Traditional Economics Fails to Explain Why Democracies Prosper

Robert W. Fogel of the University of Chicago has won this year’s Nobel Prize in economics for his work in economic history, most notably two books that held slavery to have been economically efficient, though immoral.

Such theorizing explains why so many people have an instinctive--and well-justified--distrust of economics.

In fact, slavery was not economically efficient. Slave-grown cotton in the South brought a high return on investment within a closed system. But its economics ultimately were inferior to the rising industrial economy of the North, where laborers were independent, even if abused and cheated.

In “Battle Cry of Freedom,” a great history of the Civil War era, author James M. McPherson argues that the artificial profitability of slaves and cotton blinded Southern investors to needed alternative investments so that “the collective result inhibited the economic development of the South as a whole.”

The point here is not to reargue the economics of slavery, or to criticize Fogel, by all accounts a good man and respected scholar who wrote his books in part to assert the dignity and competence of the slaves.

Rather, the point is to call attention to the narrowness of economics, which can expend such research and miss the greatest single determinant of economic growth and human progress: the gradual spread of individual autonomy--or, in a more emotive word, freedom.

There are many examples in history where the conventional economic wisdom got it wrong. And that’s a useful reflection for our own day when we increasingly call on economists to make policies that govern our society. Trouble is, economists, whose job is to chart and explain the millions of interactions between people and money, are not well suited to making policy. Their conclusions regularly underestimate democracy.

Thus, economists often argued that because of centralized decision making the Soviet Union could act faster and more efficiently than the Western democracies. The truth turned out to be precisely opposite.

Even today, economists’ consensus on the two longtime communist powers is that China’s economy will make it but Russia’s future is problematical. But that may be wrong again.

The Wall Street Journal, in an editorial celebrating the Nobels for Fogel and his co-winner in economic history, Douglass North of Washington University in St. Louis, predicts that China will come a cropper by “trying to offer its citizens prosperity without political freedom.” Russia, by giving political freedom priority, is taking the less obvious but possibly more successful route.

Our own revolutionary period was another example. Financiers in Colonial New York, with an eye toward business with Britain, opposed the Boston and Virginia leaders who fought to break away. The financiers knew money, but the Adamses and Washingtons knew a less obvious truth--that democracy and free markets are a better multiplier for long-term growth.

There are many business trends today where the reality is less obvious than conventional economics would have you believe. A renewed attention to antitrust may be one.

It could affect today’s mania for investments in movie studios, cable and telephone companies and other components of multimedia. The aim is to “control” access to the home and “control” entertainment product. The trend appears to favor a wave of mergers that might reverse the AT&T; break-up that spawned the technological revolution in communications. But that may not happen.

The very mania guarantees government antitrust action, invoking one of our great traditions, dating back almost 200 years and based on the principle of making room for outsiders because they bring new ideas.

Steamboat inventor Robert Fulton featured in an early case. Fulton had a government-granted monopoly for his boats to carry freight and passengers on the waters of New York state. But a competitor sued to get his steam-powered craft on the rivers, and the court ruled against Fulton. Letting the outsider in was more productive, the court said.

Or take welfare, the next target for Clinton Administration reform. There are 13 million Americans on public assistance, 5% of the U.S. population. Neat solutions are hard to come by, but policy should be based on fostering individual autonomy, through workfare and even make-work jobs. Make-work, recalling 1930s Depression policies, goes against conventional economics. But then, conventional economics, which calls a gambling casino productive investment but a school building wasteful public spending, so often gets human history wrong.

By opening up work opportunities for physically handicapped people in recent years, the American economy has given individuals a chance for independent lives. It should strive to do likewise for emotionally and economically deprived people.

That’s simple economics. As the late historian C. W. DeKiewit argued, “The whole of society suffers when any important group within it suffers from inadequate use of its intelligence or wasteful organization of its labor.” That was emphatically true in the uneconomic days of slavery, and it’s true today.