Summary: Scientists and engineers are finding ways to turn pollution and waste into valuable resources. From recovering fertilizer from toxic lakes to creating biodegradable packaging from farm residues, innovation is transforming environmental problems into opportunities for growth. By reimagining waste as a resource, we can make the planet cleaner while fueling new industries and jobs.

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Every summer, toxic algae blooms turn Lake Erie and other US lakes into a green soup, threatening drinking water for millions. Every year, American farmers burn millions of pounds of grain stalks after harvest. And every day, Americans throw away enough packing peanuts to fill an Olympic swimming pool. What if I told you that each of these waste streams could become valuable resources—and that the solutions are emerging from university laboratories right now?

We stand at a unique moment in history. For the first time, we possess the scientific tools to transform our most pressing environmental challenges into economic opportunities. The numbers tell a compelling story. According to the World Bank’s “What a Waste 2.0” report, global waste is projected to rise by 70 percent, from 2.01 billion tons today to 3.4 billion tons in 2050. Yet, the circular economy, or using waste productively to create wealth, could unlock $4.5 trillion in economic benefits by 2030. The question isn’t whether we can afford to innovate—it’s whether we can afford not to.

Three Breakthrough Innovations from North Dakota

The convergence of nanotechnology, materials science, and biotechnology has created unprecedented possibilities for environmental remediation. In a laboratory at North Dakota State University, my research team is developing three innovations that exemplify this waste-to-wealth transformation:

1. Calcium peroxide nanoparticles that absorb phosphates from polluted lakes and convert them into sustainable fertilizer
2. Flax-fiber composites that transform agricultural waste into biodegradable packaging materials
3. Starch-based foam alternatives that replace petroleum-based packing peanuts with compostable materials

These aren’t pie-in-the-sky concepts. They’re practical solutions that could scale from our Fargo lab benches to global implementation within a decade. Here’s how each one works—and why they matter.

Turning Lake Poison into Farm Food

Over 500 “dead zones” now plague our planet’s bodies of water, with the number doubling every decade since the 1960s. These oxygen-depleted areas, caused primarily by phosphate runoff from agriculture, cost the United States $2.4 billion annually in economic losses. The 2014 Toledo water crisis, which left half a million people without access to drinking water for three days, was just a preview of what may come unless we act.

Here’s where nanotechnology can change the game. At our NDSU lab, we’re developing calcium peroxide nanoparticles—imagine particles 5,000-times smaller than the width of a human hair—that act as molecular sponges for phosphate pollution. When deployed in eutrophic (nutrient-rich) lakes, these nanoparticles serve a dual purpose that borders on alchemy: First, they absorb phosphates from the water with an efficiency 500-times greater than conventional materials; second, they slowly release oxygen over 30 days, breathing life back into suffocating bodies of water.

But here’s the truly exquisite part: Those absorbed phosphates don’t disappear. Our research team harvests them to create sustainable fertilizer. Consider the irony—the very phosphates that are killing our lakes came from fertilizer runoff, and now we’re capturing them to make new fertilizer. It’s the circular economy in its purest form.

The timing couldn’t be more perfect. The global phosphate fertilizer market, currently valued at $72 billion, is facing a sustainability crisis. Morocco controls 70 percent of the world’s phosphate rock reserves, and at current extraction rates, most of these reserves will be depleted within a century. By recovering phosphates from water pollution, we’re not just cleaning lakes, we’re securing agriculture’s future. Our preliminary calculations suggest that phosphate recovery from US agricultural runoff alone could replace 15 percent of imported phosphate fertilizer, saving farmers billions while restoring water quality.

From Farm Waste to Amazon Packages

The second innovation transforms an agricultural nuisance into packaging gold. North Dakota grows 90,000 acres of flax annually, primarily for the valuable oil in its seeds. But after harvest, millions of pounds of stalks are typically burned or buried, a waste of remarkably strong natural fibers that have been used for over 30,000 years for textiles, food, paper, and medicine.

At our NDSU lab, we’re extracting these fibers and mixing them with biodegradable polymer matrices to create packaging materials that rival petroleum-based plastics in performance while completely biodegrading in three to six months. The resulting composite materials achieve tensile strengths of 50–70 megapascals—stronger than many conventional plastics—using 35 percent less energy to produce.

The market is hungry for such solutions. The biodegradable packaging sector is experiencing rapid growth, projected to reach $922 billion by 2034. More important, consumers are voting with their wallets: 82 percent say they’ll pay premiums for sustainable packaging, and 39 percent have already switched brands for better environmental practices. Major corporations aren’t waiting. Dell already uses mushroom-based packaging grown on agricultural waste, while IKEA has committed millions of dollars to eliminate polystyrene entirely.

North Dakota sits on a gold mine of opportunity. The state’s two million acres of various crops produce enormous volumes of agricultural residue. By viewing these stalks, husks, and shells not as waste but as industrial feedstock, North Dakota could become a hub for sustainable packaging materials. A single processing facility could create 200 rural jobs while generating $50 million in annual revenue from materials currently worth nothing.

Replacing Satan’s Snowflakes

The third innovation addresses what some environmentalists refer to as “Satan’s snowflakes”—namely, those infuriating polystyrene packing peanuts that seem to multiply in your garage and never decompose. Americans generate enough polystyrene waste to circle the Earth in a chain of coffee cups every four months. This material persists for 500 to one million years, breaking into microplastics that contaminate our food chain.

In our NDSU lab, we’re developing starch-based foam alternatives using corn, wheat, and potatoes, all crops that North Dakota grows in abundance. These “bio-peanuts” dissolve completely in water, compost within 90 days, and require just 12 percent of the energy needed to produce traditional polystyrene. They even eliminate the static cling that makes unpacking electronics feel like wrestling an electric eel.

The economics are compelling. Companies such as electronics retailer Crutchfield report saving $70,000 to $120,000 annually in freight costs after switching to lighter, bio-based packing materials. With 11 states and 250 cities already banning polystyrene foam, and the European Union implementing strict regulations on single-use plastics, the market for alternatives isn’t only growing, it’s becoming mandatory.

Perhaps the most profound impact is psychological. Every online purchase delivered with biodegradable packing materials sends a message: Modern conveniences can be maintained without mortgaging the environment. While a small victory, such progress is building momentum for larger, more significant changes.

The Scaling Potential: From Lab to Global Impact

The opportunity is enormous: If just 10 percent of US agricultural waste were converted to packaging materials, it would replace 33 million tons of petroleum-based plastics annually. If our phosphate recovery technology were deployed in the 100 most-polluted lakes globally, it could recover enough phosphorus to fertilize five million acres of farmland while restoring recreational value worth $10 billion.

These aren’t distant possibilities—our NDSU innovations are progressing through the typical stages: proof of concept, pilot testing, demonstrations, and commercialization. We’re currently in pilot testing, with plans for field demonstrations next year. Industry partners have expressed strong interest, particularly from agricultural cooperatives seeking value-added opportunities for crop residues.

Innovation Beats Despair: Lessons from Environmental History

Some critics might ask, “Aren’t these solutions just Band-Aids on the gaping wound of industrial civilization?” Such a question, however, misses the profound lesson of environmental history. Every major pollution crisis we’ve faced, from London’s killer smog to acid rain and the ozone hole, seemed insurmountable until human ingenuity proved otherwise.

Consider the track record. Since 1970, the United States has reduced major air pollutants by 78 percent while increasing gross domestic product by 321 percent. The Montreal Protocol has eliminated 99 percent of ozone-depleting substances, saving approximately two million people from skin cancer each year. Acid rain, once predicted to cost $6 billion annually to address, was solved for less than $2 billion per year. These victories weren’t achieved by abandoning modern life but by making modernity cleaner and more efficient.

The same patterns are emerging in clean technology. Solar panel costs have plummeted 90 percent in the past decade. Renewable energy is often among the lowest-cost power sources, especially when comparing marginal generation costs. When accounting for storage or backup needs, however, total system costs can vary by region and grid mix. Battery prices have decreased by 97 percent over the past 30 years. Each follows Wright’s Law—costs decline predictably as production scales. Our NDSU waste-to-resource innovations will follow similar trajectories.

The investment community recognizes this potential. Clean technology attracted $1.8 trillion in investments globally in 2023, surpassing fossil fuel investments for the first time. The bioeconomy, currently valued at $4 trillion, is projected to reach $30 trillion by 2050. These aren’t charitable donations, but rather hard-nosed bets on profitable technologies that happen to benefit the planet.

From Lab Bench to Marketplace

Numerous university spin-offs have traveled the well-worn path from laboratory to marketplace. Companies such as Membrion (ceramic membranes developed at the University of Washington) and Integricote (nanocoatings developed at the University of Houston) demonstrate that academic innovations can achieve commercial success while addressing environmental challenges.

The Optimistic Imperative

The waste crises facing our generation are real and urgent—but so is our capacity to transform them into opportunities for prosperity. The toxic algae choking our lakes could become tomorrow’s sustainable fertilizer. The agricultural waste burning in our fields could become the packaging protecting tomorrow’s e-commerce deliveries. The petroleum-based foams polluting our oceans could be replaced by materials that harmlessly dissolve back into the earth.

This transformation, however, won’t happen automatically. It requires continued investment in research, supportive policies that incentivize innovation over incineration, and entrepreneurs willing to scale laboratory successes into industrial realities. The trajectory is clear: Waste is becoming wealth, pollution is becoming profit, and environmental restoration is becoming economic opportunity.

From my lab bench in Fargo, I see a future in which every environmental challenge sparks a thousand innovative solutions, every waste stream becomes a value stream, and the same human ingenuity that created these problems engineers their solutions. That’s human progress at its finest.

Summary: Neoliberalism is often blamed for inequality, lost jobs, and social decay—but its record tells a different story. Emerging from the crises of the 1970s, market-oriented reforms revived growth, stabilized economies, and lifted hundreds of millions out of poverty worldwide. From Reagan and Thatcher to India and China, freer markets proved far more effective than state control. Critics confuse cultural discontent with economic failure, but the evidence shows neoliberalism succeeded at curbing inflation, fueling development, and creating global prosperity unmatched in any prior era.

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Despite the polarization of our times, there is widespread agreement regarding the economic approach pursued by global elites between, roughly speaking, 1980 and 2008. If the term “neoliberalism” is used today, it is usually as an epithet for that era. Progressive critics including Joseph Stiglitz frame neoliberalism as a destructive ideology that widened inequality, weakened democracy, and commodified social life. To populist and national conservatives, neoliberal globalization hollowed out national industries, undermined communities, and empowered elites at the expense of ordinary citizens. 

These critics are wrong. Neoliberalism emerged to deal with real problems, had strong intellectual foundations, and largely accomplished its goals. The anger at neoliberalism does not reflect its failures but instead represents scapegoating for complaints that are largely unrelated to economic issues. Critics of neoliberalism are wrong on economics, and there is little reason to believe that most of their preferred policies provide a better alternative.

Neoliberalism was a response to stagnation and malaise around the globe. Outside the Communist Bloc, the mid-20th century was dominated by Keynesianism in the West and state-led development in the Global South. Governments regulated industries, controlled capital flows, and expanded welfare states. By the 1970s, cracks appeared in this system: stagflation (low growth and high unemployment) in the United States and Europe and recurring fiscal crises discredited state-centered models. In the developing world, mounting debt and balance-of-payments problems forced governments to seek assistance from international institutions, setting the stage for policy change.

This atmosphere of crisis created an opening for market-oriented thinkers who had been marginalized in earlier decades, perhaps most notably the Chicago University economist Milton Friedman, who would win the Nobel Prize for economics in 1976 and become highly influential as a public figure advocating for deregulation. The law and economics movement, centered on figures including Ronald Coase, Richard Posner, and Gary Becker, also emerged at the University of Chicago, and they began to apply cost-benefit analysis to government regulations that had previously gone unquestioned. They called for taking efficiency concerns into consideration when interpreting legal doctrine.

Neoliberalism was characterized by taking seriously classical liberalism’s commitment to free markets and limited government. In the context of the world created by the 1970s, this approach meant slowing the growth in the money supply, deregulating industry, taking a skeptical approach to labor unions and industrial policy, opening markets up to the free flow of capital and trade, and in some cases, trying to shrink or at least prevent the expansion of the welfare state.

This cross-partisan convergence toward such ideas beginning in the late 1970s and continuing into the early 2000s has been called hegemonic neoliberalism. The first wave was identified with the right, associated with the tenures of Ronald Reagan (1981–1989) and Margaret Thatcher (1979–1990). The second came in the 1990s in the form of the “Third Way” leaders, notably Bill Clinton (1993–2001) and Tony Blair (1997–2007). Far from rejecting their conservative predecessors, they consolidated the new order: Clinton championed the North American Free Trade Agreement (NAFTA), welfare reform, and financial deregulation, while Blair’s New Labour accepted Thatcherite economic reforms.

The impacts of neoliberal ideology were felt well beyond the Anglo-American world. The International Monetary Fund and World Bank began to make financial aid to the developing world, much of it in disarray due to failed post-independence economic policies, conditional on adopting neoliberal reforms. Across Africa, Latin America, and Asia, governments privatized industry, cut public spending, and began to open up to international trade. The impacts of neoliberalism can clearly be seen in India and China, the two largest nations in the world. Beginning in late 1978, China introduced market mechanisms during the reign of Deng Xiaoping. In 1991, facing a balance-of-payments crisis, India implemented sweeping reforms under International Monetary Fund guidance. That involved cutting tariffs and the dismantling of the “License Raj,” which created strenuous permit requirements to import goods or operate a business. The old system placed limits on imports, set tariffs as high as 300 percent, and “made India virtually a closed economy.”

Neoliberalism made two major promises. It would put Western nations on a better economic track and also turbocharge development in the third world. On both accounts, it worked. The UK, in particular, saw growth increase in the 1980s and 1990s. Growth was about the same in the US in the 1980s and 1990s as it was in the 1970s, but with lower inflation, more stability, and lower unemployment. Refusing to follow Thatcher’s approach of taking on unions and limiting the expansion of the welfare state, the other major economies of Western Europe—France, Germany, Italy, and Spain—saw slower growth than either the US or the UK in subsequent decades. While growth rates in the Western world never returned to the those of the golden age of the 1950s and 1960s, the crisis of the 1970s had been overcome.

To put it another way, the US has been more neoliberal than the UK, which has been more neoliberal than most of the rest of Western Europe. And since the neoliberal revolution, the US has grown fastest, followed by the UK, and then Western Europe. Moreover, many economists believe that the main issue hindering even greater economic success in the UK and the US is their inability to build enough housing, due to government regulations getting in the way. That indicates that the US and the UK are suffering from too little, rather than too much, free market capitalism.

Together, China and India accounted for about 40 percent of the world population in 1980, and an even higher portion of the third-world population, so their trajectories are not just national stories but also tell us much about what has happened to the global economy. After market-oriented reforms, both nations experienced dramatic improvements in growth and poverty reduction. China’s opening up, beginning in 1978, unleashed decades of double-digit expansion, lifting more than 700 million people out of extreme poverty and transforming the country into the world’s second-largest economy. After India’s 1991 liberalization, annual growth rates increased, fueling the rise of a vast middle class and massive reductions in poverty. According to a 2022 World Bank report, China alone has accounted for nearly 75 percent of the global reduction in extreme poverty over the last four decades.

It is often said that China did not adopt all aspects of neoliberalism but pursued a hybrid model. Yet although China has grown impressively, it still remains much poorer than other East Asian nations. Its growth is slowing while its people are still at middle-income levels, whereas Hong Kong, Singapore, South Korea, and Taiwan maintained much higher growth until they became wealthier. China was able to improve its standard of living due to adopting pro-market reforms, and there is reason to believe that its growth would have been even more spectacular if it more fully embraced neoliberalism, which it hasn’t in part because free markets are potential threats to the centralized Communist Party control. Contrasting the nation with Hong Kong, Macau, Singapore, and Taiwan, the economist Garrett Jones notes, “China is, by far, the world’s poorest majority-Chinese country.” He also points to Chinese success in Southeast Asia and the New World, indicating that there are deep cultural factors and individual traits behind the remarkable consistency we see. With that context, China’s hybrid model doesn’t look nearly as impressive. It was beneficial for China to move away from communism, but its growth has likely occurred despite practices like large state-owned enterprises and government-directed resource allocation, rather than because of them.

After the fall of communism, Eastern Europe became another major laboratory for neoliberal reform. Beginning in the early 1990s, countries such as the Czech Republic, Estonia and Poland embraced “shock therapy,” which was characterized by rapid liberalization of prices, trade, and capital flows, coupled with the privatization of state-owned enterprises. The results were relatively painful in the very short run: output collapsed, unemployment soared, and inequality spiked. But over the medium to long run, many of these economies stabilized, integrated into the European Union, and experienced sustained growth. Poland in particular became a post-communist success story, avoiding recession during the 2008 financial crisis and seeing consistent income gains. Russia’s path was harsher, with extreme volatility marking the 1990s. Many reforms were started, then abandoned. It took about a decade and a half for Russian living standards to reach what they had been before the collapse of the Soviet Union. Still, across the region, neoliberal prescriptions defined the initial transition away from central planning, making Eastern Europe a critical chapter in the global diffusion of market-oriented policies.

The terrible state of Russia in the 1990s has often been cited as a blow against the ideas of neoliberalism. In fact, there is an argument to be made that in some ways Russia’s problems resulted from it not being willing to reform far or fast enough. After losing much of its economic base due to the collapse of money-losing state-owned enterprises, Russia carried the burden of subsidies, state pensions, and state wages into the post-communist era. Rather than cut spending it printed money, which led to runaway inflation, as standard economic doctrine predicted. Inflation would reach 2,500 percent in 1992. Moreover, when it came to privatization, many Eastern European states sold state assets to foreign investors rather than insiders, as was the case with Russia. That allowed the domestic producers to access better technologies, accounting practices, and so on.

If the evidence overwhelmingly suggests that neoliberalism has succeeded, why have intellectuals turned against it? It is important to understand that any idea that develops hegemonic status is likely to be challenged by aspiring elites. Neoliberalism dominated intellectual discourse, and the phrase began to be used as a stand-in for every problem that people saw in the world. Modernity is in many ways alienating, and every cultural, psychological, or public health issue that arose was placed at the feet of the dominant ideas of a previous era.

In fact, neoliberalism might have succeeded too well. In an influential 2016 paper, the political scientists Ronald Inglehart and Pippa Norris showed that as countries have become wealthier, politics has centered less on economic issues and more on cultural ones, like gay rights and immigration. While social class used to be a strong predictor of how people voted, that was no longer the case by the 2000s. In effect, when Western economies faced crises in the 1970s, people cared first and foremost about the economy, and neoliberalism largely solved the most pressing issues of that decade. Instead of declaring victory, Western publics began fighting about cultural issues. To be fair, the main cultural issue they fight over is widescale immigration, which has often been justified on neoliberal grounds. That is the only issue where widely held political values directly clash with neoliberal doctrine, and the idea that neoliberalism is not a cause of widespread discontent must be qualified by admitting that immigration is an exception to that rule.  

When material fears come to the forefront, people go back to caring primarily about the economy, as was the case during the Great Recession in particular. But interestingly, there have been fewer recessions during the era of neoliberalism, freeing people to argue about cultural issues. From the nineteenth century through the Great Depression all the way up to the early 1980s, recessions were a regular occurrence in the United States and Europe. They often came every few years as policymakers struggled with inflationary cycles, more limited tools for stabilizing demand due to the gold standard, and eventually oil shocks. In the US, in the years immediately before the neoliberal consensus, recessions had become routine, with such downturns happening in 1969–1970, 1973–1975, 1980, and 1981–1982. That created a sense that economic instability was an unavoidable fact of life. Yet since the mid-1980s the frequency and severity of recessions have dramatically declined because central banks embraced credible anti-inflation policies, unions lost the power to hinder necessary structural adjustments to the economy, free trade allowed capital and resources to be quickly deployed to more efficient uses when necessary, and governments learned to use fiscal and monetary stabilization more effectively.

Both the US and much of Western Europe have experienced what economists call the “Great Moderation,” a period of steadier growth and fewer, shorter downturns. While the Great Recession of 2008 was a major exception, it stood out precisely because it interrupted what had become an era of relative economic stability compared to the turbulence of earlier decades. The only other serious economic crisis since the mid-1980s was the COVID-19 downturn, but that was due to government shutdowns and voluntary social distancing resulting from the pandemic. That said, the COVID-19 recession was followed by an exceptionally rapid recovery.

There has also been a greater societal turn towards pessimism, related to, but in a sense independent of, the culture war. The increasing use of smartphones and social media has been linked to greater anxiety and depression among young people. Trust in institutions—from Congress to the media and organized religion—has plummeted over the last several decades.  Meanwhile, there has been no similar decrease in economic optimism. The University of Michigan Consumer Sentiment Index polls 500 Americans every month to measure their attitudes toward their personal finances and expectations. Consumer sentiment had collapsed in the late 1970s during stagflation but then shot up and remained high until the Great Recession. It picked up again as the economy recovered, before falling to around the level of the late 1970s during COVID-19, where it has been stuck since.

Note that 2020 was not only the year the pandemic began, but also the year when Joe Biden was elected president; Biden ran an administration that moved away from the neoliberal consensus and spent large amounts of money while adopting measures to ostensibly revitalize manufacturing. As predicted by the Harvard economist Larry Summers and other mainstream economists, that led to high inflation and, ultimately, contributed to the reelection of President Donald Trump. In other words, Americans were most optimistic about their finances during the period of hegemonic neoliberalism, and were more pessimistic before the consensus formed and after it broke down.

To take another indicator, the American National Elections Survey, conducted every two years since 1956, has been asking Americans whether they think their finances are likely to get better, worse, or stay the same over the next year. The two years with the greatest pessimism were 1974 and 1978, with more Americans saying they expected their finances to get worse than better. Yet from 1980 to the present, Americans have been more likely to respond that they expect to be better off than worse off. The increasing pessimism that we see regarding American governance and institutions does not apply to people’s individual finances. Data on sentiments and economic growth tell the same story.

Free markets do not have the answers to all of life’s problems, as postliberals of both the right and left have been correct to point out. Neoliberalism was a consensus that emerged from a long history of experimentation to address problems such as high inflation, high unemployment, and stagnant economic growth. It largely succeeded in its goals, and out-of-control housing prices in the era of NIMBYism indicate that policymakers have, if anything, not leaned in enough to the magic of markets. Turning back to strong labor unions, tariffs, and the state trying to decide which industries succeed or fail would simply make people around the world poorer without solving any of the underlying issues that inspire their discontent.

If someone wants to argue that neoliberalism itself is the cause of noneconomic social and political issues, the burden is on them to prove it. Simply pointing out that, for example, the birth rate or trust in government has decreased over the last few decades and indicting neoliberalism—which does not directly speak to such indicators—will not do. Causation must be established in order to justify a return to failed economic policies. At the very least, postliberals of the right and left should be able to point to countries that rejected neoliberalism and succeeded on the specific measures that they care about. But they cannot do that. Neoliberalism is an economic theory that has had positive economic results—it is not a religion that provides meaning, or ethical and spiritual guidance. Those concerned most with men’s souls should focus on shifting the culture in their preferred direction, rather than dismantling a system that has been working well for most of the world.

Listen to the podcast or read the full transcript here.

Today, I’m speaking to Peter Boettke, a Professor of Economics at George Mason University, who has a new book out with Rosolino Candela called The Historical Path to Liberty and Human Progress.

Let’s start with the big picture. What’s the book about?

This book is based on work that Rosolino and I have been doing for about a decade on the institutional requirements for pursuing productive specialization and social cooperation under the division of labor.

This notion of social cooperation, which is at the core of what Ludwig von Mises wrote about in Human Action, is the foundation for modern economic growth. We’re trying to tell the story of how institutional frameworks throughout history have empowered individuals to pursue productive specialization and realize social cooperation through mutually beneficial exchange.

By institutions, we mean both the formal and informal institutions. So, it’s not only the formal institutions that you might read about in Acemoglu, but also those informal institutions that you would read about in McCloskey. Deirdre McCloskey likes to draw a line between her work and the institutionalist work, but we’re trying to see a joint program. We’re trying to see how all those things fit together.

When we think about economic progress, we often think about free markets and competition. But the free market is also about cooperation. Can you tell us a little more about that?

Yeah, especially among modern economists. Classical economists had a much better notion of the role that markets play in making us more cooperative.

Voltaire says that the Jew, the Gentile, and the Muslim can hate each other, but when they go into the market, the word heathen is left only to those who don’t honor their contracts. That thesis, called doux commerce, has been de-emphasized in modern economics in favor of the idea of competition and market discipline, that we’re going to be constantly seeking the highest rate of return so resources will be allocated in an efficient way, and that after we do that, and after we have exhausted all the gains from trade, we end up continually producing more with less.

All of that is true, but behind it is the idea that after two individuals meet in a market, both thank the other for the exchange. The term “catallaxy,” which Hayek used a lot, means not only exchange, but also turning a stranger into a friend. It’s symbolized by a handshake, meaning mutual agreement. That’s the core of what we are talking about with regard to social cooperation and the division of labor.

In chapter one, you put a lot of emphasis on economic development being a result of private property and the price mechanism. Can you describe briefly why private property and the price mechanism matter?

Prices guide our behavior, profits lure us, and losses discipline us. If we don’t have those signals, we end up engaging in activities that are wealth-destroying rather than wealth-creating. Private property creates those incentives through exchange, which produces prices. So, if you attenuate property rights, the rest of the system gets distorted, and if you try to abolish property rights, the system breaks down.

To make it more concrete for the listener, in somewhere like the Soviet Union, the state has property rights rather than individuals, and therefore prices are not properly generated. You have overproduction of stuff that people don’t want, and underproduction of stuff that people need.

After the collapse of the Soviet Union, a lot of people became unemployed, and there was a lot of suffering. Many blamed that suffering on capitalism, but it was socialism that had employed so many people in unproductive ventures that needed to be shut down because they were reducing national wealth.

Yeah. They had firms for which the value of the inputs was greater than the value of the outputs. They were wealth-destroying. So, they needed to shut those firms down and reallocate their capital and labor more productively.

So, you already summarized the importance of property rights and the price mechanism, but they exist within institutional frameworks. There are different institutional frameworks, such as socialism and capitalism, that create different levels of believable knowledge or information.

How does the information part of it—the knowledge problem—relate to these different institutional frameworks?

When Mises and Hayek asserted that private property and incentives matter, the response by the socialists was, “Oh, wait a minute, the base determines the superstructure. So when you transform the material base, you’re going to transform the superstructure and the attitudes of the individuals within it. All those greedy little things that need to be organized and capitalized are going to go away, and rather than homo economicus, we’re going to have homo sovieticus.”

Mises and Hayek then said that, even making that assumption, those individuals will not have the knowledge necessary to accomplish the task. It’s not only a matter of mobilizing information, but also generating that information.

So, economic information doesn’t just exist out there; it has to actually be produced. Private property and the freedom of contract give rise to prices. Those prices then help entrepreneurs form wishful conjectures about various enterprises. Profits tell them they’re doing the right thing, and losses tell them they’re doing the wrong thing. It’s their ex-ante expectations being defeated by their ex-post realizations that cause the market to constantly churn, agitate, and create new ideas. Without competitive markets, it’s not that the information is difficult to process; it doesn’t exist.

That is very important for the current AI debate.

I’ve encountered arguments that once we have super quantum computers, they will be able to predict what needs to be produced and in what quantities: the ultimate socialist dream. But the problem is that decentralization is fundamental for the production of that information.

Yeah. They think of information as existing outside of the system. Imagine that you have a sand pile, and you’ve got to move it from one place to another. In the old days, we were trying to move the sand with a shovel, and now we’ve developed a backhoe. What Hayek and others argue is that without that generative process, you don’t even have that sand pile to play around with.

Of course, once we have knowledge, it does have to be mobilized. In a book that I wrote with Chris Coyne many years ago called Context Matters, we divide the entrepreneurial moment into three moments: serendipity, search, and seize. The most important moment is serendipity. That notion of actually being aware of a possibility that others hadn’t seen before is the essence of the entrepreneurial moment.

Is that why it’s so difficult for governments to identify and encourage entrepreneurs? Because you don’t know who, out of the 8 billion people, will have that serendipitous moment?

One hundred percent. This is a very Julian Simon point. In the beginning of The Ultimate Resource, he tells a story about the priest at Normandy looking at all the graves, whose eulogy is basically, “who among these could have been the next Mozart? Who among these could have been the next Einstein?” The ultimate resource is the human imagination. And economic thinking that pushes that to the wayside because we can’t model it misses out on understanding innovation and ends up being excessively pessimistic. And, again, there’s the key problem of identifying the institutional conditions most conducive to utilizing human creativity.

Let’s pursue that line of thought. In your book, you talk about “polycentric constitutional order” as leading to the best outcomes.

Can you briefly describe what a polycentric model is?

The best model is from Bruno Frey. He has papers on what he calls functioning, overlapping, and competing jurisdictions. Basically, you have lots of governments with overlapping jurisdictions that citizens can move freely between, depending on the bundle of goods and services they are offered. This puts checks on political actors so that they don’t engage in as much predation.

To put it in a very American sense, imagine American federalism on steroids. Take the basic structure of these United States, the American federalist system, and push it even further so that governance is at the most local level.

This seems close to Eric Jones’s emphasis on the geographical decentralization of preindustrial Europe. Basically, whereas most of the world was ruled by large land empires, Europe was divided into hundreds of different statelets. So there was a horizontal competition, as well as a vertical competition, where your feudal lord had to compete with the king and the clergy, and that competition created a mishmash of different liberties and responsibilities that people could choose from.

Does that qualify? 

One hundred percent. I have a very brilliant economic historian colleague named Mark Koyama, who wrote a book with Jared Rubin called How the World Became Rich. It’s a textbook. And I asked Mark, “When did the Eric Jones European miracle thesis get defeated?” And he thinks it’s never been defeated. People just got bored and moved on to other explanations because that’s what they thought they needed to do.

We’re trying to resurrect that idea again in this book: this notion that polycentric governance provides the infrastructure that allows us to pursue productive specialization and realize peaceful social cooperation among greater and greater numbers of people.

My biggest takeaway from your book is that the European miracle was really the result of a multi-century, perhaps even multi-millennial process of gradual liberalization. You write that the “accumulation of liberties leads to institutionalization of liberty, which leads to generalized increased returns, which leads to human progress.”

Thank you for finding that sentence and reading it. That is the heart of the book. Liberty is won through numerous hard-earned battles for particular liberties. Alfred Marshall, the great economist, said that “History doesn’t move in one giant leap. It moves in little marginal steps.” You see these small victories where various oppressed groups are able to push back the oppressor and gain some space for themselves.

In my book, The Struggle for a Better World, I describe this in terms of winning victories against the crown, the military or other forces of violence, the dogma of the church, the bondage of slavery, and the mercantilist interests. These various victories all accumulate until you reach a tipping point that creates an economic transformation.

This issue of transformation is important. If it were simply the case that every liberty we win improves us, we would have a straight line of increasing prosperity instead of a hockey stick. The great economist G. Warren Nutter used to ask his students, “Explain to me how a larva turns into a butterfly.” And then he would pause for a minute and say, “Now try to explain it to me in a Solow growth model.” In economics, we like to think about these things as Solow growth models, but Deirdre McCloskey’s work tells us that a Solow model cannot explain the Great Enrichment, but what can explain it is a transformation akin to a larva turning into a butterfly. That accumulation of liberties, and the moment they get institutionalized, creates a transformation.

You mentioned the Soviet context before, and in the Soviet culture, they had an issue that they called tall poppy syndrome. Which is that when anyone gets ahead, they are cut down rather than celebrated. This is McCloskey’s point: let me give it a go and I’ll make you rich. Well, for a lot of human history, we didn’t let people give it a go. We penalized them if they tried to do something different. So, we needed to get to the point where those accumulated liberties provided enough security that people could think differently and pursue things that no one had done before. That’s how you unleash the creative powers of civilization. 

It’s almost like a nuke going off. You have to have a critical mass of whatever it is that you’re trying to blow up, and then eventually you achieve ignition.

It seems to me that this process of liberalization you are describing takes place on two different levels. One is the philosophical or moral level, and the other is the political or economic level. There are these little liberties that get institutionalized into law. For example, you can now trade overseas, there is no longer a monopoly on salt, you can open a new factory without being a member of the guild, and so on. That’s the political-economic level. Then you have the moral level, which is where McCloskey comes in. She says that on top of the political and economic system, you need to have people who are comfortable with you exercising your freedom and doing with your life and with your property what you want.

McCloskey explains that the transaction costs of enforcing a rule are going to rise or fall depending on people’s value systems. So, for example, private property was introduced long before the economic takeoff, so you can’t explain the takeoff using just the formal right to private property. All our liberties rely on informal value systems that lower the costs of enforcing those rights.

Let me just tell you about two reformers in Russia whom I knew. One was Anatoly Chubais, who became the head of privatization in Russia, but at the time was a young academician just like me. Yegor Gaidar was another. In the late 1980s, all these people were reading Western thinkers like Milton Friedman and Hayek. Then, all of a sudden, they became the people in charge.

They were ridiculously young and given all this power, and, prior to them being in politics, they were as hardcore a Friedmanite or Hayekian as you’d meet at any Cato University event. And Gaidar, when he stepped down, what did he create? A giant scientific research center for himself. What did Chubais do? Chubais ended up getting a lucrative contract for a book he never wrote. And he ended up taking control of a state-run energy corporation.

Those guys became oligarchs. They violated the rule of law under the guise of privatization. How are you going to constrain that kind of behavior? You need to have the rules, but you also need to have morals that justify and legitimate those rules.

My last question is as follows: Steven Pinker says that progress is due to the Enlightenment. Deirdre McCloskey says it’s due to liberalism. But in your book, The Historical Path to Liberty and Human Progress, you call liberalism “the political philosophy of the Enlightenment.”

Could we say that those two explanations are really part of the same process of gradual liberalization?

That’s the argument we make.

I think that the Enlightenment project is critical to understanding the co-evolution of both liberal political and legal institutions and liberal economic institutions. And it’s the co-evolution of those two things that, over centuries, gets us to the tipping point, this combustible combination that leads to the world that we benefit from to this day. Despite the growing role of the state, we still have enough space—enough elbow room, as Thomas Sowell says—that ordinary people can do extraordinary things. That’s, I hope, the message that we get across.

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