Adam Gurri has asked me for my opinion on a recent piece by Deirdre McCloskey. So, now seems a good a time as any to write about some of my misgivings of McCloskey.
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First, and this applies not only to McCloskey, attempts to explain important events should embrace uncertainty. When I read McCloskey and others, the industrial revolution was caused by institutions or ideas or X or Y. Every author has a fairly precise understanding of the factors of the industrial revolution. In reality, given that we are still arguing about it, I am skeptical of their certainty.
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Let’s imagine a future where we can simulate earth on the eve of the industrial revolution. With this advance we can make slight changes in institutions, ideas, and other factors to evaluate the impact on the timing, speed, and sustainability of the industrial revolution. Without these simulations, we could still have a betters market based on what those simulations would reveal. I doubt the odds any of the scholars place on their model are 100-1, and I imagine they would place different confidence on different parts of their models. As such, we should be honest about confidence levels in the current models, something that is rarely seen in such scholarship. As an aside, I imagine McCloskey would deny the applicability of the above thought experiment, but that is a discussion for another day.
Second, I greatly prefer McCloskey’s previous writing style. I found myself unable to understand several of her points, requiring a rereading. The essay also reads like a stream of consciousness, there is no single point, rather numerous smaller ones.
Third, I would like to give my understanding of the neo-institutionalist account of the industrial revolution. Glorious revolution was an institutional change that led to more commerce. Along with the increase in commerce technological innovation hit an inflection point of no return. The institutional change was a necessary, but not a sufficient factor to generate economic growth.
The role of technological change is also tricky to understand. We can imagine a set of undiscovered technologies. However, the set is heterogeneous. To have sustained technological improvement requires being in a part of the set where the undiscovered technologies are close enough together to allow for sustained advancement.
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For example, it is difficult to imagine sustained technological change coming after the discovery of fire. The following discoveries, how to cook meat, how to heat forge metal, etc, are all sufficiently complicated that we expect them to take generations to discover and perfect. For sustained economic growth of the kind experienced since the industrial revolution there must be a much faster advancement of technology.
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Now, perhaps undiscovered technology was sufficiently lumped together for sustained economic development in previous time periods, but political repression never allowed economic growth.
McCloskey critiques neo-institutionalism, arguing that a change in institutional equilibria cannot account for the 20-30 fold rise in living standards. However, this is an uncharitable view of the neo-institutionalists, as they would argue that the new institutional equilibria was necessary for technological advancement. Knowing government agents wouldn’t shut down your artisan shop for infringing on some government monopoly is crucial for economic growth.
Fourth, the critique McCloskey applies to the neo-institutionalists can also be applied to her. A change in ideas alone is unlikely to lead to 20-30 fold increase in living standards. Also, I believe she overstates the effect of a change in ideas. Many people in modern society have beliefs others find abhorrent. However, those people find groups which share their ideas, lowering the cost of holding them. There is little reason to believe merchants in England wouldn’t find associate amongst themselves lowering the cost of holding those ideas.
Fifth, McCloskey seems to conflate two things, the industrial revolution and economic development. The quick rise of East Asian tigers seems to suggest than an institutional change is enough to spur economic growth. Perhaps other conditions are necessary for the industrial revolution, but catch up growth seems to rely less directly on ideas.
Sixth, she argues that things like identity and morality cannot be captured by neo-classical economics, but gives little reason as to why. A simple explanation of identity and morality is they serve to signal in group status. People want to trade with people who have a shared set of expectations about what constitutes fair trade. More importantly, they want to live with people with a shared understanding of permissible violence. Because the most convincing person is one who believes what they are saying, identity and morality are a central part of humanity.
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Seventh, and this applies to McCloskey more broadly than just this paper, what basis does she have for abandoning central economic assumptions. For ideas to matter either preferences are not constant (what she seems to be arguing given her jabs at de gustibus) or rational expectations is false. You cannot have all constant preferences, rational expectations, and ideas mattering. Given the importance of constant preferences and rational expectations the burden of proof is on McCloskey to change methodological assumptions. This burden of proof is especially difficult to reach in complex problems, and she fails to meet it.
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Lastly, McCloskey is arguing that economics should embrace speech, stories, shame, and the Sacred. I agree. Economists should also take culture more seriously, take beliefs and morality more seriously, and rely less on complex mathematics. However, economists can do all that just fine within the existing framework.