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The rich get richer and the poor get poorer?

24 Oct 2021

  • Prof. Deirdre McCloskey on how economic and political theories failed to explain real economic growth
By Imesh Ranasinghe Did you know that the average poor person in the world has benefited more in improving their lives in the last 60-70 years than in the previous 200 years? “Nor during the age of innovation has the poor gotten poorer, as people are always saying. On the contrary, the poor have been the chief beneficiaries of modern capitalism. It is an irrefutable historical finding, obscured by the logical truth that the profits from innovation go in the first act mostly to the bourgeois rich,” Prof. Deirdre McCloskey said in her book “Bourgeois Dignity: Why Economics Can’t Explain the Modern World”. Prof. McCloskey, who trained as an economist at Harvard University in the US in the 1960s, where she received her PhD, has written over 25 books and some 400 academic articles covering economic theory, political theory, economic history, philosophy, rhetoric, statistical theory, feminism, ethics, and law. Her recent popular books include “Bettering Humanomics: A New, and Old, Approach to Economic Science”, “Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All”, and “Leave Me Alone and I'll Make You Rich: How the Bourgeois Deal Enriched the World”. Prof. McCloskey describes herself as a literary, quantitative, post-modern, free-market, progressive, episcopalian, ex-Marxist, mid-western woman from Boston, not a conservative but Christian classical liberal. Speaking at a webinar organised by The Night Watchman Society, she explained why countries have got rich and how economic and political theories have failed to explain real economic growth. The growth of Third World and colonialism Prof. McCloskey said that although Sri Lanka is not as rich as countries like the US and Japan, it is still growing and is in a better-off place than it was in the 1800s and the 1900s. This is quite true in the world, she added, noting that it is not only the so-called “West” that has experienced enormously large economic growth. Going back to the time as a university student, she said in the 60s, countries like Hong Kong, China, India, Sri Lanka, and Bangladesh were considered hopeless in economic terms. In 1957, when she visited Ireland, it was considered a Third World country, but today it has the fourth-highest income per head in the world. “It’s open to Sri Lanka to have the same; there is no racial, religious, or geographical reason that Sri Lanka shouldn’t follow Hong Kong, Singapore, Taiwan into great prosperity,” she said. Prof. McCloskey said the usual way economists look at economic growth is deeply erroneous and mistaken, and added that this mistake applies to both the Left and the Right of conventional politics. She pointed out that on the Left, the idea is that countries like France or Spain are rich because of colonialism or Britain is rich because it exploited the working class, and the West, in general, is rich because it exploited the Third World. “The exploitation argument is very, very weak. I understand that colonialism was not nice. It was hurtful and in a way, it continues to be emotionally hurtful to those who were colonised,” she said. Taking an example to explain why the argument is weak, she said: “If I take a gun – very easy to get in my own country (the US) – and I go to the local grocery store, hold it up, and, in the course of this robbery, accidentally kill a clerk – that wasn’t my intention, but I did. The clerk and the store are really badly hurt, but I get $ 37 or something from the robbery. So my benefit from imperialism is not the same as the hurt from imperialism.” So she stressed that the imperial argument is weak and the internal exploitation argument is even weaker. Internal exploitation argument She added that the internal exploitation theory is that the bosses, the small group of factory owners, have to steal surplus value from the workers, then reinvest the surplus-value (also known as a profit), and become rich while the workers become poorer and poorer. However, she said that in the 1800s, with the exception of priests and lords, the average person in the world earned $ 2-3 a day, meaning our ancestors were utterly poor, couldn’t read, and died before they were 30. Meanwhile, countries at present have a much higher average income of $ 45 per person. The theory is that the theft by one group of society called the bosses from the other part of society managed to make the bosses richer and the rest of society poorer. If you are trying to explain an increase by a factor of 30, 40, or 50 in the average income per head, it doesn’t make sense,” Prof. McCloskey said. Further, she said that Joan Robinson, the great Marxist economist at the University of Cambridge, pointed this out a long time ago. “She said it can’t be the case that both the bosses are made vastly better off, the poor made poorer, and yet on average a poor person is much better off,” the economist added. But on the other side of the standard political spectrum, she said that the conservatives say the virtuous behaviour of the rich people in saving makes for modern economic growth. Conservative accumulation of capital Explaining the conservative theory, she said more accumulation of capital will lead to higher economic growth, where society as a whole is better off. “If you make more roads, hotels, factories, improved land, and tea, the average person gets better off,” she added. In a sense that’s true, she went on to explain, as people living in apartments in a rich society are better off than living in tents. “But capital by itself does not cause anything and it is true. If you get a university degree, learn a skill, or if you are strong, that’s useless unless there is a human idea of how to use them in a productive way,” Prof. McCloskey pointed out. The world-renowned economist said that pouring capital into an economy, which used to be the theory of the World Bank of how to achieve modern economic growth, doesn’t accomplish anything if it’s not accompanied by innovative ideas. She said it could be proven in two ways: Historically and economically. The historical way, according to her, shows that sheer capital accumulation or “saving” cannot be the explanation of why in 50 years Sri Lanka will have the same income per head as Europe, if the cards are played right, as, after all, saving is a human habit. Taking an example, she said the Grand Canal in China, which is the longest canal in the world, improved acreage and paddy fields. This was a tremendous investment and something commonly seen in East and South Asia. “If investment, those capital accumulations, by itself was enough to cause modern economic growth, it would have happened in China or ancient India. So something is historically wrong about that argument,” she added. The economic argument, Prof. McCloskey said, is against accumulation, as the solution to the problem of why people are rich and why in the next 50 or 100 years the whole world is going to become rich is that sheer capital accumulation by just having more and more apartment buildings experiences diminishing returns. “It’s perfectly obvious; you have a bicycle, a scooter, and a car. Suppose you had another automobile and another one and another. It’s clear that the fifth vehicle would be of little use to you. It’s a marginal product; if you use it for making things or providing services, it would be very low,” she said. Ideas and innovation helps economic growth She added that without an idea of how to do things, the game cannot be raised. “That’s how in the last two centuries, we have grown from $ 2-3 a day to $ 45. This isn’t about inflation but about real growth,” she noted. Further, she said that China catching up on the average income per head is quite an improvement in inequality, as the country has 20% of the world’s population. However, she said that although it is often said that there is a terrible problem of inequality in the modern world, it’s more or less the opposite. “Because China and now South Asia is growing fast, which has 40% of the world’s population, you can’t get more world inequality if the poorest people in the world once in South (Asia) and East Asia are now getting much better off at a rate much faster than the western countries that have been rich for a long time,” she added. The economist said that it’s the ideas in a creative society that makes people rich, and further stressed that the idea need not be a fancy one but a simple one, such as opening a hairdressing saloon in an area that lacks such a thing, which raises the game of the particular area and makes it better off. In the historical perspective, she said that humans have always innovated – the humans invented the bow and arrow 70,000 years ago to kill and some person in South Central Asia above the Black Sea learned how to ride horses, which had been eaten before that. The innovation of growing tea in Sri Lanka, she said, was all advances and raising the game. “But they were too slow before the 1800s; they were too slow to offset the Malthusian theory of the greater population that the initial prosperity brought – more children, more mouths, and less food per mouth,” she said. But Prof. McCloskey said that the great change in the 1800s, almost since Thomas Malthus first articulated the idea of Malthusian pressures in 1798 and since the first date of publication, became less and less relevant. The reason for it was the production of ideas that enormously increased worldwide. She said the ideas came from liberalism – from advanced intellectuals in Northwestern Europe. “It is highly confined in the 18th Century where European writers such as Voltaire, John Locke, and Mary Wollstonecraft said an ideal society would be one in which hierarchies, castes are eliminated, in which everyone has equal permission not equal opportunity and are allowed to trade with each other completely free and are allowed to try our new ideas. They have free speech, free assembly, and free press,” she added.


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