WEEK 5: Day 7 & Day 8: 3. Cracking the Ice: Why the Hinge in 1870 in the Dover Circle?. 3.1. The Dover Circle. 3.2. Institutions. 3.3. Culture. 3.4. Psychology :: History of Economic Growth
UC Berkeley Econ 135 S 2023
2022-02-14 Tu: Day 7: 3. Breaking-Through. 3.1, The Dover Circle; 3.2. Institutions (lecture notes still in preparation); slides: <https://bcourses.berkeley.edu/files/85386914/download?download_frd=1>
2022-02-16 Th: Day 8: 3.2. Psychology & Culture (lecture notes still in preparation) <https://bcourses.berkeley.edu/files/85409292/download?download_frd=1>
Clark, Chapter 8
Clark, Chapter 9
William Baumol: Entrepreneurship: Productive, Unproductive, Destructive…
Karl Marx & Friedrich Engels (1848): The Communist Manifesto…
Christopher Berry (2018): Adam Smith: A Very Short Introduction, chs 1, 4-6
Joel Mokyr (1990): Lever of Riches, ch 5 The Years of Miracles
Nathan Nunn (2012): Culture and the Historical Process
Clark, chapter 7 “Technological Advance”:
Why I want you to read this: So that you understand how important sustained technological progress was and is to getting humanity out of the Malthusian trap, where every "efflorescence: was likely to be temporary, was certain to be limited in scope, and was likely to be followed by regression—or even by a dark Age.
If you didn’t read it, what it says: Technological innovation was the key driver of economic growth, with investment in research and development, the availability of capital, and the skills and knowledge of the workforce being the key drivers of the discovery, development, and deployment of new ideas. More important than any of these factors, moreover, was the key role played by technological spillovers, which occur, which were absolutely critical in spreading new technologies and fostering the growth of new industries. And Clark does not neglect but, I think, even overstresses cultural attitudes and values that supported innovation and risk-taking.
Clark, chapter 8 “Institutions”:
Why I want you to read this: The people who thought and worked and ruled after 1500 and after 1870 were, by enlarge, the same kinds of people who thought, and worked and ruled before 1500. And yet, because they were embedded in their societies in different ways, they acted differently. And those differences were decisive for the pace of technological progress—first the post–1500 jump up to much more than 5% a century, and then the post–1870 jump to 2% per year. This embedding-in-society is what economists have started to call “institutions”, and it is important to give them their pride of place.
If you didn’t read it, what it says: Standard wisdom is that "Institutional quality” is perhaps the crucial determinant of relative economic growth, for it is the “quality” of institutions that varies most greatly between societies and over time. What is an “institution”? Clark defines them as “the formal and informal rules of the game in a society”—the system of property rights, the patterns of contracts, and the actions of governments. These institutions do not have to be written down. They can be largely tacit mutual understandings. And they are constantly changing.
Good institutions are essential in creating that trust and stability that is absolutely necessary for people to be able to take time and focus on production, and to even undertake the exchange necessary for a fine and hence productive division of labor. The Dover Circle developed very good institutions gradually in the years since about 1000. There was no single watershed, there was no magic moment.
Greg's chapter 8 is interesting because he is writing against the grain—saying that in mediæval England incentives were such that you could work hard and become, if not rich, prosperous, without worrying about somebody else taking your stuff. But institutions do more than just incentivize people to work hard. They need to provide people with tools to find counterparties, learn skills, and acquire tools.
Clark, chapter 9, “The Emergence of Modern Man”:
Why I want you to read this: But were the people post–1500 the same kinds of people as before? Greg Clark thinks not. I (largely) disagree with him, and think his case is grossly overstated. But you need to read him so you can decide what you think.
If you didn’t read it, what it says: The key differences between modern man and earlier societies lie in their respective attitudes towards work, innovation, and risk-taking. Prior to the Industrial Revolution, culture discouraged work and risk-taking. The rise of modern man was characterized by a sea change in attitudes towards work, innovation, and risk-taking. This was, again, a slow and uneven process.
Baumol: "Entrepreneurship: Productive, Unproductive, Destructive":
Why I want you to read this: Baumol provides a very nice framework for thinking about how institutions, cultures, and psychologies affect long-run growth by directing societal energies in different ways, all of which are “entrepreneurial” in their own ways.
If you didn’t read it, what it says: Productive entrepreneurship contributes to economic growth by creating new products and services that improve the standard of living. Unproductive entrepreneurship does not add value. It merely captures rents and redistributes wealth. Destructive entrepreneurship impoverishes the economy. Baumol’s framework provides a useful tool for understanding how different incentives that direct societal energy in different ways have powerful long-run general equilibrium consequences.
Karl Marx & Friedrich Engels: “The Communist Manifesto”:
Why I want you to read this: The most influential political text of all time. And, also, a very useful summary of what I see as the sociological perspective on escape from the Malthusian Trap. Marx and Engels attribute the entire escape to the development of “bourgeois” relations-of-production, in place of the previous feudal system ones.
If you didn’t read it, what it says: The Communist Manifesto is a call to action for the working class to unite and overthrow the ruling class. Why? Because capitalism is a fundamentally unjust system that exploits the working class and creates a divide between the rich and the poor. Capitalism is also an extraordinarily productive and progressive system: it creates the technologies and investments that would allow us to live in utopia. But the capitalist system’s workings also prevent that utopia from being realized.
The working class, or the proletariat, must overthrow the bourgeois ruling class to create a fairer and more equal society. Capitalism is inherently unstable and prone to cycles of boom and bust. Capitalism will eventually lead to the concentration of wealth in the hands of a few individuals, and a widening gap between the rich and the poor that cannot even be ameliorated within the system, but requires the system’s replacement via a socialist revolution.
Christopher Berry: “Adam Smith: A Very Short Introduction”:
Why I want you to read this: Smith provides our best window onto the belief that replacing feudal society by commercial or bourgeois society was a vast improvement in humanity’s life. Berry gives a gentle introduction into what Smith said, and why we should take his argument seriously.
If you didn’t read it, what it says: Adam Smith is best known for his groundbreaking Wealth of Nations which laid the foundation for modern economics world in his day. Smith saw the good society as emerging out of individual pursuit of self-interest in a market economy subject to the guardrails of a state that both enforced and obeyed the rule of law. Hence, Smith argued, a prudent government would use market competition as a tool to lead to economic prosperity and growth, rather than attempt to centrally plan the work of society.
Joel Mokyr: The Lever of Riches, chapter 5, “The Years of Miracles”:
Why I want you to read this: Mokyr does a very good job of drawing together all of the things that made post–1500 pre–1870 different than pre–1500, and putting them all in their proper places.
If you didn’t read it, what it says: Mokyr argued that early-modern and industrial-revolution growth were driven by a confluence of factors, including advances in transportation, the growth of global trade, and the development of new technologies such as the steam engine and the spinning jenny. These advancements allowed for increased specialization, leading to economies of scale and greater efficiency. Empire—cruel and brutal as it always was—played a role in driving this economic growth, as empire created new opportunities for entrepreneurs, investors, and traders.
The shift to a much more economically progress word than the one we had seen in the pre–1500 agrarian age was the result of a complex interplay between institutions, technology, and culture. Mokyr offers due regard to the importance of institutions, such as the rule of law, property rights, and a supportive economic and political environment, in facilitating economic growth. At the same time, he recognizes that cultural attitudes towards innovation and risk-taking had their role to play. And, of course, the most critical driver of economic growth was technological progress, and the rational and scientific spirit that both underpinned it and made it possible.
Nathan Nunn: “Culture and the Historical Process”:
Why I want you to read this: Nunn makes an argument that I think is wildly overstated as to the importance of “culture”. But you should read it and decide for yourself—he, after all, is a Harvard professor, and I am not.
If you didn’t read it, what it says: Nunn argues that cultural factors play a significant role in shaping economic outcomes. Institutions and governance structures, are, as Nunn sees it, much more emergent developments from culture that reinforce culture-driven trends. They are not independent factors that drive outcomes when they go against the grain of the culture. It is individualism and entrepreneurship that are progressive, and conformity and stability that lead to stagnation. And those rule and shape the formal institutions into patterns that fit the culture.
For Nunn, it is also the case that cultural is predominately the consequence of historical legacies. For example, colonialism and enslavement has had a lasting impact on the economic development of many countries, as they shape cultural attitudes towards risk, investment, and economic behavior.