given its early achievements and innovations, why did China not continue to lead in scientific and industrial developments, allowing Europe to overtake it and usher in the modern scientific revolution?
“Why was Europe first?”
I began reading about economic growth
or “social change” more generally
this article by Abramowitz was the most interesting thing I read
Why I like it so much?
starts with serious economic theories
theories of the firm
theories of political economy
decides that they aren’t good enough
That is,
economists can’t explain economic growth!
Finishes with
pure sociology, political science, cultural theory
“social climate”
Where did things go wrong for economic theory?
long-term economic growth can only be explained by technological development
How to explain technological development?
you need all those other, non-economic, theories and perspectives
This provided an opening for me
I came up with my own answer to the Needham problem
I can talk about that at the end
but first let’s turn to Abramowitz’ article
Adam Smith, “The wealth of nations,” 1776
Today — everyone is talking about “economic growth”
but how should it be explained?
if there is anything economists should be able to explain, it is surely this!
Smith talks about “wealth,” but what is it?
Smith’s great insight: not how much we have, but how much we can produce
our productivity
We talked about this before
the difference between an old, rich, woman
and a young, brilliant, artist
Wealth is a question of
providing the right conditions for brilliant painters, so to speak
Smith trusted in individuals and in their self-interest
people are constantly trying to find the most advantageous use for their money
If everyone acts in this way — the total benefit for society will be maximized
as individuals we are all selfish, but the total outcome of our selfish actions is the outcome most beneficial to society
cf. self-interest of baker and shoe-maker etc
The “invisible hand”
“he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention“
Division of labor
Smith was fascinated by pin factories
from 10 pins a day per person
to 48,000 pins by 10 people
4,800 pins each
Advantages of specialization …
division of labor — more productive labor
easier to invent machines
The idea of the factory
unleashed a tremendous potential
Size of the market
the bigger the market, the more specialization
for a very big market you can survive making a very small thing
Applies also across borders
world market — globalization
we need to make the markets as big as possible — increase specialization
in order to take advantage of division of labor — we must trade
Advantage of foreign trade:
‘”if a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage … It is certainly not employed to the greatest advantage, when it is thus directed towards an object which it can buy cheaper than it can make it”
I.e.
free trade permits the best allocation of society’s resources
protective tariffs interfere with this allocation — reduce national income
“The dismal science”
The only problem:
once labor is perfectly divided, you cannot go further
growth will come to an end
Factors of production
You get the same result if you look at how something is produced
production functions
What do we need in order to make something — like a chair?
raw material
tools — capital
labor
Input-driven growth
What you get out of the economy depends on what you put in
land is fallow, workers have no jobs, machines are not turning
the economic potential it not realized
The economy grows if you realize this potential
plant more potatoes on a given piece of land
Cf. China’s spectacular growth during the past 40 years
central planning meant that productive resources were not used
after the introduction of markets and capitalism — China simply had to grow
the growth could actually have been higher
But what happens when you run out of inputs?
you can’t get more output if there is no more input
the economy grinds to a halt
similar to the limits of division of labor
Cf. Thomas Malthus
English clergyman
convinced that any economic improvements would be wiped out by population growth
GDP/capita stay the same or decline
there is less for people to eat
Population grows geometrically
food production grows arithmetically
Decreased marginal utility of labor
more people are working on the same land
the last person contributes less
decreased productivity per person
Preventive checks
moral restraint
delayed marriages
celibacy
Positive checks
famine
disease
war
Actual population growth rates
the number of children declines with increased GPD per capita
Taiwan had fewer newborn children than China — despite the one-child policy
Why was Malthus wrong?
women’s participation in the work force
access to family planning
changing social norms
urbanization — children are not an asset
social security and pensions — you don’t need to rely on your children in your old age
World population
will peak at 10 billion in the 2080s
and stabilize and decline after that
Thomas Carlyle: the “dismal science”
Economics, with its predictions of gloom and societal challenges based on self-interest and limited resources, offered a bleak outlook on the world’s future.
It is a science of ultimate decline or at least stasis
sooner or later we will always run out of resources
Cf. Karl Marx
From this perspective
Communism as unleashing new productive potential
not a question of justice — but of economic growth
The means of production
the physical tools and resources required to produce goods
Relations of production
the social organization of production
a certain given social type
A slave economy, a feudal economy, a capitalist economy
they all set limits to the economy
Communism will shatter those limits
unleash new potential
“fully automated luxury Communism”
Return to growth theories
From the middle of the 19th century
economists stopped worrying about growth
the economy was growing very quickly — nothing to worry about!
“Development” as a catch-word for the protectorates of the League of Nations
but how is development to be achieved?
Acute issue after the end of the Second World War
competition with the Soviet Union
“central planning is a much more efficient system”
Often fought in newly independent poor countries
they wanted their economies to grow
but what could the West offer them?
great efforts by big scientific foundations to develop “theories of growth”
Much better statistical data
GDP data only after WW2
Growth accounting
Robert Solow
paper in 1956, Nobel Prize in 1987
Basic idea
measure the contribution of different factors of production to economic growth
understand the sources of long-term economic growth
Decomposes the growth rate of an economy’s total output into components that are attributed to
labor, capital, natural resources
Shocking results:
only 20% of growth explained this way
the rest was “the Residual”
“a measure of our ignorance”
that is a lot of ignorance!
Later attempts
got the residual down to 50 percent
that is still not that great
What is the rest?
everyone agreed that it had to do with productivity gains
more efficient use of resources
Technology
economic growth is a consequence of technological development
For example,
use biotechnology to increase crop yields
use machines to make chairs
use computers
Our economies have grown exponentially for two hundred years
far outstripping all our previous limitations
Ergo,
if we want to explain economic growth, we must explain technological change
But how should we explain technological change?
this is where economists fall down
they are simply not equipped to do it
Most of Abramowitz article deals with the existing economic theories of economic growth
he gives credit to some of them
but is critical of most of them
this is where his article becomes very detailed — and a bit difficult to follow
Basic problem:
economists are limited by their models
Give incentives to individuals
lower taxes etc
but unclear relationship to technological innovation
Higher savings, higher investments in R and D
but it is obviously not that simple
The problem of balancing models
they come to a stop
they can’t sort of go anywhere
Perfect competition
profits go down to zero
and there is no money for research
Austrian economics is better!
evolutionary perspective
Joseph Schumpeter, Austrian economist
the importance of monopoly profits
the importance of entrepreneurs
Capitalism as a question of
“creative destruction”
you destroy at the same rate as you create
Role of companies
Technological advancement
contingent on investment
businesses must invest in research and development to pioneer new products and processes that meet market demands and improve efficiency
Feedback loop
technological progress is influenced by business activity
which in turn responds to technological advancements
The pace and direction of technological development are shaped by
production, investment, market demands, and competitive pressures
Issues of patents
reward inventors
but not restrict dissemination
Retaining staff
invest in staff that goes elsewhere for more money
Role of government
Investment in infrastructure
the development and effective use of technology require
advanced infrastructure in power, transportation, and communication
markets may not sufficiently provide due to the public goods nature of such investments
Education
For example
the significance of a highly skilled workforce
creating a society that values and supports continuous learning and innovation
shifting values towards more knowledge-intensive activities.
“Positive externalities”
greater benefits to society than just to individuals and companies
justifies a role for government
Research
Research is expensive and the returns are uncertain
carry high risks and uncertainties, especially given the potential for commercial obsolescence
markets, being risk-averse and focused on short-term returns, may underinvest in the long-term research and development
Regulatory environment
Protect property rights, enforce contracts, and regulate economic activities to ensure fair competition
prevent monopolies, thereby encouraging investment and innovation
Stable macroeconomic environment
a strong propensity to save
well-developed financial system
legal and regulatory systems that protect property rights and encourage entrepreneurship
Economic structure transformation
changes society — puts people under strain — consequences of growth
the government has to deal with them
economic growth — more of a welfare state
Dani Rodrick on globalization
Decline of Britain
How lot’s of innovations originally were made in Britain
but only realized in the US
very difficult to find something “made in the UK”
For example
telephone
jet engines
LCD displays
computer technology
World Wide Web
AI
Why?
better funding
technological ecosystem
university research
skilled workforce
Wars sharpen the mind
the competition during war often leads to technological breakthroughs
often as a result of vast spending by the state
Cf. the only viable Soviet innovations
Kalashnikov, AK-47, machine guns
Tupolov airplances
Sputnik and other space technology
The Spy Who Came in From the Cold
Switzerland and the coo-coo clock
US defense budget
great innovations
For example
internet infrastructure
GPS — and Google Streetview
semi-conductors and micro-chips
stealth technology
voice recognition and AI
drones
satellite imaging
“Social climates”
quotes Kuznets
The underlying social climate and public attitudes towards economic activities and government policies
the importance of a societal outlook that supports secularism, egalitarianism, and nationalism is emphasized
Egalitarianism
Democracy
Nationalism
A growth society
organize and utilize resources efficiently
the societal values that encourage innovation and hard work
institutional and educational frameworks that support technological advancement and skill development
Markets, while efficient in allocating resources, do not inherently provide or enhance these social capabilities
But Abramowitz shows that these factors too vary a lot
they change over time
and they are totally different in the US, UK and Japan
and they would not apply to China at all
Best explanation — John Stuart Mill:
Innovative hubs
1oth century Baghdad
15th century Florence
all those painters lived really close to each other
London in the 1960s
Silicon Valley
What do they have in common?
they are all urban setting
people from all different background come together
there is an intense competition — but not necessarily for money
the people involved often very young
Why Europe was first
My explanation …
Mazzucato, What is economic value and who creates it?