” and thus any economics which does not concern itself with empiricism and making valid predictions is not scientific. But here we have two examples (evolution, and technology) of sciences where prediction is not possible. Does that mean they are not scientific?
Later, JM goes into an explanation of the way changing technology led to economic development, and the way economic development impacted institutions and social ideas, and then the way this fed back into attempts to limit technological development and, by extension, economic development:
If you look at Europe in 1650 or 1700, what you see is a very sophisticated set of economies. They have just basically finished exploring the rest of the world, and there has been great deal of commerce and trade — joint stock companies are emerging, insurance is emerging. This is a fairly sophisticated commercial economy. The problem is, there are lots of special interests trying to get exclusionary arrangements that are good for them but bad for the economy. This is a system in which property rights are well defined and enforced, as Douglass North loves to say, but also rather distortive in the sense that you have lots of exclusionary arrangements. In other words, for the economy to function well, you don’t just need good property rights, you also need what we could call, somewhat vaguely, “economic freedoms.” You need labor mobility; you need to get rid of guilds; you need to get rid of monopolies, both local and global; you need to get rid of all kind of regulations; and above all, you need free trade. And if you don’t have that, you’re going to end up in a society that will not be able to grow.
Nowadays we have a different term for this. We call it corruption. We always say, look at countries like Russia or the Central Asian nations — these countries will never have good economies because they are corrupt. But corruption is really just a special form of what we call, in economic jargon, “rent-seeking.” I argue in my book that one of the things that happens in eighteenth-century Europe is a reaction against what we today would call rent-seeking, and that this, to a great extent, is what the Enlightenment was all about. The Enlightenment wasn’t just about freedom of religion and democracy. It wasn’t to be about democracy at all, but never mind that. It was about freedom of religion, tolerance, human rights– it was about all of those things. But it was also a reaction against mercantilism, and you find that attitude in certain people who were very important in the Enlightenment. Above all, of course, the great Adam Smith.
[…]
when you look at the few places in Europe where the Enlightenment either didn’t penetrate or was fought back by existing interests, those are exactly the countries that failed economically [Spain, Russia]
This is definitely a different take on the Enlightenment than I have come across before, but it makes a lot of sense to me and seems to do a good job of integrating economic, technological and political phenomena of the time period!
nobody has held technological leadership for a very long time… technology creates vested interests, and these vested interests have a stake in trying to stop new technologies from kicking them out in the same way that they kicked out the previous generation
That is the feedback loop mentioned earlier, and why the Enlightenment might have been a reaction against a vested interest reaction.
Cardwell’s Law: the more open the world is, the more free trade, the more ideas and people can move from one country to another, the less likely it is that technological progress will come to an end
This idea gives hope that there is a case for rational optimism assuming liberal social institutions around the world.
if you change the institutions but don’t change the culture, you’re not going to change the institutions
[…]
the degree to which we hold fast to the wisdom of earlier generations is an incredibly important element in how innovative a society is, because if you think about it, every act of invention is an act of rebellion
This suggests that “conservativism” as a social policy might lead to stunted economic development, depending upon when marks the beginning of what traditions and systems one is trying to conserve. It also highlights the problem that RS mentioned, namely, that there is complex interactivity between social institutions which enable economic growth and it’s possible that a “backwards” culture could interfere with or limit the effectiveness of “progressive” social institutions as a whole, so it’s not as simple as, say, invading a country and giving them a modern political constitution (ignoring the obviously negative social impact of a war!)
And this might seem like a throwaway quote, but I thought it was interesting:
Over most of history people have not voted their pocketbooks — Marxists included.
Thankfully! Because if they did, or do, then it will be truly hopeless to expect any kind of reform ideology to take place in the face of billions of people who could “vote their pocketbook” and keep instituting handout systems that impoverish everyone.
William Easterly
WE focused on the appropriateness of specific institutions to solving specific problems, namely, the planner-mentality to solving poverty. He looks at poverty as a circumstance created by a lack of innovation, and he identifies planning as a practice which is anti-thetical to innovation. Thus, planning can not solve poverty:
Planners think that the end of poverty requires a comprehensive, administrative solution. They’re trying to do something that’s a lot like central planning in the old, Soviet-style economies, in the context of poverty reduction.
[…]
It’s as if central planning has been totally, mercifully extinguished everywhere else except [in the areas with] the world’s desperate, poorest people, who can least afford such a dysfunctional solution to their problems — [areas] where it would be much better to imitate the mentality of free markets, which are all about giving financial incentives and motivating people to meet consumer needs.
[…]
corporate planning is just about scaling up a solution after you find something that works… you can’t use planning to find what works
William Lewis
WL, like JM, emphasizes the way that institutions can be used to enable and unleash innovative forces, or to restrict and restrain them. He also talks about attitudes of people in the industrialized West who are trying to create panacea solutions for people in poor countries:
Just because people are not educated does not mean that they are incapable, which is a mistake educated people in the West often make.
He points out that if the opposite were true, poverty would be a necessary part of the social landscape for much of the world for at least the next 50 years while several generations of people are being educated. But this wasn’t the pattern of development in the industrial countries before they obtained their industrial development and he doesn’t think it’s a good assumption for the remaining non-industrial countries as well.
No producer – no producer – has ever asked for more competition. So these domestic producers are really the secret enemies of globalization and they are exerting a lot of influence against it.
There’s that feedback loop! And it gives us an insight into the truth of protectionist policies, which don’t enable development but rather enable special interest groups to profit patriotically.
[Gordon] Wood showed t
February 14, 2019
Nick Schulz and Arnold Kling start off with a new analogy to help define a modern economy, based on more than tangible inputs. The new knowledge based economy, or "software" layer of the economy, is now the driving source of production and wealth creation. Understanding this is important to analyzing the modern economy. The authors also interview many well known economists and cover a range of interesting topics. The books gives us many reasons to be hopeful and optimistic.
March 29, 2020
This book taught me how markets were undermined in economic policies and fight against poverty.
The importance of market is very crucial in public policy making process.
The importance of market is very crucial in public policy making process.
August 5, 2014
This book is a loose collection of interviews the authors had with ten economists about the free market--its history, future, and contemporary intersection with modern society around the world.
At the beginning, the authors differentiate between what they call Economics 1.0 and Economics 2.0. The former is how economics has been studied for most of its history--in terms of commodities and the "scarce allocation of resources." The latter is less about raw materials or tracking the swings in supply and demand, and more about the value of information.
Another way of looking at it is that Economics 1.0 studies the hardware in a computer, and Economics 2.0 studies the "software layer" containing the intangible things that have economic value--and the social and political institutions that are a necessary condition for this sort of value to develop. Economics 2.0 explains that when I purchase a new car today, most of the sale price is not going toward the physical materials making up the vehicle; rather, I am paying for all the knowledge and information accumulated over time that go into that vehicle: the physics required to design an aerodynamic body, the electrical components and computer systems that make a thousand minor calculations and adjustments per second as I speed onward, the insights required to design an anti-lock brake system, or airbags, or rear-view cameras, or electric engines.
The importance of the prerequisite government institutions and social stability cannot be overstated. The authors write in their introduction:
At the beginning, the authors differentiate between what they call Economics 1.0 and Economics 2.0. The former is how economics has been studied for most of its history--in terms of commodities and the "scarce allocation of resources." The latter is less about raw materials or tracking the swings in supply and demand, and more about the value of information.
Another way of looking at it is that Economics 1.0 studies the hardware in a computer, and Economics 2.0 studies the "software layer" containing the intangible things that have economic value--and the social and political institutions that are a necessary condition for this sort of value to develop. Economics 2.0 explains that when I purchase a new car today, most of the sale price is not going toward the physical materials making up the vehicle; rather, I am paying for all the knowledge and information accumulated over time that go into that vehicle: the physics required to design an aerodynamic body, the electrical components and computer systems that make a thousand minor calculations and adjustments per second as I speed onward, the insights required to design an anti-lock brake system, or airbags, or rear-view cameras, or electric engines.
The importance of the prerequisite government institutions and social stability cannot be overstated. The authors write in their introduction:
"The magnitudes of these intangible assets and invisible liabilities are staggering. [The] World Bank estimates that the average citizen in many advanced industrial countries has over $400,000 in intangible net worth. Meanwhile, the intangible net worth of people living in the poorest, most ill-governed nations of the world is actually negative. Their social and political institutions are like software that has so many bugs and viruses that you would be more productive without any computer at all.Under a paradigm of Economics 2.0, entrepreneurs are the driving force for innovation, allocating capital to new ideas most efficiently and abandoning what doesn't work. The economists interviewed come from a wide range of fields and areas of expertise. They hold differing views about the role of government necessary in an economy (not of whether but of how much), and their predictions for the future range from extreme pessimism to extreme optimism. But the one thing they all hold in common is that free markets--in an environment of low interference and reliable stability--are essential to growth, development, and innovation worldwide.
February 19, 2017
Some of the passages by the authors are a little dry, but all of the interviews are very interesting/enlightening. It does an excellent job at highlighting the importance of knowledge dissemination and the promotion of innovation.
January 21, 2011
Fast paced introduction to Economics 2.0 -- the new economics of prosperity, rather than the old economics of scarcity. Not that economic rationality doesn't play a role (this is not the economics of wealth a la John Ruskin or other moral critics of capitalism), but institutions and innovation become central.
The authors' use of software and network metaphors for the economy was helpful: Douglass North's definition of institutions is ambiguous and does need differentiation, and the use of "protocols" for the rules of the game helps those who live in a software dominated world. Identifying institutional failure with "software bugs" is cute, also, although it may suggest that fixing the problem is easier than it really is.
The interviews included in the book were well-done and an excellent addition. I looked forward to each one.
So much of what the authors introduce us to needs to enter public discourse about the building of innovative, wealth-creating economies. The notion that we use markets to address market failure, that we can't structure incentives to produce a certain set of outcomes without running the risk of cutting off even better outcomes -- so you structure a society to create as many interactions as possible, knowing that many will produce real value to people that we can't predict ahead of time, etc., are things I have to argue with people about every day.
Bravo! I expect to use this book with my course on innovation and entrepreneurship next year.
The authors' use of software and network metaphors for the economy was helpful: Douglass North's definition of institutions is ambiguous and does need differentiation, and the use of "protocols" for the rules of the game helps those who live in a software dominated world. Identifying institutional failure with "software bugs" is cute, also, although it may suggest that fixing the problem is easier than it really is.
The interviews included in the book were well-done and an excellent addition. I looked forward to each one.
So much of what the authors introduce us to needs to enter public discourse about the building of innovative, wealth-creating economies. The notion that we use markets to address market failure, that we can't structure incentives to produce a certain set of outcomes without running the risk of cutting off even better outcomes -- so you structure a society to create as many interactions as possible, knowing that many will produce real value to people that we can't predict ahead of time, etc., are things I have to argue with people about every day.
Bravo! I expect to use this book with my course on innovation and entrepreneurship next year.
April 28, 2010
I enjoy reading Arnold Kling’s blog, and his appearance on CSPAN gave me easy access to his book; the library seems to stay attuned to CSPAN guest appearances. Much of the book consists of interviews, not all agreeing with Kling and Schultz. This makes it unique among a lot of popular economics books. It also made it seem a little bland, and maybe a little confusing. Out of deference to the guest authors, Kling and Schultz didn’t aggressively challenge their opinions. Had they done so, it would have been a more engaging book.
One thing they did successfully get across is the dynamic nature of capitalism, and the true threat of wrong-headed government policies. I was surprised how relatively dynamic the U.S. capitalist system was when compared with other developed nations. The book helps explain why even Obama and a Democrat majority may not be able to destroy that dynamic in a few short years.
One thing they did successfully get across is the dynamic nature of capitalism, and the true threat of wrong-headed government policies. I was surprised how relatively dynamic the U.S. capitalist system was when compared with other developed nations. The book helps explain why even Obama and a Democrat majority may not be able to destroy that dynamic in a few short years.
July 29, 2010
A thorough and thoughtful exploration of human economic development. The authors distinguish between economics 1.0 and 2.0 - pointing out how the "software layer" or " recipes" as opposed to simply land labor and capital are the distinguishing characteristics of modern economies that spur innovation. There is an acknowledgement of the primacy of property rights right alongside a warning that Intellectual property rights can't be too strong without curtailing innovation. One of the main take aways was that incumbency always stifles innovation.
At the end of the day this was a very thought provoking read that provided what I believe are genuine insights into innovation and prosperity. I wish our congress and executive branch would read this before making policy that may help or hinder the innovative spark of our great nation.
At the end of the day this was a very thought provoking read that provided what I believe are genuine insights into innovation and prosperity. I wish our congress and executive branch would read this before making policy that may help or hinder the innovative spark of our great nation.
January 27, 2010
I cannot give this book 5 stars because it is too breezy, too polemical, and lacks statistical meat. However, the book does point to some very interesting sources in the end notes. The authors try to explain differences in development (per capita GDP on a purchasing power exchange rate basis) by a computer analogy -- hardware (infrastructure, resources, human capital, the usual suspects that economists study) and software (values, mores, behaviors of various kinds, institutions, etc.) that run on the hardware. Way more of the difference in development is explained by the software than by the hardware, which runs counter to every argument espoused by the World Bank, NGOs, etc.
April 9, 2013
One of the paradoxes of economics as many people teach it beginning with a theory of scarcity - supply/ demand curves and the like. Yet, we see around us an economy where rivalrous consumption is not a problem - there intangible assets and invisible liabilities.
The book combines some very good and accessible theory with a series of interviews with noted economists like Douglass North and Robert Fogel.
The old model of market failures inducing government solutions is called into question.
In all this is a great and useful book.
The description above is also useful if mine is too much in shorthand.
The book combines some very good and accessible theory with a series of interviews with noted economists like Douglass North and Robert Fogel.
The old model of market failures inducing government solutions is called into question.
In all this is a great and useful book.
The description above is also useful if mine is too much in shorthand.
April 11, 2014
A good book that describes modern economics (version 2.0) which is different from traditional economics in that traditional economics ignores the importance of entrepreneurship and innovation. This book also helps understand the importance of sound government which enables innovation without interfereing with it and how important financial intermediation is to innovation.
It could be a good book for anybody trying to instil culture of innovation and ownership in his company or department or on a personal level.
It could be a good book for anybody trying to instil culture of innovation and ownership in his company or department or on a personal level.
December 4, 2013
I have had a tendancy to be pessimistic about the future recently. I have been in a funk. That is why I am glad I have read this book. I believe after reading "From Poverty to Prosperity" that the future of planet earth and mankind will continue to improve. That change will continue and accelerate (annoying but it is progress). This book is an example of why ecconomics is more about behavior than math.
January 5, 2010
Finally an economics book that addresses the long time deficiencies of economic theory. A real cogent overview of how markets function best and the causes of gaps in global standards of living.
Read
May 12, 2010Hmmm, I read a lot of these type of socio-economic books and don't even realize it. This one is about innovating our way, our entire society, to a better life.
November 10, 2010
It contains the most up-to-date views on growth economics with both chapters and interview transcripts. The authors were able to accomplish this both concisely and with laymen prose.
Well done.
Well done.
Want to read
September 3, 2011It also seems to go by the title, "Invisible Wealth: The Hidden Story about How Markets Work"
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