Thursday, April 24, 2008

Didn't Adam Smith's views make sense in 1776?

In his book, "A Farewell to Alms", Gregory Clark claims that Adam Smith’s views about good government made little sense in the world in which they were composed (p35).

The basis of Clark’s argument is that in a Malthusian world in which higher wages lead to increased population, the adoption of policies to increase incomes is pointless. It results in further population growth without any improvement in living standards in the longer term.

Clark implies that Smith, along with other classical economists, did not understand that good government could only make countries richer in the short run , before population growth restored equilibrium between food production and population (p34).

It seems to me that in writing “Wealth of Nations” Adam Smith was very much aware of the link between economic growth and population growth in a Malthusian economy (see: I.viii 35-44). The policies he advocated were intended to foster economic growth. He observed that it is in the “progressive state, while the society is advancing to the further acquisition” of wealth that “the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state” (I viii 43).

In the same passage Smith refers to the possibility of a society acquiring “its full complement of riches” - words that suggest that he did not necessarily envisage that economic growth would be a never-ending process. But that did not make it any less desirable to oppose policies that would hinder growth.

Jerry Muller argues that economic growth “was hampered in Smith’s eyes, by some of the protectionist restrictions to which his countrymen attributed their growing riches, and it could be speeded up by expanding the greater market freedom already visible in parts of the economy” (“The mind and the market, p 56). The greater market freedom that Muller refers to involved abandonment of the systems under which prices were set by guilds and wages were set by justices of the peace. The regulation of foreign trade was actually increasing, for example, with increased protection against corn imports introduced in 1791.

Clark may be broadly correct in his view that markets for goods, services, capital and land were generally free by around 1300, but Adam Smith’s views nevertheless made a great deal of sense in the world in which they were composed. His views still make a great deal of sense today.

Does Gregory Clark have a good explanation for the timing of the industrial revolution?

In his book, “A Farewell to Alms” (2007) Gregory Clark questions the view that the industrial revolution that occurred in England around 1800 can be attributed to institutional change. He argues that formal institutions only “play at best a minor direct role” in the story of the Industrial Revolution.

Clark suggests that if the World Bank were to assess the institutions in England in 1300 it would find them to be much better than the institutions of all modern high income countries, including modern England (p 148). In medieval England individuals already enjoyed a high level of security for their persons and property, tax rates were low, and markets for goods, services, capital and land were generally free.

Another piece of evidence that Clark produces in support of his contention that institutions played a minor role is the failure of countries such as India to experience high rates of economic growth during the colonial era, despite being governed under basically the same institutions as Britain.

Clark argues that cultural change offers a better explanation for the location and timing of the industrial revolution. He has assembled an impressive array of evidence to support his view that the extraordinary fecundity of the rich in England in the centuries prior to the industrial revolution resulted in the embedding of bourgeois values into the culture. The poor produced fewer children because they tended to postpone marriage until they had the means to support a family. Methods of population control used in other parts of the world during that period did not have the same bias toward survival of the wealthy.

The mechanism of cultural change that Clark puts forward provides a plausible explanation of why the industrial revolution did not occur sooner than it did, but it seems to me that he still has a problem in explaining why it occurred when and where it did. In order to explain this we need to be able to explain why productivity-increasing innovations occurred when they did (particularly in the English textile industry) and why England had a government that was inclined to allow these changes to occur despite the disruption of existing modes of production and the lifestyles of many people.

I think it might make sense to construct a theory along the lines that specialization was necessary for innovations of the kind involved in the industrial revolution. In order to obtain the benefits of specialization it was necessary for influential groups in the society to have some understanding of the benefits obtainable from international trade (for example, exporting textiles and importing food). They also needed sufficient understanding of the benefits of free markets to allow disruptive innovations to take place. For this to occur, ideas favouring free markets - such as those of Adam Smith in Wealth of Nations - would need to be highly influential.

An obvious objection to this theory is that the necessary free markets, property rights etc were already established well before the time of Adam Smith. Yet, if that is so then how is it possible to explain the strength of the Luddites (machine-breakers) in opposing innovation. Gregory Clark provides a table in his book documenting the fate of major innovators in the textiles sector: three of the six innovators listed had property destroyed or were forced to flee by machine-breakers (p 235). At the time it was claimed that these disturbances had no parallel in history since the time of Charles the First.

The government took the threat to order posed by the Luddites seriously and passed legislation to tighten security arrangements. A less enlightened government might have chosen an alternative course to respond to social unrest, namely preventing discouraging socially-disruptive innovations – and thus delayed the industrial revolution.

What policy implications does Charles Murray draw from his pursuit of happiness perspective?

The second half of Charles Murray’s book, "In pursuit of happiness and good government", is concerned with the implications for public policy of his perspective on what the pursuit of happiness involves. (The first half of the book is reviewed here.)

The main link between the two halves of the book is a view about human nature. This is the view that “people need to be self-determining, accountable and absorbed in stretching their capacities, just as they need food and shelter” (p 243). What allows people to fulfil their own nature is the process whereby individuals respond to challenge, risk and reward (p 140).

Another point about human nature that is introduced into the second half of the book is explicit recognition of the importance of community: “The pursuit of individual happiness cannot be an atomistic process; it will naturally and always occur in the context of communities. The state’s role in enabling the pursuit of happiness depends ultimately on nurturing not individuals, but the associations they form” (p 213).

The author discusses several public policy implications that are associated with the nature of humans and the pursuit of happiness.

  • When people are given the opportunity to advance their own interests in the political arena they do not behave like angels. Murray endorses Madison’s famous statement: “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary” (pp 134-141). His point is that political decision-making inevitably results in unintended consequences.
  • Historically, people tend to have a good record of performance when left alone to live their lives and undertake cooperative ventures with others (including running schools, hospitals etc). This means that rather than just design policy solutions to problems in education and health systems etc we should take a step back and ask why existing systems are dysfunctional (Chapter 11).
  • “There must be a stopping point, some rule by which governments limit what they do for people ... because happiness is impossible unless people are left alone to take trouble over important things” (p 221).
  • When social policies perform roles previously performed by community organizations people tend to become detached from the communities in which they live (p 228-9).
  • Before imposing regulation it is important to consider what purpose regulation is intended to serve rather than evaluating performance in terms of targets that seem appropriate. For example, a lowering of road deaths following introduction of more stringent speed restrictions does not necessarily indicate that the policy is appropriate. It is important to remember that people don’t need to have the speed limit reduced in order to obtain the safety benefits of driving their own cars more slowly. The purpose of setting a speed limit should be to reduce the probability of accidents that are caused by speeding motorists who are a danger to other road users (Chapter 9).

It seems to me that an important message is to beware of the tendency of political leaders to respond to voters’ concerns about particular problems by setting targets and developing strategies to meet those targets in the absence of any understanding of why the problems exist in the first place. Good government is not about papering over cracks.

What is the best book about pursuit of happiness and good government?

Charles Murray’s book, “In Pursuit of Happiness and Good Government”, was first published by Simon and Schuster in 1988.

I think this is the best book I have read about the public policy implications of pursuit of happiness. Even though the book was written prior to the explosion of happiness research that has occurred over the last decade or so, it seems to me to have a contemporary feel about it. It could not be improved greatly by reference to more recent research.

The strength of Murray’s approach derives to a large extent from its coherence. In the first half of his book he establishes a working definition of happiness, identifies enabling conditions and then considers the thresholds required to meet each enabling condition. In the second half of the book he considers how we can know whether policies are enabling us to make progress toward the best of all possible worlds.

Murray’s working definition of happiness is “lasting and justified satisfaction with one’s life as a whole” (p 22). He argues (convincingly in my view) that justification is necessary – it is not enough to feel good. Self awareness and self judgement are indispensable to humans, so we can’t really be happy unless we have plausible reasons for being satisfied with our lives. This definition differs from the avowed happiness measured in social surveys, but it is not clear whether the distinction is important in practice. (See here for some relevant discussion.)

Murray derives enabling conditions for happiness from Maslow’s needs hierarchy and considers threshold requirements for material resources, safety, self esteem and self actualization.

  • Material resources. The threshold requirement is near subsistence. Policies that increase material resources beyond subsistence are not likely to enhance the ability of people to pursue happiness if other enabling conditions are not met.
  • Safety. The threshold requirement is not just a matter of being sufficiently protected against threats. It also involves the lawfulness of communities – the need for criminals to be predictably held accountable for their crimes and for communities to be able to enforce their standards of public civility.
  • Self-esteem. Murray argues that self-respect is the core human need in question – it is possible for hoodlums to score highly on self-esteem questionnaires. Self-respect is defined as measuring up to internalized standards of what it means to be a full-fledged member of the community – it is closely related to acceptance of personal responsibility for the consequences of one’s actions.
  • Self-actualization. Human enjoyment is intimately linked to the exercise of competence in the face of challenge. By contrast the purpose of most social policies is to take the challenge out of things – to reduce a difficulties, lower barriers and insure against risks.

In discussing enabling conditions and thresholds for human happiness Murray was more interested in presenting a coherent way of thinking about happiness than in presenting a theory that could be tested empirically. Nevertheless, the way of thinking that he has presented is not, in principle, immune from empirical tests – and it would be good to see such testing take place.

I will discuss the second half of this book in my next post.