… is from page 69 of my GMU Econ colleague Mark Koyama’s, and his co-author Jared Rubin’s, superb 2022 book, How the World Became Rich:
[T]echnological innovation is essential for growth to persist in the long run. But innovation requires detailed knowledge of production processes and what can make production more efficient. Any society that frowns upon hard work will be unlikely to have a robust class of innovators. Any society that disparages finance will be unlikely to have a thriving entrepreneurial class or significant investment in capital.
DBx: Yes.
Important lessons are packed into this short passage. The first sentence identifies a key reason why, in any country with more than a tiny population, widespread and sustained prosperity will never happen as a result of a government distributing to its population the proceeds that come from that government’s ‘ownership’ of petroleum or other natural resources. The people of a country remain prosperous only if and when each of them produces – meaning, people specialize according to their comparative advantages and, no less essentially, innovate and are open to economic innovations and creative destruction.
The second sentence of the above quotation implies that innovation that contributes to economic growth requires that individuals on the spot have the freedom to act on the detailed and dispersed bits of knowledge to which each has unique access. To the extent that this freedom is curtailed, information that might prove useful for economic growth remains untapped and wasted. Moreover, innovation, by its nature, cannot be predicted or planned. Therefore, innovation is inherently at odds with industrial policy and other attempts to impose on the economy a particular ‘vision’ of just how resources should be allocated. A society can have industrial policy – by which I mean a policy aimed at securing a predetermined pattern of resource allocation across a broad swathe of the economy – or it can have innovation that is necessary for sustained growth. It cannot have both.
The truth of the third sentence is obvious. Prosperity means access to lots of consumer goods and services. These outputs will be available only if they are produced – meaning, only if people are willing to work hard either to produce directly the outputs they consume or produce outputs to exchange for the things they consume. Because innovation is typically the result of hard work, anything – policy, a set of cultural attitudes, whatever – that discourages hard work discourages innovation.
The truth of the fourth and final sentence of the quotation is rooted in the reality that economic growth requires efficient capital goods, and that production and maintenance of these capital goods requires that some resources be diverted from satisfying present consumption desires into the production and maintenance of capital goods. Financial markets encourage savings and are essential to the gathering up of saved resources and the allocation of these resources to those particular uses that have the prospect of contributing the most to economic output. Financial markets also reduce economic waste by drawing resources away from uses that are not as productive as other uses of those resources are likely to be.
It’s easy to disparage finance as ‘unproductive.’ But as with any sector of an economy, insofar as the financial sector arises in response to market forces, it contributes to the efficient allocation of resources. The fact that economically uninformed pundits and politicians do not understand the importance of the role played by financial markets – the fact that these uninformed people publish economically ignorant indictments of financial markets – does not render these markets less essential to modern widespread prosperity.
