James A. Dorn
Joel Mokyr, the Robert H. Strotz Professor of Arts and Sciences and professor of economics and history at Northwestern University, was awarded the Nobel Prize in Economic Sciences today, along with Philippe Aghion of the Collège de France and the London School of Economics and Peter Howitt of Brown University. Below is a January 2024 commentary about Mokyr’s work, written by Cato Senior Fellow Emeritus James A. Dorn.
Joel Mokyr’s widely acclaimed book A Culture of Growth (2018) has important parallels to the work of Peter Bauer (1915–2002), a pioneer in development economics. Both economists recognize the importance of culture and a competitive market for ideas in fostering economic development.
Mokyr was primarily interested in explaining the factors that led to the Enlightenment and the Industrial Revolution, while Bauer was concerned with the transformation of a subsistence economy into an exchange economy. His careful observation of less developed countries (LDCs) in Southeast Asia and British West Africa in the 1940s and 1950s convinced him that many of the leading ideas regarding the determinants of economic growth were wrong. He presented strong evidence that poverty was not self-perpetuating, that external trade was beneficial both in enlarging consumption opportunities and spreading new ideas, and that culture matters on the road to prosperity. He recognized the failure of state-led development and the promise of freedom, individual choice, and limited government.
The Economist praised Mokyr’s book, saying, “It is refreshing that an economist is taking seriously the idea that ideas and culture make a difference to economic growth.” This article examines some of the key ideas of Mokyr’s book and shows that Bauer shared similar views with regard to the importance of ideas and culture in fostering economic growth.
Mokyr on the Origins of the Modern Economy
The key role of useful knowledge in promoting growth lies at the heart of Mokyr’s quest to discover the origins of the modern economy. As he writes, the notion that “useful knowledge” could “transform the economy” was “the driving force in bringing about the Great Enrichment” (p. 267). Economic growth requires a competitive market for ideas. The institution that helped foster a vibrant market for ideas in the United Kingdom and Europe in the 17th and 18th centuries was the so-called Republic of Letters (see Mokyr, chap. 12).. Scholars could exchange ideas via an active network of informed individuals, who could also move from one jurisdiction to another to avoid suppression of free thought. The Scientific Revolution led the way for the Enlightenment and Industrial Revolution, which transformed the West into a modern economy.
A Model of Cultural Change
Mokyr defines culture broadly as “a set of beliefs, values, and preferences, capable of affecting behavior, that are socially … transmitted and that are shared by some subset of society” (p. 8). Those beliefs, values, and preferences can change over time as people acquire new knowledge. In that sense, Mokyr argues they are “a matter of choice” (p. 12).
The role of “cultural entrepreneurs,” such as Francis Bacon and Isaac Newton (see Mokyr, chaps. 7–8), spurred the Scientific Revolution with its emphasis on the scientific method, the laws of nature, and the promise of improvement. Enlightenment thinkers spread optimism about the possibilities for progress—provided government power was limited and human (natural) rights protected.
Mokyr develops “a model of cultural change that explains why the Enlightenment took place in Europe.” His model rests firmly on two factors: the emergence of a Republic of Letters and the fact that a fragmented Europe allowed the market for ideas to develop as jurisdictions competed for talent (pp. 339–41). A culture of growth replaced the stasis that had enveloped Europe as “changes in the market for ideas” widened the range of knowledge and allowed “cultural entrepreneurs” to flourish. Regions that allowed greater freedom in the exchange of ideas led to “choice-based cultural evolution” and prosperity (chap. 6).
In a nutshell, Mokyr holds that economic development requires a commitment to “pluralism and competition with a coordination mechanism that allows knowledge to be distributed and shared, and hence challenged, corrected, and supplemented” (p. 340).
The Market for Ideas
Many economists have pointed to the importance of institutions on incentives and behavior in studying the factors that influence growth. However, less attention has been paid to the importance of a free market for ideas. Mokyr argues that “the central messages of the Enlightenment that mattered to subsequent economic change were products of the competition in the market for ideas and were a direct continuation of the Republic of Letters” (p. 268).
In particular,
The liberal ideas of religious tolerance, free entry into the market for ideas, and belief in the transnational character of the intellectual community were essential to Enlightenment thought. These were the cultural underpinnings of the institutions that not only supported a functioning market for ideas, that is, a market in which innovators had a fair chance to persuade their audiences. They also actively encouraged intellectual innovation and thus laid the foundation for the emergence of the modern economy (Mokyr, p. 178).
The lesson from Mokyr is that a government that protects persons and property and supports a free market for ideas best serves to promote human welfare. From a study of the European Enlightenment, he understood that “to advance the material conditions of humanity,” it is necessary to be open to new ideas and to constrain the power of government for the good of society. Those two ideas “and their triumph in the market for ideas,” argues Mokyr, “created a massive synergy that led to the economic sea changes we observe.” Notably, “from industrialization and the growth in physical and human capital to the discovery and mastery of natural forces and resources” that could not have been imagined in the mid-18th century (p. 341).
Bauer’s Approach to Economic Development
Like Mokyr, Peter Bauer placed importance on cultural factors and the market for ideas. In particular, he pointed to cultural changes that widened the range of choices open to people and improved their lives. His studies of the rubber industry in Southeast Asia (Bauer 1948) and small traders in British West Africa (Bauer 1954) convinced him that poor people could lift themselves out of poverty with hard work, entrepreneurial activities, and internal and external trade—provided they had the freedom to do so. He exposed wrong ideas offered by the elite in diagnosing economic development, and he used close observation and careful reasoning to confirm classical liberal theories to help explain the wealth of nations.
The Principle Objective and Criterion of Economic Development
For Bauer, “the principle objective and criterion of economic development” is “the extension of choice, that is, an increase in the range of effective alternatives open to people” (Bauer 1957: 113; Dorn 2002). Measures that increased freedom of choice and limited the power of government, thereby protecting persons and property appealed to Bauer, both from a moral and practical perspective. In this sense, he was in line with classical liberalism.
This view of development put Bauer at odds with post-second World War experts who favored state-led development and foreign aid and those who opposed free trade. The failure of central planning and the lack of development in countries that practiced protectionism proved Bauer to be correct. The World Bank recognized his importance by including him in its first edition of Pioneers in Development (1984).
Tenets of Postwar Development Orthodoxy
In the 1950s, it was widely held that there was a “vicious circle of poverty.” Most development economists assumed that low incomes in LDCs, together with the lack of foresight, would constrain saving and investment, which were seen as essential for growth. Poor people were seen to be incapable of responding to market incentives, and external trade was considered to be ineffective or even harmful. Poverty was therefore regarded as self-perpetuating. The only way out of this “poverty trap,” according to postwar development orthodoxy, was by following the path of central planning or relying on foreign aid (Bauer 1984: 1).
Case Studies
Bauer questioned the tenets of postwar development orthodoxy based on his knowledge of classical economic principles and close observation of LDCs. His early studies of Southeast Asia and British West Africa in the 1940s and 1950s convinced him that economic development mostly depended on “the individual voluntary responses of millions of people to emerging or expanding opportunities created largely by external contacts and brought to their notice … primarily through the operation of the market.” He went on to say that, “These developments were made possible by firm but limited government, without large expenditures of public funds and without the receipt of large external subventions” (Bauer 1984: 5).
What Bauer observed first-hand was that “the ordinary people of the LDCs were not necessarily torpid, rigidly constrained by custom and habit, economically timid, inherently myopic or generally deficient in enterprise.” For example, illiterate peasants in Southeast Asia and West Africa “planted millions of acres to produce new cash crops,” some of which (e.g., rubber, cocoa, and kola trees) took five years before yielding marketable products. Those direct investments, argued Bauer, were “made possible by voluntary changes in the conduct, attitudes and motivations of numerous individuals” (Bauer 1984: 5).
Determinants of Economic Development
Although Bauer was skeptical about the possibility of constructing a general theory of development (as was Mokyr), he did think it was feasible to recognize patterns in the process of economic development and make predictions about the consequences of alternative policies intended to improve economic performance (Bauer 1976: 24).
After studying a number of LDCs, Bauer concluded:
Economic performance depends on personal, cultural, and political factors, on people’s aptitudes, motivations, and social and political institutions. Where these are favorable, capital will be generated locally or attracted from abroad, and if land is scarce, food will be obtained by intensive farming or by exporting other goods (Bauer 2000: 29).
Bauer also argued that a large and growing population is not a detriment to economic progress, nor is a high population density—provided the institutional setting is favorable to freedom and responsibility. In his view, “Economic achievement and progress depend on people’s conduct, not on their numbers.” He criticized the use of national income per capita as a measure of personal welfare since “it ignores satisfaction people derive from having children or from living longer.… Ironically, the birth of a child is registered as a reduction in national income per head, while the birth of a calf shows up as an improvement” (Bauer 2000: 30–31).
Bauer pointed to the positive effects of external contacts. He argued that international trade with more developed economies exposes LDCs to the possibility of advancement. It undermines “attitudes and customs” that “inhibit material advance.” External contacts also “promote new ideas, attitudes and modes of conduct, as well as new crops, wants and improved methods generally, besides encouraging production for sale” (Bauer 1976: 38).
In sum, if people are left alone to exchange goods and ideas in international markets, they will benefit by “voluntary adjustment to new opportunities.” However, protectionist policies will restrict those opportunities and perpetuate poverty (Bauer 1976: 85).
Conclusion
Bauer and Mokyr, like Deirdre McCloskey, both sought to understand the process of development from a wider perspective than simple growth models. They both viewed culture and the market for ideas as important noneconomic variables that account for the wealth of nations.
Bauer (1976: 84) was convinced that “economic development requires modernization of the mind.” He recognized the importance of free people and free trade in widening the range of choices open to people. He predicted that central planning and foreign aid would fail to bring about material advancement and that market-led development was the best path toward a harmonious society. In particular, he held that state-led development destroys an “experimental turn of mind” (Bauer 1976: 84, 86).
Bauer’s life work was vindicated as development experts found that many of his criticisms of orthodox development theory proved to be correct. His inclusion in the World Bank’s Pioneers in Development is testimony to his many contributions to development economics. As Amartya Sen noted, in his introduction to Bauer’s final book, From Subsistence to Exchange,
Bauer has been a consistent and cogent defender of the role of the market economy in bringing about economic development. No one has done more in clarifying the reach of Adam Smith’s thesis regarding the creative contributions of exchange.… The role of culture in economic development and change is a recurring theme in Bauer’s writings (Sen 2000: x).
Mokyr was very influenced by McCloskey on the importance of culture, which is a factor that is still overlooked by many economists. But while Bauer was a development economist and not an economic historian like Mokyr and McCloskey, he was an outstanding example in his field that made related points decades ago. As Sen (p. ix) reminds us, although Bauer’s ideas are gaining adherents, “the new enthusiasts … often do not give him enough credit” (see Vasquez 2007 for why Bauer’s work was neglected for so long). A reference to Bauer in Mokyr’s book would have added to its distinction.