Transcript Econ 309 Lecture Jul10

Econ 309: Capitalism’s
Record of Success
July 10th
Background on Schumpeter:
Austrian vs. English traditions
English
Austrian
Adam Smith (1776)
David Ricardo
Thomas Malthus
Karl Marx (1850s-70s)
J.S. Mill (c. 1850)
Stanley Jevons
Alfred Marshall (c. 1900)
Francis Edgeworth
Textbook micro
Keynes
Paul Samuelson
Textbook macro
Paul Krugman
Leon Walras
Karl Menger (1860s)
Eugen von Bohm-Bawerk
Friedrich Wieser
Chicago school
Milton Friedman
Robert Lucas
Gary Becker
Friedrich Hayek
Ludwig von Mises
Joseph Schumpeter
Modern “Austrians,”
e.g., GMU’s Peter Boettke
Schumpeter’s Capitalism,
Socialism and Democracy
• Historical significance:
– Primary source of the concept of “creative
destruction”
– Conceives democracy as a “competitive
struggle for the people’s vote”
• Today, Schumpeter’s name symbolizes the
idea of dynamic change in economics
Schumpeter’s Capitalism,
Socialism and Democracy
• Thesis: “Can capitalism survive? No, I do not
think it can.” Why?
– Growing hostility to capitalism in public opinion
– “Obsolescence of the entrepreneurial function”:
commerce and innovation were being taken over by
bureaucracies
– Bourgeoisie poor at providing political leadership
– Overestimated ability of socialism to organize
prosperity and innovate
• However, Schumpeter doubts that socialism can
be democratic
Schumpeter: Contemporary
relevance
• Since 2008, a storm of existential
questions about the viability of capitalism
are being raised again, e.g., Richard
Posner, A Failure of Capitalism (2009)
Schumpeter’s Contemporary Relevance:
Growing Hostility to Capitalism
• In 2005:
Sarkozy blames French model for riots Chirac's riot speech criticised as timid
The "sickness in the suburbs" was a reflection of a wider French "malaise", and
the blockages in French society caused by selfishness and corporatism, M.
Sarkozy said. "The troubled suburbs are the extreme expression of a
country which despairs for the future. They are not another France but
France as we have built, and managed it, for the past 30 years.“
• In 2009:
Sarkozy, who is frequently attacked what he calls “Anglo Saxon capitalism” said
the global economic crisis has created a catastrophe that requires us all to
question the ideas, values and decisions that’ve led to such results.
Sarkozy, who has frequently attacked what he calls “Anglo Saxon
capitalism” said the “global economic crisis has created a catastrophy that
requires us all to question the ideas, values and decisions that’ve led to
such results.”
Growth
• As the Beatles say: “I do admit it’s getting
better, just a little better all the time…”
• What do the themes of Smith, Keynes,
Schumpeter, Becker, Wolf, Pritchett and
Boudreaux have in common? Growth
• Contrast: myths of a past “Golden Age” in
many cultures
Smith (1776)
Observe the accommodation of the most common artificer or daylabourer in a civilized and thriving country, and you will perceive that
the number of people of whose industry a part, though but a small
part, has been employed in procuring him this accommodation,
exceeds all computation… if we examine, I say, all these things, and
consider what a variety of labour is employed about each of them,
we shall be sensible that without the assistance and co-operation of
many thousands, the very meanest person in a civilized country
could not be provided, even according to what we very falsely
imagine, the easy and simple manner in which he is commonly
accommodated. Compared, indeed, with the more extravagant
luxury of the great, his accommodation must no doubt appear
extremely simple and easy; and yet it may be true, perhaps, that
the accommodation of an European prince does not always so
much exceed that of an industrious and frugal peasant, as the
accommodation of the latter exceeds that of many an African
king, the absolute master of the lives and liberties of ten
thousand naked savages.
Keynes (1919)
What an extraordinary episode in the economic progress of man that age was which
came to an end in August 1914! The greater part of the population, it is true, worked
hard and lived at a low standard of comfort, yet were, to all appearances, reasonably
contented with this lot. But escape was possible, for any man of capacity or character
at all exceeding the average, into the middle and upper classes, for whom life offered,
at a low cost and with the least trouble, conveniences, comforts, and amenities
beyond the compass of the richest and most powerful monarchs of other ages. The
inhabitant of London could order by telephone, sipping his morning tea in bed, the
various products of the whole earth, in such quantity as he might see fit, and
reasonably expect their early delivery upon his doorstep; he could at the same
moment and by the same means adventure his wealth in the natural resources and
new enterprises of any quarter of the world, and share, without exertion or even
trouble, in their prospective fruits and advantages... He could secure forthwith, if he
wished it, cheap and comfortable means of transit to any country or climate without
passport or other formality, could despatch his servant to the neighbouring office of a
bank for such supply of the precious metals as might seem convenient, and could
then proceed abroad to foreign quarters, without knowledge of their religion,
language, or customs, bearing coined wealth upon his person, and would consider
himself greatly aggrieved and much surprised at the least interference. But, most
important of all, he regarded this state of affairs as normal, certain, and permanent,
except in the direction of further improvement, and any deviation from it as aberrant,
scandalous, and avoidable.
Schumpeter (1942)
• Applies extrapolation: if the growth rate
continues at the pace of 1878-1928, then it will
rise to…
• Is extrapolation (induction) valid?
– (We use induction all the time, though David Hume
claimed to prove it lacks logical foundation)
• There is no tendency for the rich to get richer
and the poor, poorer (argues S.)
• On the contrary, growth specially benefits the
masses
Schumpeter (1942)
“I have stated above that, broadly speaking, relative shares
in national income have remained substantially constant
over the last hundred years. This, however, is true only if
we measure them in money. Measured in real terms,
relative shares have substantially changed in favor of the
lower income groups. This follows from the fact that the
capitalist engine is first and last an engine of mass
production, which unavoidably means also production for
the masses… The capitalist achievement does not
typically consist in providing more silk stockings for
queens but in bringing them within reach of factory girls
in return for steadily decreasing amounts of effort.”
(Schumpeter, 67)
Wolf
“In the period after 1820, the rate of global growth
greatly accelerated. Between 1820 and 1998,
world population rose almost six-fold, its GDP
forty-nine-fold and its GDP per head almost
nine-fold. Between 1820 and 1998, real GDP per
head rose nineteen-fold in western Europe, the
former British colonies of North America and
Australasia. In Japan, which was relatively poor
in 1820, standards of living had risen thirty-one
fold. In the rest of the world, real GDP per head
rose only five-fold.” (p.44)
Can capitalism’s record of success
continue?
Yes
Smith
Wolf
Becker
Boudreaux
(Pritchett)
The optimists have
been vindicated
No / Doubtful
Schumpeter
Keynes
The growth skeptics
have been proven
wrong… so far
Keynes: Why capitalism’s record of
success is unlikely to continue
• The economic situation in Europe after 1870 was
“unstable and peculiar”
– Emigration and imports of food ensured that Europe could feed
itself
– Internationalization of finance, trade
• The “psychology of society”
– Bourgeoisie were brought up to be savers, not spenders
– “It was precisely the inequality of the distribution of wealth which
made possible those vast accumulations of fixed wealth and of
capital improvements which distinguished that age from all
others…”
– The system depended on a “double bluff or deception”: (a) lower
classes got very little of the social product, (b) the rich were
encouraged to save for “posterity”
Why does the economy grow?
• Smith: division of labor (with an honorable
mention for technology)
• Keynes: capital accumulation (irrational) is a big
factor
• Schumpeter: technology and innovation, with
accompanying “creative destruction”
• Boudreaux: “the free market”
• Wolf: many factors, morality is mentioned
• Pritchett is looking at the empirical record to
derive desiderata for a theory of growth
Wolf on morality and markets
• Markets both require morality and, to some extent,
encourage it: “Markets also require, reward and reinforce
valuable moral qualities: trustworthiness, reliability, effort,
civility, self-reliance and self-restraint” (p. 55)
• But conflicts of interest also arise in business, e.g., in
corporations
“Economists are very uncomfortable with the notion of
morality. Yet it seems to have a rather clear meaning in
the business context. It consists of acting honestly even
when the opposite may be to one’s advantage. Such
morality is essential for all trustee relationships. Without
it, costs of supervision and control become exorbitant.”
(p. 50)
Pritchett’s “lower bound”
• Pritchett estimates that the lowest level of GDP
per capita consistent with survival is
$250/annum
• This implies that:
– There could not have been much economic growth in
Europe before 1820 or so
– Growth rates in today’s rich countries must have been
much faster than in today’s poor countries since 1870:
“divergence, big-time”
• Leading growth theories, e.g., the Solow model,
predict convergence
Pritchett vs. Smith
• Smith: “it may be true, perhaps, that the
accommodation of an European prince does not
always so much exceed that of an industrious
and frugal peasant, as the accommodation of
the latter exceeds that of many an African king,
the absolute master of the lives and liberties of
ten thousand naked savages.” (in 1776)
• Pritchett: Income differences cannot have been
too large prior to 1820, because Europeans
weren’t far above the survival threshold
• Who is right?
Pritchett’s desiderata for a theory of
economic growth
1. The last 125 years have seen massive
divergence in… incomes.
2. Steady and near equal growth among
the leaders over the long haul.
3. The poorest countries have historically
had very very low growth.
4. Some countries that began poor in 1960
continued to stagnate.
Pritchett’s desiderata for a theory of
economic growth
5. Some countries that began poor in 1960 have
had extremely rapid growth.
6. Cross-sectionally, growth has varied enormously
in developing countries
7. Growth has been much more variable not only
across but also within developing countries.
8. Growth rates, especially in developing countries,
have shown very little persistence.
Why have so many poor countries
been left out of economic growth?
• Institutions / politics: dictatorship, corruption,
lack of property rights (Rodrik)
• Geography: trade, transportation, and malaria
(Sachs)
• Culture? (not a politically correct answer!)
• Exploitation / colonialism / core-periphery
narratives
• Becker has an answer: Taiwan grew because it’s
capitalist, Cuba didn’t because it’s communist
What determines the rate of longrun growth?
• The standard answer (among economists as well as the
general market): technology
• But market capitalism seems to be best able to generate
and economically exploit new technologies
• Competing theories
– “Neoclassical” theorists attribute growth to factor accumulation
plus “exogenous” technological change
– “Endogenous growth” theorists emphasize how R&D is driven by
market incentives
– Knowledge is an excludable, non-rival good
• Is the answer to “What are the determinants of long-run
growth?” the same as the answer to the question, “Why
are some countries poorer than others?”
Conclusions
• Long-run trends are positive all over the
world
• Capitalism