False Dichotomy

     

Deirdre McCloskey seems to believe that an argument about institutions (that is, incentives) can be settled by an argument that it was not institutions but ethics that mattered. I cannot recall that anyone — least of all Doug North or Avner Greif — ever argued that ethics (or morality) did not matter. Indeed, Greif has a set of recent papers (Greif, 2012; Greif and Tadelis, 2010) in which the importance of morality is neatly integrated into an institutional framework. More generally, a theory of institutions without the underlying set of beliefs, ethical or otherwise, would be woefully inadequate, as North himself would be the first to admit (North, 2005). That does not imply that institutions do not matter. The reason that institutions have become so popular among economists is not because it has been the flavor of the month or because “as the World Bank nowadays recommends, to add institutions and stir” (as Deirdre writes, violating her own friendly advice given to me so often: “don’t sneer.”). The idea that institutions mattered for economic growth resonates in the economics profession because it rings true. Governance matters. The effective rhetorical device employed by Acemoglu and Robinson in their Why Nations Fail (2012) is to juxtapose two societies that are similar in most respects except governance: North and South Korea, or Nogales, Arizona, and Nogales, Sonora. In every measurable way, a huge gap exists between these cases, yet it’s hard to say that North Koreans are ethically different from their southern cousins even though their GDP per capita is lower by a factor of 18 (an order of magnitude that should impress Professor McCloskey, who finds a factor of “at least sixteen” to be “the heart of the matter”).

Most of Deirdre’s arguments against my defense of institutions seem to be equally ill-founded. I wrote a long paper on the “Institutional Origins of the Industrial Revolution” in which I discussed how and why British institutions may have been better in c. 1700 than they had been in England in 1200, or than they were in Germany in 1700. Even Gregory Clark, who is if possible even less friendly to the idea that institutions were of importance than Deirdre, has a little graph pointing out how English murder rates in 1700 were lower than in 1200, a point since made in great detail by Steven Pinker. Property rights existed in 1200, but whether they confirm that “property rights were very good in England many centuries before the Industrial Revolution or the Great Enrichment” remains unproven. Were they as good? Surely the rule of law, as approximated by the level of daily violence, had improved between King John and King George.

Deirdre objects to my example (and that is all it was) of apprenticeship in England. Yes, of course, there was apprenticeship on the Continent and in most places in the world. But was it the same? One small institutional difference: on the whole, the rules in most of Europe were enforced by formal organizations, craft guilds. In England, because guilds were relatively weak, the rules had to be self-enforcing. It worked better: as early as 1690, even Dutch travellers commented on the superiority of British artisans and their high level of skills from furniture design to the casting of metal rollers (Dobbs and Jacob, 1995, p. 74). By the late 18th century British engineers and skilled artisans were swarming all over the Continent, installing, maintaining and operating state of the art machinery. Ethics?

Related Links: 

The real issue, unresolved as yet, is how we build an institutional and cultural explanation of technological progress. After all, if we agree with Deirdre that the modern growth is driven by innovation, what is the institutional basis of the growth in useful knowledge? How were the people who created it rewarded, compensated, and incentivized? It is this issue that my new book, The Cultural Origins of Economic Growth (Princeton University Press, forthcoming, 2019), will tackle, though a taste of the argument can be found in various papers. The argument in a nutshell eschews the false dichotomy between beliefs and preferences (“ethics” if you want — but there is so much more) on the one hand and institutions on the other. It looks at the European experience of the period 1500-1700 and asks where the Enlightenment came from. If we understand the sources of the Enlightenment, I believe, we have solved a great deal of the riddle of the Great Divergence. The book argues that ideas and beliefs of all kinds and types are presented to a market for ideas, in which people try to persuade one another (the importance of persuasion and rhetoric as a historical force was impressed upon me many years ago by one Deirdre McCloskey). But the market for ideas took place in a framework that created rules and norms, higher rewards for the successful and reduced risks for the venturesome. In short, the institution in which people tried to persuade one another mattered. Within that institution, successful cultural entrepreneurs such as Martin Luther, Nicolaus Copernicus, and Benedictus Spinoza (to name just three) could thrive and influence others. The test of a good market is that entrepreneurs and innovators can be spectacularly successful, and this is what happened in Europe. The institution that made all this possible was called the Republic of Letters. It was a virtual institution, a network of publications and correspondence, of people who read other people’s work, vetted, criticized, and cited it. They rarely met, but that did not prevent them from setting up rules that rewarded and penalized, determined how people should and should not behave, and what was an acceptable product. It was competitive, creative, and destructive all at the same time, as effective markets are supposed to be. This is not the place to explain precisely how and why this institution emerged and what the rules were; but it was there for all to see. Unlike, say, the Middle Ages or Classical Antiquity, it was not a construct of historians: The term originates in 1417, and Pierre Bayle began publishing his newsletter named Nouvelles de la République des Lettres in 1684. It created open science, a world in which discoveries and new ideas were placed as quickly as possible in the public domain — an institution that is still with us. It was the institution that explains the fantastic explosion of useful knowledge that drove modern growth.

Related Links: 

Ethics mattered too, of course, who would deny it? None of the arguments that Deirdre makes in her rich and persuasive books rings wrong to me. But the evolution of ethics, too, emerged from a competitive marketplace for ideas and was subject to persuasion. Was it ethical to kill someone because he was a heretic? In 1550 the answer was different than in 1680. Was it ethical to postulate that the earth was not the center of the universe, that a vacuum could exist, that Ptolemy and Galen were wrong about most things? Among many societies, to impugn the learning of the “ancients” was the one of the worst sins --- not least among my forefathers, the Jews of Europe (who expelled the sinful and horrid apostate Spinoza from their midst). Was it ethical to do science not only to illustrate the glory and wisdom of the creator but also, as Bacon said, “to establish and extend the power and dominion of the human race itself over the universe, his ambition … is without doubt a wholesome thing and … noble…. Now the empire of man over things depends wholly on the arts and sciences. For we cannot command Nature except by obeying her”?

Oscar Wilde once said, “It is not enough for me to succeed; my friends have to fail.” It is not enough for Deirdre to be right; (almost) all others have to be wrong. As she well knows, I stand beside her in most of the chapters in Dignity, in which she disposes of half a dozen or more bogus explanations of the Industrial Revolution and the Great Divergence. But on institutions she is dead wrong. This is not to say that her critique of much of the institutional literature is off the mark -- far from it. But if North may not have gotten all the details quite right, his insight stands undiminished.

Culture cannot be understood without institutions, just as institutions cannot be understood without culture. Understanding how the two interacted remains a challenge for the next generation.