JARED DIAMOND (2013) ON THE WORLD UNTIL YESTERDAY

Jared Diamond on The World Until Yesterday

What makes the analysis of traditional societies ( before about 9000 years BC) so important for us, living in a modern world.

  1. In many basic ways we are not all the same; traditional societies: different system of counting; different way of selecting wives and husbands; different way of treating children; different view on how to react on danger; different concept of friendship.
  2. Traditional life styles are what shaped us; now we are used to farm-grown and store-bought food rather than wild food hunted and gathered daily. Now the use of tools of metal rather than of stone and wood and bone. Now we are going to court rather than using traditional informal mechanisms. Traditional life styles show more diversity: in some cases elderly people are treated very cruel relative to other traditional societies where they are more cherished. Western industrial societies’ are studied by psychologists, but their experimental subjects are typical WEIRD-persons: western, educated, industrialised, rich, democratic society.

The opposite of traditional societies are the modern states; state means not only “condition”, but also ‘large society with centralised bureaucratic government’. States need police, laws, and codes of morality to ensure that the inevitable constant encounters between strangers don’t routinely explode into fights. Societies larger than 10,000 people need a state: leaders, executives, bureaucrats. States try to create order, even though the distribution of resources is unequal to some extent.

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EUROPE: INVEST AND REFORM – AND DO IT DEMOCRATICALLY

Europe: Invest and Reform – and Do it Democratically

 The European economies do not grow anymore. Nevertheless, the economic establishments are preparing a next round of cuts in the level of the government expenditures. First, a few Mediterranean economies, such as Greece, Spain and Portugal faced a decline in their growth rates, later followed by Italy, France and Belgium. Now even economies such as Germany and The Netherlands are coming to a standstill. All these countries have failed to achieve their economic goals set a few years ago. Government deficit and debt ratio are the indicators that play a decisive role in this respect. The first expresses the relationship between budget deficit and gross domestic product; the second is the ratio between total government debt and gross domestic product. The last one is the most important one, of course. To get a lower debt ratio, politicians must try to reduce budget deficits, while stimulating the growth of the economy. Which strategy must be taken to achieve both goals at the same time? The establishments in Europe, especially leading figures in the financial world, develop their therapies on the basis of a so-called neoclassical or monetarist view on the world. Their answer is: the government is to be blamed for the lack of economic growth, and only lower government expenditures and less regulation of markets will lead us back to stable economic growth. So far this strategy has failed severely. In this text we will discuss the presumptions of the dominant neoclassical analysis and offer one of the alternative approaches, namely the Post Keynesian approach, to see what sort of analysis and therapy it has to offer to get out of the crisis.

The neoclassical approach

The neoclassical analysis of a free market economy is based on the assumptions that actors are economic, rational and non-social. It means that all individuals and organizations such as firms, are motivated to reduce scarcity of natural resources as much as possible and are motivated to do it in the most rational way. The actors are constantly searching for the latest information about prices and quantities and qualities of goods, and use this information in their decisions with respect to all sorts of transactions. The world is a large set of free markets and every actor and every market is small relative to the whole of the economy. It means that mistakes of actors can lead to market disequilibria, which are so small that they cannot disturb the economy as a whole. Those who make mistakes, must accept the losses, restructure or go bankrupt.

There is only one market, which is large relative to the whole, and that is the money market. Disequilibria on this market do lead to disequilibria on all other markets. This might be a sufficient reason for the government to monopolize the control of the process of money creation. In that case the government should delegate this task to the central bank, because monetary management is too difficult for politicians, who might become seduced to abuse this control function.

The task of the government in a free market economy is to guarantee private property rights, and to organise the production of a few public goods, such as dikes. The government must be interpreted as a consumer household; in other words, governments are not productive – they do not invest, whatever they do! It implies that tax receipts should cover all expenditures. Borrowing capital is not allowed as a way of financing expenditures. If governments were issuing bonds to finance current expenditures, their demand for capital would crowd out private investments through an (inefficient) increase of the interest rate. If a particular government continues to create deficits and finances it by means of bonds, it takes the risk that financial markets begin to distrust this government: ‘maybe one day it declares itself bankrupt!’ This would lead to a significant rise in tax tariffs and private investors withdraw their capital from this country as soon as possible. The economy will turn into a severe recession, which can only be solved by the government who starts a programme of expenditure cuts, so as to reduce budget deficit and debts. If just one country is so stupid to elect stupid politicians, the recession might not become that serious, and after trimming the government apparatus trust can return pretty quickly. To help restore this economy a depreciation of its currency might help to adjust to its economic environment as quick as possible. All European economies are small relative to the whole of the global economy. Competition between the different economies will lead to lower deficits and debts.

There are a few serious problems when analysing economic processes in this way. In the first place, the basic presumptions about human nature, namely humans being rational and non-social, are far from realistic. Moreover, the presumption that governments are just consumer households is extremely unrealistic. Major functions such as law and order, infrastructure, education, health care and social benefits have a significant investment character. Another significant problem is the growing interdependencies between economies. Actually the euro-zone has become large relative to the EU-economy and even to the global market economy. In the other words, some units are too big to fail.

A more realistic approach in all the problematic aspects just mentioned is the Post-Keynesian approach. It allows elements of irrationality and sociality into its analysis. Especially the idea of ‘too big to fail’ plays an important role. On the basis of the Keynesian presumptions an ideal-typical macroeconomic analysis has been developed. It shows that a macro-economy, be it a very large national economy, such as the USA, or the European Union economy, or the global economy, is an unstable system. Government intervention is necessary in order to keep the economy on track. Over-optimistic investors can cause a depression and over-pessimistic investors are responsible for the economy to stay in that depression. According to the neoclassical/monetarist Friedman an economy can overcome a depression by an expansive monetary policy. Low interest rates and an affluence of liquidity stimulate private investment and private consumption, bringing the economy back to equilibrium. According to Keynes low interest rates are not enough for over-pessimistic spenders to take risks in an environment that is characterised by declining economies. A lack of demand for goods in a pessimistic environment implies a leftward shift of the demand curve, in the goods as well as in the labour market. Ongoing downward adjustments of prices and wages are the result. Only if the price adjustments are larger than the wage adjustments, labour income will rise, stopping the decline.

Keynes advocates an increase in public investments: infrastructure, such as roads and railways; today he might have stressed digital infrastructure. If the economy is quite liquid – money that is hoarded rather than financially invested – the government can issue bonds to make these hoardings active again. Otherwise the government should create money via the central bank to finance its investments. Only the government is large enough to give the economy a boost large enough to turn the climate of pessimism into one of optimism. This would mean the end of the depression, since private spenders will definitely follow now.

Current debate about Europe

The Germans and the Dutch are the leaders of the group of politicians and economists who advocate policies based on the neoclassical/monetarist view. The main ingredients of their policy are:

  1. Cuts in government expenditures; according to their static equilibrium analysis it will lead to a reduction in deficits and debts;
  2. Budget balance, interpreted as structural expenditures equal to structural receipts; in other words, no deficits or surpluses on average over a business cycle.
  3. Only a common currency if all members accept budget balance and a low level of debts; otherwise, we need a currency system with flexible exchange rates in order to restore disequilibria between national economies;
  4. In many European countries important micro markets function badly; especially labour markets must be made more flexible by reducing government intervention;
  5. In many European countries important collective systems are not designed to adequately tackle future problems, such a the collective pension systems;
  6. Especially in Southern Europe the government apparatus is inefficiently organised; slow in its operation and too many civil servants are appointed without sufficient economic motivation (clientelism);
  7. The current situation is an emergency situation. Even economies such as Germany and The Netherlands are threatened by credit rating agencies for losing their triple- A status. The last few years the ECB has intervened in the bonds market in order to influence the interest rates for the countries under attack. By means of compensating transactions the bank tried to avoid massive money creation. Being a loyal adept of Friedman the bank considers outright money creation so as to stimulate the economies now. Many monetarists are reluctant, however, and talk in terms of the “ nuclear option”.

There are alternative views to be found in economics. Alas, they form a set of marginalised groups – in the media only a small minority. Especially the Anglo-Saxon media are very biased in this respect. Therefore it is very important to become acquainted with more realistic views and policy options. When we apply Post-Keynesian views to the current situation in Europe, we get the following summing up[1]:

    1. The financial crisis of 2008 was caused by a lack of financial regulation. Free market economies are unstable, which means that important markets such as financial markets and labour markets should be regulated so as to function efficiently. Especially the US-economy is badly regulated, and banks and other financial organisations have acted quite irrational. So with the US-labour markets where wages did not rise for more than a decade although labour productivity kept rising with a few percentages per year. This seduced many workers to accept attractive mortgage loan conditions. When the Fed increased the interest rate and the economy began to slow down, the debtors became in trouble, and with them the banks. Since European banks had made comparable mistakes, and had invested massively in American subprime assets, also the European economies became in trouble. A global depression was the result.
  • Fortunately the Chinese were prepared to stimulate their internal spending, which meant – via their increasing imports – a stimulus for the rest of the global economy. Especially Germany has profited from the Chinese contribution. Unfortunately the Europeans refused to participate in a global plan to get back to economic equilibrium. Especially countries like Germany and The Netherlands ignored the fact that the members of the EU and of the euro-zone are too interdependent to implement national policies. The Germans want every member to cut its government expenditures, so as to reduce its deficit and debt. But this policy doesn’t work in a situation where the whole of the euro-zone is in a depression. It only works for a country that is the only one in a depression. Then it becomes cheaper and can improve its export performance. But if all relevant economies are following the same policies, the effects are disastrous. And this is exactly what we see at the moment. Time and again healthy European economies cut government expenditures but the deficits and debt levels are not declining; on the contrary.

 

  1. The euro was introduced about a decade ago. Until now it is a success. And especially in a period of depression it is important to have a European system of fixed exchange rates. Imagine all members of the euro-zone re-introduce their national currencies. They all would immediately depreciate their own currency – which is impossible of course. A price war on the foreign exchange market is the result, creating ever more uncertainty in the economy.
  2. Now we are in the middle of a second depression, which implies that the important spenders are pessimistic about the near future, and the government should step in as the spender in last resort. According to Keynes public investments are to be preferred to public consumption.
  3. If market economies are badly regulated, institutional reforms are necessary. Banks and other important financial institutions, such as large investment funds and pension funds, should be more liquid and more solvent, also in times of seeming ‘stable’ growth. On the labour market the role of discrimination and prejudice should be reduced. In many European economies unemployment among young people and among the group 50+ is much too high in this respect. Many economies, especially the Mediterranean ones, should significantly improve the efficiency of their government apparatus, and make their pension systems ready for the future.
  4. Now Europe faces the second dip, it should stimulate its public investments. It is possible that the European Commission implements a series of proposals that are already made. It is also possible that especially the countries with a trade surplus stimulate their own public investments. Digital infrastructure, railways, education and social care are good examples in this respect. If the investments are not financed monetarily, it leads to higher debts, which might frighten the financial markets. On the other hand, money creation (making something out of nothing) frightens the financial experts too, although this principle is the essence of a growing money economy!Personal viewIn the second place, the irrational financial world has successfully pressed governments to deregulate markets in the course of the 80s and 90s. It will take years to transform the financial sector into a well-functioning part of our society.In the fourth place, European countries were pressed to reform their economies. According to the established view, reform means less regulation and more free markets. To me, we should search for efficient institutions, which is not the same as just markets being as free from government intervention as possible.In the sixth place, the EU should make a simple model of the EU-economy, since most national economy models are flawed, and unable to model the relationship between government expenditures and debts adequately. Also the IMF is constantly making this mistake, and should also make models of larger economic units.

Conclusion

  1. To the new generation of students I like to say: there are simply no authorities in the scientific world. The only authority you must recognize is your self. So, be critical, always and everywhere. And start you march through the institutions and change them, to your benefit and the benefit of so many other people with less talent and opportunity.
  2. Europe is in a severe crisis. But the euro-crisis is not because of the euro, and the debt crisis is not because of debts. The essence of the crisis must be formulated as follows: the establishment in the financial, political and economic-scientific world sticks to outdated and inadequate frames of interpretation of the situation. The media are strongly influenced by the views of the leaders in the different worlds. This irrationality is based on vested interests, making the opinion leaders mentally unable to admit their mistakes from the past and drive them to repeat their short-sightedness.
  3. In the fifth place, Greece did a bad job in the period 2001-2007. So they were not well prepared to counter the Anglo-Saxon depression. The inadequate European reaction made things worse, and transformed the badly structured Greek economy into a ruin. The financial help, meant to help the European banks, was too little and too late, and was offered on counter-effective conditions. The European attitude towards Greece and later to other Mediterranean countries as well, seems to be driven by social rather than economic motivation. North feels superior to South, and wants to punish the South for their bad behaviour. There is some similarity with the situation in 1919, when France wanted to punish the Germans and required extremely high payments from them to restore the economies of the Allied Forces. Keynes warned for this policy, and said: ‘make your enemy to your trading partner’. Applied to Europe today we can say: ‘don’t make your trading partner to your enemy’. The best solution to the problem of North versus South is the following: the South must make their government apparatus more efficient, not necessarily smaller. Further improvements are possible with respect to their labour market institutions. The North appeared to be able to solve the big social conflict between capital and labour and between the different classes within labour. The EU could form a Social-economic Peace Force and send experts in the field of taxes, social security and labour conditions to the Southern countries to help them developing more social en political unity. Both reforms should make Greece to a more democratic country, where the price of adjustments is not only paid by the poor and unemployed, but also by the very rich. The Peace Force should also make the institutions of other Mediterranean countries, such as Portugal, Spain, France and Italy more efficient and fair.
  4. In the third place, the European reaction to the subsequent global depression of 2009 was inadequate. Especially the Germans and the Dutch pressed for cuts in government expenditures. If one country is doing it, it might lead to lower deficits and debts. But all euro-zone countries began to implement this policy – even the Germans and the Dutch! As already said, he effects appeared to be dramatic.
  5. In the first place, the neoclassical/monetarist view, which dominates economic thinking for already half a century, is based on unrealistic assumptions. It can only predict developments well if the economic weather is nice, investments, consumption and production show steady growth, and if those people who are unable to participate in a market economy fully accept their fate. But human irrationality makes a sunny period to a rather short one. As soon as the economy turns into a depression, there are no mechanisms in a free market system that stops the decline. Fortunately in modern societies the government is relatively big, and via so-called automatic stabilizers the depression might be short. Also an expansionary monetary policy might help to shorten the decline. But if there has happened something very bad, such as a severe financial crisis, these mechanisms might be too weak. The Post-Keynesian approach is based on more realistic presumptions. If this approach will be connected with an adequate institutional theory it has the scientific power to be superior to the established view.

[1] For a non-technical introduction into the Keynesian thinking, see: Robert Skidelsky, Keynes, The Return of the Master, Allen Lane, 2009.

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THE PROBLEM OF INEQUALITY: STIGLITZ > ACEMOGLU > PIKETTY

The Problem of Inequality: Stiglitz > Acemoglu > Piketty

  • Introduction

 

Not only Acemoglu and Piketty published a book on inequality in 2012 – so did Stiglitz. The books became widely known and were subject of academic and public debate. In this text I want to  make a comparison in terms of theoretical and practical importance. The text will be published on my website – www.pietkeizer.nl – where the reader also find comments on the books by Acemoglu and Piketty already. Here we stick to  a short characterization of their approaches. Stiglitz, however, will be discussed more thoroughly. Then we will compare and contrast the three books, especially from a methodological point. We will see that there are differences in the language, which are used by the three authors. Examples of important concepts are structure, institution and system. We first

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ARE FINANCIAL WARS OUR FUTURE?

Are Financial Wars our Future?

  • Introduction

 

Over time we see an increasing share of fiduciary money in the total of money supply. In earlier times particular goods functioned as money, such as pigs and chicken. Later gold was very effective in its functioning as money. When storehouses began to lend money to people, thereby increasing the amount of money in circulation, part of the money become fiduciary, which means that money has no intrinsic value. The nominal value, as printed on coins and notes, was based on the confidence of the money-holders that the mass of the people would accept the nominal value of the money. In the Western world banks considered their gold stocks as the means to keep the confidence of the people intact. The higher the ratio of money in circulation relative to the stock of gold in the vaults of the bank, the more fragile the bank(s) and the monetary system. During the 20s and 30s of the previous century, an increasing number of Western countries dropped their gold standard: substitution of gold in exchange for money was not possible anymore.

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PROTESTANTISM AND ECONOMIC DEVELOPMENT

Protestantism and Economic Development

  • Introduction

 

There is much empirical research with respect to the relationship between Protestantism and economic development. Especially in the fields of economic history, social economics and economic sociology the hypothesis which says that higher proportions of the population being member of a protestant church correlate with higher levels of wealth. It all started with the thesis by Max Weber, who saw a relationship between Protestant individualism and  entrepreneurship.

We define Protestantism as a movement of Christian people, who see themselves as stewards of the earth. God has created a world full of treasuries, including humans, who are gifted with talents, which can be developed and used to live a meaningful life. In this essay we will discuss the theoretical foundations of the above-mentioned empirical relationship. Especially the idea of Protestantism will be considered. In the next section we will discuss ideal-typical Protestantism. In a third section we will consider realistic specifications of protestant culture and attitudes. A last section concludes.

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DAVID LANDES ABOUT THE WEALTH AND POVERTY OF NATIONS

David Landes (1998) about the Wealth and Poverty of Nations

Introduction

Landes’ book is well-known in the world of economic history. It is much used at universities as textbook, and therefore it deserves a methodological account. Most economic historians are storytellers rather than model makers. Actually this is not a proper dual; it should not be one or the other. Stories can only be told systematically if the teller has a systematic analysis in mind. This analysis functions as a scope – be it a micro- or a macro-scope.

When reading Landes’ book I’ve tried to find which analysis has laid at the basis of his stories. Unfortunately I could not find a general analysis, in which the book is rooted. On a more specific level I found a number of elements, which might be considered as important cornerstones for such an analysis. In the following we will first discuss the role of geography and culture according to Landes. Then we review the way he interprets the different styles of colonisation between Northern and Southern European countries. At last I will discuss Landes’ views on science and the role it has played in the economic history of the world. I finish this essay with a few critical comments on the methodology of the book.

Geography and Culture

In contrast to people such as Daron Acemoglu (2012), Landes considers climate as an important factor. A moderate climate with regular and modest rainfall makes agriculture to a profitable business. This makes it possible for a region to create a labour surplus, which could try to find employment outside the agricultural sector. Two major examples were the profession of trader and of craftsman.  These people could escape from the rural areas, where the nobility ruled the lives of the landless peasants. They lived increasingly in villages, towns and cities – outside the control of the medieval governance systems.

Landes considers also culture as an important development factor. Again Acemoglu and others deny its relevance, but do not offer a clear-cut analysis of this concept. It makes falsification impossible of course. Landes talks about the relevance of readiness and willingness of people to improve their material situation, which are cultural variables. At one point Landes’ explanations are quite similar with those of Acemoglu:

  1. Some countries are governed by a dictatorial ruler and his elite. They use the economy as an instrument to improve their status and wealth. The ordinary people are exploited and work at the service of the elite. In international relations they are inclined to conquest and exploit other economies. The building of a large empire is the ultimate goal, so as to dominate large parts of the world.
  2. Other countries have more decentralised systems of governance. The culture is more democratic, which means that individual persons have a series of inalienable rights. The government is supposed to be responsible to maintain these rights, rather that rule these individuals in an arbitrary way.

 

Besides this similarity there is a significant difference between the two scholars. Acemoglu denies the importance of culture and stresses the relevance of institutions. For Landes, however, culture is decisive. Since both authors are not offering the reader an explicitly formulated analysis, based on carefully defined concepts, it is important to see whether they really differ in their views on development.

We define culture as the common understanding of a group of people of their situation. The main themes in life that need a common understanding are the relationships between parents and their children, between man and woman, between boss and subordinates in whatever organisation and the relationship between individual and community[1]. When answering the question why Europe was the first region were really a take-off took place, Landes refers to the process of decentralisation and individualisation of societies. The Magna Charta in Britain (1215), the Renaissance and the Reformation are events and processes, which reflect the cultural change that made structural economic growth possible – less hierarchy and top-down and more democracy and bottom-up. According to Landes a line can be drawn between North-Western and South-Eastern Europe, that divides Europe in two culturally different pieces. The first region appeared able to leave the medieval legacy of hierarchical thinking behind. The second region is still highly affected by structures of governance, in which an elite is exploiting the mass of the people.

According to Acemoglu structures of governance are institutions, which can function well, irrespective the culture of the people. His famous example is Nogales, a town located on the USA/Mexican border. The Northern part of Nogales is American in its institutions, but Mexican in its culture, while the Southern part is Mexican, institutionally as well as culturally. In terms of GDP per capita, however, the Northern part is much richer than the Southern part. Ergo, culture is irrelevant; it’s all institutions!

Do Landes and Acemoglu really differ in approach? I don’t think so. For both holds that they do not offer a theoretical analysis, which makes it difficult to find out what really causes their difference. To me clarification of the relationship between the two concepts helps a lot.

As we defined above is culture a common understanding of a series vital relationships between humans. Institutions are rules of behaviour, derived from a particular common understanding. So, it is never culture or institutions, but always and culture and institution. In social practice culture and institutions are interacting. In a social-dynamic model culture is permanently changing under the influence of a permanently changing institutional framework, and vice versa.

Let’s go back to Nogales. Both parts are characterised by a mix of different cultures. Now the formal structure of Nogales-North has become American, the actual culture is slowly changing from less American to more American, at the cost of Mexican influence. In practice institutions as well as culture are mixes of ideal-types of theoretical ideas about what is culture and what are institutions. Moreover, practical phenomena are always mixes and never in equilibrium.

Styles of Colonisation  

For Acemoglu (2012) colonisation is everywhere and always characterised by conquest, domination and exploitation. In Landes (1998) we see an important difference in style between North-European and South-European colonizers. He extensively describes the attitudes of the Spanish conquistadores with respect to Latin America. Acemoglu follows his interpretation to a large extent. The Spanish are looking for domination so as to enlarge their empire, and for robbing as much gold as possible to finance the wars they are fighting in Europe. Spanish culture was to a large extent typical Southern at that time. The Portuguese increasingly imitated Spanish behaviour: robbing rather than trading. According to Landes however, the British and the Dutch were different. Their behaviour was primarily focussed on trade rather than domination. Of course, they also were tough and rude; especially in case the local rulers were aggressive or not willing to trade. Also Northern people were well aware that their weapons were superior. So, when using the ideal-typical difference between domination and trade, were the Northern people more trade-minded than the Southern ones, who were more domination-minded.

How to explain this difference? As already said, we must find this cultural difference in the regions were the Latin/medieval order was maintained (South) rather than gradually changed into an order, which was influenced by Judeo-Christian beliefs (North). These beliefs appear a protest against hierarchy, inequality and the idea that the elite had absolute knowledge. During the Roman empire the Roman-Catholic Church turned increasingly from a typical Northern to a typical Southern institution with a very important role for itself in the preservation of absolute knowledge about God and the way ordinary people should live their lives. Most of the time this church cohabitated with the nobility in their common attempt to maintain the status quo.

People, who lived on a relatively large distance from Rome, and were educated sufficiently to become traders and artisans developed an attitude of protest against the central rulers – in terms of religious beliefs as well as in terms of politics or doing business. Hofstede (1980) argues that the border through Europe that separates the regions, which belonged to the Roman Empire and those who did not, clarifies current cultural differences between North and South Europe. Within the Roman Empire its influence becomes stronger the more the region is located closer to the centre. The British process of decentralisation (from 1215 on), the Reformation in Germany (1517) and the Dutch fight against the Spanish (1568 – 1648) are nice examples illustrating the growing cultural gap.

In the Bible, in particular in the Old Testament, we read already about the Jewish people, who are warned by their prophets for accumulation of clerical as well as political power. The Protestant reformation is based on that idea. God is ‘identical’ to power, and the will of god can only be discovered by individual believers who educate themselves by studying the Bible and doing research into every problem area. Nowadays the Dutch are still famous because of their Polder model: this reflects perfectly well the Protestant idea of democracy and equality: “Thou shall consult rather than oppress the Other”.

 

The Role of Science

Landes considers the emergence of Western science as a major stimulus to individual initiative and enterprise. During a long period the Roman-Catholic Church ruled the world of ideas. During the Renaissance an increasing number of individuals developed ideas about nature, independent of clerical dogma. Hobbes (1651) belonged to the first, who developed a modern political philosophy, although of a conservative kind. Later more liberal and more socialist philosophers were following. Their philosophies appeared the basis for a productive social science. In the field of natural science (beta-science), some of the opponents of clerical influences were empiricists. They denied the role of ideas and considered reality as something materialistic. Scientific – that is, empirical – research had to establish stable empirical relationships. This type of knowledge could function as the basis for all sorts of action, also political action, meant to improve the human condition. It would make religion and philosophy superfluous, thereby ending so much conflict that characterises human history.

According to most philosophers of science this project has failed. Reality is too complex to be understood by a limited number of stable empirical relationships. Moreover, knowledge is the result of a confrontation between the subject of the researcher and his object of research. This result will always reflect the subjectivity of the researcher to a certain degree. If many different researchers find the same results, they might approach objectivity, but we will never know to what degree. An important implication is that there is always room for new ideas that leads to analyses and theories, which produce more realistic pictures. In the literature of scientific philosophy reality is considered as an open system, a characteristic which can only be understood by researchers with an open mind. One should never approach reality just in one way – many interpretations are good candidates. In a free market for ideas they all compete in their attempts to construct the most realistic explanation.

Landes claims to apply the historical approach. He does not explicitly formulate in which this perspective differs from other perspectives. Now and then he takes distance from the typical economic theory, which has produced theories, such as the trade theory of Ricardo about comparative advantage. As far as I have understood Landes well, the historical approach suggests that there are very long run developments. North-West Europe still profits from events, which occurred many centuries ago. Even the Roman Empire, which ended in the 4th century AC, has still its effects. In the traditional evolutionary approach it is technological change rather than cultural change being the prime mover of economic history. May be this is the reason why Landes does not portray himself as an evolutionary economist. But lock-in investments, hysteresis and path dependence are typical evolutionary concepts, which could be used also by Landes.

Conclusions

As we know neoclassical economics stresses the role of technology in the process of economic development. To improve the wealth of the country education and research & development should be stimulated.

In geographical economics the role of geography is emphasised. Moderate climates offer humans more means of living than tropical regions. It means that it is very difficult for areas with extreme climates to copy the life style of people living in the moderate territories.

In most social economics and economic sociology culture is seen as the decisive factor. Some cultures stimulate private initiative, while other cultures are ‘teaching’ to be humble and to accept what the natural rulers are doing. It goes without saying that institutions, which do not reflect the prevailing culture, will adjust until the institutional framework perfectly reflects culture..

In institutional economics, and more precisely the Original Institutional Economics, institutions play a key role in economic development. They frame the actions, and even the preferences of the people. In other words, culture is primarily an endogenous variable. A long period of ruthless oppression make people belief that this is the natural order and that they can better accept it rather than keep on trying to change the unavoidable.

Every approach has its own bias. That makes it so difficult to execute empirical research on the basis of one of the perspectives just mentioned. We need a more comprehensive perspective. Can we consider the historical approach as an example of such perspective? So far the only book I know, which offers at least a description of a historical process is Lenski (1970). He calls his approach technological evolutionism. The title suggests that technological change is the motor of all progress. But what is technology? The concept has a materialistic connotation: motorcars, computers, tables and chairs, for instance. But an important aspect of technology are the (theoretical) ideas behind these material constructions. Moreover, technology can refer to the ideas about human behaviour and about the functioning of human organisations and societies. Technological progress then means that our ideas are increasingly effective in reaching our goals – technically, psychologically, socially and economiclly. Landes is not clear about the structure of knowledge and of technology. My advice for Landes will be to improve the text in this respect, so as to make the text even more valuable than it is now already.

References

Acemoglu, D., J. A. Robinson (2012), Why Nations Fail, London: Profile Books Ltd.

Landes, D. (1998), The Wealth and Poverty of Nations, New York: W. W. Norton & Company.

Lenski, G. E. (1970), Human Societies: A Macro Level Introduction to Sociology, New York: McGraw-Hill.

Dr. Piet Keizer

Utrecht University School of Economics

03-07-2014.

Word count:2454.

 

 

 

 

 

 

[1] The definition of culture and of the decisive themes in life are based on work by famous sociologists and psychologists, such as Zygmunt Bauman and Carl Jung.

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PIET KEIZER ON THOMAS PIKETTY

Piet Keizer on Thomas Piketty

Introduction

This year Harvard University Press published the book by Thomas Piketty, titled “Capitalism in the Twenty-first Century. It appeared a hit. Many reactions, also from Paul Krugman, were very positive. Two important statements of the book are:

  1. The rate of return on capital is larger than the growth rate of output and income, which means the beginning of the end of capitalism.
  2. The introduction of a wealth tax, ideally on a global level, is a necessary step to save the system.

Today’s biggest problem is the significant increase of the wealth in the hands of the top 10%. Especially in the Anglo-Saxon world the increase has arisen sharply. Alas, Europe is going in the same direction. Piketty’s quantitative statements are based on an incredibly large database with respect to the distribution of income and wealth.  The data concern many countries and over very long periods; a true walhalla for econometricians.

His claim that inequality is the most important problem in the economy is not based on a careful analysis of the functioning of a capitalist economy; it is just based on a large series of ‘theory-free’ facts. This makes it necessary to critically assess the methodology behind Piketty’s claims.

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