Boettke on Cowen, Smith, Schumpeter, and Stupidity

Lynne Kiesling

One of the most beautiful (or frustrating) things about the Internet is that if you wait long enough, someone will say what you wanted to … and probably say it more eloquently. Pete Boettke and the commenters on this recent thread did that for me. In this discussion Pete analyzes Tyler Cowen’s argument in The Great Stagnation, which you’ve seen summarized and discussed in several places.

Tyler created a stir by arguing that the stagnation in real per-capita median income since 1980 is due to a deceleration in technological change, and that we have exploited all of the technological “low-hanging fruit” from an economic growth perspective. While his analysis has sparked considerable debate, I have found my thoughts on it to be rather inchoate — purchasing power is a tricky piece of data, differences in the quality of goods and what goods are available matter, how those available goods change our quality of life is hard to measure, and so on, so my initial reaction has been skeptical.

Pete has put his finger on what I think is an important interpretation of Tyler’s argument that is extremely relevant to our current economic analyses and policy debates:

Government policies since WWII have created an illusion that irresponsible fiscal policy, the manipulation of money and credit, and expansion of the regulation of the economy is consistent with rising standards of living.  This was made possible because of the “low hanging” technological fruit that Cowen identifies as being plucked in the 19th and early 20th centuries in the US, and in spite of the government policies pursued.  An accumulated economic surplus was created by the age of innovation, which the age of economic illusion spent down.  We are now coming to the end of that accumulated surplus and thus the full weight of government inefficiencies are starting to be felt throughout the economy.

Think of it in terms of two complementary categories of growth drivers as defined in Joel Mokyr’s Lever of Riches: Smithian (growth through trade and commerce) and Schumpeterian (growth through innovation, technological change, and the creation and application of useful knowledge). Pete takes this framework to analyze Tyler’s argument thus: despite government policies that distort incentives and redistributes resources in ways that reduce productivity, over the past 150 years we’ve had sufficient Smithian and Schumpeterian growth to more than offset the government drag on economic activity … but now the growth of government is shifting that relationship and leading to what Tyler calls the great stagnation, in this period between what Tyler characterizes as innovative waves. Pete says it thus:

We realized the gains from trade (Smithian growth) and we realized the gains from innovation (Schumpeterian growth), and we fought off (in the West as least) totalitarian government (Stupidity).  As long as Smithian growth and Schumpeterian growth outpace Stupidity, tomorrow’s trough will still be higher than today’s peak.  It will appear that we can afford more Stupidity than we can actually can because the power of self-interest expressed through the market off-sets that negative consequences. But IF and WHEN Stupidity is allowed to outpace the Smithian gains from trade and the Schumpeterian gains from innovation, then we will first stagnate and then enter a period of economic backwardness unless we curtail Stupidity, explore new trading opportunities, or discover new and better technologies.

Yes, this, this is an eloquent articulation of my inchoate thoughts on the subject! And this interpretation of Tyler’s argument bears directly on the current policy debates that are roiling the US, from entitlements and health care to debt ceiling and government borrowing to monetary policy to authoritarian immigration and security policies … all of which have grown to become net economic drags, anchors that we all have to pull along. In particular Tyler analyzes data indicating that government services, health care, and education are substantial contributors to what he sees as stagnation; these are the sectors of the economy where those government anchors are most prevalent, although he doesn’t pursue that connection as deeply as I would have liked in the analysis.

I’m wary about calling this phenomenon “stagnation”, because I’m not persuaded that Schumpeterian growth has decelerated (in the comments on Pete’s post Steve Miller makes the same point, as do others in the thread). This is a really complicated question to tackle, both because innovation/technological change/application of useful knowledge is punctuated and not uniform and because its endogeneity with Smithian growth and Stupidity (and, for that matter, with culture) means that its effects on productivity and economic growth show up with lags and in unpredictable patterns.

In part what I like about Tyler’s approach and Pete’s interpretation are the parts that point out what Pete calls the “economics of illusion”, and how that aligns with my take on regulation. In his EconTalk podcast on the work, Tyler points out that the expectation of consistent, uniform annual GDP growth rates of 3% lead us to fiscal and taxation policies to perpetuate that rate that are ultimately costly, and he argues that with the growth in the size and scope of government that illusion is more disastrous today than it was in 1985. In other words, striving for security, for constancy, for consistent economic growth facilitated by government policy to tweak the growth rate is pointless, because those goals are unachievable illusions. I make the same argument for regulation in electricity.

So I encourage you to read Tyler’s (short!) book, Pete’s post and the comment thread, and I recommend EconLog’s David Henderson’s review of it in Regulation in the Summer 2011 issue. David finds Tyler’s argument less than persuasive for some of the reasons I described above, and his analysis complements the other readings.

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4 thoughts on “Boettke on Cowen, Smith, Schumpeter, and Stupidity

  1. I liked Pete’s analysis, but I’m wary of confirmation bias.

    Just for kicks here is another stagnation story: up until about 1973 the United States had access to cheap energy which was mostly produced domestically. Since 1973 energy costs have been higher on average and more of our energy is imported. Our “energy return on energy invested” is dropping, and that is the story of stagnation. In this story the “low hanging fruit” is cheap energy. The low hanging fruit was picked and now we’re working our way higher and higher up the tree.

    I haven’t read Cowen’s book, but comparing Pete’s story and the ‘end of cheap domestic energy’ story, why should I believe Pete’s bad big government story and not the ‘end of cheap domestic energy’ story?

    By the way, I’m not claiming the ‘cheap energy’ story as my own belief, just tossing up a plausible hypothesis and asking why I should believe one or the other or neither.

  2. I think that’s a really good point, and it’s one that I don’t know if Tyler or Pete have considered. It’s also a hypothesis that’s consistent with the longer span of economic history, which you can frame as building economic growth by being able to access increasingly intense energy sources.

    I’m also wary of confirmation bias, but how Pete’s interpretation resonated with my thoughts on regulation really was striking.

  3. Lynne and Mike,

    Picking 1981 is problematic. That was the year that the US savings rate started its 25+ year decline. Eating one’s seed corn, or worse, spending accumulated savings in the form of home equity loans, is a key part of the story. The failure of the Big Three in Detroit also has laid waste across the industrial heartland over that period. That was a combined failure of management and labor unions, not government.

    There have been too many technological changes in those 30 years to count: I-Pod vs. LPs, tablets vs. typewriters, fresh fruit off-season imported from abroad rather than frozen or canned fruit, The Internet, Facebook, texting from mobile phones, etc. I believe that Mr. Cowen also stated in another article that the difference in the daily lives between the middle / working class and the rich has narrowed dramatically, even in the past 20 years.

    In short, we need to do the basics well – save, invest, and use government spending as a complement to the private sector rather than for social engineering.

  4. Eric,

    Surely you cannot mean that raising taxes to reduce private funds available for saving and investment, taxing the returns to savings and investment, and contemplating a “one time” wealth tax are not the path to long term prosperity.

    Surely you are not suggesting that redistributing wealth and income until we all achieve the ideal communal state is not the path to long term fulfillment.

    (sarc off)

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