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We’ve reached the end of Logic of Life, Tim Harford’s engaging tour of economics and its lessons for everyday life. Harford ends the book on a highly speculative note about technology, economics, and growth. Tim does a good job summarizing the emerging consensus. The “normal” state of human life is poverty and near zero economic development. Once a community establishes reasonable institutions for commerce and trade, people can quickly produce and exploit technological advances. The effects are cumulative: once a nation allows markets to work beyond a certain threshold, the population experiences exponentially increasing benefits. The economists’ summary of world history is: “no capitalism = no growth, some capitalism = growth, growth, growth!!”
This discussion is interesting because of the connections to ideas outside the normal realm of economics, especially in areas like psychology and, my own area, sociology. Here’s just one example. Harford discusses the idea that population size should correlate with innovation. Simply put, if you have a hundred million people, you’ll get a least a few geniuses. The inventions of these geniuses can be mass marketed, which fuels later growth episodes. Fair enough.
But where do “geniuses” come from? Turns out, there is a fascinating literature on creativity and achievement. A few names: R. Keith Sawyer, a sociologist/psychologist, writes eloquently on the emergence of genius from networks and groups. Sociologist Randall Collins wrote a highly regarded book on prominent philosophers showing that “genius level” philosophers tended to be clustered in space and time, suggesting that genius is made possible by very specific kinds of “hot house” situations. Other research, pioneered by Florida State psychologist Anders Ericsson, shows that high level performance isn’t just a matter of talent. It’s also a matter of specific training techniques and immersion in a topic. Basically, it’s not just talent that leads to achievement, it’s also the right kind of social environment.*
What’s the point? It’s this: Economics, as understood for hundreds of years, has played out. The major problems of econ 101 have been solved. We know about supply and demand, marginal utility, choice under uncertainty, and budget constraints. We have a wide variety of tools, ranging from game theory to econometrics, that help us identify these processes in situations ranging from war, to car sales, to dating. We are also seeing how these processes plug into classic macroeconomic issues, such as growth and international trade.
However, the market system itself, as indicated by Tim’s concluding chapter, depends on population, innovation, and liberal economic institutions. These, in turn, depend on psychology, group culture, and networks, the domain of sociologists, psychologists, historians, and anthropologists. Economists have shown how the market system processes the inputs, but there’s still much, much more to be said about where the inputs come from. That’s what’s going to be exciting in the decades to come, and I can’t wait to see it.
* Author David Shenk nicely covers this research on his blog The Genius in All of Us.
“…the market system itself…depends on population, innovation, and liberal economic institutions.”
Why not take it a step further? Liberal economic institutions (primarily Rule of Law-ish sorts of things) depend on morality.
This sort of puts a perspective on Tyler’s remarks about Ed Glaeser and cities, doesn’t it?
Simply put, we’ve developed a political system that incentivises the lack of density, and thus as a society we under-invest in urban areas and the density they contain. However, density, or at least density of specific communities, is a clear prerequisite to the types of “hot house” situations you describe, which may lead to massive economic growth. It follows that by encouraging policies that lead to less-than-optimal density, we are actually retarding economic growth.
This “hot house” or “critical mass” factor has long been acknowledged in the world of arts and culture. In a world with modern technology, a jazz fan in Peoria may be just as capable of listening to music as his counterpart in New Orleans, but it’s obvious that innovation, growth and change are brought about by the jazz community density of the latter city and not the existence of jazz fans in the former.
Similarly, few would dispute that the existence of great universities has had an enormous impact on the breadth and depth of intellectual though in modern society. While the economies of scale in acquiring capital assets may have something to do with this (i.e. the existence of one large library), it is clear that the real value of universities has historically been and continues to be that they bring many academics and intellectuals together in a setting where they interact, and that their ability to advance thought collectively is greater than would be possible if they each worked independently.
Why ever would we expect the forces economic growth to behave any differently?
What an irony that the country that most visibly claims to espouse capitalism in the name of economic growth does so much to undermine one of the central inputs that leads to growth!
I don’t think geniuses are driving the growth we’ve seen in China, for example. Geniuses make beautiful art, write colorful sentences and entertain with their eccentric personages, but they don’t create sustained economic growth.
Speaking of China, how about those liberal economic institutions? Should I mention Sweden? Malawi?
“The major problems of econ 101 have been solved.”
that’s worryingly close to declaring that all possible melodies have been composed.
I reckon there may be room for some big twists in the ‘basics’ yet – but I don’t want to derail the thread / expose my own ignorance by speculating here.
What I meant to say was that I’m very interested to learn of all this work on innovation & creativity – so far the only such work I knew of was Mokyr’s The Gifts of Athena. I like to think there may be a lot of mileage for economists from this stuff.
Excellent post, Dr. Rojas. I agree that discovering what causes societies to choose liberal economic institutions, and what causes innovations to be produced, are fascinating and important research problems. But I think that solutions will come through an integration of the various social sciences rather than a decline of a “played out” economics and a rise of sociology and psychology. What if economics isn’t played out, it just needs to be generalized so that it can be more usefully “imperialist”? Maybe, as Robert Putnam once said, we need more economic analysis of sociological variables.
Hmmm. The sociologists, political scientists, anthropoligists and anybody in “studies” have been
saying roughtly the same thing for years and years and just as wrong and well just silly and demonstrating
their own self serving bias. The Marxists, the institutional economists and ad infinitum. The declarations
of economics being over and irrelevant have been made for years. Their was a nice hit piece in the Atlantic
back in 84 even……Not the first to say this, not the last and wrong like the rest….
Well, lets save the post and track down Rojas in 20 years and I predict that economists on average
will be doing higher impact work, earning more and contributing more to society (and more genuises) than
the sociologists… What is your bet? Great example of a.) self serving bias and b.) saying something that
we can likely characterize as controversial but its really stupid to get more web hits. c.) confirms
what we always suspected about the other social “sciences”.
“Economics” is a flexible concept, denoting basically whatever it is that economists study, and economists are flexible enough to move to study whatever seems most interesting. So if “psychology, group culture, and networks,” are the future of social insight, well then that may well be the future of economics.
It is striking that the USA has contributed massively to human wealth without ever producing a genuine copper-bottomed genius. Otherwise you’ve made do with fine scientists, excellent engineers, prodigious industrialists, practical Constitution-writers, innovative inventors and so on. But no Newton, Einstein or Clerk Maxwell. No Darwin or Mendel. No Lavoisier, no Gauss. No Rembrandt, Shakespeare, Beethoven, Mozart. No Smith or Ricardo, no Hume or Socrates, no Aristotle or Archimedes. Not one from the genuine top drawer. All very odd.
I don’t think we have reached the end of economics. I think the truth is we never really reached the beginning. Economics has contributed very little to our understanding of economies. About all it really taught us is that capitalism is good. I don’t think though that we really understand exactly why or even why socialism has been such a disaster.
“But no Newton, Einstein or Clerk Maxwell. No Darwin or Mendel. No Lavoisier, no Gauss. No Rembrandt, Shakespeare, Beethoven, Mozart. No Smith or Ricardo, no Hume or Socrates, no Aristotle or Archimedes. Not one from the genuine top drawer. All very odd.”
These names trend backward in time (e.g. Socrates). To be fair, you want to compare similar times. You’re giving Europe an over-2000-year window (since you include Socrates), and the US has existed only for a little over 200 years. And for much of that time it was relatively small and something of a backwater. It really came into its own as a massive contributor in the 20th century. Okay then, if we want to do a fair comparison, let’s limit ourselves to 20th-century names. Who’s left from the above list? Einstein did his earth-shattering work in the early 20th century, arguably before American preeminence. Maxwell died in the early 20th century and probably did his major work in the 19th (I didn’t check the details).
So, essentially, nobody is left. What we can gather from the list is that you can’t think of anybody in any part of the world who was genius level during the American period of preeminence. This says little about the US per se.
“Economists have shown how the market system processes the inputs, but there’s still much, much more to be said about where the inputs come from.”
And eventually economics will absorb the sciences that explain them?
Oh Great:
So the future of our prosperity is dependent upon Sociologists, Psychologists and Anthropologists: three groups whose economics are overwhelmingly socialist and hostile to the free market.
If you are right, then we are doomed.
There’s still a pretty big question to be answered from Econ 101. Why does self-interest in some instances work for the greater good? The invisible hand is still invisible…
i can’t understand clearly
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I agree and I also find very interesting the theory about geniuses birth rate at several nation growth proportions. The awesome fact is that geniuses at first don`t know what they are capable of doing, and they discover their potential by doing some psychometric test free on the internet or by coming up with some revolutionary thinking in an idle discussion with friends. You might not recognize a genius on walking him by on the street, but chances are for this to happen, considering how overpopulated we are.
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