Sunday, January 9, 2011

How should the history of the industrial revolution influence economic reforms?

While recently reading Deirdre McCloskey’s ‘Bourgeois Dignity’, Joel Mokyr’s ‘The Enlightened Economy’ and Eric Jones, ‘Locating the Industrial Revolution’ (discussed previously here, here and here) I was pleased to find that these authors have been able to make a strong case that the industrial revolution can be best explained by modern economic growth theory that emphasises the importance of technological progress, innovation and productivity improvement. It is reassuring that this conceptual framework fits the facts relating to the history of the last few hundred years as well as comparative growth experiences of different countries in more recent times.

In their explanations, however, McCloskey and Mokyr move substantially away from the view that because ‘incentives matter’ the best explanation for everything must be found in changes in economic incentives. This does not necessarily involve moving away from a utility maximization framework (although McCloskey does). There is no reason why a Max U framework cannot recognize that inventors may be strongly influenced by the pleasure of discovery and by recognition of their peers; innovators may obtain pleasure from seeing scientific knowledge being put to good use; and everyone may gain some satisfaction from acting in accordance with their own perceptions of their identity, whether that involves behaving like a scientist, a gentleman, a tycoon, a rent-seeker or a mendicant.

In explaining the industrial revolution Mokyr and McCloskey emphasize the importance of beliefs and ideologies – in particular those associated with the Enlightenment. Three inter-related strands of beliefs and ideologies connected to the Enlightenment seem to be particularly relevant:

  • First, Mokyr argues that the influence of the Baconian program - with its emphasis on research to solve practical problems - extended beyond formal scientific research. He makes a strong case that the ‘legitimization of systematic experiment carried over to the realm of technology’, including through the proliferation of provincial ‘philosophical’ societies discussing practical and technical issues.

  • Second, as emphasized by McCloskey, there was a bourgeois revaluation – a change in attitudes toward the middle classes, markets and innovation. Mokyr links this to norms relating to politeness and gentlemanly behaviour, and an apparent improvement in social trust which reduced transactions costs.

  • Third, there is the ideological change stemming directly from the success of the Scottish Enlightenment and, in particular, from publication of ‘Wealth of Nations’ by Adam Smith. As Mokyr writes: ‘The Enlightenment in its different manifestations advocated a set of new institutions that cleared up centuries of mercantilist policies, regulations and social controls, whose objective had been primarily to redistribute resources to politically connected groups and to enhance the interests of the Crown (the best connected group of all). The mercantilist world was unsuitable to a brave new world of continued technological progress driven by free markets, innovative entrepreneurship, and an internationally collaborative effort to advance technology’ (p. 486).

In reviewing Eric Jones book I asked myself whether the industrial revolution could be attributed to economic freedom and suggested that his book had reinforced my view that it could be (even though Jones does not argue strongly in favour of that view). My subsequent reading has not led me to change that view but it suggests that economists interested in economic growth should give more attention to beliefs and ideologies that lie behind the formal rules of the game and their incentive structures.

In writing this I am reminded of comments made by Douglass North in his Nobel Prize lecture in 1993:
‘It is the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance. While the rules may be changed overnight, the informal norms usually change only gradually. Since it is the norms that provide "legitimacy" to a set of rules, revolutionary change is never as revolutionary as its supporters desire and performance will be different than anticipated. And economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement. The implication is that transferring the formal political and economic rules of successful western market economies to Third World and eastern European economies is not a sufficient condition for good economic performance. Privatization is not a panacea for solving poor economic performance’.

The fact that privatization by itself is no panacea does not stop me from arguing in favour of it, but I take the point that economic freedom cannot be sustained unless prevailing beliefs, ideologies and norms are supportive.

I should have mentioned the growing importance of freedom of speech as a factor which would have contributed to the various strands of Enlightenment thinking noted above. This enabled the growth of social networks and civil society as discussed by Mokyr (p. 387). The line of argument in Timothy Ferris's book, 'The Science Liberty', (which I discussed here) is also relevant in this context.

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