This year’s Nobel Prize in economics was awarded to three scholars specialising in economic growth. It is a timely reminder that many of society’s problems can be fixed by enlarging the economic pie, while obsessing over how to distribute that pie is the route to perpetual discontent.
The American economist Walter Williams once famously remarked that: “Prior to capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man. Capitalism made it possible to become wealthy by serving your fellow man.” This astute observation paves the way for appreciating the contribution of the three Nobel winners this year – Northwestern University’s Joel Mokyr, College de France’s Philippe Aghion and Brown University’s Peter Howitt – which show why the key driver of sustained economic growth in the modern era is capitalistically driven technological innovation.
Dr Mokyr’s research focused on eras like the Industrial Revolution, which started in Great Britain before spreading to Europe and North America. By studying the social, political and legal factors that played a role in the unprecedented rates of economic growth witnessed during the 19th century, Dr Mokyr was able to build a narrative about why some countries industrialised and others did not.
In particular, his research helps affirm that the narrative presented in many left-wing circles – namely that Britain became rich due to slavery and exploitation – is an oversimplification that ignores the much more important role played by technological advancement. After all, many societies were deeply unequal and had access to slave labour, yet Britain was able to march ahead of them for several reasons, including the unique culture of entrepreneurship it fostered.
Dr Aghion and Dr Howitt are most famous for advancing our understanding of the “creative destruction” concept that was originally proposed by the Austrian economist Joseph Schumpeter in the first half of the 20th century. Their models can be whittled down to the idiom that “if you want to make an omelette, you have to be willing to break some eggs”. Essentially, economies grow when new technologies are discovered through the purposeful allocation of resources to research and development, yet some of the returns reaped are at the expense of those whose livelihoods are tied to the technologies made obsolete by the new discoveries.
For example, during the 19th century, when engineers mastered the steam engine and rail networks proliferated around the world, huge opportunities for economic expansion materialised. However, not everyone benefitted, with canal boats and horseback couriers constituting some of the losers from this technological leap. Dr Aghion and Dr Howitt argue that governments need to be attuned to this collateral damage and devise policies that fine-tune the rate of economic growth while also potentially compensating those who lose out.
The Nobel committee’s acknowledgement of these scholars’ contributions comes at an important time during which economic illiteracy is threatening social cohesion. Over the past three centuries, billions of people have been lifted out of poverty – not due to redistributive taxation or minimum wages – but because of aggregate economic growth, with China being the current exemplar in that regard. A low-income American today consumes much more than a British aristocrat in the 18th century as a direct consequence of the economic pie’s rapid enlargement.
Unfortunately, leftist thinking inspired by the communist and socialist paradigms of the 20th century has successfully convinced many people – especially those too young to have witnessed the horrors of left-wing totalitarianism – that modern prosperity is a house of cards built on rich people exploiting the poor.
While there is no doubt that significant economic injustices exist around the world and that they contribute to societal tensions, there is plenty of evidence to suggest that the best solution is to focus on growing the economic pie. Fixating on using tax instruments to redistribute wealth builds resentment. It also conditions people to think about how to improve their living standards at the expense of others rather than in tandem with them, in line with the pre-capitalist sources of economic growth that the late Williams alluded to in his famous quote.
This year’s Nobel Prize in economics celebrates Dr Mokyr, Dr Aghion and Dr Howitt’s insights, reminding the world that fostering innovation and growth – not divisive redistribution – is the proven path to shared prosperity. Let’s heed their work to build a future where opportunity, not envy, drives progress.
