Beyond Positivism, Behaviorism, and Neoinstitutionalism in Economics
by Deirdre Nansen McCloskey
University of Chicago Press, 2022; 222 pp.
Deirdre McCloskey is a great economic historian, and in Beyond Positivism, she makes a number of valuable points that draw from her immense learning in this field. I’d like to concentrate on a few of these insights in this week’s column.
She stresses the importance of the “Great Enrichment,” the process by which the free market has, by rescuing millions from poverty, increased longevity and bettered conditions of life and material well-being far beyond all previous advancements. Concerning this, she says:
We economists have been trying ever since 1776 to explain the Great Enrichment. About the lower end of the Great Enrichment, the economic historian Cormac O’Gradá documents the recent sharp decline in famines. The world’s highest end of productivity and consumption, enjoyed now by about three-quarters of a billion people, and each year by more and more, supports a flourishing life. . . . In other words, when we lecture to undergraduates about economic history, our message of hope is that human welfare has shot up startlingly since 1800, giving it a pattern like the handle and blade of an ice-hockey stick. . . . History in 1800 reached the business end of the hockey stick. (emphasis in original)
How has the Great Enrichment come about? McCloskey is particularly concerned to challenge the explanation of the “neoinstitutionalists,” who believe that changes in institutions, by which they mean customary patterns of social behavior, such as legal codes, explain economic growth. and she concentrates most of her fire on Douglass North. According to him, the state made an essential contribution to economic growth in England, the beginning point of the enrichment, by establishing a new and more stable institution of property rights in the seventeenth century. McCloskey prefers her own explanation, emphasizing a new attitude of approval for profitable economic innovation in the eighteenth century, and her response to North is of interest to anarchocapitalists.
North argues that changes in English property law made possible the secure contracts that are essential to a growing free market economy, but McCloskey is not convinced:
One thing that does not explain [the Great Enrichment] . . . are the alleged legal changes arising from the Glorious Revolution of 1688–1689. For one thing, the laws did not change. For another, English contract and property law were well developed and enforced “before the reign of Edward the First,” which is to say 1272, as Pollock and Maitland established as long ago as 1895, a fact confirmed repeatedly by later legal historians.
Why should anarchocapitalists be interested in McCloskey’s argument? The answer is that she goes beyond the point made in the passage just quoted. She maintains that property rights existed before states and that states have for the most part acted to prey on these rights, not to secure them:
A society wholly without property rights and the rule of law is not a society. The historical truth is that since the beginning of human societies, the enforcement of property rights has been more or less universal, with or without the permission of the sovereign, if there was one. The scientific question is “more or less,” not “yes or no,” or “present and absent.” Little bands of hunter-gatherers, with no fixed sovereign, or much of any leader at all, had a vivid sense of ownership. . . . To speak of larger societies, Israel under the judges had fully enforced private property, though the evidence from the Bible is mixed on its exact character, well before the Israelites unwisely demanded that God give them a king—who then in fact compromised their property rights, just as God through Samuel had warned them that he would.
Despite the immense benefits of a free market, interventionists oppose a policy of laissez-faire. An unhampered market might work, they acknowledge, under the conditions of competitive equilibrium, but these conditions are so stringent that they in practice can never be met. In the real world, monopoly and “externalities” are ubiquitous, and the state must be vigilant against them.
McCloskey assails these contentions on several fronts. She explains that the market is a process of endeavors by competing firms to satisfy the demands of consumers. She asserts that the equations of static equilibrium are by no means to be taken as a welfare ideal and urges people to accept the Austrian view.
Concerning monopolies, she argues that the problem does not lie with the free market but with the state, which bears the primary responsibility for their creation. In the free market, successful firms that hold a dominant share of the market will attract competitors, and, as the market expands, the scope for competition will widen.
Perhaps McCloskey’s most interesting criticism of the arguments for interventionism stems from her work as an economic historian. It is not enough, she says, to allege that there are defects in the market. It must be demonstrated that these effects are large enough to be important, and that requires precise statistical studies. She writes, “Moderate leftists, such as Paul Samuelson and Joseph Stiglitz and many of their followers, argue (without measurement) that a perfect market cannot exist, and therefore government intervention is desirable/necessary/good. . . . This has got to stop. . . . It substitutes an existence theorem for a quantitative judgment, substituting blackboard economics for factual inquiry.”
McCloskey comes to the conclusion that those who rely exclusively on alleged theoretical defects of the market are relying on “empty boxes” to make a case against the market. But this is precisely what economic theorists have done, she shows:
John Clapham’s complaint in 1922 was that the theorists, as they still do nowadays, were proposing on the basis of a diagram or two that government should subsidize allegedly increasing-returns industries. The economists were silent on how to attain the knowledge of how to do it or how much their nonquantitative advice would actually help an imperfect government to get closer to the perfect society if it started from a pretty good, or pretty bad, actual society. . . . He chided A.C. Pigou in particular. One looks, Clapham wrote. into Pigou’s “The Economics of Welfare to find that, in nearly a thousand pages, there is not even an illustration of what industries are in which boxes [that is, in which theoretical categories]”
McCloskey has used her knowledge of economic history to demolish the arguments of the interventionists, and I highly recommend her book.