From The Spectator comes this thoughtful comparison of the worldview of Deirdre McCloskey with that of Thomas Piketty. (HT my Mercatus Center colleague Bob Graboyes)
McCloskey, by contrast, has long argued that economists are far too preoccupied by capital and saving. She doesn’t even like the word capitalism, on the grounds that capital is not what got us where we are today. ‘If Scotland is trying to become Holland, then capital accumulation is how to do it. That will double your income, maybe triple it.’ But for her, that sort of accumulation is a scratch-card-sized prize — and the lottery jackpot beckons. She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’
That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.
Professor McCloskey has a point, of course. Think of the Bill Gates and Steve Jobs, big wealth accumulators in recent times. It wasn’t the magic of compound interest on capital that made them rich; it was intellectual property. They created billions of dollars of business from virtually nothing at all. If you measure the profits as a return on the small amount of initial capital invested, then it looks huge; but capital was no more important an ingredient of the original Apple or Microsoft than cookies or cucumbers.
An important insight – central to the story of modern economic growth told by deeply insightful scholars such as Schumpeter, Mises, Hayek, Lachmann, Kirzner, and McCloskey, but which is lost on thinkers such as Piketty – is the following: indispensable to our modern prosperity is not only the innovative creation of capital but also the continual destruction of capital that such successful innovation entails. Creative destruction. What is destroyed is not only some jobs (e.g., t.v. repairman) and the value of some consumer goods (e.g., crutches for polio victims) and services (e.g., postal delivery), but also the value of capital.
Capitalism’s nature is not, contrary to Piketty’s claim, to forever protect and augment existing capital. Central to capitalism’s nature is what McCloskey calls “market-tested innovation.” And this innovation inevitably destroys the value of older, less-productive capital that is in competition with with it – in competition with the new capital, the new goods, the new production and consumption processes, and the new knowledge that innovative entrepreneurs create.
Piketty’s apparent obliviousness to this central feature of market-driven capitalism creates a foundational flaw in his celebrated book.
