Every now and then you have one of those cross disciplinary moments when everything you think you know about a discipline is proven wrong.
I thought I had a pretty good handle on economics, but was blown away last night to find that most economists apparently think that wealth is created by savings, or efficiency gains.
This is so obviously wrong, that I was surprised Dierdre Mccloskey, a renowned American economist, would be touring Australia telling us at length that it was wrong.
But apparently there is a real debate in the economics profession, and Mccloskey is on the side that says that innovation is the main driver behind increasing wealth, and her innovation on innovation is to say that it is cultural.
Mind you, I had come across plenty of people who argue that getting the tax system right, or encouraging national savings, are the keys to national wealth, but any survey of world economies shows that this is hard to justify. If tax was the key, why is it that Sweden and Australia have very similar levels of per capita national wealth?
I’m not arguing these things don’t matter, just that if they were the main drivers, then Australia would be very much richer than Sweden, and it isn’t.
Basically wealth is a measure of the stuff that one has available, now or in the future, for one’s personal use. It can be temporarily embodied in things, such as buildings, but the measure of value of a thing is the cash flows that it can generate, and cash flows are only valuable because of what other things they can buy.
An increase in wealth occurs when we control, or have access to, more things.
In this context, looking around modern society, the harnessing of energy through electricity, steam and combustion, is probably the biggest generator of wealth ever – it gives us the slaves that allow us the time to buy access to luxuries that even top human predators a thousand years ago could only dream of.
So having social systems that encourage rather than stifle innovation is important, and according to Mccloskey (assuming I am getting this right) societies where “Having a go” is encouraged have got it right, which societies where “Having a fair go” is demanded, will get it wrong.
Which obviously feeds back into tax systems, but as a second order issue.
So technology is the main driver of economic growth – who would have thought? Apparently not economists.
I heard Mccloskey speak last night at a function jointly sponsored by the The Economic Society of Australia, Griffith University and the ALS Friedman Dinners, and know little of her work apart from this.
So perhaps her approach to savings is more nuanced than it sounded. While the innovation thesis is incontrovertible, I did think that she underplayed the role of savings.
The great powers of the world have all been great banking powers, and the reason that the US colossally bestrides the globe isn’t primarily because she has a large army, but because her financial power buys her one.
And while the US is a tremendously innovative society, others are as well, but it is easier to fund innovation in the US than it is anywhere else, and this has got to be a key to her dominance.
I often think about the information revolution and regret that I wasn’t born in the US. If I had been OLO would be quite different from what it is today. Apart from access to a huge English speaking audience, we would also have had access to Tech Bubble finances.
We’re more innovative than the Huffington Post, yet the Huffington Post is now much larger and more successful than we are ever likely to be. Why?
Innovation counts, but other things, like access to savings, count just as much, certainly in the race to get innovation to market.
Would we know who Bill Gates or Steve Jobs were if they had been born and worked anywhere else but the US? I don’t think so.