A Discussion of Bourgeois Equality Chapter 15 “And the Oomph of Institutional Change is Far Too Small”
Dr. McCloskey continues critiquing the popular view of economists that good institutions explain the hundred-fold economic growth rate since the 18th century.
For the past 2 chapters, she has argued that good institutions are necessary for economic growth, but not sufficient.
Then she pushes that idea further using the rules of logic to show that our story should be that both good institutions and good ideas are required.
Now, she is continuing her argument that good institutions alone cannot be the answer to why some countries grow and some do not.
Good Institutions do not Improve Productivity Enough
The story we tell is that good institutions create the incentives to use our factors of production (capital, labor, etc.) productively.
McCloskey says that can explain some of the growth we have seen but not all.
Suppose a quite terrible government causing market failures and wretched property rights had reduced income originally by as much as 80 percent of its potential. In that case, a perfectly wise government correcting all market failures and establishing ideal property rights would increase income by… a factor of 4. (p. 133)
Quadrupling sounds good except the Great Enrichment McCloskey is trying to explain in this book is more like “a factor of 10 or 30 or 100.” (p. 133)
Improving and repairing the incentives the institutions create does help growth, but it can only explain the full explosion of growth when it is paired with the good idea of liberty and dignity for each person that frees them to drive the trade tested betterment of the Great Enrichment.
A Tale of Two Countries
Another piece of evidence McCloskey offers is New Zealand and Italy. They have similar GDP per capita a day of $88.20 and $86.80. (p. 134)
Yet, their institutions are quite different in quality.
New Zealand is one of the top-ranked countries in a variety of indexes that track the ease of doing business, government transparency (which means low corruption), and economic freedom. Italy is far down on all of those lists. (p. 134)
Thus, large differences in the quality of institutions only has a small impact on the wealth of the countries because both had participated in adopting the good ideas that led to the Great Enrichment.
The reason Italy and New Zealand differ so much in governance and so little in income is that Great Enrichment consists not of little efficiencies but of utterly novel betterments causing the marginal product of labor curve to zoom out, such as asphalt-paved roads, cheap screws and bolts, sewer traps in plumbing, screens on open windows, dental implants, widespread secondary schools, computers. (p. 134)
Thus, even a relatively poorly governed country like Italy is more impacted by the adoption of these profitable betterments.
Conclusion
Wrapping up this chapter, McCloskey observes the difference in service between state-owned and privately owned coffee shops in Italy, contrasting the poor quality service from the state-owned coffee shop located in a Milan train station with the high quality service at a private bar. (p. 138)
Such pride in craft and service in the private sector, eagerly adopting trade-tested betterment in accord with the Bourgeois Deal, innovism, is why Italy, or for that matter Chicago, is not so poor as its governance would imply. Not all economic activity is in the institutions of Le Ferrovie dello Stato Italiane or the Chicago Department of Streets and Sanitation. Institutions are not where the action is. (p. 138)
McCloskey is not saying good quality institutions are unimportant, but they alone can only explain a relatively small part of the enormous growth we have witnessed in the Great Enrichment.
Thus, we can continue enjoying the fruits of the Great Enrichment even if our institutions decay, but if we give up on the idea of liberty and dignity for the average man, then likely we will not.
Reference: McCloskey, Deirdre Nansen, 2016. “And the Oomph of Institutional Change is Far Too Small,” Chapter 15 of Bourgeois Equality, The University of Chicago Press.
