A Nobel for human progress

By Ryan Young of CEI.

"This year’s economics Nobel Prize went to three students of the two most important questions in economics: Why have living standards in rich countries improved 30-fold since the 19^th century? And how can that process continue and expand to developing countries?

One half of the prize was awarded to the economic historian Joel Mokyr, whose work emphasizes the role of both technology and culture in the Great Enrichment.

The other half of this year’s prize was split between Philippe Aghion and Peter Howitt, whose work focuses on CEI favorite Joseph Schumpeter’s idea of creative destruction.

Mokyr, the economic historian, has written several books on the early Industrial Revolution that, on the surface, appear to be about technology. But technology alone is not enough to create mass prosperity.

Mokyr argues technology must be paired with pro-innovation cultural values. Even the greatest inventions cannot improve lives unless people are open to using them. If innovators are social pariahs, they may not have any incentive to invent in the first place. Their inventions may also be repressed, or risk Luddite-style revolts.

This was the argument in his first book, 1990’s The Gifts of Athena. In more refined form, it is also the thesis of Mokyr’s most recent book, 2017’s A Culture of Growth, which I reviewed here.

In 1992, Aghion and Howitt created a mathematical model of creative destruction. This is the idea that progress happens when new technologies displace old ones or when new businesses supplant unprofitable ones. In with the computer; out with the typewriter, for example.

For 30 years, theirs has been the workhorse model for researchers interested in how progress happens. Not only have Aghion and Howitt done their own research using their model, but their prize is also in part for enabling other scholars’ work. This sort of meta-contribution deserves more frequent recognition.

In an average year in America, between one-seventh and one-sixth of all jobs are destroyed. But in most years, more jobs are created and the number of total jobs grows. New technologies create at least as many jobs as they destroy, year after year, and generation after generation. This churning process, or creative destruction, is why people today are richer than their grandparents were. Otherwise we’d all still be farmers.

The unemployment rate in 1776’s agricultural economy wasn’t that different from our modern high-tech economy. But the living standards have increased at least 30-fold. It’s not the number of jobs that matters for living standards, so much as what value those jobs create.

The labor market’s biggest threats are from bad policy choices – trade protectionism, industrial policy, and inflationary monetary policy – not from innovation.

The creative destruction process that Aghion and Howitt have modeled ensures that people are continually improving how they use their human, physical, and financial capital.

Zombie companies use up labor and resources that could be put to better use. The price of creating a car industry is the destruction of the horse-and-buggy industry, for example. It’s a tradeoff, but the creation is well worth the destruction. Slowing down that process in the name of tradition or stability means slowing or even stopping the Great Enrichment.

Mokyr, Aghion, and Howitt ask big questions and get big answers. They are the worthiest Nobel recipients in years. They differ from 2019’s laureates, who also work in the development economics subfield, but with a different approach: ask small questions and get small answers.

Theirs is the approach of middle managers telling other people how to do their jobs, or of management consultants writing people-pleasing reports. Too much of development economics today is social desirability bias masquerading as a research program.

One of the papers cited in the 2019 Nobel prize was the finding that having students in Kenya spend more days in school, and spending more money on their textbooks, does not improve their test scores. That is useful information, but it is also the sort of thing that educators on the ground can figure out on their own.

The problem with education in developing countries is not a lack of advice from outside experts. It is that educators in many countries are not allowed to figure out those sorts of things on their own, let alone act on them. It is a problem of permission and dignity, not just resources.

Development is an ongoing process, not an end result. Mokyr, Aghion, and Howitt get that. Many other laureates do not. Nor do leaders at the World Bank and the IMF, many economists at top-five departments, and in many years, the Nobel prize committee.

People in developing countries don’t need better test scores so much as they need ongoing, market-tested improvement processes that are always adapting, changing, and experimenting. That is how you get better school test scores. It is also how poor countries become rich. Enable the process, and the results will follow.

Enabling the process is also the hardest part. It is a cultural issue, not a question of this or that micro-policy, such as students spending enough days in school or spending a certain amount on their textbooks. The origin of human progress is a bigger question than economists from the Harvard-Princeton-MIT mold are typically trained to ask. But it’s right up Mokyr, Aghion, and Howitt’s alley.

When people value openness, cooperation, and innovation, they work to enrich themselves and others. When people fear change and over-value tradition, the result is stagnation and decline.

If you want better results, you need better institutions. And if you want better institutions, you need cultural values that allow those institutions to operate.

Mokyr, Aghion, and Howitt are part of a long mainline tradition in economics that includes deserving would-be laureates such as Deirdre McCloskey, Peter Boettke, and William Easterly. It includes fellow laureates Elinor Ostrom, Douglass North, and Vernon Smith. And it goes back through F.A. Hayek, Frederic Bastiat, and all the way back to Adam Smith.

A well-chosen award ennobles both the recipient and the award itself. The more Nobels awarded in this mainline humanist tradition, and the fewer in the Paul Samuelson economist-as-technician tradition, the better for the prize’s prestige.

Postscript: Mokyr in particular has influenced the work we do at CEI. CEI founder Fred Smith cited him in a piece about the intersection of science, technology, and environmental policy. Iain Murray and I cited him in our Traders of the Lost Ark paper about trade policy in the first Trump administration. My review of A Culture of Progress is here."