16 December 2010

Within this fascinating interview Needed: An Economics for Grownups - National Review Online (via Arts & Letters Daily – note founder and editor Professor Denis Dutton honoured yesterday) , Professor Deidre McCloskey , Distinguished Professor of Economics, History, English and Communication of the University of Illinois at Chicago, discusses how the birth of the Industrial Revolution came about.

It started with the British and the Dutch some 300 years ago.

Professor McClosky’s latest book Bourgeois Dignity: Why Economics Can't Explain the Modern World has just been released – the second of likely six installments.

Solving the mysteries of the birth of the Industrial Revolution, has been the primary task and test of economic history. According to Professor McCloskey, modern economics to date has failed to explain this adequately – and because of this – economics has largely failed.

In her view, the major driver of the birth of the Industrial Revolution is speech. By extension – community attitudes.

At the beginning of the 18th century, people in the Netherland’s and Britain began talking about commerce as a good thing – a novelty at the time. They gave dignity to the bourgeoisie. And that drove capitalism, giving birth to the modern world.

The economist Angus Maddison, Historical GDP per capita statistics (XLS file – slow download) illustrate how human prosperity (for increasing numbers of the world’s population) has been like a hockey stick for 300 years over the span of the past 2000 years. A remarkable human achievement, over a short stretch of human history (about 12 generations).

As Professor McClosky notes, if this had not occurred, we would all still be on about $3 a day. She states –

“What changed was the sociology. That is what changed the attitude of the rest of society toward businesspeople, and with that new attitude came a change in government policy. It was suddenly all right – most clearly in the most bourgeois country on earth, the USA – to get rich and to innovate.”

Professor McCloskey makes it clear that the Global Financial Crisis is not the big issue of our time - but that the seismic changes in attitudes in China in 1978 and India in 1991 are the major modern events.

When asked her views on modern economics, Professor McCloskey responded –

“With alarm. But non economist intellectuals need to understand some elementary economics. There is no such thing as a free lunch, national income equals national product equals national expenditure, free trade is nice, more money causes inflation, governments are not all wise, spontaneous order is not chaos.”

“My alarm comes from the economists tendency to reduce humans to Maximum Utility machines. We need a humanomics, of the sort that Adam Smith and John Stuart Mills and John Maynard Keynes and Frederick Hayek and Gunnar Myrdal and Kenneth Boulding and Albert Hirshman practiced. Some current practitioners are Nancy Folbre, Arjo Klamer and Richard Brook. It is an economics for grown ups.”

The glaring inadequacies of modern economics were highlighted however with the Housing Bubbles induced Global Financial Crisis, as the writer explained within an article Housing Bubbles And Market Sense some two years ago, more recently within Sound Housing Market Measures Required and on a lighter note Australia is different.

It is pleasing however to see these hugely constructive conversations occurring within and outside the economics profession, as this profession has a huge influence on the public’s understanding of “how the world works”, public policy and other professions.

If economists, policymakers and the wider public understood the significance of the “artificial scarcity triggers” being the cause of the housing bubbles, with finance simply being the “fuel” (as Mike Insulmann, CEO of the urban research group MetroStudy does), the perils of strangling urban land supply and inappropriately financing infrastructure, would have been “blindingly obvious” to them decades ago.

The Annual Demographia International Housing Affordability Surveys illustrate clearly year after year that housing should not exceed three times annual household income. Adding “financial fuel” would have simply led to over production of new housing (note Atlanta, Georgia – refer Schedule 2 Demographia Survey) – not housing bubbles – something far less damaging.

Importantly too – business and professional organizations need to act ethically and in the wider public interest, as the writer explained to the Housing Industry of Australia - The need for clarity – some years ago. Business can only prosper in an environment where it is trusted. It’s past time they realized this.

ENDS

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