A More Holistic View Of Economic Growth

Economics — Zac Townsend @ December 16, 2010 8:02 pm

When I was in high school, PBS had a documentary called Commanding Heights. A fine documentary about the history of economic thought and globalization in the 20th century, much better than the book that proceeded it.  (The books predictions and tone got turned upside down by September 11). Ultimately the documentary is  slightly too full-throated in its defense of globalization. Nonetheless, a comment by Jeffrey Sachs may have been what prompted me to think about development economics for the first time in my life:

The world is more unequal than at any time in world history. There's a basic reason for that, which is that 200 years ago everybody was poor. A relatively small part of the world achieved what the economists call a modern economic growth. Those countries represent only about one-sixth of humanity, and five-sixths of humanity is what we call the developing world. It's the vast majority of the world. The gap can be 100-1, maybe a gap of $30,000 per person and $300 per person. And that's absolutely astounding to be on the same planet and to have that extreme variation in material well being.

I tend to think that economists can be too focused on models of the modern macroeconomics of the developed world when thinking about development. That is why I loved my Theory of Economic Development class at Brown, It included modern models, but Professor Oded Galore is an advocate for thinking about the long-view of economic history, and suggested we read books such as Guns, Germs and Steel. He calls his model Unified Growth Theory (Wikipedia page), and I'm not sure how much traction it has had among economists. The first paragraph from his overview of UGT:

The evolution of economies during the major portion of human history was marked by Malthusian Stagnation. Technological progress and population growth were miniscule by modern standards and the average growth rate of income per capita in various regions of the world was even slower due to the offsetting effect of population growth on the expansion of resources per capita. In the past two centuries, in contrast, the pace of technological progress increased significantly in association with the process of industrialization. Various regions of the world departed from the Malthusian trap and experienced initially a considerable rise in the growth rates of income per capita and population. Unlike episodes of technological progress in the pre-Industrial Revolution era that failed to generate sustained economic growth, the increasing role of human capital in the production process in the second phase of industrialization ultimately prompted a demographic transition, liberating the gains in productivity from the counterbalancing effects of population growth. The decline in the growth rate of population, and the associated enhancement of technological progress and human capital formation, paved the way for the emergence of the modern state of sustained economic growth.

This is all by way of introducing an interview with Deirdre McCloskey in the National Review. I find her incorporation of dignity and rhetoric as economic drivers to be fascinating. It makes modern economic growth part of a larger historical movement going back to the enlightenment. The article's introduction does a good job of closing out my post:

Economic history looks, in graphic representation, like a hockey stick. For tens of thousands of years we traced nasty, brutish, and short lives along the shaft. Children anticipated a world no different from their grandparents’. Shakespeare’s audiences had only marginally better lives than Sophocles’. But at the beginning of the 18th century, mankind — beginning with the British and Dutch — hit the blade of that hockey stick, enjoying an unprecedentedly sharp and irreversible upturn in prosperity, life expectancy, and health. Ever since, the world has changed more quickly in every generation than it had previously in millennia. By all criteria, human life has improved in ways unthinkable 300 years ago.

Solving the mysteries of the birth of the Industrial Revolution (and, subsequently, the modern world) has been the primary task and test of economic history. And, according to Deirdre McCloskey, all explanations so far have failed. Those failures, in turn, indicate the failings of modern economics. Her magnum opus, an explanation of the birth and flourishing of the bourgeoisie and its subsequent transformation of the modern world, will occupy at least six volumes. This month, Chicago University Press releases the second installment: Bourgeois Dignity: Why Economics Can’t Explain the Modern World.

Traditional economic models — the ones we find in Econ 101 — center on labor, capital, technology, population, etc. McCloskey’s economics incorporates two more factors: dignity and rhetoric. Economics, she argues, has failed be a humane science that accounts for the ways in which things like human speech — rhetoric — influence the way a society lives and works. After a detailed examination of traditional explanations of economic growth, McCloskey concludes that each is inadequate, and that the only explanation for the peculiar birth of the modern world is speech: At the beginning of the 18th century, people in the Netherlands and Britain began talking about commerce as a good thing — a novelty at that time. They gave dignity to the bourgeoisie. And that drove capitalism, giving birth to the modern world.

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