Waylaid Dialectic

January 2, 2012

Markets and Progress

Filed under: Development Theory — terence @ 6:32 am

The best case I ever heard for free markets was the one made by Paul Krugman, who paraphrased Churchill to the effect that markets are the worst way of organising economies, except for every other way we’ve ever tried. That sounds about right to me. In many instances as an allocative and organising tool markets are lousy, but nevertheless less lousy than any alternative I can think of. Their outcomes aren’t particularly just. And they are prone to clear and repeated failures. And they don’t guarantee entitlements to their participants that are adequate for survival. But in many – although not all – situations they do a better job than the alternatives in getting people what they need and want.

That’s a reasonable defence of markets I think. Not markets in everything (there are many areas where otherwise organised collective action is better and or necessary) but markets in some things, at least.

A much less convincing defence of free markets is that they lead to faster economic growth. This is plausible but not really true. Growth, in the long run, is driven mostly by technological change. And successful technological change, it turns out, is often much more about states than markets.

Here’s Naomi Oreskes and Eric Conway in Merchants of Doubt:

“[W]e turn to Milton Friedman’s Capitalism and Freedom, where he claimed that “the great advances of civilization, in industry or agriculture, have never come from centralized government.” To historians of technology, this would be laughable had it not been written (five years after Sputnik) by one of the most influential economists of the second half of the twentieth century. The most important technology of the industrial age was the ability to produce parts that were perfectly identical and interchangeable. Blacksmiths and carpenters couldn’t do it; in fact, humans can’t do it routinely in any profession. Only machines can. It was the U.S. Army’s Ordinance Department that developed this ability to have machines make parts for other machines, spending nearly fifty years on this effort – an inconceivable period of research for a private corporation in the nineteenth century. Army Ordnance wanted guns that could be repaired easily on or near a battlefield by switching out the parts. Once the basic technology to do this – machine tools, as we know them today – was invented, it spread rapidly through the American economy…Markets spread the technology of Machine tools throughout the world, but markets did not create it. Centralized government, in the form of the U.S. Army, was the inventor of the modern machine age.

Machine tools are not the exception that proves the rule; there are many other cases of government-financed technology that were commercialized and redounded to the benefit of society. Even while Friedman was writing his soon-to-be-famous book, digital computers were beginning to find uses beyond the U.S government’s weapons systems, for which they were originally developed. Private enterprise transformed that technology into something that could be used and afforded by the masses, but the U.S. government also played a made it possible in the first place. The U.S. government also played a major role in the development of Silicon Valley. In recent years, something we now all depend on – the Internet, originally ARPANET – was developed as a complex collaboration of universities, government agencies, and industry, funded largely by the Department of Defense’s Advanced Research Projects Agency. It was expanded and developed into the Internet by the government support provided by the High Performance Computing and Communication Act of 1991, promoted by then-senator Al Gore.

In other cases, new technologies were invented by individual or corporate entrepreneurs, but it was government action or support that transformed them into commercially viable technologies, airplanes and transistors come to mind…Still other technologies were invented by individuals but were spread through government policy. Electricity was extended beyond the major cities by a federal loan-guarantee program during the Great Depression. The U.S interstate highway system, which arguably created postwar America as we know it, was the brainchild of President Dwight Eisenhower, who recognized the role it could play both in the U.S. economy and in national defense; it became the model for similar highway systems around the globe…The relationship between technology, innovation, and economic and political systems is varied and complex. It cannot be reduced to a simple article of faith about the virtues of a free market.”

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