Chapter 7 - The Turning Point

This chapter again seems to channel Schumpeter's creative destruction - "Conflict over institutiosn and the distribution of resources has been pervasive throughout history."(184)

The authors go on to examine England, the Glorious Revolution and the Industrial Revolution as an illustration of a "turning point" from extractive to inclusive institutions. I think of Joel Moykr's work on technology and the industrial evolution and wonder to what extent the analysis in this chapter holds up. That is, the answer to Why England? sees to remain an open question and the institutional response presented in this chapter is one of a number of alternatives rather than the conclusion.

In any event, the overview in this chapter does connect political change and technological change in an interesting manner.

Chapter 5 - I've seen the future and it works

This chapter echoes Schumpeter's Creative Destruction and makes, for me, a valuable distinction between growth under extractive institutions v growth under inclusive institutions.

I look forward to our discussion of an assertion made by the authors early in the chapter:

". . .sustained growth requires technological change,"(124)

While this is an intutively attractive cause/effect relation, I wonder to what extent has it been reflected in the literature and in empirical work. That is, the Solow model of growth, Romer's growth model and other models assign differing weights to the role of technology in the complex process of change. So, I wonder to what extent this assertion is useful.

That said, the discussion of growth under extractive institutions is very helpful for understanding the hurdles faced when a society facing transition. There are a number of players in extractive societies that do in fact earn rents and, in the short run, provide some level of growth to the entire society. "Extractive institutions are so common in history because they have a powerful logic: they can generate some limited prosperity while at the same time distributing it into the hands of a small elite. For this growth to happen, there must be political centralization."(149)

So, here is a dilemna, previous the authors argue that some degree of political centralization is necessary for the development of inclusive institutions. But here, in chapter 5, they recognize that political centralization is necessary for extractive institutions to emerge and persist. Is it a matter of degree? That is, how does the "proper" level of centralization emerge and persist?

On page 131 the authors further assert: "It [growth] had been done by government command, which could solve some basic economic problems."

I have an issue with the idea that any systme can "solve" problems. Economic systems set up incentives that motivate activity that can address problems, create problems and provide alternatives to existing responses to problems.

That said, I would have liked to know which economic problems are solved by command economic systems.

deLong writes . . .

Four times in the past century, a large chunk of the industrial world has fallen into deep and long depressions characterized by persistent high unemployment: the United States in the 1930’s, industrialized Western Europe in the 1930’s, Western Europe again in the 1980’s, and Japan in the 1990’s. Two of these downturns – Western Europe in the 1980’s and Japan in the 1990’s – cast a long and dark shadow on future economic performance.


In both cases, if either Europe or Japan returned – or, indeed, ever returns – to something like the pre-downturn trend of economic growth, it took (or will take) decades. In a third case, Europe at the end of the 1930’s, we do not know what would have happened had Europe not become a battlefield following Nazi Germany’s invasion of Poland.

In only one instance was the long-run growth trend left undisturbed: US production and employment after World War II were not significantly affected by the macroeconomic impact of the Great Depression. Of course, in the absence of mobilization for WWII, it is possible and even likely that the Great Depression would have cast a shadow on post-1940 US economic growth. That is certainly how things looked, with high levels of structural unemployment and a below-trend capital stock, at the end of the 1930’s, before mobilization and the European and Pacific wars began in earnest.

In the US, we can already see signs that the downturn that started in 2008 is casting its shadow on the future. Reputable forecasters – both private and public – have been revising down their estimates of America’s potential long-run GDP.

For example, labor-force participation, which usually stops falling and starts rising after the business-cycle trough, has been steadily declining over the past two and a half years. At least some monetary policymakers believe that recent reductions in the US unemployment rate, which have largely resulted from falling labor-force participation, are just as valid a reason for shifting to more austere policies as reductions in unemployment that reflect increases in employment. And much the same processes and responses are at work – with even greater strength – in Europe.
Most important, however, has been what looks, from today’s perspective, like a permanent collapse in the risk-bearing capacity of the private marketplace, and a permanent and large increase in the perceived riskiness of financial assets worldwide – and of the businesses whose cash flows underpin them. Given aging populations in industrial countries, large commitments from governments to social-insurance systems, and no clear plans for balancing government budgets in the long run, we would expect to see inflation and risk premiums – perhaps not substantial, but clearly visible – priced into even the largest and richest economies’ treasury debt.

Creative destruction

Boyes posting on the reaction to fracking is an excellent illustration of the impact and reaction to creative destruction. As the process of innovation and creativity is actualized the prospect of change is unsettling. This sense of discomfort is amplified by the threat that change poses to those who are successful under the existing regime.

That said, the role played by education at any level in confronting creative destruction is significant. One perspective of the role of education is to create independent thinking and provide a framework for examining alternative points of view. In fact, this ideal lies at the heart of the economic way of thinking - trying to understand costs and benefits, the incentive and institutional framework that shapes incentives and costs and an analysis of the consequences of choice.

Another view of education, explicated by Sowell, Hayek and others, is indoctrination. That is, as in the case that Boyes reports, schools can present and advocate for an ideology. The point of view presented by the elementary school teacher is one based on fear of change, distrust of emergent processes and hostility to change.

Boyes and I have explored the moral content of economics and this case is an excellent opportunity to consider the moral framework offered by the economic way of thinking and to juxtapose the economic way of thinking with an ideological view that mobilizes to oppose creative destruction in favor of a static view. Further, the static view favored by those who control or seek to control is a narrow one premised on the false premise of egalitarianism.

I am anxious to explore this juxtaposition in an effort to better understand those who would deny progress or change.

Borders and creative destruction

Creative destruction - this article is a nice illustration of Joseph Schumpeter's insight.

Douglass North writes about the importance of adaptive efficiency to the process of economic change. This flexibility or lack thereof is an essential ingredient in the path of economic growth, improving economic welfare and progress. Trial and error and the associated willingness to embrace risk and uncertainty is on of the foundations of an institutional framework that allows for liberty and responsibility.

So, unlike the US auto and financial services industry, we can see in the retail book industry a nice view of the forces of creative desctruction.

The Washington Post observes:

Borders, they know, is struggling to survive. It recently suspended payments to book publishers. Dozens of its stores across the country, including several in the Washington area, have closed. For many in the industry - and for this group of Borders regulars - the question is not whether the chain will go under, but when.

"How many record stores are there these days?" Minor said after the meeting, resigned to the eventual end.

A Borders spokeswoman declined to comment or make

North reminds us that the process of change is ubiquitous and that efforts to slow down, derail, or prevent change lead to very perverse and often unintended outcomes. We are in a positive to view this in the US auto and financial services industries.

However, retail books allows us to see the alternative - creative destruction at play with relative little effort by outside forces - the government, labor unions, NGOs to slow down, derail, or prevent the changes that are sweeping though individual behavior in dealing with information and thought.

Michael Rosenwlad writes:

Borders, which helped a generation of readers learn the pleasure of diving into a book for hours at a stretch, now competes for the attention of readers who dip into a few pages on an iPad, open Facebook, read some more, then tweet random thoughts. Printed books don't need a power outlet or a data plan, yet for some people, their utility seems to be fading.

Here is the essense of emergent and evolutionary orders, at times the speed of evolution accelerates at a dizzying rate. And we see this in retail books, and perhaps a wide swath of retailing in general.

The key is the end of the above quote - utility changes. As time moves on individuals see fulfillment, satisfaction, happiness and information in a variety of new ways. Our lives are infinitely improved due to digitalization and this poses huge benefits to consumers and huge threats to producers.

I see the future of technology as a force that drives middlemen (Borders between the author and the reader) to explore new, creative, alternative, innovative ways to improve individual utility and to make lives better.

Thankfully the government, labor unions or NGOs (among some of the myriad rent seeking, centralized organizations) have overlooked this powerfully positive process.

Rosenwald writes about his process

It started with Amazon. Launched in 1995 by Jeffrey Bezos, the company aimed to be the biggest bookstore on the planet, and it shipped books anywhere at prices so cheap that it lost money on many sales. The jokes came fast: Amazon dot bomb, some people called it. Amazon dot gone, others said.

But it turned out that Amazon knew what it was doing, building an infrastructure that eventually displaced Borders - then known as the more bookish of the chains - as the preferred way to get the right book into the hands of the right customer. Amazon built software that suggested other books to customers, based on their orders. As Amazon got better at such tactics, "Borders lost that patina they had, that special place of a bookstore, and they became just another discount retailer," said Albert Greco, senior researcher at the Institute for Publishing Research.


So, while entreprenuars like Steve Jobs and Jeff Bezos are forward thinking trying to identify the future utility patterns of consumers (a risky, uncertain process that is at the heart of a trial and error society) Borders was slow to react. And, as Bill Gates titled one of his books - Business at the Speed of Light - the rate of change in many if not most areas of live does not allow much forgiveness for organizations that are slow on the uptake. This is also true for workers - in the event an individual fails to anticipate future needs their employment is endangered. For example, book clerks in retail stores might be advised to consider updating their skill sets or examining their talents for alternative types of jobs.