The Soulful Science

What Economists Really Do and Why It Matters - Revised Edition

Diane Coyle

• Publisher: Princeton University Press
• Year: 2009
• Print ISBN: 9780691136233, 9780691125138
• eBook ISBN: 9781400833689
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

For many, Thomas Carlyle's put-down of economics as "the dismal science" rings true--especially in the aftermath of the crash of 2008. But Diane Coyle argues that economics today is more soulful than dismal, a more practical and human science than ever before. The Soulful Science describes the remarkable creative renaissance in economics, how economic thinking is being applied to the paradoxes of everyday life.


This revised edition incorporates the latest developments in the field, including the rise of behavioral finance, the failure of carbon trading, and the growing trend of government bailouts. She also discusses such major debates as the relationship between economic statistics and presidential elections, the boundary between private choice and public action, and who is to blame for today's banking crisis.

Prologue to Part 1

The first three chapters start this book with the question that has been central to economics since Adam Smith’s The Wealth of Nations. What makes economies grow, and why do some fail to do so? The latter part of this question has become one of the biggest global public policy issues of our time. In the rich Western countries some people have even rioted in the streets about it, while in the poor countries of the (non)developing world hundreds of millions of other people lead lives of quiet desperation.

There are additional reasons for starting my survey of the frontiers of economic research here. Chapter 1, covering what we have learnt about economic history, demonstrates the importance of new sources of data. Vital new data sets have become available since the 1980s, facilitated by ever-cheaper computer power. They have delivered results which have changed the way economists think about growth, its causes and social mechanisms, which is the subject of chapter 2. The new “top-down” growth theories which have resulted from the historical and macroeconomic evidence highlight the importance of issues such as the institutions and governance of economies. In chapter 3 I look at the implications for poor countries. Development economics has always been a controversial area of research, and that hasn’t changed. I would hardly describe the results of recent economic research as amounting to a consensus, even within the profession, never mind in the campaigning think tanks and nongovernmental organizations (NGOs). Still, there has been huge progress in the contribution of economics to analyzing and addressing the challenges of poverty and the failures of growth.

The second part of the book will switch from the top-down, macroeconomic approach to bottom-up microeconomics, and the third part will bring them together, looking at the new microfoundations of the economic study of society. It will bring us full circle, back to the social mechanisms for growth highlighted in this first part.

PART 1

The Mysteries of Wealth and Poverty

CHAPTER ONE

The History Detectives

Newcastle-upon-Tyne, in the northeast of England, is the principal town of one of the poorest regions of the United Kingdom. It has in recent times enjoyed a bit of an economic and cultural revival. The sculptor Anthony Gormley created the massive Angel of the North, a twenty-meter-high steel and copper angel with a wingspan of fifty-eight meters standing by the side of the main road into the northeast, to symbolize this renaissance. The Baltic Centre in Newcastle, a converted dockside warehouse, is an exciting arts venue. Nearby Gateshead boasts one of the country’s biggest shopping centers. The buzz, even if it proves vulnerable to a recession, harks back to the town’s nineteenth-century past. Then, as Britain’s busiest coal port, it was an industrial hub in the world’s leading industrial power. But the Great Depression of the 1930s brought massive unemployment and poverty. People in the northeast, like the other industrial areas of Britain, suffered from extensive hunger and the illnesses of poverty such as tuberculosis and rickets, living in filthy, polluted towns where the grandeur of the Victorian industrial monuments mocked the poor and unemployed.

In this depressing time and place grew a boy whose father was lucky enough to have a steady job as an engineer on the railways. It was an era of street-corner politics: passions ran high, there were mass marches, and even fights between the British fascists and their opponents. This child had a retired uncle, a colorful character living off a pension for injuries received in World War I, who used to stand on a soapbox making speeches advocating socialism. His admiring nephew was often in the audience. The boy also used to attend weekend schools run by the Cooperative Movement, one of the many educational initiatives run by and on behalf of working-class people.¹ As a thirteen year old in 1940, he heard a lecture that was to set the course of his life. It was given by his school history teacher and was based on a new book, How to Pay for the War, by the eminent economist John Maynard Keynes. The boy was hooked on the idea that problems like those he saw around him, unemployment, hunger, insecurity, might have solutions.

From that intellectual seed, Angus Maddison, Emeritus Professor of Economic Growth and Development at the University of Groningen in the Netherlands, went on to become one of the world’s leading economic historians. He is little known outside the economics profession but is nevertheless a central character in this chapter because of his definitive work in estimating levels of national output and growth for the whole world from the year 1000 to the present. For we are going to start with something basic: analyzing the history of the world during the past millennium. There is nothing like the grand sweep of history for tempting researchers to develop grand theories. One of the contributions of modern economics is to make it possible to start to weigh one grand theory against another by showing whether some are inconsistent with the historical evidence. And it does so thanks to the efforts of economic historians who apply the weight of statistical theory and computer power to data collected from neglected documents lying on dusty shelves in libraries around the world.

The scale of the task Maddison and other economists set themselves in assembling figures on gross domestic product (GDP) in many countries over many years should not be underestimated. The concept of this measure of the total output of the economy dates back only to 1940.² It was not until 1952 that an internationally consistent method of collecting the raw data was agreed and even now many countries, especially poor ones, do not assemble high-quality economic statistics. The formerly communist economies did not start measuring GDP in the same way until after 1990 and the quality of these figures remains poor, too. Prior to World War II no country collected statistics in the right form, and of course the further back in time we go, the less adequate the basic statistical information. What is more, to compare one country with another requires using exchange rates to convert one currency into another: this is particularly controversial and I’ll return to it later. So Maddison’s estimates of levels of output and growth rates for up to 199 countries since 1000 (although obviously for far fewer countries at the start of that period) is an impressive achievement. For modern times in particular he draws on similar work by other economists, notably the Penn World Tables developed since the mid 1970s by Irving Kravis, Alan Heston, and Robert Summers. The most basic facts about the past and present of the world economy represent a half-century-long effort by very many researchers and have only become widely available since the mid 1990s.

Maddison himself spent much of a long and varied career working for the Organisation for Economic Co-operation and Development (OECD) (based in one of the ritziest quartiers of Paris), first on postwar reconstruction in shattered Europe, and later on economic development in other parts of the world. The precursor to the OECD was the institutional embodiment of George Marshall’s famous plan to rebuild Europe in order to create the “political and social conditions in which free institutions can exist.” So by no means all of Maddison’s career was spent burrowing in the dim stacks of obscure libraries: he traveled widely in Latin America, Asia, and Africa.

One trip, in 1965, took him with three colleagues to Guinea, independent from France since 1958. The French had left in a huff when the country opted for independence: several thousand French administrators, soldiers, and experts abruptly leaving a country where only fifty people out of a population of three million had higher education.³ The new government called in help from the OECD’s Development Centre. Its small emergency team of economists found themselves giving a three-week course on how to run an economy to the president, Sekou Touré, his brother Ismael, who was economic development minister, and Keita Fodeba, the defense minister and former professional dancer and founder of the national ballet, Les Ballets Africains.⁴ Guinea’s soldiers were involved in development work, undertaking tasks such as mending roads and making clothes and shoes. The defense minister was also responsible for policing and had set up a crack unit of traffic police for the capital, Conakry, all glamorous women who doubled as a nightclub orchestra. As Maddison puts it, with admirable understatement: “Despite the chaos, it was a lively and interesting place” (see p. 13 of his autobiography (Maddison 1994)). Mongolia was another destination, where the economists stayed in Ulan Bator’s only hotel. Its Yugoslav chef had gone insane, so bad was the local food, and the British ambassador lived off steak and kidney puddings delivered in the diplomatic bag. He graciously shared these classic British pies with the OECD visitors.

Maddison explains in an autobiographical essay that his involvement with economic statistics, both in real time during the 1950s as countries developed their national accounts and through his work in the 1980s and 1990s developing the historical statistics, emerged out of his engagement with economic policy—which in turn had been triggered by his childhood experiences. The big question, certainly for anyone who has lived cheek by jowl with hunger and poverty as he did, is what makes an economy thrive, or fail to do so? Why do economies grow? Is it because of some aspect of culture, as Max Weber suggested in arguing that Protestantism explains the success of capitalism in northern Europe? Is demography destiny, as Robert Thomas Malthus and others since have thought, or is it climate, or ecology? Does colonial exploitation account for the success of the West at the expense of the rest, as many historians, notably Paul Bairoch and Fernand Braudel, have argued (Bairoch 1967; Braudel 1985)? Or does the secret lie, as economists since Adam Smith have believed, in the cumulative gains from the steady specialization of labor and increased trade? And what part is played by technology, which most people believe has an important role in modern growth; how does innovation fit with other explanations? Evidence is needed to start to judge the competing answers: which countries have in fact grown, and when? How do these patterns mesh with the proposed contributory factors, whether population growth or the dates of the Protestant Reformation or colonial conquest?

These are big questions, for the different grand theories of economic history and development are of more than theoretical interest. They point to different policies today for stimulating economic development and reducing poverty. Most of us are far more interested in sweeping arguments than in statistical detail, but it is only by looking thoroughly at the data that we can hope to reject some theories and tentatively accept others, just as scientific debates about the nature of the universe rest on the results of a thousand and one careful experiments. Angus Maddison has assembled much of the necessary evidence, establishing over the decades a network of researchers in the United States, Europe, Japan, and even the Soviet Union (when it still existed) dedicated to collecting the fundamental economic data. He calls it the “Club des Chiffrephiles,” or lovers of figures. Maddison’s great statistical syntheses of his work were published in 1995 and 2001, updated in 2003 and again in 2007, so there has been relatively little time for the data to have changed the academic consensus about the contours of world economic history (Maddison 1995, 2001, 2003, 2007). But this will happen. The figures are enriching economists’ understanding of what makes economies grow, and may even make it possible to reject some of the most prominent historical explanations.

CONFRONTING BIG THEORIES WITH BIG FACTS

It is possible, with the evidence published in Maddison’s historical statistics, to state several “stylized facts,” or valid generalizations, about the main trends in world economic history.

• There was no economic growth before 1000 c.e. This is an exaggeration, as the process of urbanization and improvements in nutrition indicate there must have been some economic progress. But it was too little to register a footprint in economy-wide GDP data.

• “The West” (as it became)⁵ but not “the rest” experienced a slow but steady upward crawl in per capita incomes from 1000 up to around 1800. Elsewhere, per capita GDP was the same in 1800 as it had been eight centuries earlier, although quality of life (in terms of life expectancy for example, or new goods) had improved.

• There was an acceleration in per capita GDP growth after 1820 in all the countries of the West. Britain’s surge happened a bit earlier.

• There was no similar growth surge elsewhere. This includes China, which was the world economic leader in medieval times and still on a par with western Europe at the end of the eighteenth century. Indeed, other researchers argue that China was still richer than “the West” in 1800: this remains an open statistical question. Either way, income per capita in China was about the same in 1900 as in 1300.

• The Western growth surge has continued to the present, with striking ups and downs. Ups include the period 1870–1913 and the 1950–73 “golden age,” while there were marked slowdowns in 1913–50 and after 1973—and perhaps also starting in 2007.

• A few non-Western countries have subsequently attained a much faster rate of growth, including Japan and, recently, China.

As so many countries have not got to the point of a modern surge in growth, the gap in incomes per capita is the greatest it has ever been, although it increased most rapidly in the early industrial era. In 1000, western Europe lagged behind Asia and northern Africa and far behind China in income levels; by the fourteenth century, on Maddison’s figures, it had caught up with world leader China; by 1820 the average Western income was two times the average of the rest, by 1900 six times, and by 2000 the gap was about seven to one.

Everyone would agree that measures of GDP per capita do not tell the whole story about economic development. So, for example, the statement about no growth before 1000 concerns measured GDP growth. It certainly does not deny the evidence of increasing human stature, decreasing infant mortality and improved hygiene, the growth of cities, and other indicators pointing to economic development. It’s simply that such changes, important as they are in human history, do not leave a footprint in GDP data. The upward creep in GDP per capita in those early times was too slow to register. Economists don’t ignore the alternatives to GDP at all. This is a point which will recur in later chapters: many noneconomists wrongly believe that economists only care about GDP, or about incomes measured in money terms. This has always been a false caricature, and it is certainly not the case now. However, these chapters are about understanding conventional GDP growth, and in this context, the most controversial issues in this list of stylized facts concern the confrontation between the figures and cherished historical theories. The pattern of growth makes grand theories look rather simplistic.

THE SEARCH FOR TURNING POINTS

To take a striking example, the statistical evidence sits uncomfortably with any theory which makes 1500 the key turning point in Western economic development. Maddison’s work indicates that there was no acceleration in g...

Table of contents

• Cover
• Title
• Copyrights
• Contents
• Acknowledgements
• Introduction
• Prologue To Part 1
• Part 1. The Mysteries of Wealth and Poverty
• Prologue to Part 2
• Part 2. Are Individuals Free to Choose?
• Prologue to Part 3
• Part 2. Are Individuals Free to Choose?
• References
• Index