John Nye on Joel Mokyr (from my email)

by  Tyler Cowen in

I became an economic historian because I thought then and still believe economic history is more scientific than most of economics. It is/was not afraid to combine rigorous analysis with softer, more verbal theory and analytic narrative.
The Nobel underestimates how important it was that Joel who first promoted the distinction between Smithian growth and Schumperterian growth.
That is, Smithian growth is that growth which emerges from trade and well functioning markets. But societies that experienced Smithian growth usually did not overcome the Malthusian trap enough to provide sustained per capita income growth.
Schumpeterian growth was that based on innovation, which is a combination of creative invention AND the ability to successfully market a viable commercial product that changes the industry. The two do not, and prior to the 18th century only rarely came together.
Furthermore, he later added the idea of knowledge noting that inventing things — such as the imperial Chinese –without a deep understanding of the underlying theory behind the invention’s success limited the extent to which that idea could propagate.
As I tell my students, even when the US was still a minor power (such as the early 19th century) it was already a major innovator with items like the cotton gin, the sewing machine and the American system of manufactures. This idea of systematically making products with interchangeable parts took decades or more to become a true reality, but the Americans were the first to take this seriously at a high level.
Joel understood all this and our discussions on this subject have continued to this day.
Note, that because of the nature of his work, Joel did not get a top 5 pub till the late 2010s. By today’s standards, he would not have gotten tenure at most strong and second tier departments in the world. This shows the limits of the current. The old system where top schools balanced judgment against publication record — which GMU strives to promote — was a better source of truly innovative talent than the mechanical formulas promoted in most of worldwide academia.

AI and the First Amendment

by  Tyler Cowen in

The more that outputs come from generative AI, the more the “free speech” treatment of AIs will matter, as I argue in my latest column for The Free Press.  Here is one excerpt, quite separate from some of my other points:

Another problem is that many current bills, including one already passed in California, require online platforms to disclose which of their content is AI-generated, in the interest of transparency. That mandate has some good features, and in the short run it may be necessary to ease people’s fears about AI. But I am nervous about its longer-run implications.

Let’s say that most content evolves to be jointly produced by humans and AI, and not always in a way where all the lines are clear (GPT-5 did proofread this column, to look for stylistic errors, and check for possible improvements). Does all joint work have to be reported as such? If not, does a single human tweak to AI-generated material mean that no reporting is required?

And if joint work does have to be reported as joint, won’t that level of requirement inevitably soon apply to all output? Who will determine if users accurately report their role in the production of output? And do they have to keep records about this for years? The easier it becomes for individual users to use AI to edit output, the less it will suffice to impose a single, supposedly unambiguous reporting mandate on the AI provider.

I am not comfortable with the notion that the government has the legal right to probe the origin of a work that comes out under your name. In addition to their impracticality, such laws could become yet another vehicle for targeting writers, visual artists, and musicians whom the government opposes. For example, if a president doesn’t like a particular singer, he can ask her to prove that she has properly reported all AI contributions to her recordings.

I suspect this topic will not prove popular with many people.  If you dislike free speech, you may oppose the new speech opportunities opened up by AIs (just build a bot and put it out there to blog, it does not have to be traceable to you).  If you do like free speech, you will be uncomfortable with the much lower marginal cost of producing “license,” resulting from AI systems.  Was the First Amendment really built to handle such technologies?

In my view free speech remains the best constitutional policy, but I do not expect AI systems to make it more popular as a concept.  It is thus all the more important that we fight for free speech rights heading into the immediate future.

What matters for central banks?

by  Tyler Cowen

This study examines the drivers of inflation levels, inflation variability, and growth variability collectively representing long-term central bank performance across 37 advanced economies in the Great Moderation era. A key finding is that central bank performance is consistently linked to the overall quality of institutions, while central bank-specific factors such as independence, exchange rate regimes, or inflation targeting show no significant impact. The analysis is extended to the 2022 inflation resurgence, using pre-2022 country characteristics. The results indicate that reliance on imports from Russia (likely gas) and its interaction with post-COVID GDP growth are the primary determinants, suggesting that the inflation surge was not a reversal of the Great Moderation.

That is from a recent paper by

Democracy and Capitalism are Mutually Reinforcing

by  Alex Tabarrok

Many people argue that democracy is incompatible with capitalism but they differ on whether democracy will kill capitalism or whether capitalism will kill democracy. Peter Thiel, for example, famously said, “I no longer believe that freedom and democracy are compatible.” Thiel’s argument has a long-pedigree. The classical economists from Adam Smith to John Stuart Mill all worried that democracy would kill capitalism. Even Marx and Engels agreed with the analysis arguing that under democracy “The proletariat will use its political supremacy to wrest, by degree, all capital from the bourgeoisie, to centralize all instruments of production in the hands of the State…” they differed only in welcoming such a revolution.

On the other side of the aisle we have the moderns such as Robert Reich and Joseph Stiglitz who argue in Reich’s words that Capitalism is Killing Democracy as “Corporations” and “billionaire capitalists have invested ever greater sums in lobbying, public relations, and even bribes and kickbacks, seeking laws that give them a competitive advantage over their rivals…”

A third argument, consistent with the views of Hayek, Mises, Friedman and others, is that capitalism and democracy are compatible and even mutually reinforcing. Ludwig von Mises, for example, argued that “Liberalism must necessarily demand democracy as its political corollary.”

My latest paper (WP version) (with Vincent Geloso) is in the new book, Can Democracy and Capitalism be Reconciled? We take the third view and show empirically that capitalism and democracy go hand in hand. We also provide some mechanisms for this correlation which I may discuss in a future post.

The data is very clear that democracy and capitalism go hand in hand. The figure below, for example, uses the Fraser Institute’s Economic Freedom Index to measure capitalism and the Varieties of Democracy Index to measure democracy (we use liberal democracy for convenience but show the correlations are strong with any variety of democracy).

Every major democracy is a capitalist country and virtually every capitalist country is a democracy (Singapore and Hong Kong being the only two exceptions.) Moreover, the upper left region–countries with a lot of democracy and low economic freedom, i.e. state control of the economy–what we might call the “Democratic Socialism” region–is empty.

We show further in the paper that changes in democracy are positively correlated with changes in economic freedom. We can see this very clearly by examining a natural experiment–the fall of the Berlin Wall. The fall of the Berlin Wall created a big positive shock to democracy which was followed by large and sustained increases in economic freedom.

It is sometimes argued that only an authoritarian regime is capable of “imposing” big increases in economic freedom and this is clearly false but it is true that there have been large increases in economic freedom in some authoritarian regimes. In the paper we look at the biggest such cases, Peru, Nicaragua, Uganda and Chile. The case of Peru carries some general lessons.

Peru began in 1970 with an authoritarian regime and only modest economic freedom. Economic freedom declined under an authoritarian regime and to levels well below those of any democracy. Modest increases in democracy brought modest increases in economic freedom. Under the authoritarian Fujimori regime there were large increases in economic freedom which in the 2000s were ratified, solidified and strengthened under democratic governments.

What we learn from this brief history is that authoritarian regimes can decrease as well as increase economic freedom. Indeed, one reason we sometimes see big increases in economic freedom under authoritarian regimes is simply that they are starting from the wreckage left by the previous regime. It’s easy to increase economic freedom a lot when you begin with a base level far below that of any democratic regime. Moreover, the Peru case is representative in that when a democratic regime is established it typically does not reject but instead ratifies and strengthens economic freedom.

What accounts for the correlation in economic freedom and democracy? The paper discusses a number of mechanisms of which I will only mention two here. Consider two ways to get rich, redistribution and growth. Redistribution can make a minority rich at the expense of a majority. A dictator can live in luxury amid national misery. But no redistribution scheme can enrich the majority—only growth can. Broad prosperity comes not from dividing wealth, but from creating it through pro-growth, capitalist policies. As a result, in a democracy, the rulers, the demos, can only get rich through growth and this provides some incentive to think about capitalism and economic freedom. The incentive is not a guarantee, of course, democratic voters can vote for bad policies but if they want to get rich they have to think about growth and that means capitalism.

The second reason for the correlation is a negative one, democratic socialism collapses into authoritarian socialism. As Robert Dahl argued:

It is not the inefficiencies of a centrally planned economy…that are most injurious to democratic prospects. It is the economy’s social and political consequences.

A centrally planned economy puts the resources of the entire economy at the disposal of government leaders. …“power corrupts and absolute power corrupts absolutely.”

A centrally planned economy issues an outright invitation to government leaders, written in bold letters: You are free to use all these economic resources to consolidate and maintain your power!

The bottom line is if you care about economic freedom, democracy is the way to go and if you care about democracy, economic freedom is the way to go.

Read the paper (WP version) for more.

Tanmay Khale on the decline in iconic songs over time (from my email)

by  Tyler Cowen in

https://x.com/wdavidmarx/status/1977162349107900770?s=46

A model that would explain this (which seems plausible to me for how judges generate these lists):

1. Come up with some metric for assessing works which is normalized such that the overall distribution is constant over time, usually by normalizing a metric that isn’t constant over time.

E.g. (a sports example) touchdowns scored by quarterback -> percentile of touchdowns scored by quarterback among currently active quarterbacks.

The metrics are less concrete for art, but I think people try to make similar adjustments in art as they do in sports (to make the distributions constant over time). The motivation that the judges would give for this is that one should assess each contribution based on how exceptional it was for its time.

2. Classing an achievement as “great” when it’s at least a certain percentile compared to whatever preceded it, by one of the metrics above. (“Oh wow, Johnson’s X was far more Y than anything preceding it, what an innovative work!”)

1. and 2. together will basically guarantee that you’ll have (by that definition) fewer great works over time; in the simple case where you’re looking for something that’s better than everything before it by some metric where the distribution is constant over time, the chance of observation n being better than everything preceding it is 1/n…

I don’t claim that judges are doing exactly this, but they only have to be doing some of this (e.g., their assessment criterion is 20% something like this) for it to lead to the behavior highlighted in the Twitter post!

We Turned the Light On—and the AI Looked Back

by  Alex Tabarrok in

Jack Clark, Co-founder of Anthropic, has written a remarkable essay about his fears and hopes. It’s not the usual kind of thing one reads from a tech leader:

I remember being a child and after the lights turned out I would look around my bedroom and I would see shapes in the darkness and I would become afraid – afraid these shapes were creatures I did not understand that wanted to do me harm. And so I’d turn my light on. And when I turned the light on I would be relieved because the creatures turned out to be a pile of clothes on a chair, or a bookshelf, or a lampshade.

Now, in the year of 2025, we are the child from that story and the room is our planet. But when we turn the light on we find ourselves gazing upon true creatures, in the form of the powerful and somewhat unpredictable AI systems of today and those that are to come. And there are many people who desperately want to believe that these creatures are nothing but a pile of clothes on a chair, or a bookshelf, or a lampshade. And they want to get us to turn the light off and go back to sleep.

…We are growing extremely powerful systems that we do not fully understand. Each time we grow a larger system, we run tests on it. The tests show the system is much more capable at things which are economically useful. And the bigger and more complicated you make these systems, the more they seem to display awareness that they are things.

It is as if you are making hammers in a hammer factory and one day the hammer that comes off the line says, “I am a hammer, how interesting!” This is very unusual!

…I am also deeply afraid. It would be extraordinarily arrogant to think working with a technology like this would be easy or simple.

My own experience is that as these AI systems get smarter and smarter, they develop more and more complicated goals. When these goals aren’t absolutely aligned with both our preferences and the right context, the AI systems will behave strangely.

…we are not yet at “self-improving AI”, but we are at the stage of “AI that improves bits of the next AI, with increasing autonomy and agency”. And a couple of years ago we were at “AI that marginally speeds up coders”, and a couple of years before that we were at “AI is useless for AI development”. Where will we be one or two years from now?

And let me remind us all that the system which is now beginning to design its successor is also increasingly self-aware and therefore will surely eventually be prone to thinking, independently of us, about how it might want to be designed.

…In closing, I should state clearly that I love the world and I love humanity. I feel a lot of responsibility for the role of myself and my company here. And though I am a little frightened, I experience joy and optimism at the attention of so many people to this problem, and the earnestness with which I believe we will work together to get to a solution. I believe we have turned the light on and we can demand it be kept on, and that we have the courage to see things as they are.

Clark is clear that we are growing intelligent systems that are more complex than we can understand. Moreover, these systems are becoming self-aware–that is a fact, even if you think they are not sentient (but beware hubris on the latter question).

China fact of the day

by  Tyler Cowen in

Chinese brand Mixue Ice Cream and Tea, the world’s largest fastfood chain by number of stores, is set to open its first location in New York as it continues to expand its overseas presence.

The beverage giant had 46,479 locations globally at the end of last year, with 41,584 of them located in China, according to the company’s annual report. Elsewhere in Asia, where its store count is 4,895, around 2,600 storefronts are located in Indonesia, with others in Vietnam, Thailand and Malaysia. About 70 percent of its overseas revenue comes from Indonesia and Vietnam, Bloomberg reported.

The fast-food outlet, known for its brightly colored menu, is most famous for its range of offerings — from bubble teas and ice cream to coffee or fruity concoctions often costing under $1. This makes them popular with university students, people on a tight budget or those who enjoy a bargain.

Here is the full story, note that makes it the number one fast food chain in the world.  Via Orikron.

French facts of the day

by  Tyler Cowen in

Macron’s government consistently spent more as a share of total output than any other OECD member, with the public sector accounting for over 57% of GDP in 2024. The telling trend is France’s divergence from its neighbors. When Macron took office, France’s debt-to-GDP ratio was 11 percentage points above the Eurozone average; by 2024, that gap had increased to 25 points. Public debt is set to hit 116% of GDP in 2025 and the deficit is set to double the EU average.

France’s fiscal stance under Macron reflects continuity with recent trends, rather than any break with the past. The Stability and Growth Pact sets a 3% deficit and a 60% debt reference. Since 2002, France has breached the limits every year, and the deficit limit every year except two. More telling, France’s deficit has exceeded the Eurozone average every single year since 2002. Its public debt has grown faster than its peers’ since 1995, with only a brief pause under President Sarkozy…

And:

In 2021, Macron signed a law that commits France to zero net land development by 2050 (and half by 2030), making it illegal to develop any land in France unless some existing city or village is demolished. His governments banned renting less-well-insulated homes, allowed councils to forbid building second houses, and imposed nation-wide rent controls.

That is from Luis and Pieter Garicano.

Nobel Prize in economics goes to Philippe Aghion and Peter Howitt and Joel Mokyr

by  Tyler Cowen in

Excellent choices.  Here is the press release with links to longer discussions of their works.

This is a prize for economic growth, and for the ideas of creative destruction.  Those are some of the most important ideas in economics, so I could not be happier with this pick.  Joel Mokyr in particular has been a long-time associate of GMU and Mercatus, so I would like to congratulate him in particular.

Aghion is at INSEAD in France, Howitt at Brown, and Mokyr at Northwestern.  It is also nice to see some people outside of “the usual schools” winning the prize.  Aghion and Howitt, of course, worked together to produce a model of creative destruction and economic growth.  Here are their key papers together.

Joel Mokyr is an economic historian, and best known for his pioneering work in explaining the Industrial Revolution in England.  Here are his best-known works.  Read The Lever of Riches and The Gifts of Athena and A Culture of Growth.  I have benefited most from The Enlightened Economy: An Economic History of Britain 1700-1850.  He has a new book coming out in November, with Tabellini and Greif.  It is correct to consider him as an “Enlightenment thinker.”  Brian Albrecht has a good thread on this.

Below you can find individual posts on Aghion, Howitt, and also Mokyr.  Here is Alex’s post on the prize.

The Economics Nobel goes to Mokyr, Aghion and Howitt

by  Alex Tabarrok in

The Nobel prize goes to Joel Mokyr, the economic historian of the industrial revolution and the growth theorists Phillippe Aghion and Peter Howitt best known for their Schumpeterian model of economic growth.

Here’s a good quote from Nobelist Joel Mokyr’s the Lever of Riches.

Yet the central message of this book is not unequivocally optimistic . History provides us with relatively few examples of societies that were technologically progressive. Our own world is exceptional, though not unique, in this regard. By and large, the forces opposing technological progress have been stronger than those striving for changes. The study of technological progress is therefore a study of exceptionalism, of cases in which as a result of rare circumstances, the normal tendency of societies to slide toward stasis and equilibrium was broken. The unprecedented prosperity enjoyed today by a substantial proportion of humanity stems from accidental factors to a degree greater than is commonly supposed. Moreover, technological progress is like a fragile and vulnerable plant, whose nourishing is not only dependent on the appropriate surroundings and climate, but whose life is almost always short. It is highly sensitive to the social and economic environment and can easily be arrested by relatively small external changes. If there is a lesson to be learned from the history of technology it is that Schumpeterian growth, like the other forms of economic growth, cannot and should not be taken for granted.

Aghion and Howitt’s Schumpeterian model of economic growth shares with Romer the idea that the key factors of economic growth must be modelled, growth is thus endogenous to the model (unlike Solow where growth is primarily driven by technology, an unexplained exogenous factor). In Romer’s model, however, growth is primarily horizontally driven by new varieties whereas in Aghion and Howitt growth comes from creative destruction, from new ideas, technologies and firms replacing old ideas, technologies and firms.

Thus, Aghion and Howitt’s model lends itself to micro-data on firm entry and exit of the kind pioneered by Haltiwanger and others (who Tyler and I have argued for a future Nobel). Economic growth is not just about new ideas but about how well an economy can reallocate production to the firms using the new ideas. Consider the picture below, based on data from Bartelsman, Haltiwanger, and Scarpetta. It shows the covariance of labor productivity and firm size.  In the United States highly productive firms tend to be big but this is much less true in other economies. In the UK during this period (1993-2001) the covariance of productive and big is considerably less than half the rate in the United States. In Romania at this time the covariance was even negative–indicating that the big firms were among the least productive. Why? Well in Romania this as the end of the communist era when big, unproductive government run behemoths dominated the economy. As Romania moved towards markets the covariance between labor productivity and firm size increased. That is the economy became more productive as it reallocated labor from low productivity firms to high productivity firms.

Aghion and Howitt’s work centers on how new ideas emerge and how creative destruction turns those ideas into real economic change through the birth and death of firms. But creative destruction is never painless—growth requires that some firms fail and that labor be displaced so resources can flow to new, more productive uses. Aghion and Howitt will likely point to the United States as dealing with his process better than Europe. Business dynamism has declined in Europe relative to the United States, a worrying fact given that business dynamism has also declined in the United States. Nevertheless, the US has a more flexible labor market and appears more open to both the birth of new firms (venture capital) and the deaths of older firms. Yet, in both the United States and around the the world the differences between high productivity and low productivity firms appears to be growing, that is the dispersion in productivity is growing which means that the good ideas are not spreading as quickly as they once did. Aghion and Howitt’s work gives us a model for thinking about these kinds of issues–see, for example, Ten Facts on Business Dynamism and Lessons from Endogenous Growth Theory.