Deirdre McCloskey on innovation and laissez faire. SUPER brilliant!

Lyne: I had said that reading Julian Simon’s The Ultimate Resource had a great impact on me. ..  First the good news. I have recently been having an ongoing argument with a left-leaning graduate student. I have taken the position with him that capitalism does not require exploitation (although it often occurs), that it is better than the alternatives, and that it is the goose that cracks out the golden omelets.

McCloskey: I don’t think that voluntary trade, as compared with say gulags and slavery, is “exploitation.” And to claim that trade is “exploitation” is to treat it as equivalent to the real exploitation in other systems.

Lyne: In the opening chapter of the book I found myself persuaded by the evidence of improved life quality and longevity, and the argument that trade can cultivate virtues. I love the quote [from the Chief Rabbi of the British Commonwealth] about how capitalism makes difference a source of riches rather than a curse.

McCloskey: [In] the opening chapters of the new book, Bourgeois Dignity I retail … the overwhelming evidence, collected mainly by other historians, that the post-1800 Age of Innovation (as I prefer to call it) led to a jump of real, price- corrected ability-to- consume in places that took advantage of it from about $3 a day to about $100 a day. The magnitude is why, as the subtitle says, “economics [whether bourgeois or Marxist] can’t explain the modern world.”

Exploitation or colonies or slavery or peaceful trade or virtuous saving or sensible reallocation or routine exploration for oil or corporate laboratories for inventions are the events that economists talk about. Such events might explain a doubling of consumption, a factor of two (though, by the way, stealing from poor people in the Third World has never been a successful business plan; commonly it hurts ordinary people in the imperial country, so imperialism, contrary to your leftish students and mine, can’t explain an increase). But the routine economics can’t explain the actual factor after 1800 of about thirty. That depended on Simon’s “ultimate resource,” innovation from true creativity— which incidentally was something increased by rising population.

The left believes that innovation was caused by the State, the right thinks by Science. Neither are right: it was caused by creativity unchained by bourgeois dignity and liberty (thus the title of the second book in the series).

Innovation depended on the people doing it getting two entirely novel changes in status. The first was dignity. Being a merchant or businessperson or inventor rather suddenly started to be admired, in Venice and Florence and Barcelona as preface (though quickly developing into over-regulated sclerosis), and then in Holland in the 17^th century (another late sclerosis), and then in the 18^th century Britain imitating Holland, with no sclerosis, and in British North America from its founding doing its own, highly bourgeois and emphatically non-sclerotic thing. Look at Benjamin Franklin (the real one, not the cardboard parody attacked by anti-bourgeois reactionaries such as D. H. Lawrence).

But the second, necessary change in status is what you are worried about: liberty to do and to trade, or “laissez faire, laissez passer,” as the French theorists of the new society began to say in the early 18^th century. Without the liberty a dignified bourgeoisie becomes merely a monopoly—since what economic “liberty” means is not the right to violate the laws of contract or tort or property, but the right to start a cable company or a hotdog stand competing with existing businesses. May the best win. And then, the history shows, we all do.

Try not calling it by the misleading name of “capitalism,” and called it “innovation” instead. Connection with the anti-statism that is laissez faire. States support monopolies because of the Golden Rule: those who have the gold, rule. Look at the “regulation” of deep drilling in the Gulf of Mexico up to April 20, 2010. And for similar reasons states crush innovation—look at the computers used by air traffic controllers, or the seizure of state-run schools by unions.

Laws are necessary, as I said, and so is the state- sponsored courts to enforce them (though much of law happens well short of a state-paid judge). Laws of tort, for example, need to exist, under which people can sue the pants off careless oil drillers. Yet what happens when governments get big enough to be worth corrupting? “Regulation” that acts as a liability cap for Big Oil! It’s happened again and again in the U.S. [Sanjeev: Regulatory capture is the unstated elephant in the room - the fundamental cause of the recent GFC. How many economists understand that? Very few. They think governments are benevolent. Wrong.]

Let me ask the anti-statist’s Big Question: quis custodiet custodiem? Who is going to “regulate” the government, and “protect” us from government? I claim that markets do so. We can leave off buying British Petroleum products or stocks, and sue it. You can sue the king only with his permission. The U.S. government at all levels has so much power that it is worth corrupting. [Sanjeev: This is crucial. The state can't be sued for damages. It can't be brought to account.]

[On the welfare state]

It turns out that most of the money [welfare state] goes back to the middle class. The other day I heard the new British Chancellor of the Exchequer touting the fact in his new budget: you, oh bourgeois voters, have nothing to fear from the state’s redistribution, he said, since most of it goes to you! For the same reason the high-taxed Swedes of the middle class are contented. By actual count, some 80 percent of what they pay in taxes goes back to them, to pay for education through graduate school and for co-pays of zero in health care.

Mostly a well-off Peter is being robbed by modern governments to pay.. not poor Paul, but another well-off Peter who has persuaded Congress to write him into law.

Government spending that is not entirely wasted on “defense” consists largely of transfers within the middle class, such as protection for big U.S. sugar farmers or bribes to public service unions or low- cost higher education subsidizing middle- and upper-income out of taxes imposed on poor people.

Give poor people the money (taxed from you and me) to go to school, I say. But don’t put the schools in the hands of big state bureaucracies and big unions.

INFRASTRUCTURE PRIVATISATION

And the other “services” like roads would be better provided if privatized. Imagine publically provided baked goods! With cheap modern electronics, roads could be largely tollways, with congestion charges and pollution charges. You Democrats like mass transit, right? Well, sell local and state roads to companies, and suddenly they would be priced correctly, and mass transit would boom.

“Infrastructure” has a magic ring. It sounds like a solid (indeed, reinforced concrete) concept in economics. But it’s not. In practice it means “things I want the government to provide even if private alternatives have become cheaply available.”

For a while roads were very expensive to privatize. Nowadays if you put a cheap transponder in every car and cheap a wire in every road the roads could be owned like bakeries.

Chicago sold off the Chicago Skyway and the downtown parking rights.

Lyne: But here’s another point of resistance. Corporate influence is pervasive. 

McCloskey: And so, John, you want “this place” to make more laws? The idea that a government corrupted by corporations is going to protect you from the machinations of corporations is strange at best. [Sanjeev: This was one of the best retorts I've heard. Super brilliant!]

Lyne: To me the corporate economy increasingly has the look of oligopoly.

McCloskey: So you want to replace the oligopolistic corporations with a monopolistic government? In the words of a great (nineteenth- century definition) liberal, Thomas Babbington Macaulay, To quote again the farsighted Macaulay in 1830, against Robert Southey’s proto-socialism: Southey would suggest that “the calamities arising from the collection of wealth in the hands of a few capitalists are to be remedied by collecting it in the hands of one great capitalist, who has no conceivable motive to use it better than other capitalists, the all-devouring state.”

Lyne: I didn’t say I was in favor of state ownership of the means of production.

McCloskey: Except for that “infrastructure,” eh? What I am suggesting is that big government, which you’ve said you are suspicious of, too, is in effect a corporation-sponsored all- devouring state.

The answer? Make the government much smaller. Take responsibilities away from it. In a phrase, institute laissez faire. Kill off the military- industrial complex, for example, by reducing “defense” to actual defense—against the wild Canadians and Mexicans, say, a Coast Guard.

The point I’m making, again, is that a big government is well worth the money of the malefactors to corrupt.

As the American economist James Buchanan famously put it, summarizing a famous old Swedish economist, “Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made.”

In the United States a regulatory agency is routine usually captured by the industry it is supposed to be policing.

Not the “mere” absence of government, that is, liberty. But also dignity, a dignity that protects the liberty.

BAILOUTS AND CRONY CAPITALISM

Lyne: I see a world of huge mega-banks that extort huge bail-outs lest they destroy the china shop.

McCloskey: I opposed the bailouts, at any rate on odd days of the week (on the even days I did fear a Great Depression.) The big difference between a law forcing you to pay taxes for the American empire and the money you pay to those evil corporations is that you can opt out of paying the corporations, and most conveniently so when two or more of them vie for your business. You can’t opt out of taxes, this side of the federal penitentiary or emigration to Canada (with higher taxes). The corporations do compete with each other. If they didn’t, their profits would rise and rise and rise to swallow national income—rather in the way that modern states, when they do not have competitors, have risen and risen in the share of income they spend. All profits, corporate and otherwise, are about 15 percent of national income, and have been that way for two centuries (before, they were higher). The unreasonable and populist fear of monopoly has powered a rise of a real monopoly, the holder of the monopoly of violence called the government.

Lyne: I like the argument that, for all its problems, capitalism beats the alternatives.

McCloskey: Yes, and a capitalism without laissez faire is meaningless: it becomes a creature of the ruling class. Laissez faire, John, is your friend!

Lyne: Your substitution of “innovation” for “capitalism” is rhetorically astute, by the way.

McCloskey: I’m just an honest old lady economist. No rhetoric in me!

Don’t confuse my position with Fox News! Or more exactly, do watch on Fox John Stossel, who says things like “Time to stop fighting the drug war” (June 20, 2010). But watch no one else on Fox. They are all dangerous idiots. Think of me as a combination of Stossel on Fox and Olbermann on MSNBC.

Liberalization works astoundingly well. India from 1948 to 1991 groaned under a “License Raj” of central plans and local bureaucrats, and its real income per head grew at 1 percent per year per head. Since 1991 it has been growing at Chinese rates, 7 percent per year.

Lyne: When I was teaching in Shanghai two years ago, I asked people what term they would use for what to me seemed like capitalism on steroids in their midst. “Socialism” was the answer!

McCloskey: Yeah. I had a student from China a couple of years ago who thought that “socialism” meant “set up a business when and where you want” and “buy low and sell high.” We know better!