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Our Editor Interviews Cato’s Deirdre McCloskey 

Blog Post | Innovation

Our Editor Interviews Cato’s Deirdre McCloskey 

They discuss the big question: how did the world get rich?

Earlier this year, I had the pleasure of speaking with Deirdre Nansen McCloskey. Deirdre is a Distinguished Scholar and Isaiah Berlin Chair in Liberal Thought at the Cato Institute, as well as Distinguished Professor Emerita of Economics and of History, and Professor Emerita of English and of Communication, at the University of Illinois at Chicago. She is a highly regarded economic historian and, in her own words, a “literary, quantitative, postmodern, free‐​market, progressive‐​Episcopalian, ex‐​marxoid, Midwestern woman from Boston who was once a man.”

Deirdre is the author of many academic articles and books. The latter include her most recent work, Why Liberalism Works: How True Liberal Values Produce a Freer, More Equal, Prosperous World for All (2019), and the famed trilogy of books on the Bourgeois Era: The Bourgeois Virtues: Ethics for an Age of Commerce (2006), Bourgeois Dignity: Why Economics Can’t Explain the Modern World (2010), and Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World (2016).

Over the course of two hours, we discussed the spread of classical liberalism as a chief cause of the Great Enrichment, the renewed interest of the clerisy in the discredited idea of industrial policy, the workings of spontaneous order, bureaucratic meddling in the economy and public choice theory, F. A. Hayek’s distinction between the macro and micro worlds, the importance of innovation for economic growth, the difference between Smithian and Schumpeterian growth, hierarchy and equality, progress and utopia, the differences between conservatism, classical liberalism, and progressivism, revolution versus evolution, the importance of studying history, the rise of liberalism in the 18thcentury, Francis Fukuyama, interjurisdictional competition, and ancient China.

We end our conversation on a personal note, with Deirdre reflecting on her life’s journey and her message to young people today.

Blog Post | Progress Studies

What Are the Causes of Human Progress?

The escape from stagnation has always required a culture of optimism and progress.

Summary: Human progress requires a culture of openness to change and innovation, which historically has been rare and resisted by established elites. Periods of remarkable achievement, like that seen in Enlightenment Europe, occurred when societies embraced new ideas and allowed for intellectual and economic freedom. The key to sustained progress lies in maintaining a culture of optimism and a politico-economic system that encourages innovation rather than suppressing it.

To make progress, we must do something differently from what we did yesterday, and we must do it faster, better, or with less effort. To accomplish that, we innovate, and we imitate. That takes a certain openness to surprises, and that openness is rare. It is difficult to come up with something that never existed. It’s also dangerous, since most innovations fail.

If you live close to subsistence level, you don’t have a margin for error. So, if someone wants to hunt in a new way or experiment with a new crop, it is not necessarily popular. There is a reason why most historical societies that came up with a way of sustaining themselves tried to stick to that recipe and considered innovators troublemakers.

That means that innovation depended on stumbling on a new way of doing things. Someone came up with a new and better tool or method by accident or by imitating nature or another tribe. But when populations were small, few people accidentally came across a great new way of doing things, and there were few people to imitate. In other words, there is a limit to what can be done in small, isolated societies.

It took greater population density and links to other groups to get the process of innovation and specialization going. Cultures at the crossroads between different civilizations and traditions were exposed to other ways of life as merchants, migrants, and military moved around. By combining different ideas, they set the process of innovation in motion. Ideas started having sex with each other, in the British writer Matt Ridley’s memorable phrase.

Such openness gave rise to extraordinary periods of achievement in cultures like ancient Greece and Rome, Abbasid Baghdad, and Song China. They were, as the American economist Jack Goldstone calls them, “efflorescences”—sharp and unexpected upturns that did not become self-sustaining and accelerating. They did not last.

The American economic historian Joel Mokyr talks about that as Cardwell’s Law—named after the technology historian D. S. L. Cardwell, who observed that most societies remained creative only for a short period. Often, they were ruined by external enemies, since poorer states and roving bandits are attracted by the former’s wealth.

But there are also enemies within. Every act of major technological innovation is “an act of rebellion against conventional wisdom and vested interests,” explains Mokyr. And conventional wisdom and vested interest have a way of fighting back.

Economic, intellectual, and political elites in every society have built their power on specific methods of production and a certain set of mythologies and ideas. The vested interests have an incentive to stop or at least control innovations that risk upsetting the status quo. They try to reimpose orthodoxies and reduce the potential for surprises, and sooner or later they win, the efflorescence is stamped out, and society reverts to the long stagnation.

An escape from stagnation requires a culture of optimism and progress to justify and encourage innovation, and it takes a particular politico-economic system to give people the freedom to engage in the continuous creation of novelty.

Enlightenment and Classical Liberalism

Luckily, this culture emerged forcefully in western Europe in the 17th and 18th centuries, in the form of the Enlightenment, which replaced superstition and authority with the ideals of reason, science, and humanism, as the Canadian psychologist Steven Pinker summarizes it, and classical liberalism, which removed political barriers to thought, debate, innovation, and trade.

It was the combined forces of the Enlightenment and classical liberalism that reduced intellectual and economic elites’ power to stamp out progress. Cardwell’s Law started to break down, and the road opened for individualists, innovators, and industrialists to change our world forever.

Why did this happen in Europe, and why then? There are two traditionally competing narratives, one associated with the right and one with the left, and they are equally wrong. According to the first, it was because Europeans were better than others (perhaps because of natural superiority, the legacy of the ancients, or Christianity). According to the second, it was because Europeans were worse than others (perhaps because of slavery, colonialism, and imperialism).

The problem with the first explanation is that experimentation in science, technology, and capitalism had been present in previous pagan, Muslim, Confucian, and other cultures. In fact, Europe imported and improved upon many non-European advances. The problem with the second explanation is that all previous civilizations also engaged in slavery, colonialism, and imperialism when they had a chance. Yet, they remained poor. So, what made Europe more successful must have been something else.

As noted, elites everywhere reacted to surprising innovations by trying to enforce political authority and intellectual orthodoxy. What made Europe different was that the elites failed. Unlike the Chinese or Ottoman empires, Europe was blessed with political and jurisdictional fragmentation, which has been emphasized by scholars like the British-Australian economic historian Eric Jones and the English historian Stephen Davies.

European rulers had the same ambitions to conquer and control, but on a peninsula of peninsulas, they were halted at mountain ranges, bodies of waters, riverine marshes, and forested landscape. Therefore, Europe was split into a mindboggling array of polities, independent cities, autonomous universities, and different religious denominations.

Hundreds of different sovereigns could not coordinate repression and impose one orthodoxy on all. That always left room for thinkers, entrepreneurs, and banned books to migrate to the jurisdiction most hospitable to their particular heresy. The Protestant Reformation was a further blow to ambitions for universal authority. How can you revert to a trusted authority when you don’t know which authority to trust? Nullius in verba (take nobody’s word for it), was not just the motto of the Royal Society, founded in London in 1660, but the spirit of the whole Enlightenment project.

European princes discovered that rivals who welcomed more migrant scientists, entrepreneurs, and technologies also acquired more wealth and thereby more war-making capacity. Disruptive innovations still threatened the elite power base in the long term, but a lack of innovation might threaten their lives instantly—via a superior invading army. In a fragmented Europe, sovereigns faced the opposite incentive of rulers of vast empires, who feared domestic discord more than they feared foreign conquest.

Fear of change therefore began to give way to a fear of stagnation. “And thus, it is,” wrote the German philosopher Immanuel Kant in 1784, that the Enlightenment gradually arises “from the selfish purposes of aggrandizement on the part of its rulers, if they understand what is for their own advantage.”

Scientific and Industrial Advances

The associated classical liberal transformation, pioneered by the Dutch Republic, and then taken further by Great Britain and the United States, simultaneously widened the freedom for new experiments and enterprises through greater equality under the law, more secure property rights, and freer domestic economy and expanding markets.

That created a virtuous circle, since the scientific endeavor, businesses forced to compete, and an open society are by their natures works in progress, subject to constant challenge and improvement. They allow more people to experiment with new ideas and methods and combine them in unexpected ways.

As the American economic historian Deirdre McCloskey has shown, these processes went hand in hand with a profound reevaluation of urban and bourgeois life. Whereas commerce and innovation used to be seen at best as necessary evils to fund a hierarchical and aristocratic society, they now started to be seen as desirable, even honorable.

This relative freedom for inquisitiveness and irreverence unleashed first a scientific revolution and then an industrial one. The cumulative nature of knowledge instilled a powerful sense of optimism. When telescopes, microscopes, and the English scientist Isaac Newton unlocked nature’s mysteries, the whole world soon learned about it and started thinking about how natural regularities could be exploited for practical purposes.

Through migrations, correspondence, the printing press, coffee shops, and learned societies, scientists and entrepreneurs systematized knowledge in mechanics, metallurgy, geology, chemistry, soil science, and materials science. That made it possible to consciously manipulate, debug, and adapt methods, materials, and machines to changing needs. New knowledge pointed to new experiments that could be used to interrogate nature further, and the results of those interrogations pointed to new technologies that could be used to grow more food, prevent or cure disease, shape materials, and exploit energy sources.

The modern corporation and financial markets emerged as vehicles for systematically transforming capital and knowledge into goods and services that improved people’s lives. No longer did mankind have to wait for someone, somewhere to stumble on a breakthrough at widely dispersed intervals. An economic and intellectual system devoted to the systematic pursuit of discoveries and innovations had been created. From Manchester and Menlo Park to Silicon Valley, pioneers methodically pushed the technological frontiers further into the unknown, and free competition and international trade made such wonders widely accessible at everyday low prices.

Therefore, for the first time in history, progress did not come to a sudden halt. It continued and accelerated. More people than ever looked at the world’s problems and were free to come up with their own suggested solutions. Finally, mankind reached escape velocity, and progress was no longer a bump on a flat line of human development but a hockey stick, pointing sharply upward.

“It may be that the Enlightenment has ‘tried’ to happen countless times,” writes the British physicist David Deutsch in The Beginning of Infinity. And therefore, it puts our own lucky escape into stark perspective: All previous efforts were cut short, “always snuffed out, usually without a trace. Except this once.”

It should make us deeply grateful that we are among the few who happen to be born in the only era of self-sustained, global progress. But it should also make us focused and combative. History teaches us that progress is not automatic. It only happened because people fought hard for it and for the system of liberty that made it possible.

If we want to remain the one great exception to history’s rule of oppression and stagnation, every new generation must find it within itself the desire to make the world safe for progress.

Blog Post | Energy Production

Degrowthers Are the New Barbarians

The degrowth movement fails to appreciate that human ingenuity and technological innovation can solve the very problems they aim to address.

Summary: Like Rome’s ancient grandeur, today’s economy is supported by human ingenuity. Rome’s technological marvels such as the aqueducts were threatened by barbarians who sought destruction and ultimately achieved it. Modern sources of flourishing are likewise under fire. Today, the “degrowth” movement advocates for radical reductions in energy use. But like the Ostrogoths destroying aqueducts, this new form of regression underestimates human ingenuity as our source of prosperity.

In ancient times, the city of Rome was home to a million people—an achievement not to be repeated in Europe until the 19th century. The city flourished because of extensive Mediterranean trade networks, rule of law, and security provided by the far-flung legions. But Roman life would have been impossible without its aqueducts. These magnificent symbols of human ingenuity and progress brought water to the city, nourishing its population and lubricating its economy.

Rome began its long slide from preeminence in the 3rd century. By the 6th century, Rome was a shadow of its former self. It was then that the invading Ostrogoths sped up the process of decline by cutting Rome’s aqueducts and eventually capturing the city. Fast-forward to today and consider the “degrowth” movement, which advocates for slashing energy use in modern economies.

Degrowthers argue that to avert environmental catastrophe, we must drastically reduce our consumption of energy, particularly fossil fuels. They envision a future where economies shrink, energy use plummets, and humans adopt simpler, less resource-intensive lifestyles. While their intentions sound reasonable, their proposals are as destructive to our society’s prospects as the Ostrogoths’ actions were to ancient Rome.

The aqueducts of Rome were engineering marvels, bringing fresh water from distant sources to the heart of the empire. They enabled the city to thrive, supporting public baths, fountains, and private households. When the Ostrogoths cut these aqueducts, they didn’t just disrupt the water supply; they struck at the core of Roman life. In a similar vein, energy is the lifeblood of modern economies. It powers our hospitals, schools, factories, and homes. Cutting off this supply, as degrowthers propose, would not only slow our economies but would also unravel the fabric of our society.

Consider the immense benefits that energy has brought us. Over the past century, access to abundant and affordable energy has lifted billions out of poverty, extended life expectancies, and driven unprecedented technological progress. Our reliance on energy has enabled us to build skyscrapers, develop lifesaving medical technologies, and connect the world through the internet. To cut energy use drastically would be to turn our backs on these advancements and the potential for future progress.

The degrowth movement fails to appreciate that human ingenuity and technological innovation can solve the very problems they aim to address. Just as the Romans used their engineering prowess to build aqueducts, we can develop new technologies to create cleaner energy sources. Our use of solar and wind power is growing by leaps and bounds. Nuclear power is undergoing a renaissance, while geothermal and fusion energy hold much promise for the future. We’ll likely be able to reduce our reliance on fossil fuels without necessitating a return to pre-industrial lifestyles.

Put differently, degrowthers overlook the dynamic nature of human progress. Throughout history, humanity has faced and overcome numerous challenges. The Industrial Revolution, for example, caused significant environmental damage, but it also set the stage for the technological advancements that would eventually lead to a cleaner environment and greener energy sources. By embracing innovation rather than retreating from progress, we can continue to improve our quality of life while addressing environmental concerns.

It is also crucial to consider the global impact of degrowth policies. Developing nations, which are still striving to reach the levels of prosperity enjoyed in the West, rely heavily on energy to fuel their growth. Imposing stringent energy restrictions would stifle their development, thereby exacerbating global inequalities. Instead, we should focus on ensuring that these countries have access to affordable energy, enabling them to grow and share in the benefits of progress.

Degrowthers’ vision of a future with less energy consumption is a step backward, akin to the barbarians who, lacking understanding or appreciation for Roman civilization, sought only to destroy. Just as Rome’s aqueducts were symbols of human achievement, our energy infrastructure represents the potential for a brighter future. Let’s not let the modern-day barbarians cut it off.

Our World in Data | Financial Market Development

Mobile Money Accounts Are Surging Globally

“Mobile phones and the Internet have enabled the growth of mobile money accounts in regions with limited banking infrastructure. These accounts provide simple financial services like deposits, transfers, and payments to hundreds of millions of people.

As this chart shows, the number of active mobile money accounts globally has grown from 13 million in 2010 to more than 640 million in 2023. This is based on data published by the GSM Association.

While the adoption of mobile banking was almost exclusive to Sub-Saharan Africa in the early 2010s, Asian countries have seen significant growth in recent years.”

From Our World in Data.

Blog Post | Financial Market Development

The Democratization of Investment | Podcast Highlights

Chelsea Follett interviews Jennifer Schulp about how technology and regulation are shaping the future of investment.

Listen to the podcast or read the full transcript here.

Tell me about some hopeful trends or progress we are seeing in the financial industry.

One of the most hopeful trends in the financial industry is broader access to financial investment. Traditionally, investment in the stock market has been limited to the wealthy. Investing in the stock market is really important because, over the past decades, the S&P 500 has returned approximately 8 percent per year, which is way more than other non-equity investments.

Financial access has improved tremendously over the last 50 years. In the mid-70s, to make a stock trade, you had to call your broker on the phone and tell them what you wanted to trade, and they would charge you something like $50. So, you didn’t want to place a trade unless you were placing a large trade because otherwise, the fee would overwhelm the trade. And you didn’t want to trade very often. All of it made it very difficult for regular people to invest in the stock market. Over the course of decades, those fees came down as there was additional competition brought into the brokerage space.

In the 1990s, we saw the rise of internet trading, which allowed you to place trades on your own. In 2015, Robinhood started offering no-commission trading on a phone app, which allows people to trade regularly without worrying about fees eating into their profits or adding to their losses. People can now take some money from each paycheck and put it in the stock market. That’s been huge. The entire brokerage industry is now moving towards phone access for easy, cheap trading, and that’s made a huge difference in the number and type of people accessing investment in the stock market.

In 2020, during the pandemic, we saw a massive rise in retail trading that many wrote off to people being bored while they were stuck in their homes. However, a lot of those investors have remained in the market, so what might have started as a pandemic-induced interest in the stock market has become part of a long-term trend towards additional retail trading that has brought in more racial minorities, more low-income people, and more young people.

Easy and cheap trading has also allowed people to experiment with the stock market and learn by doing. There was a study that came out not too long ago by FINRA and NORC at the University of Chicago that looked at the investors who opened accounts in 2020. And they found that those who stayed in the market showed an increase in their financial literacy. Having this access helped them allocate their capital better. So, we have more people invested in the larger economy, and they are getting smarter about it. The benefits will compound over time.

What are some of those potential benefits?

Certainly better personal financial outcomes. Of course, some people are going to make poor decisions. You can’t say, “Because you put money in the market, you’ll be better off.” But for people looking for long-term investment options, the stock market is the greatest wealth generator we’ve ever seen.

I think this could also drive economic growth for a couple of reasons. One, investment gives people a stake in society and the economy, and that itself can drive growth. Two, having retail investors put money that might otherwise be under the mattress or in a low-interest savings account into businesses allows those businesses to flourish.

Are there any benefits for those who are trying to start businesses?

That brings up a new set of questions. What we’ve been talking about so far has been retail investment in public equities markets. But the stock market doesn’t generally provide startup capital. You have to be a mature company to want to bring an initial public offering that gets you listed on the stock exchange. Private market investing is where startup investing happens. And in the United States, far more money is raised in private markets than in public markets. The average person is not allowed to partake in private investment in the United States, as well as in most economies across the world. In the US, you need to be what’s known as an accredited investor, which essentially means you make more than $200,000 a year or you have a net worth of over a million dollars.

This is a very arbitrary standard. You could win the lottery tomorrow and suddenly become an accredited investor, and that doesn’t make you any smarter at investing than you were the day before. It doesn’t make you any more of a capable investor than someone who, say, studied startup investing in their MBA program but isn’t yet making enough money to be allowed to invest themselves. And all of this is a problem because it means the government is standing in the investor’s shoes and making decisions for them. Are they smart enough? Are they rich enough? Is this a good idea for them?

Let’s talk about entrepreneurs, as you asked. People trying to start businesses tend to turn to their community. They tend to raise money from the people that they know best. But if you are a minority or live in a rural or low-income area, you likely don’t know many people who meet that accredited investor standard. You’re already at a disadvantage in raising money and getting your business off the ground. That hurts entrepreneurs in less wealthy communities, the economy as a whole, and potential investors who don’t have the opportunity to share in the growth of that business.

The house recently passed three bills looking to reform the accredited investor definition; two have codified an SEC modification to the rule allowing people who have passed certain securities tests, such as brokers or investment advisors, to qualify as accredited investors, even if they’re not wealthy enough. The third bill is a bit broader; it opens up the testing concept to allow, if passed by the Senate and signed by the President, anyone who passes a test to be able to invest as an accredited investor. There will be costs associated with the testing, and it doesn’t get at the underlying paternalism, but it is a step in the right direction.

Could you talk about ESG?

ESG is actually two distinct concepts, and it’s important to identify which one we’re talking about. It can be broken down into a dichotomy that I’ve borrowed, which is value versus values investing.

“Value investing” in the form of ESG just refers to using environmental, social, or governance factors to analyze whether a company faces risks that might affect its financial performance. Where ESG sounds a little bit different is when we think about it as “values investing.” That kind of ESG is about sacrificing financial return to reach a certain outcome with your investment, like lowering carbon emissions. Of course, investors should be free to invest their money as they see fit. If they want to invest in saving the whales, they should have that opportunity. But it gets trickier when a company or asset management firm makes those decisions about what to do with their investors’ money without being upfront with them. That’s a question of disclosure and whether or not the funds are being clear with investors.

Government mandates are the key place to focus on here because, ultimately, the market should decide whether investing in ESG is the right way to go. Europe has decided, writ large, that the way to tackle climate change is to centrally plan how money will flow through the financial system to choke off funds for non-green investment. Supporting that is a host of European directives on sustainable finance that include a lot of disclosure by companies about how they, too, will meet net-zero goals. Europe has what we in the securities industry refer to as a “double materiality standard,” where European companies are not only supposed to disclose information that might impact the company’s financial performance but also how their company impacts society and the environment. All of this comes with pretty heavy costs.

The United States is now considering how far to follow Europe down that line. The Securities and Exchange Commission (SEC) has proposed a sweeping climate risk disclosure framework. It’s different from the European framework in that the SEC at least recognizes that they don’t get double materiality; the SEC is only allowed to require companies to disclose information that investors might find useful in deciding whether to invest in the company. However, the SEC’s climate risk disclosure rule goes well beyond that. It would require all US public companies to disclose an awful lot of information about climate risk, including scope one, scope two, and, for many companies, scope three, greenhouse gas emissions. What’s important here is that this type of disclosure is not a small undertaking. It’s going to be a massive drag on public companies.

You also oppose government rules that would restrict voluntary ESG-related disclosures. Can you tell me about that?

Sure. There’s been some legislation introduced, some of it passed, from state-level Republican legislatures that prohibits the use of ESG in investment. But this broad prohibition is also not the right answer. In fact, it is itself values-based and seeks to impose an ideology onto investing.

In addition, there are real costs to blanket prohibitions of ESG. One is that ESG as value investing can sometimes yield better returns. Pensions in some states that have introduced legislation to prohibit the consideration of ESG factors have released analyses showing that over the course of 10 years, the pensions might be losing billions of dollars in returns by having their investment pool artificially limited.

Another example is Texas, which prohibits localities from doing business with financial firms that are, quote, “boycotting the fossil fuel industry.” A study done not too long ago showed that the cost of municipal borrowing has gone up in Texas because many firms exited the market, meaning taxpayers in Texas are now paying more for municipal building projects. We shouldn’t forget that narrowing the scope of investment opportunities also narrows the opportunities for growth.

Could you speak about the potential impact of AI on investment and the financial industry?

Many people don’t understand how much AI is already part of the investment industry. For example, AI is already involved with investment research, predicting stock value, and portfolio management. That’s all going on behind the scenes.

I think that there’s real potential with respect to financial advice. AI could make investment advice as accessible as trading on your phone is today. For a long time, we’ve had what are known as robo-advisors, which are essentially chatbots with a narrow tree of advice based on a set of questions. More sophisticated large language models could give individualized investment advice that considers all sorts of circumstances at a very low cost. In the future, you may be able to go on your computer or phone and tell the LLM, here’s what my investments look like; what should I do next? That’s powerful stuff, assuming that the regulators allow something like that to happen.