In her column, American economist Deirdre McCloskey explains why, in her view, modern wealth derives less from capital than from the freedom of individuals and the power of ideas..
Economists once believed that the accumulation of capital was the cause of the wealth of nations. It's a truism that you can get rich by usurping your neighbor. That's what makes theft so attractive. Even Adam Smith, who fiercely opposed theft, slavery and conquest by you or your state, believed that what made a nation rich was accumulated capital. After all, he said, in 1776, Holland was rich and had plenty of physical capital, while the Scottish Highlands were poor and didn't have much.
It took two and a half centuries for economists to get away from this apparent truth. Marx, who followed Smith on many points, believed that «surplus value» derived from the working class was reinvested by capitalists, enriching the country, and especially the capitalists. French Marxist Thomas Piketty built his sensational – and sensationally wrong – book about inequality, published in 2013, on this very belief.
But Marxists weren't the only ones who continued to believe that capital accumulation - the stacking of bricks, or university degrees - was the source of our wealth. For decades after its creation in 1944, the World Bank followed the orthodox recipe of «add capital and stir». It didn't work. Ghana received massive foreign aid, but did not become rich. In the 1990s, the World Bank adopted a new recipe: «Add (good) institutions and stir». That didn't work either.
What the economists and their followers have failed to see is that the world's strangely great enrichment since 1776, of 3000% per person, has been mainly caused by innovation. So we'd do better to remove the misleading word «capitalism» and replace it with «innovism». Innovators, once freed from the Ancien Régime, came up with new ways of doing things. Railroads. Electric motors. The modern university. The Internet. Allowing women to work for pay. Ending tariffs on foreign trade. And so on, with billions of innovations unique to the modern world.
Capital was sometimes necessary, of course, particularly for railroads, for example. But all sorts of conditions that don't in themselves create new ways of doing things, such as having a workforce or complying with laws, were also necessary. And other modern inventions, such as computer tools, are first and foremost concepts, requiring no capital investment.
What is decisive and represents the real secret of modern economic growth is human creativity. In 1911, Joseph Schumpeter, in 1928 Allyn Young and in 1933 G. T. Jones began to move away from the dogma that capital drives wealth. Alas, many recent economists continue to think along these lines, within what they call «growth theory».
But Young and Jones died prematurely, and Schumpeter fell back on his original dogma. It took an article by Robert Solow (Nobel 1987) in 1957 to revive thinking about the power of ideas in economics, what he called «technical progress». It's like dark matter and dark energy, which, according to physicists, now account for 95% of everything that exists. Yet economists still clung to the Smith-Marx dogma, and the Nobel Committee awarded dozens of prizes to economists who developed it.
In November, the committee finally recognized the fundamental difference: ideas, not capital, have shaped the modern world. It awarded the prize to a French theorist and two empirical scientists, the Canadian Peter Howitt and my dear friend Joel Mokyr, who is Dutch, Israeli and American. Hooray!
But when will economists understand that the new ideas themselves came not from other elements of physical capital, but from the liberation of ordinary people? The original liberalism that advocates equal rights to do things is the main reason we are prosperous.
Let's hope this realization doesn't take two and a half centuries.
Every month, carte blanche to Deirdre Nansen McCloskey. Professor Emerita of Economics at the University of Illinois at Chicago, she holds the Isaiah Berlin Chair in Liberal Thought at the Cato Institute, Washington D.C.
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