Sunday, September 30, 2007

Impressive Interview with Gregory Clark: a comment

Gregory Clark gives an interview (here) to the Intrepid Liberal Journal, 29 September, and explains the themes of his thesis from ‘A Farewell to Alms’ (Princeton University Press, 2007) in clear language for all. It is an impressive performance. I give a selected paragraph relating to Adam Smith below.

The Industrial Revolution Unplugged: An Interview With Author Gregory Clark” by Intrepid Liberal Journal (originally posted in the Intrepid Liberal Journal as well as the Independent Bloggers Alliance, The Peace Tree and Worldwide Sawdust).

ILJ: One element of your book I found ironic is your challenge to Adam Smith, considered the founding father of capitalism, who in 1776 published The Real Wealth of Nations. Smith postulated that the rule of tyrants and their institutions undermined incentive for productivity because the ruling class ultimately confiscated any wealth that was produced. You contend that pre-industrial England had plenty of incentive for producers, such as limited government and low taxes, yet prosperity still wasn't generated. Hence, Smith who is identified with the ethos of limited government actually postulated that the ruling class can positively or negatively influence economic policy with activist government. Why do you believe Adam Smith was wrong about that?

Clark: Well, since I've published the book I've come under criticism from intellectual historians. So, I think what I should be careful to identify it's the modern image we have of what Smith was about, rather than Smith himself. I'm not a historian of economic thought, so what I mainly want to emphasize is the message we've taken from Smith, the Smith we've constructed.

Smith is regarded as arguing that growth results from getting the correct economic incentives, which results from getting the right set of economic institutions. That's really an incredibly strong founding principal of modern economics, the idea that people really are at base the same everywhere. If you can only get the incentives correct, then economic growth will result. So, the book strongly takes issue with that.

I'm saying that economists have had to construct a false history of the world. They've had to imagine a pre-industrial past that is, you know, a cross of Brave Heart and Monty Python's Holy Grail and all the bad movies about medieval England. An image of rape, and pillage, disorder and violence, and serfs groaning under the weight of the lords emerged about medieval England.

My knowledge of medieval history, and this is one of the areas I've studied in detail, shows that picture is just unsustainable. If the World Bank was to now score medieval England against modern economies in any objective way, in terms of what are the incentives for production and for innovation, medieval England would score much more highly than somewhere like modern Sweden - which is a very rich and successful society. One way that shows up is, for example, in the average government tax rate for medieval England? It's one percent. In low tax America we're closer to forty percent, and in places like Sweden they're even close to sixty percent in terms of how they're taking from any extra earnings of the average wage earner.

Medieval England had absolute price stability. It had almost no government debt. It had very strong security of property. People who invested in land in local villages, who needed a ten percent return in order to make that investment, had absolute property security. We can see through the course of 500 years that lots of these land plots were transferred properly from one legal owner to another. They had a free market. And they had huge incentives. If you produced you ate, if you didn't produce you starved. For example we can see from the records that in 1316-17, in the last great famine that England experienced, poor people died and the rich lived (laughs).

ILJ: (Laughs)

Clark: You had every incentive to acquire assets in this world. Assets could be the difference between life and death. And yet this was still a world with very, very slow economic growth. Almost none. So one of the things the book is saying is look, modern economics in some sense is a cult. It's like pre-modern medicine, where you keep repeating these same ineffective treatments. They keep failing. In the book I provide lots of other instances where good economic institutions are not associated with economic growth. That's why I'm saying there has to be some other thing required, and what the book is arguing is that there really are important cultural processes that take place before you get modern economic growth. If we neglect that we're never going to understand the true nature of economic growth. And so we really need to move away from incentive explanations, and what the book is saying is that history is illuminating about this and we really need to know more about that history.”

And Clark concludes later (you must read it all to grasp his interesting thesis):

“And if we are going to solve the problem of poverty in sub-Saharan Africa, the solution is going to come in a very different form then the followers of Adam Smith are going to accept.”

The first thing to note is that Gregory Clark acknowledges that there is a separation between what Adam Smith of Kirkcaldy wrote and what ‘his followers’ claim for him today. See his contributions to the debate on A Farewell to Alms, posted on various dates since August on Bryan Caplan and Arnold Kling’s economic blog: EconLibrary Blog (here).

Having made this acknowledgement, I am not convinced that it is sufficient to do so in an Internet discussion whilst leaving the original assertion to the contrary as if the acknowledgement had not been made. Clark should undertake to make a correction in new editions of A Farewell to Alms and in discussions in other fora. The problem with modern ‘followers of Adam Smith’, all located in the neoclassical majority and all influential in economics policy programmes for developing countries, is that their presentation of Adam Smith’s ideas about growth is mainly wrong, and their growth theories are problematical (Solow, for instance).

Compressing a millennium into the odd century (14th?) when English agriculture was relatively peaceful is not representative of Western Europe after the fall of Rome in the 5th century. In fact there was peasants’ revolt, from memory, in 1381.

Let me state Adam Smith’s theory of growth in commercial society (the 4th Age of Mankind), if only to separate it from the modern ‘followers of Adam Smith’, rightly derided by Gregory Clark. I should have though that if Gregory Clark agrees that Adam Smith did not write what modern economists say he did, that he would be curious at least as to what he did write!

Gregory Clark queries why, with various institutional conditions all in positive mode in early Medieval England, there was no industrial revolution, or at least a breakout from the Malthusian trap? Gregory Clark points to the extent of trade relations (exports of wool, corn, etc.,) to continental Europe. But an industrial revolution (assuming such a term is valid) needs more than a market in a few specific commodities.

For a start it requires numerous extensive markets in many things, particularly manufactured (i.e., hand made) items, which also requires knowledge, know-how, and practised dexterity. This is before machines move from aids to augment physical labour to power-driven machines to replace labour. Manufacturing techniques in Europe often spread from theft, imitation and invited migration of artisans from one country to another (assisted by short-sighted religious motivated expulsions of hundreds of families, often to England, who brought with them necessary knowledge of manufacturing processes).

Smith regarded the trade between country and town in England as a crucial element in the continuing growth (partly a revival from Roman days) of commerce. Instrumental in this process was the slow and gradual accumulation of ‘capital stock’ in the hands of ‘merchants and manufacturers’. Smith sourced ‘stock’ in the savings out of immediate consumption way back in the age of hunters (the first age of mankind), where it was practised in primitive trade, as in his Just So story of the arrow maker trading with the hunter. Stock in that world was akin to a ‘grub stake’ and as societies developed into shepherding (the second age of mankind) and into farming (the third age of mankind) the accumulation of stock became less casual and more significant.

Herds required secure pasture land (to stop animals wandering back to nature) and crops required secure arable land (to stop animals, and landless humans, wandering in to deplete the crops. Both required ‘hired’ hands to nurse the stock into breeding and re-planting seed corn and to protect the integrity of property (see Wealth Of Nations, Book V, chapter ii). On this basis civil government was invented (where it failed, so did development); where it never started – in much of the world – populations remained in the first age, there being nothing inevitable about development.

From the end of the allodial era of warlords and vast landed proprietors, much of it uncultivated, from the 11th century, and during the feudal era, commerce slowly revived (the history of pedlars, etc.,) and with improved seagoing ships, foreign trade became an important element, including to move troops across the channel, and towns slowly grew from huts to more secure buildings. Waterways, rivers, coastal waters, were significant trade routes in which manufactured products were exchanged among settlements and with the rich proprietors in the country.

Literacy revived, initially from preservation in isolated monasteries, and then via the printing press into a wider, educated public. Universities were established (four in Scotland, two in England) and knowledge culture, based on Greek and Latin, spread.

Now place Smith’s model of growth into this mix. His theory of capital accumulation was long-term, slow and gradual, in progression. Those few with access to capital-stock could allocate some of it to immediate consumption, which above a minimal amount became prodigality. They could also allocate some of it to building machines (hand operated) to raise yields from the land (ploughs, shears, harnesses, secure fences, etc.,) in the form of fixed capital. To work the machines required labour who worked for wages at varying subsistence levels, depending on supply and demand. The machines required materials, raw or semi-processed. Fixed capital produced nothing unless circulating capital was applied to it (the purchase of labour and materials). Whereas fixed capital remained with its owner, circulating capital passed to others.

From the application of labour to work machines and repair them, output was produced and sold in markets. From the revenue received (market prices), the owner recovered outlays on the maintenance of labour and the purchase of materials. Any surplus above these outlays was profit on capital, from which the owner allocated a part to his immediate consumption, which could include items consumed over longer time periods, such as clothes, buildings, furniture, artefacts, trinkets, etc., and the other part to augment his capital stock. That proportion that augmented his capital stock constituted economic growth.

Across society, wealth was defined as the annual production of the ‘necessaries, conveniences, and amusements of life’. For a growing minority this was not a subsistence level of consumption. Per capita income statistics eliminate this most crucial component of development; hence I assert that the per capita statistics detailed by Gregory Clark are misleading as a measure of development. In the extreme, I have suggested that economic history of the last 10,000 years (and for long enough before that) the history of the poor is not the decisive factor in economic development: it is the history of the rich (all those above subsistence), plus the history of the politically powerful who diverted some proportion (from taxation, levies, duties, and oppression) of the annual production of wealth into stone built cities, infra-structure, cathedrals, harbours, canals, routes for trade, shipping, and the instruments of war.

The growing commercial exchange economy below a society, gradually accumulating capital stock (Smithian growth), with all the associated knowledge, literature, natural and moral philosophy, science, invention, and technologies, prepared the ground for the eventual invention and application of power-driven machinery that constituted what some call the industrial revolution.

I have suggested to Gregory Clark that he take sometime to study what Adam Smith actually wrote and not what modern economists (who may never have read him at all) say he wrote. This is not just of intellectual interest; he might find some of the answers to the conundrums he wrestles within A Farewell to Alms.


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