Friday, December 12, 2008

The Importance of Market Entrepreneurs

Mark Engler, a writer based in New York City, is a senior analyst
with Foreign Policy In Focus and author of How to Rule the World: The Coming Battle Over the Global Economy (Nation Books, 2008), writes in Portland independent media center (HERE):

Adam Smith was not an economist. In the 1750s, when he was a professor
at the University of Glasgow in his native Scotland, Smith served as
the Chair of Moral Philosophy. The designation is telling. The rise of
modern economics departments in universities was a late-nineteenth and
twentieth century phenomenon. Economics in its infancy, characterized
by the pursuits of Smith, Ricardo, John Stuart Mill, and Marx, was not
a matter of graphs and econometric models. It was a broader
investigation into social life, a look at how society structured
labor, production, and exchange. And it concerned itself greatly with
the ethical implications of this structure.

As early as the 1950s, economists began establishing a greater role
for socially accumulated knowledge in mainstream understandings of
growth. During that decade, Nobel-Prize winning economist Robert Solow
argued that advances in knowledge are, in fact, the primary driver of
today's growth. Alperovitz and Daly write, "Solow calculated that
nearly 90 percent of productivity growth in the first half of the
twentieth century (from 1909 to 1949) could only be attributed to
'technological change in the broadest sense.'" This suggestion was a
radical shift away from accounts that stressed the more specific
agency of capitalists and entrepreneurs—or of laborers, for that matter
—in expanding our economy
.”

Comment
On theories of economic growth I agree with Mark Engler and I suggest that Solow, and others, went 'astray' because their models are 'closed' and their aggregated variables are better thought of as open processes, with increasing returns (lowering costs) in their constituent parts (see Alyn Young, Economic Journal, 1928).

Mark Engler's article develops a theme and while I agree with some parts I also find parts of it unconvincing. The discoverers of knowledge – a cumulative process, if passed on – have a more justified claim to the rewards from development because without their crucial role as discoverers, inventors, innovators and educators is more relevant than the “agency of capitalists and entrepreneurs”.

Well, there is a specific historical example of a society that was the most advanced in the world in inventive science and technologically, which also stagnated. I refer to the old Empire of China which by the 15th century was ahead in so many inventions that they are still being catalogued today by enthusiasts for Chinese history.

But over several decades in the 15th century, China fell into stagnation (partly reported by Adam Smith in the 18th century in Wealth Of Nations), and didn’t really recover until the 19th century (after which there was another interregnum under, first the depredations of the western colonial imperial powers and then, in the mid-20th century, the violent failings of the communists.

The missing ingredient was demonstrated convincingly by the turn away from world trade by the Chinese Emperor, whose writ in these matters ran far and wide. The entrepreneurs and merchants turned inwards and away from the exploitation of scientific knowledge, and no progress was made thereafter in inventions, technology or science. China did not advance into a commercial age; if it had the entire history of the world would have been quite different.

As knowledge revolutions broke through and spread across the backward West, especially in that part of Europe left devastated by the fall of the western Roman empire in the 5th century (of which Adam Smith writes a great deal) that had presaged the thousand-year interregnum, or the ‘dark ages’, which began to end in the West, fortuitously just as China was entering its own self-imposed dark ages.

This development, catching up with old China was accompanied by the age of commerce (‘at last’), as Smith described it in his lectures in 1762), the appearance of ‘entrepreneurs’ and ‘commercial’ adventurers, who turned knowledge into innovative products on scales unimaginable ever before also produced funded feedback (economic growth) to boost a continuing scientific and technological advance of all knowledge without precedent.

Knowledge of the configurations of the stars was interesting, but long-distance overseas trade on a regular basis drove the need for both accurate timekeepers for safer navigation from knowing longitude as well as latitude and for accurate charts for safer seamanship, once the ‘secrets’ of discovery gave way to the less dramatic open-seas of regular trade routes. Knowledge is necessary (three cheers to the discoverers!); but not sufficient. What made the difference are the entrepreneurs and the creators of industry.

Markets were not discovered by a scientist; they operated millennia before the science of economics appeared (and their merits are still hotly debated). Scores of ideas are dormant until somebody finds a use for them and somebody markets those uses successfully.

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