Who Created the Economy?

Human action, but not human design

Share with your friends

More share buttons
Share on Pinterest

Excerpted from The Evolution of Everything: How New Ideas Emerge by Matt Ridley. With permission of the publisher, HarperCollins Publishers evolution_of_everything

The Evolution of the Economy

Depending on whose estimate you choose, and how you correct for inflation, the average person alive in the world today earns in a year between ten and twenty times as much money, in real terms, as the average person earned in 1800. Or rather, he or she can afford ten or twenty times as many goods or services. Call it, as the economic historian Deirdre McCloskey does, the ‘great enrichment’. She says it is the ‘main fact or finding of economic history’. Indeed, says McCloskey, depending on how you allow for improvements in things like steel girders, plate glass and medicine, the standard of living could have risen as much as a hundred times just since 1950 in a place like Hong Kong. At the rate the world economy is growing – and it has shown no signs of deceleration – the average human being may be earning up to sixteen times as much again in 2100 as he or she does today, according to the OECD: that’s $175,000 a year in today’s money. The Great Recession of 2008–09 was just a brief blip in global terms: one year when the global economy shrank by less than 1 per cent before growing by 5 per cent the next.

By far the lion’s share of this improvement went (and still goes) to ordinary workers and the poor. As McCloskey puts it, although the rich got richer, ‘millions more have gas heating, cars, small pox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newpapers, a vote, a shot at university and respect’. Global inequality is currently falling fast as people in poor countries get richer quicker than people in rich countries. The proportion of the world population living on $1.25 a day, corrected for inflation, has gone from 65 per cent in 1960 to 21 per cent today.

Surprising as it may seem, the cause of the great enrichment is still unknown. That is to say, there are plenty of theories about why incomes started growing so rapidly in some parts of the world in the early nineteenth century, and this then spread to the rest of the world, and – despite repeated predictions that it would stop – they just keep on growing today. But none of these theories commands universal allegiance. Some credit institutions, others ideas, others individuals, others the harnessing of energy, yet others luck. They all agree on two things, however: no body planned this, and nobody expected it. Prosperity emerged despite, not because of, human policy. It developed inexorably out of the inter action of people by a form of selective progress very similar to evolution. Above all, it was a decentralised phenomenon, achieved by millions of individual decisions, mostly in spite of the actions of rulers. Indeed, it is possible to argue, as Daron Acemoglu and James Robinson do, that countries like Britain and the United States grew rich precisely because their citizens over threw the elites who monopolised power. It was the wider distribution of political rights that made government accountable and responsive to citizens, allowing the great mass of people to take advantage of economic opportunities.

Human action, but not human design

The great enrichment was an evolutionary phenomenon. Let’s return to the late eighteenth century, when Britain stands on the brink of this great enrichment, and revisit that great thinker about the general theory of evolution, Adam Smith. In 1776 Smith published his second book, The Wealth of Nations. In it he set out to champion a different evolutionary idea from that which he had set out in his Theory of Moral Sentiments. If God was not the cause of morality, was government the cause of prosperity? In Smith’s day, commerce was a tightly regulated business, with joint-stock companies chartered specifically and exclusively by the state to have monopolies, and mercantilist trade policies designed to promote certain kinds of foreign exports, not to mention professions strictly licensed by the government. In the cracks between the paving stones of regulation and dirigisme individuals could buy and sell, but pretty well nobody thought this was the source of prosperity. Wealth meant accumulating precious things.

The ‘physiocrats’ in France had at least begun to suggest that productive work was the source of wealth, not heaps of gold. From François Quesnay, leader of the physiocrats, whom he met in 1766, Smith picked up the idea that mercantilist direction of trade was a mistake, as was government grabbing all the revenue of trade to spend on ruinous wars and futile luxuries: their cry was ‘Laissez faire et laissez passer, le monde va de lui même!’ (Let do and let pass, the world goes on by itself!). But the physiocrats insisted, strangely, that the only kind of productive work was farming. Manufacture and services were wasteful frittering. Smith said instead that the ‘annual produce of the land and labour of the society’ was what counted. Today we call that GDP.

So becoming more prosperous means the same as becoming more productive – growing more wheat, making more tools, serving more customers. And the ‘greatest improvement in the productive power of labour’, Smith argued, ‘seems to have been the effects of the division of labour’. If the farmer supplies food to the iron monger in exchange for tools, then both are more productive, because the first does not have to stop work and make a tool badly, while the latter does not have to stop work to till a field badly. Specialisation, accompanied by exchange, is the source of economic prosperity.

Here, in my own words, is what a modern version of Smithism claims. First, the spontaneous and voluntary exchange of goods and services leads to a division of labour in which people specialize in what they are good at doing. Second, this in turn leads to gains from trade for each party to a transaction, because everybody is doing what he is most productive at and has the chance to learn, practise and even mechanise his chosen task. Individuals can thus use and improve their own tacit and local knowledge in a way that no expert or ruler could. Third, gains from trade encourage more specialisation, which encourages more trade, in a virtuous circle. The greater the specialisation among producers, the greater is the diversification of consumption: in moving away from self-sufficiency people get to produce fewer things, but to consume more. Fourth, specialisation inevitably incentivizes innovation, which is also a collaborative process driven by the ex change and combination of ideas. Indeed, most innovation comes about through the recombination of existing ideas for how to make or organise things.

The more people trade and the more they divide labour, the more they are working for each other. The more they work for each other, the higher their living standards. The consequence of the division of labour is an immense web of cooperation among strangers: it turns potential enemies into honorary friends. A woollen coat, worn by a day labourer, was (said Smith) ‘the produce of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser…’ In parting with money to buy a coat, the labourer was not reducing his wealth. Gains from trade are mutual; if they were not, people would not voluntarily engage in trade. The more open and free the market, the less opportunity there is for exploitation and predation, because the easier it is for consumers to boycott the predators and for competitors to whittle away their excess profits. In its ideal form, therefore, the free market is a device for creating networks of collaboration among people to raise each other’s living standards, a device for coordinating production and a device for communicating information about needs through the price mechanism. Also a device for encouraging innovation. It is the very opposite of the rampant and selfish individualism that so many church men and others seem to think it is. The market is a system of mass cooperation. You compete with rival producers, sure, but you cooperate with your customers, your suppliers and your colleagues. Commerce both needs and breeds trust.

Imperfect markets are better than no markets

Few would disagree with this formulation, but equally few would accept that the ideal is ever realised in practice. And that, churchmen aside, is where all the disagreement about markets comes from. Fine in theory, useless in practice – so goes the verdict of most right-thinking people on the topic of markets.

The question then becomes whether commerce only works if it is perfect. Are semi-free markets better than none? The economist William Easterly is in no doubt that the invisible hand is not Utopia: ‘It is the process of driving out of business the incompetent in favour of the mediocre, the mediocre in favour of the good, and the good in favour of the excellent.’ A glance at economic history makes clear that countries run by and in the interests of merchants have not been perfect, but they have always been more prosperous, peaceful and cultured than countries run by despots. Phoenicia versus Egypt; Athens versus Sparta; the Song of shop keepers (England) versus Napoleon; modern California versus modern Iran; Hong Kong versus North Korea; Germany in the 1880s versus Germany in the 1930s.

There is no longer much doubt that free commerce has a better economic or humanitarian record than command-and control government. The examples just keep rolling in. Take the history of Sweden, for instance. Contrary to conventional wisdom, Sweden did not become wealthy as a result of having a big government imposing social democracy. When it liberalized a feudal economy and strongly embraced Smithian free trade and free markets in the 1860s, the result was rapid growth and the spawning of great enterprises over the next fifty years, new products). When it expanded government hugely in the 1970s, the result was currency devaluation, stag nation and slow growth, culminating in a full-blown economic crisis in 1992 and a rapid fall in the country’s relative standing in the world’s economic league table. When it cut taxes, privatised education and liberalised private healthcare in the 2000s, it rediscovered growth.

To argue that free commerce leads to more prosperity than government planning is not, of course, to argue that all government should be abolished. There is a vital role for government to play in keeping the peace, enforcing the rules and helping those who need help. But that is not the same as saying government should plan and direct economic activity. Likewise, for all its virtues, commerce is not perfect. It has a habit of encouraging wasteful and damaging extravagances, not least because it leads to the marketing of signals for conspicuous consumption.

The central feature of commerce, and the thing that distinguishes it from socialist planning, is that it is decentralised. No central direction is required to tell the economy how many woollen coats, laptops or cups of coffee are needed. Indeed, when somebody does try to do so, the result is a miserable mess. Or North Korea. Prices, if allowed free to rise or fall, will gravitate under competition towards the cost of production, as demand matches supply. Suppliers will direct their efforts to the products most valued at any one time, driving down price and satisfying the most intense demand. The system is run by the decisions of millions of individuals.

Get Evonomics in your inbox

In this way, prosperity, when it grows at all, grows entirely organically, without any direction from above. The division of labour has emerged, uninvited, within society. It has evolved. It is stimulated by our natural willingness to trade. And ‘the propensity to truck, barter, and exchange one thing for another’, in Smith’s famous phrase, comes naturally to human beings, but not to other animals: ‘Nobody ever saw a dog make fair and deliberate exchange of a bone with another dog.’ So it is this propensity, if encouraged, that will cause prosperity to increase. Government’s role is to let it happen, not to direct it.

The central problem for systems of command and control, whether fascist, communist or socialist, is the knowledge problem. As champions of free enterprise from Frédéric Bastiat to Friedrich Hayek have pointed out, the knowledge required to organise human society is bafflingly voluminous. It cannot be held in a single human head. Yet human society is organised, none the less. As Bastiat put it in his 1850 Economic Harmonies, how would one even contemplate setting out to feed Paris, a city with hordes of people with myriad tastes? It is impossible. Yet it happens, without fail, every day (and Paris has a still vaster population today, with more eclectic taste in food). There is a close parallel with evolution here. The feeding of Paris and the working of the human eye are equally complex manifestations of order. But in neither case is there a central commanding intelligence. The knowledge is dispersed among millions of people/ genes. It is decentralised. As so often, Smith got there first, saying in The Wealth of Nations: ‘The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.

Invisible hands

This decentralised emergence of order and complexity is the essence of the evolutionary idea that Adam Smith crystallised in 1776. In his famous metaphor, Smith made the guiding hand invisible: each person ‘intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention’. Yet when Smith wrote his Wealth of Nations, there was little good evidence for his central idea that free exchange of goods and services would produce general prosperity. Up until the late eighteenth century much wealth creation had been by plunder in one form or another, and there was nothing remotely resembling a freemarket government in power anywhere in the world.

Yet in the decades that followed the book’s publication, Britain in particular (and then much of Europe and North America) played out an extraordinary story of rising living standards, falling inequality and declining violence – thanks largely to the partial and hesitant following of Smith’s recipe. Sceptics might argue that the accumulation of plundered capital from the empire was the source of that wealth, but this is plainly nonsense. As Smith so clearly saw, colonies were mostly a drain and a military distraction. Nor can capital explain the sheer scale of what happened to living standards. As Deirdre McCloskey puts it, in the great enrichment of the past two hundred years average income in Britain went from about $3 a day to about $100 a day in real terms. That simply cannot be achieved by capital accumulation, which is why she (and I) refuse to use the misleading, Marxist word ‘capitalism’ for the free market. They are fundamentally different things.

Adam Smith is no paragon. He got plenty wrong, including his clumsy labour theory of value, and he missed David Ricardo’s insight about comparative advantage, which explains why even a country (or person) that is worse than its trading partner at making everything will still be asked to supply something, the thing it or he is least bad at making. But the core insight that he had, that most of what we see in society is (in Adam Ferguson’s words) the result of human action but not of human design, remains true to this day – and under-appreciated. This is true of language, of morality and of the economy. The Smithian economy is a process of exchange and specialisation among ordinary people. It is an emergent phenomenon.

Excerpted from The Evolution of Everything: How New Ideas Emerge by Matt Ridley. With permission of the publisher, HarperCollins Publishers 

Donating = Changing Economics. And Changing the World.

Evonomics is free, it’s a labor of love, and it's an expense. We spend hundreds of hours and lots of dollars each month creating, curating, and promoting content that drives the next evolution of economics. If you're like us — if you think there’s a key leverage point here for making the world a better place — please consider donating. We’ll use your donation to deliver even more game-changing content, and to spread the word about that content to influential thinkers far and wide.

 $3 / month
 $7 / month
 $10 / month
 $25 / month

You can also become a one-time patron with a single donation in any amount.

If you liked this article, you'll also like these other Evonomics articles...


We welcome you to take part in the next evolution of economics. Sign up now to be kept in the loop!

  • Robert Price Green-Party

    As someone who has been helping those on the bottom tier of British society, and on occasion those who are refugees due tot he current trade practices and laissez faire to fascist practices of Western governments, i am often surprised at how easily even those who must have taken some small interest in the subject are detached from the reality of it.

    People are killing themselves. They are not doing this because they have a warped sense of their own existence and their existence is approaching utopia. They are doing so because a slow process of demonisation, isolation, and subjugation of the lower echelons of society has been in progress for decades. They are doing so because whilst new and ingenious methods are being created to actually lower their incomes, and simultaneously to misrepresent the increases in cost of living which are progressing with the increasing greed of the prosperous. A higher income, though invariably incomes are falling for those at the bottom, would make little difference as rents increase at a pace.

    The most vulnerable, the disabled, are the most demonised. They are in the case of those with deep depression, the easiest of targets. They are far more likely to go away and reduce the surplus population than to fight for justice against a bullying state and society. Incidentally, the phrase to reduce the surplus population is from Dickens, written during the period in which Mr Ridley seems so utterly besotted. I doubt whether the Irish population which died as food was exported from their countries felt they were having a general increase in prosperity for which they should be grateful.

    Equally in the developing world, there are tribes which have survived for centuries on particular land which they have used to farm. These same tribal groups are of course often ejected from these lands when the unregulated market capitalists enter upon the discovery of mineral dposits. Boko Haram did not arise in a vacuum; they arose because their lands were taken by multi-national corporations which then had security forces punishment rape family members of indigneous people to try to silence their dissent. Of course those people who are abused and left to starve will also not be feeling a general increase in wealth or a feeling of joie de vivre.

    So people are dying and the right wing rhetoric continues in a way which lends itself to the opinion of Von Mises that their apriori knowledge cannot never be falsified by reference to fact seems to have become a form of religious doctrine; though one seemingly without any form of morality usually used to make it attractive.

    As for Smith himself. The Wealth of Nations is a long book. It is around three and three quarter million words long and a tad dry in places. Having read it a couple of times, then listened to it as an audio book several more times (I recommend the latter) I often suspect whether other commentators have done the same.

    I know John Kenneth Galbraith said that the idea of the invisible hand though only mentioned once appears as a constant message; I can continue to admire Galbraith’s work, though also say he himself recognised there was more to the book than this single phrase. It suggested progressive state measures, like the need for state education, which were advanced for the time but the core of real prosperity; the core which is eaten away by those of the far right who do things like privatise and restrict education to the wealthy.

    Smith was not correct about everything; worse still are the deliberate misinterpretation of his work in order to favour the interests of a small rich elite. For instance, i would suggest that his fifth chapter may have had a better influence on society and government had he referred to Nicholas Barbon’s, A Discourse of Trade. Or perhaps had he consulted a colectors of coins; numismatism was not coined as a phrase until some four decades after Smith’s work, but the actual study of coins and literature on the subject had existed since the early sixteenth century; the works of Copernicus and Gresham were forms of this though highly reduced forms. He would have realised he made some inaccurate statements on money; statements which continue to be inaccurately followed to this day.

    Markets are not something which immediately occur as a consequence of human nature; nor indeed any form of nature as they do not exist in any other species. they are the product and creation of organising regulation. Regulation which with increased strictness gives increased certainty to the workings of the market. It reduces the likelihood of mistake in contract or of fraud. The total relaxation of regulation only benefits those who would use such relaxation to push even further their attempts at self gain at the expense of broader society.

    Finally, even the division of labour in pin manufacture was not Smith’s new idea; it appeared some thirty years earlier in encyclopedia; Gertrude Himmelfarb explains this quite well in her book the Idea of Poverty. Division of labour is a very old idea. It was the probable reason why our ancestors, in larger tribal groups, survived whilst the stronger more intelligent Neanderthals, who had smaller tribal groups, perished. It is in fact a communist idea rather than one driven by laissez fairre markets; to each according to their needs, from each according to their abilities.

    Among the dishonest rhetoric of this small piece from a book I shall definitely not be taking the time to read, is the idea that prosperity may in some way for the lower orders be due to them having fought for their involvement in government. The Liberal movement which arose in the 1830s from a culmination of several groups was one that wished for government to function for people. Willhelm von Humboldt’s work on Liberalism, On the Limits of State Action, which was published in 1854, was in fact produced prior to 1792. It is not then an attack upon the government which would regulate markets for the benefit of a stable society, but upon the earlier structures which very much involved a co-relationship between government and big business. It is used now to attack government in favour of the rich controlling interests who would prefer laissez fairre so they may be even more unscrupulous in their greed.

    Anyone who has read Das Kapital knows that Marx recognised a difference between a market and capitalism.

    Though just as Humboldt was published late to attack the progression of democratic government, and evidence free writers from Ayn Rand to Milton Friedman have done quite well producing something for the rich which tells them to fuck the poor, I am sure Mr Ridley will do quite well out of this book.

    • Swami Cat


      Take it down a notch and actually spend some time familiarizing yourself with the world conditions of both history and today. Even a casual familiarity with a market invention called Google will allow you to search for average standards of living pre Wealth of Nations and today. Try it!

      You will find that 90% or more of the less than a billion people in existence were living short, illiterate, unfree, backbreaking days, with no effective medical care on a couple of dollars a day. The entire world was worse off then Bangladesh is today. Please allow this horror to sink in and consider how awful it would be if thinking like you think was part of the cause.

      Those states gaining 1) open access impartial rule of law government with property rights, 2) relatively free and open markets, and 3) scientific rationalism started to grow at a measurable rate of about two percent per year on average standard of living even as population grew. More people better off. In pretty much any nation adopting the above three institutions and their mindsets, the standard of living improved by thirty to one hundred times what it was throughout all the rest of history. This is the single most important event in history.

      Of course this is an “inconvenient truth” which threatens the very essence of the “Green Party”.

      More recently, the straggling states have begun to get the power of markets message. And over the last generation, more people have been allowed to raise themselves (by participating in voluntary division of labor and exchange) than any time ever. A billion people have recently emerged out of extreme poverty by participating in the complex adaptive problem solving system known as markets. Our generation has seen the best economic progress on a global scale ever, and the gains have been especially strong with the poorest people in the poorest countries (actually placing pressure on wages of those of us in “privileged” developed nations)

      The fact that you refer to this process as “f&[email protected] the poor” is absolutely Orwellian.

      • Robert Price Green-Party

        It’s difficult to know how to addreas the typical troll behind an avatar. you begin by asking me to take it down a notch, throw in some evidence free rhetoric, add a little abuse, and ask me to imagine that which evidence shows otherwise. You then choose to attack the Green Party because it’s part of my name.

        You have offered nothing of worth. You might as well be on the BBC. I don’t know how you think the Ricardo like free market rhetoric ensured that during the potato blight in Ireland the export of food was a good idea. Then again, your logic will be based on things you simply, “Reckin’ to be right,” whereas the policies of the Green Party, decided by their membership, are based on discussion of actual evidence. You know evidence, it opposes what you say and you ignore it? Remember it?

        As with all right wingers i expect you will continue with evidence free rhetoric, why don’t you shout a few more names from your standard play book. I will happily ignore you and look at the evidence. I suggest others do the same.

        • Swami Cat

          I am not “of the right,” in the slightest. I have no love for either the far right and far left. Indeed, I believe their zero sum political tribal posturing blinds them to both truth and goodness. My name is Swami, not “Tea Party Swami”

          But let us go to evidence. Please note that my evidence was
          1). population prior to 1776 compared and trending to the present
          2). Average standard of living prior to 1776 compared to and trending to the present
          3). Average lifespan prior to 1776….
          4). Literacy prior to 1776…..
          5). Leisure and working conditions…..

          These are easily Googled facts. I encouraged you in the comment to do so. In every case you will see a trend that starts in the “shitter” and rises steadily in places with the three institutions I mention in my explanation, pretty much in line with when they adopt them.

          Now you could certainly try to argue with me on the robustness of my explanation. Fair game. But to pretend I gave an empty rhetorical, evidence free argument just pretty much confirms that you don’t know what empirical data is (or you don’t know how to search the Internet). Do you actually dispute any of these trends?

          If you reread me carefully you will see that I am not in favor of exporting most food during times of famine. That would be a political idiocy. It would be a complete and total failure of good government. And I am a big fan of good government. Aren’t you?

          Please give your next post careful thought. You are making the entire Green Party look bad (granted not a hard thing to do if they try to deny the above trends).

          • Robert Price

            Just because you don’t have the name Tea Party as part of your fictional trolling name, Swarmi Cat, it doesn’t mean you are not merely espousing right wing rhetoric.

            The element you have missing, in your argument here, is that you see a causal effect where none is proven; you merely correlate then use your apriori, praxeological, mindset to decide the facts prove what you, “Reckin’ to be right.”

            Insulting the Green Party because it’s part of my name hardly does anything to show you are anything other than the idiot you appear to be called by people up and down these threads. Your continued efforts to show yourself thus with me will end with this post by me. You are willfully ignorant, and I cannot be bothered with your trolling.

            The Green Party, by they way, tend to be comprised with educated people who do not merely Google things and claim what they find is fact, or supports something which is not fact but apriori ignorance. That is rationalism, and a pre-enlightenment mode of logical supposition.


          • Swami

            See what I mean with the tribalistic us/them thinking? You see the world divided into your team and the other team and you cannot even conceive the world in another way, despite the fact that I am clearly in no way a conservative (nor a libertarian). I don’t identify myself as such because I think for myself and disagree with them on many or most things.

            I have indeed been working for the last few years on the causal connections between science, markets, open access politics and prosperity. If you ask nicely and apologize I will enlighten you. Otherwise, I will not waste my time.

  • Greg Davidson

    A minor point – you use the phrase “The lion’s share” incorrectly – the lion’s share means everything (the implication of the idiom meaning that lions don’t have to share).

    • Manar Hussain

      No matter the origin and perhaps original meaning, what it is taken to mean now is just as the author uses it:'s_share — it is mistaken or disingenuous to call usage in line with the consensus view as incorrect. You may wish the phrase were not used that way, but it is.

      • Greg Davidson

        Enjoyed your response, but I am afraid I also disagree with your perception that it is mistaken or disingenuous to make a minor note regarding word usage. The only possible relevance to the larger and more important points under discussion is perhaps the assumption we make about the behaviors that will ensue with a dramatic power imbalance.

        • Manar Hussain

          Nothing wrong with making a minor note regarding word usage. My comment was prompted by you saying it was incorrect when it was in fact in line with how most would use the phrase.

  • Greg Davidson

    You do not address the implications of other parts of Adam Smith’s work, namely where he writes that “Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate”. There is the possibility through political action to take steps to destroy the options available to workers, and thereby drive down their negotiating position. If we go back to the 1870’s in the United States, companies could use monopoly power to limit the options of workers and consumers and thereby drive down the cost of labor and increase prices. Subsequent to that time, “rulers” (as you put it) established regulation that increased the level of competion beyond that which would have occurred naturally in the marketplace. Also in the 1870’s, companies used political power to limit the options of workers (as with sharecroppers or company towns), further increasing their ability to reduce labor costs. These actions of the free market were similarly ended by government establishing regulation to prohibit child labor, to establish limits on the work-week, to enable employees to have collective bargaining rights to counter the more centralized power of corporations.

    In a free market economy, the actions of companies in the 1870’s were rational. Even if many companies were led by those who had a higher level of moral standards regarding the use of power to impose their will on their employees, in the absence of regulation, the free market would tend to reward those who most used power to suppress the wages of labor. In today’s economy, many good companies do sincerely care about their employees. And government regulation prevents the worst companies from profiting from abuse. But all of this comes from an economy in which government regulation is a critical element, because the experience with the free market before these regulations were in place can be as horrific as some of the despotic examples that you presented

    • Swami Cat

      Sorry Greg, but your history is topsy turvy.

      Just to clarify, you continue to make the same mistake as many commenters on this site. You have somehow redefined free markets into “anything wealthy people or corporations do for their own gain, most of which I disapprove of.” A free market is a system of VOLUNTARY specialization in the creation and exchange of goods and services. Using political power (( to suppressed wages or support monopolies) is a non voluntary use of coercion and is by definition the antithesis of a voluntary interaction, and hence a NON MARKET ACTION.

      Actual review of history shows that voluntary specialization, creation and exchange were constantly suppressed by various actors — bandits, Pirates, priests, feudal lords and incumbent cartels. Monopolies were widespread and were one of the major sources of income for the crown. The cities were dominated by exploitative cartels known as guilds, and the country was controlled by privileged lords who treated serfs as chattel. Crime was rampant, as were wars, arbitrary actions of lords, and tolls. In addition, transportation and communications and finance were limited in scope. Large scale complex adaptive markets were stunted from every direction.

      The Wealth of Nations and the emerging field of economics served as a roadmap to the possibilities of positive sum cooperation created by specialization. In effect, humanity learned how to constructively cooperate at an unlimited scale. I would add to Ridley’s praise of specialization that it also allowed for mechanization, and mechanization converts productivity into an engineering problem subject to incalculably large gains in efficiency.

      History reveals that places like the Netherlands, then Britain, then the US, then west Europe and Japan and so on capitalized on the productive potential of voluntary division of labor and exchange and in doing so began to see huge, and unprecedented gains in living standards. These funded shorter work weeks, less need for child labor, higher wages, safer work places, and so on. Later, after free markets generated the possibility of these things, states passed regulations requiring what markets had already enabled. The state’s role in better working conditions was secondary and any review of actual trends in hours, wages, living standards and child labor makes this clear.

      Don’t get me wrong, I am not arguing the state had no role (neither was Ridley). I am suggesting that if you are familiar with the way competition works, that higher wages and better working conditions are something which greedy companies have to provide to compete for good employees in a healthy functioning free market without entrance barriers. This does however imply the rule structure of rule of law, property and contract law, etc.

      The great enrichment involved markets, regulatory institutions and science self amplifying and supporting each other.

      • Greg Davidson

        You are mistaken, I very much do not define free markets into “anything wealthy people or corporations do for their own gain, most of which I disapprove of” I recognize the positive aspects of market-based systems, I don’t seen wealthy people as particularly more prone to adverse actions as non-wealthy people, etc. I work at a reasonably senior position in a large corporation, and I do not believe that my work is immoral. Perhaps you are confusing someone else’s words for mine.

        Please address my specific point. In contrast to the hypothesis that you appear to support, when the US government played a greater role in regulating the basics of the economy, the economy grew more than in the era when the economy was deregulated.

        I also contest your definition of free markets as based only on voluntary actions, or if you wish to stick to that language, let me assert what I believe that means in real life. If you believe voluntary is based on individuals making the best choices given their options, then competitive advantage can be achieved by constraining the options of those whose interests are contrary to your own. Sharecroppers may make voluntary choices to keep working on land, but that is because they do not own because they lack the capital to independently compete. Competition can be due to better specialization and product innovation, or it can be due to manipulating the environment to lower your costs and increase your prices. If you say that every good part of competition is “the free market” and every bad aspect is something else, then of course”the free market” is a good thing. But it’s just cheating totally up only one side of the ledger.

        • Swami Cat

          GDP per capita has grown a fairly steady two percent per year since 1800 in the US. Child labor rates were consistently dropping as farmers (most of whose kids worked the farm) left agriculture for better opportunities, workplace injuries were dropping steadily before OSHA and the rate of improvement didn’t even improve after the agency was created, average work week was dropping steadily until the more regulated 1930s when it stopped dropping as fast.

          I am not against reasonable regulation or anything, but even a cursory familiarity with trends reveals marginal productivity increases are funding improved living standards and working conditions and later, after the possibility has been created, the government steps in and passes regulations. Some of these regulations are wise, most are not. Specifically, pro-Union, minimum wages, affirmative action, required benefits, mandated working week and so on regulations have on net had little or no positive impact on the average worker and in many cases have had negative overall effects.

          As to your last paragraph, I agree that voluntary market interactions can create negative results. These include externalities such as pollution, unproductive arms races (though not all arms races are unproductive, just some. Google “Moloch” for examples), and “creative destruction” where someone benefitting via economic cooperation gets dumped by the cooperating party for a better Cooperator.

          • Swami Cat

            By the way, Greg, what do you mean “manipulate the environment” to lower costs or increase prices? And what does “constraining options” mean? I assume you are talking about voluntary actions and not about one party using government, or hired thugs to enforce the constraining and manipulating?

            Government regulations don’t make companies care about their employees. They care about their employees because they are a necessary part of the cooperative network necessary to generate profits (and hopefully because they are decent people to start with*). The terms of the employment are based upon the meeting point of the needs and values of the employee and the needs and values of the employer within a framework of other competing employers and employees and the entrepreneurial possibility of creating something of value for consumers.

            * similarly, employees care about their employers because they are necessary part of the cooperative network necessary to gain wages and hopefully because the employee is a decent person**

            **. And if the employee or employer is NOT a decent person, you have to expect the other party to bail on the cooperative endeavor at the first opportunity. Jerks have to pay more or get paid less to thrive long term in a reasonably competitive market.

          • Greg Davidson

            Swami Cat,

            I gave you an extreme case designed to test your position, that of a sharecropper who is trained only in farming, lacks the capital for land or seed, and lacks the knowledge of other alternative professions or locations where farming prospects might be better. In that example, the farmer may be said to make a “voluntary” choice to continue sharecropping, because it is the best of the available alternatives, but that is a misleading characterization. In this example, those who owned the land and had the wealth to fund the seeds may have taken actions which limited the range of choices of this farmer and others. For example, they could have fought to limit the funding of local schools to ensure that the farmer did not learn other skills. They could pass state or local legislation making it harder for outside entities to come in and set up potential alternative financing.

          • Swami Cat

            Okay, good, this helps.

            The odd thing is that you shift from market freedom to state action. Thus your criticism of market freedom is that economic actors can use the state to harm sharecroppers. This is rent seeking. It is using the coercive force of the state to limit the opportunities of others for the gain or privilege of the rent seeker.

            This is not a market abuse, it is a government abuse of power. Markets depend upon people NOT having the power and privilege to bias the environment in their favor.

            I am against rent seeking. I am against it when unions to it and when capitalists and landowners do it.

            Just to clarify, modern progress requires three institutions to thrive. These are science, markets and open access political institutions. Each depends upon the others. All are necessary, but none is sufficient. Each has its domain, and problems crop up whenever these domains are not kept in their proper place or where institutional effectiveness is compromised.

          • Greg Davidson

            Please, address 1950-1975 vs. 1980-2015. Your comment that “GDP per capita has grown a fairly steady two percent per year since 1800” also refutes your basic point, because there have been differential levels of centralized regulation since that time, and your thesis is that the degree of centralized control makes things worse. But in particular, if you want to refute my argument, make a case for the most modern of the periods since 1800.

          • Swami Cat

            Nice try at redefining the conversation. Does that normally work for you? Let me recap….

            You said that free markets required government regulation and that otherwise firms would use their power to suppress the “wages of labor”. You specifically mentioned the 19th C as the time of abuse.

            I responded that per cap growth rates and well being have pretty much gone up consistently by two percent per year and that though good regulation is necessary, that in general the mass of governmental interference has had “little or no positive effect” and in many cases have had a negative effect. I am sure that in many cases there was a positive effect too. I am not against reasonable, parsimonious, impartial regulation.

            I have no idea why you want to change the discussion to 1950 to 1975 compared to 1980 to 2015. But if you insist. In the US, the post war period was one of lighter regulation (compared to the latter era) where there was very little foreign competition for labor. Growth rates were around two percent per year. Since 1980, the amount of government regulation and market interference has increased dramatically, especially in the realm of employee/employer relationships. During this time, globalization has put severe pressures on developed world wages. We have also seen a major shift in compensation from wages to benefits (due in part to government reg), and a shift to fewer people working (increased levels of both retirement and disability). Wage growth has actually been a bit slower in the developed world (though extremely fast in undeveloped world), and the market growth has shifted from regulated states and industries to less regulated and unionized states and industries. The non market growth of government service workers has also been robust at the expense of non government workers (blatant rent seeking).

            To get back to the main point though. Higher marginal productivity increases the value of the worker. Businesses then compete with each other to attract these workers. This competition drives up wages and improves working conditions.

          • Greg Davidson

            Swami Cat,

            I believe that I am being fair in raising a question directly related to the thesis of the author of this article, and in asking you to respond to my specific question. The author himself makes some comparisons, including one between Germany in two different eras. Seeing as the US is both the world’s largest economy and the one that we live in, it seemed fair to ask those favoring the author’s thesis to defend his argument using a comparison between the two most recent eras in American economic history.

            I do want to make sure that I understand your point, are you asserting that industries such as telecommunications, finance, or transportation were less regulated in the 1950-1975 time period? I am bringing up that specific period of time, because the government had a much stronger role in defining the products that could be sold and determining the prices that could be charged for those products. Those are two pretty fundamental aspects of what the author of this article would describe as “socialist planning”.

            That is my primary point, and I would really appreciate you sharing your views on this specific point.

            As a secondary matter, I am sure that the partisans of Ronald Reagan would be surprised to learn that “since 1980, the amount of government regulation and market interference has increased dramatically”. I also think that government actions with respect to unions changed significantly starting with Reagan and the Air Traffic Controllers in the early 1980’s, and so I would like to hear how the the decline of labor unions fits into your assessment of increased regulation of “employee/employer relationships” – my sense is that overall employers have more flexibility today than they did in an era with much higher union participation as in the 1950’s and 1960’s.

          • Swami Cat

            Thanks Greg,

            See the list of regulations. Here is one link:


            As you can see, the number of regulations and regulatory agencies, and the size and extent of the regulatory agencies continues to grow. I don’t think anyone seriously doubts this.

            I am aware there was some deregulation too, not all of which was good. Fifteen steps back, one step forward.

            Conservatives and libertarians do not believe that Reagan succesfully defeated the regulatory growth machine. I am surprised you think they do. Indeed, they believe the economy would be multiple times larger today if the regulatory state had not gone crazy.

            Let me explain unions. Unions in practice are a cartel which restricts the supply of labor to increase wages. In economics terms, it is a rent seeking. It exploits those prospective seekers of jobs, consumers and capitalists for their own selfish reward. The net effect of a union is thus higher wages for those privileged to hold a union position at the expense of prospective workers who are precluded from accepting the job at a lower wage. Data shows that unions increases wages by about fifteen percent, again though at the cost of higher prices, lower employment and lower returns to capital. Robbing Peter to pay Paul.

            Lower returns to capital obviously reduces the risk adjusted expected rate of return in the unionized industry. This reduces the influx of capital, investment in the industry and over the long range jobs. Capital flees to where the cartel doesn’t operate. Thus no more jobs in Detroit, lots of jobs in the Carolinas and places and industries which respect freedom. Unions are in effect a form of coercive exploitation which destroy themselves over time as they strangle off investment and cause it to flee to freer pastures.

            Note that this matches any review of history. Unions thrived in a time of limited global competition, until they self destructed and wise capital could escape. Basic economics.

            You are right that employers and prospective employees are a lot more free today. It is basically because capital relocated to the states and industries which allowed freedom. And this is, IMO, why regulation hasn’t slowed growth down as much as conservatives and libertarians fear. Capital has exit options and thus seeks out places and industries without as many stupid regulations.

            And just to clarify, I am not a libertarian or a conservative. Nor am I against parsimonious and impartial regulations. I think regulation is essential for markets to work. I am very, very much against complex, partial, constantly changing, highly discretionary rules which try to determine outcomes rather than establish fair rules for all players.

          • Swami Cat

            In the second to last paragraph, I meant to say more free from unions. I do still believe that in general the extent of regulation is growing.

          • Greg Davidson

            Almost 90% of the analyses at your link do not even address the comparison between 1950-1975 and 1980-2015. The only data sets that enable a comparison between the two time periods refer to the quantity of pages in federal documents. I do not accept the implicit assertion that the quantity of pages of government regulatory documents is an accurate measure of the extent of government influence. To build on an example raised by the author of the article, there are far fewer pages of government regulations in North Korea than in the United States.This is not an accurate measure of the degree of influence on economic behavior by the governments of North Korea or the United States.

            The data does support the argument that there has been a growth in the complexity of government regulations in the United States, but it is plausible that the net effect of the complexity has been to weaken regulatory efforts by writing into the rule-making provisions for many special circumstances that provide more flexibility to businesses. In terms of the article we are discussing, the thesis is that the degree of governmental control is directly correlated with economic outcomes, and that is the position you are defending. In doing so, you have yet to address my specific examples of when all the companies in the shipping, trucking, rail and airline industries literally had to go to the government for approval of routes and prices. You have yet to address how we could achieve a higher level of GDP growth in the 1950-1975 era with the very real limitations on major industries such as finance and telecommunications.

          • Swami Cat

            Here is another article I just stumbled upon… I would cut and paste the link, but this site won’t seem to allow me to paste. Oh well, here is the quote…. You can google the source from the quote.

            “Figure 1 shows page counts for the Code of Federal Regulations (CFR), which compiles all
            federal regulations in effect each year. The CFR grew nearly eight-fold over the past 55 years, reflecting tremendous growth in the scale and complexity of federal regulations. At 175,000 pages, the CFR contains as many words as 130 copies of the King James Bible.2 While Ten Commandments sufficed for the Hebrew God of the Old Testament, the CFR contains about one million commandments in the form of “shall,” “must,” “may not,” “prohibited,” and “required.”

            Figure 1 strongly suggests that the regulatory leviathan is a bipartisan creation: The regulatory code consistently grew during both Democratic and Republican presidencies. There are exceptions – the first term of Ronald Reagan, and the first term of Bill Clinton, for example – but they are few and short-lived. This observation carries an important corollary: Simply putting one political party or the other in charge of the federal government is unlikely, by itself, to reverse or permanently arrest the expansion of the regulatory state. We need a more fundamental shift in our approach to regulation.

            It’s hard to summarize the scale of state and local government regulation, or its growth over time. Consider, instead, just one example in this regard: occupational licensing. The fraction of workers who must hold a government-mandated license to lawfully perform their jobs rose from less than 5 percent in the 1950s to 29 percent in 2008.4 About one-third of growth in occupational licensing since the 1960s reflects changes in the mix of jobs.5 The other two-thirds reflects a greater prevalence of licensing requirements within occupations.
            Licensing requirements make sense in a few occupations, as a means to protect people from unscrupulous or incompetent providers. But do we really need onerous licensing requirements for barbers, manicurists, tree trimmers, funeral attendants, massage therapists, auctioneers, sign language interpreters, and hundreds of other jobs?6 Worker certification, which preserves consumer choice and competition among suppliers, is usually a better response to concerns about supplier quality. All too often, licensing serves mainly to protect incumbent businesses and workers from competition – to the detriment of customers, young workers, and would-be entrepreneurs.”

            As to the rest of your comment you are coming across as somewhat delusional. I was arguing with your statements that regulation was the driving for the of the betterment of average worker. I clarified that the driving force was marginal productivity and that regulation has little or no positive effect and in some cases negative effect.

            You are you are of course correct that complex regulations are not the only way to master plan an economy. North Korea doesn’t issue regulation, it just centralizes decision making. How is that working out by the way?

            I did acknowledge the deregulation which has occured. Indeed I specifically said it wasn’t even all good. Remember the line about 15 steps back and one forward and the comments about how markets exit over regulated industries and areas and flock to freedom?

            Sorry dude, but you really seem to be floundering in this conversation.

          • Greg Davidson

            Alas, Swami Cat, despite your reference to terms such as “delusional”, you have demonstrated an inability to address my basic argument. You still can’t explain why GDP growth wasn’t worse when the US government had greater control over products and prices in major sections of the economy from 1950-1975. You have not substantiated your counterargument that government involvement in the economy was greater 1980-2015 (in particular, you didn’t address my argument that page count was not a valid measure and that complexity was a product of market forces, as companies choose to invest in lawyers to maximize profits by getting into a sort of arms race with regulators where companies could outspend govervment). You seem to have a praxeology-like faith that anything bad associated with the operation of a market is defined as “politics” because markets themselves must always be pure. If you won’t address the specifics of my arguments, I am not sure that we can progress further in this discussion.

  • Pingback: Who Created the Economy? - Evonomics | Economic...()

  • A lot of truth in this article, and also a lot of half truths and outright mistakes.

    There is a half truth in the quote from Smith that each person “intends only his own security”. Smith got that wrong.

    Sure there are some few sociopaths who intend “only” their own security. Most people also intend the security of friends and family and colleagues – it is called cooperation or compassion. Robert Axelrod received the American Science medal for essentially showing in Games Theory terms that cooperation requires attendant strategies to prevent cheating if it is to be stable. He demonstrated that the simplest class of such attendant strategies is the retaliator class – cooperate until trust is broken then retaliate hard enough to remove all benefit from cheating. We see it at many levels in our biology and our society, from emotions like jealousy and injustice to social conventions like our legal system that supposedly punishes cheats.

    Thus Axelrod demonstrated in mathematics and logic that it is in fact sensible to care for far more than “only” our own security, provided we have agreed and functioning systems to remove most cheating strategies, and are actively looking for both cheats and new levels of effective countermeasures. And in an almost paradoxical twist, such caring and cooperation does end up actually being in our own long term self interest.

    When viewed from this perspective, rather than the exchange aspects of markets being central, it can be seen that the distributed trust networks that are a part of real functioning markets were at least as important, and possible far more important, to prosperity than any value of exchange.

    Certainly freedom is key to prosperity, and it is key at every level. At every level of society there needs to be freedom to question, to innovate, to experiment to determine if new methods, new ideas, do actually deliver benefit, or if there are other unforeseen complicating factors. This applies at all levels of knowledge, from household to trade guilds, to science, to philosophy (in as much as it can be said to differ from science, which is marginal or non-existent in some understandings).

    And it can get very complex, as many levels arise, and there is much done for hidden reasons. Much of the legislation in place in the name of public safety is actually far more about protecting profits and monopolies, and when looked at closely actually causes far more harm than good.

    Which is not to say that there are not people and businesses out there that do actively put people in danger for profit motives, those exist, but much legislation tends to give such cheating strategies much more protection than it does to the public in general.

    The claim that “the cause of the great enrichment is still unknown” is utter nonsense.

    There was no single cause.

    There was a vast array of causes.

    Weapons was one cause. The long bow, in the hands of someone trained in its use, made that man dangerous to all other men. As such it was a great equaliser. Kings and gentry learned to their cost that they could only push people so far, before someone would take retaliatory action.

    Thus was authoritarian rule reduced in a sense.

    New energy sources was another. Steam power allowed the multiplication of effort. Human power or horse power was no longer the limiting factor in production. Water power and steam power allowed more to me made by fewer people. That trend has continued as new forms of power have come on stream.

    New ways of understanding processes became important. Looking for rate limiting steps, and focusing on those, sequentially, produced steady improvement at all levels, and as the number of levels at which improvements happen increase so the exponent of the increase increases.

    New levels of understanding contribute, opening an exponentially increasing set of new boundaries to be explored. Unfortunately, part of that exploration was into new ways to keep the majority of people ignorant of the sorts of exploitation they were subject to, that is now a multi-level business consuming much intellectual resource.

    Much of the increase in output came not from specialisation per se, but from the process improvements it allowed. A self sufficient generalist person is not significantly less skilled or productive than a specialist when actually on task, it is all the down time required to switch tasks where most improvements were made. Keeping a forge going and working it to capacity is much more time and energy efficient than starting it up for a short job then shutting it down again. In this sense, productivity gains were most often much more about process and energy than about the human skill involved. Rapid transport and rapid communication allowed for specialisation to be efficient. If you could start your own forge, use it and shut it down again quicker than you could walk to a blacksmith, then it was more efficient to do it yourself. The internet has taken that process close to its asymptotic limit.

    People are still being fed the nonsense that we face a scarcity of material and energy. That is outright lies.

    We know how to produce as much energy as anyone reasonably needs, using solar cells, geothermal and hydro, but that is distributed energy, and will destroy the vast profits being made by oil and energy companies from centralised production and supply.

    As third and forth generation 3D printing comes on stream, and production becomes completely automated and decentralised, the need for exchange as a means of survival vanishes.

    Smiths’ ideas of moral sentiment are a reasonable approximation to our more recent understanding of the depths of the strategy spaces explored by evolution at both genetic and cultural levels. Dawkins’ 1976 classic “The Selfish Gene” is still probably one of the best introductions to the topic around, and it is a topic of extreme depth, and recursively involves cooperation and competition in a dance where cooperation is clearly ever more dominant in the higher levels of the dance (as the benefits of cooperation grow exponentially and the likelihood of cheating being noticed rises exponentially).

    What our society has not yet broadly caught up with, is that our modern ability to automate any process, using computers and robotics, gives us the capacity to deliver universal abundance of all essentials, but that market based economics must always value any universal abundance at zero.

    When most things were genuinely scarce, markets and the information signals they provided made a lot of sense. Now that we can automate any process, market values actively work against the interests of a large section of society. Scarcity is now much more about the ways we have of thinking about things in terms of money, than it is about our inability to produce real goods and services.

    Sure we need to clean up our technological act to be a much better fit with existing biological ecosystems, and the major thing stopping that is the very notion of capital, and the need to extract as much profit as possible from existing technology before replacing it with newer and more efficient technology.

    Those at the top of the distribution heap have something of a myopic focus on the role competition in creativity and evolution, and are selectively blind to the ever increasing role of cooperation at all levels.

    Certainly there is great truth in the fact that specialisation of roles allows for emergent levels of complexity.

    And biology has a clear lesson for us here.

    When a subset of the cooperative starts using resources for its own replication at cost to the operation of cooperative as a whole, we have a term for that – it is called cancer.

    Much of the money system, the finance system, has become a cancer that threatens the life of humanity as a cooperative species.

    And saying that is not in any way implying that everyone is the same or needs to be the same. It is saying that the system needs to deliver the essentials of life and liberty to every individual (life blood must go to every cell). Most individuals actually have quite modest needs, easily met.

    The cancerous tumours of greed, creating risk to others, threaten us all.

    We actually have ample creativity to supply all that anyone needs, and all that most people want, provided we adjust our systems to make it so.

    Our systems of automation and production have actually taken us past the threshold where exchange based systems of value can actually send clear signals of what those real human needs and wants are.

    Elinor Ostrom has shown us a series of alternative modes of cooperation (which align well with Axelrod’s work).

    Yes – at a time where markets provided the best trust networks available, imperfect markets were better than no markets.

    Now we have levels of communication available from the internet, and from high density personal storage, that allow us to develop widely distributed trust networks with very high redundancy and very high accuracy over time – much better than anything any market could ever provide.

    The key, as Hayek pointed to, is seeing markets as information systems, and then seeing how the internet makes them redundant.

    It is now clear, beyond any shadow of reasonable doubt, that markets, and their scarcity based value systems (money and capital), are now becoming the single greatest liability, and the single greatest threat to the most cooperative species ever to emerge on this planet – us!

  • Pingback: News: Real Estate, Risk, Economics. Dec. 21, 2015 | PropertyPak()

  • Pingback: Evonomics – Who created the Economy? | Ted Howard NZ's Blog()

  • Peter Mersch

    Very interesting, as the whole book is. Unfortunately it lacks a General Theory of Evolution, though the title of the prologue is “The General Theory of Evolution”. On page 4 (of the book) it says: “I want to do for every aspect of the human world a little bit of what Charles Darwin did for biology …” The biggest achievement of Charles was the Theory of Evolution by Natural Selection.

  • Duncan Cairncross

    This article misses the point totally
    The markets deal with the distribution – but the absolute key is the ability and knowledge to make the goods
    We can make things for pennies that cost thousands a few years ago because we know how to and have built the machines and processes that make the machines to make the products

    • Swami Cat

      No, Duncan again YOU miss the point. Markets are absolutely not PRIMARILY ABOUT distribution. They are fundamentally about the creation of value. The reason we can create things for pennies which cost thousands of dollars is that we have a complex adaptive problem solving system on the creation (and distribution) of goods and services. We have a complex learning system which constantly creates additional value through integrated networks of cooperation and constructive competition.

      I could explain it in depth if you would like. It may explode your world view though.

      • Duncan Cairncross

        You are an idiot
        Markets do NOT create anything
        They permit the operations that do the actual creation

        • Swami Cat

          Yes, that was the implication. There is no point in further correspondence.