Marian Tupy: Hello and welcome to the newest episode of the Human Progress podcast. Today I’m going to be speaking to Professor Peter Boettke, who is Professor of Economics at George Mason University, and he has a new book out with Rosolino Candela called The Historical Path to Liberty and Human Progress. Peter, welcome to the show.
Peter Boettke: Thank you very much. I’m thrilled to be here with you.
Marian Tupy: Excellent. So let’s start with the big picture. What’s the book about? Why did you decide to write it? And what are you hoping to accomplish?
Peter Boettke: So this is based on work that Rosolino and I have been doing for about a decade, exploring what are the institutional requirements to pursue productive specialization and realize social cooperation under division of labor. This notion of social cooperation, which is at the core of what Ludwig von Mises wrote about in Human Action, what we believe is the foundation for modern economic growth, is how you allow for the extensive form of division of labor to continue to grow, get refined, and explode. And that’s how you get your hockey stick. And so we’re trying to tell that story about how it is that we find these institutional frameworks throughout history that have empowered individuals to pursue productive specialization and realize social cooperation through mutually beneficial exchange, as opposed to the unleashing the predatory powers of the state and the confiscatory nature of that, which is the history of most of humanity. So the hockey stick looks like this, it goes ooh whoop, right? And what drives our attention is the whoop. That’s where we get excited about. And…
Marian Tupy: The hockey stick of prosperity, we should say.
Peter Boettke: Yeah, yeah. Yes. Not the ecological one. Yeah. The one of the hockey stick of prosperity. But the key issue of that is most of human history is here. It’s still like going along with this very life is nasty, brutish, and short, as Hobbes says. And then we get to this position where you end up by having this non-scalar explosion of modern economic growth, as Deirdre McCloskey has tried to explain it. And it can’t be explained just by the invention of a new tool. It can’t be explained just by improvements in the productivity of labor. That can’t explain modern economic growth. It doesn’t get you this. It gets you improvements, but it doesn’t get you this massive scalar improvement. And so we’re puzzling and trying to figure out what is it that actually sort of happened at this combustible moment. And that’s the key story of what’s going on.
Peter Boettke: Our argument is that Adam Smith pointed out that the greatest increase in the productivity of mankind is due to division of labor. We’re trying to understand what expands that notion of division of labor and what are the institutions. And by institutions, we mean both the formal and informal institutions. So it’s not only the formal institutions that you might read and say someone like Acemoğlu or whatever, but it’s also those informal institutions, which you would read in McCloskey, right? So Deirdre likes to draw a finer line between her work and the more modern institutionalist work and focus more on ideation. We’re trying to see like a joint program in that, probably annoying both the institutionalist and McCloskey at the same time, but we’re sort of trying to see where it is that those things fit together, which we think is more in line with the kind of thinking that Mises and Hayek and others that we’re drawing on.
Peter Boettke: And the book is mainly Mises and Hayek and Buchanan, and then applying them to the field of development economics.
Marian Tupy: Excellent, so we’ll get into all of that, but let’s start with something you said. You said the book talks a lot about human cooperation. Now, when we think about progress economically, we think about free markets, we think about competition. But there is more to free market than just competition. It’s also about cooperation. Can you tell us a little more about it? Because I think the cooperative element of it gets de-emphasized very often. Do you agree with that?
Peter Boettke: Yeah, so especially among modern economists. I think if you read the classical economists, they have a much better notion of what was referred to as the doux commerce thesis. That is the role that markets play in actually softening us and making us more cooperative beings, more voluntary beings. Go all the way back to Voltaire. Voltaire says, the Jew, the Gentile, and the Muslim can hate each other, but when they go into the market, they interact with one another, and the word heathen is only left to those who don’t honor their contracts. And so it’s this doux commerce thesis, this idea of the arguments for capitalism before capitalism, as Albert Hirschman put it, that Montesquieu had, that even Adam Smith has, that has been de-emphasized in modern economics when it’s more like the ruthless efficiency that competitive forces impose on us. That is that we’re going to be constantly seeking where the highest rate of return is, so resources will be allocated in such an efficient way, and when we get that, we get the least cost technologies are always being employed, and we have all the gains from trade that are being exhausted, and we end up by continually producing more with less. That is true, so I don’t want to take any of that away, but at the core of it is what’s behind that, is the idea that two individuals meet in a market and both say thank you after they engage in an exchange, right?
Peter Boettke: And so the term catallaxy which Hayek used a lot of times, you go back the Greek meaning, its roots, it’s meaning not only exchange, but turning a stranger into a friend, and it’s symbolized by a handshake, you know, both of them agree, right? And it’s that core of that idea which we are talking about social cooperation and the division of labor. So social cooperation is not to be juxtaposed with competition, but it’s what the consequences are of free and competitive market processes on the behavior in which individuals engage in with one another. So, we see ourselves as equals, all these kind of things like that, yeah.
Marian Tupy: Yeah, the reason why I thought it was worth exploring because there is this notion that free markets lead to dog-eat-dog atomization, man is another man’s wolf and things like that, whereas psychological literature actually does show that free trade societies or societies that trade a lot are actually much more trustful.
Peter Boettke: Yeah, yeah, no, the evidence on this is quite overwhelming if you look at some of the experimental evidence that was done in different types of societies and stuff, I think this is what you were kind of just referring to. I had a great Soviet economics teacher, his name was Michael Alexiev, and he teaches at University of Indiana now, but one of the things that was funny is he used to say in class, he said, Under capitalism, man eats man, under socialism, it’s the other way around.” But it turns out that actually when you study these societies, the idea that we are going to become more greedy and all these other kinds of things that are associated with the critiques of capitalism, it turns out that non-market societies actually produce more of that than the market societies. And my colleague Virgil Storr and Ginny Choi, they have a book called Do Markets Corrupt Our Morals? And they try to go through a lot of the evidence on this, actually in it. So for your listeners, that would be a great book for them to look at. They do the cross-country comparisons and all of that.
Marian Tupy: Yeah, I grew up on the socialism side, I can attest to the fact that there was plenty of greed there and so forth. Part of your thesis, certainly in chapter one, you put a lot of emphasis on economic development being a result of private property and price mechanism. Can you describe briefly why private property and price mechanism matter?
Peter Boettke: So in a broader sense of things, this goes back to your question about why economists sometimes get things wrong. Our 20th century economics, not the history of economics, but 20th century economics suffered from, I would argue, and this is obviously contested, from three fundamental problems. We had excessive aggregation, excessive formalism, and excessive empiricism. The last one is not to be confused with wanting to understand the world out the window. It’s the way we went about trying to do it, which was based on the problem of statistical aggregates, which is the problem. So we had excessive aggregation, and it took away our ability to root economic phenomena in the choices of individuals. And our excessive formalism ended up by taking away our ability to understand institutional context. So if you think about it, Armen Alchian, great economist that a lot of your listeners might know, he is famous for developing a theory called the theory of property rights. But we know all the way back from Aristotle that private property is an argument against collective ownership, right? So it’s the oldest argument in intellectual history, but yet why did it have to be rediscovered by Armen Alchian in the second half of the 20th century among economists was because of the issues that I just sort of tried to say in my conjecture.
Peter Boettke: So we can’t explain this, the whoop here, because our excessive aggregation or excessive formalism has hidden from view the underlying mechanics. So part of the economics that Rosalino and I are trying to bring back is a institutional economics that recognizes the fundamental role that property rights play in providing incentives, that prices play in being guides to our behavior, how profits lure us and losses discipline us. So it’s this property prices and profit and loss system that enables us to pursue productive specialization and peaceful social cooperation. If we don’t have those incentives and signals and disciplinary feedback, what we’ll end up by doing is engaging in activities which will not generate mutually beneficial exchange, will be wealth destroying rather than wealth creating. And so it’s this wealth creating process that we’re trying to lay out and its roots in private property, because private property is what gives rise to not only the incentives for us to utilize resources effectively, but it gives rise to the basis of exchange, which produces prices.
Peter Boettke: And those prices are the inputs that end up by being able to whether or not we get profits or whether or not we have losses. So it all roots back down into private property rights. And so when you don’t have those private property rights, all the rest of the system gets either, if you have attenuated property rights, the system gets distorted. If you try to abolish property rights, the system breaks down. And so this explains, I think, the different performance in different economic systems.
Marian Tupy: Right. So to make it more concrete for the listener, somewhere like the Soviet Union, it’s the state really that has property rights rather than individual human beings. Prices are not properly generated as a result of that. And so you have overproduction of stuff that people don’t want to buy. You have underproduction of stuff that people need. And the whole system basically performs subpar compared to capitalist economies. And that’s how they end up being poorer. They do not drive value creation upwards. They may be actually destroying value. And consequently, one argument made after the collapse of the Soviet Union was that a lot of people got unemployed and there was a lot of suffering. And they blame it on capitalism, whereas in reality, it was socialism which employed people in unproductive ventures. And consequently, those needed to be shut down because they were reducing national wealth rather than improving it, right?
Peter Boettke: Yeah. So this is a subcontext of the book because it’s based on the work that I did in the very beginning of my career and continue to do. I just published with Matt Mitchell and Konstantin Zhukov two years ago, a book on Poland and a book on Estonia that sort of lays out all these kind of ideas. But I had done a lot of work earlier in my life on the Soviet system and spent a lot of time in Eastern Europe. And the issue is that the problem is that they had negative value-added firms, right? That is firms that the value of the inputs were greater than the value of the outputs that the firms produced. And so that’s wealth destroying. And so what you need to do is when you transition, you need to shut those things down and you need to recalculate how you’re going to deploy scarce capital as well as scarce labor and allocate it in a more productive direction. And so the very shutting down of the negative value-added firms was actually increasing the wealth-creating capacity of a former East Germany or Poland or the Soviet Union, Russia or whatever.
Peter Boettke: The problem with the post-socialist period is not that they followed shock therapy, but that they actually didn’t follow the shock, really. They didn’t introduce markets strong enough. We can talk about that some other time. I don’t want to derail the conversation. But there’s just a lot of misunderstanding about the ’90s. So just to give you one concrete example, in 1992, a ruble exchanged for a dollar at 180 rubles to $1. By 1995, it was over 5,000 rubles to a dollar. Now, what’s interesting about that is that’s during the time supposedly Russia was following shock therapy and the lessons of Milton Friedman. So the equation of exchange, M=PQ. The reality was that they weren’t inflation targeting, they were engaged in hyperinflation, which is that Gerashchenko was just simply in charge of the central bank and he was printing. There’s an apocryphal story that in the 1920s, when Austria was going through its hyperinflation, they all came to Mises. And they said, “Professor Mises, how can we stop the hyperinflation?” He says, “Meet me here at midnight.”
Peter Boettke: And they met him at his office at midnight. He says, “Follow me.” And he walked them down the street where the printing press was going on. He goes, “Turn it off.” So the Soviet Union did not, and then Russia, did not engage in the introduction of markets, privatization. It was hybrid privatizations, whereas municipal ownerships. And it just became this crony mess that all came out of this. And understanding that is a very important story for understanding what’s gone on. This book was written and motivated by the fact that after I did my post-Soviet studies, what I started to realize and what was emerging from people like Bill Easterly and others was that development economics in general was in fact nothing more than transition economics. Or transition economics was nothing more than development economics. So if you could understand how the West grew rich, you might actually be able to understand how it is that you could get a Soviet economy to turn around and become a thriving Russian economy or be like Estonia or something, right? So you could imagine that happening if they just followed the institutional patterns that we’ve learned from the process of development.
Peter Boettke: And Easterly’s work is extremely valuable for your listeners in the evolution of the work because the elusive quest for growth is just an identification that all efforts of modern efforts to orchestrate growth fail, right? So population control, big bang, you know, and if you go through all of his studies, the Elusive Quest For Growth, he goes through each of the policies and then points out, nope, that didn’t work. Nope, that didn’t work. Nope, that didn’t work. And so then you get to the follow-up books, which is, you know, The White Man’s Burden and The Tyranny of Experts. And now he’s going to have this fantastic new book coming out called The Brutal, what’s it? Savage Saviors which is about like the history of people trying to go into these places and orchestrate for the benefit of whoever, but really they’re trying to just pillage and plunder for their benefits of their own rents. The story of why the West grew rich, again, to point your readers to an older book is by Birdzell and Rosenberg, How the West Grew Rich.
Peter Boettke: And again, what they do is they knock out all of the competing hypotheses. The West grew rich because of colonialism. The West grew rich because of slavery or whatever, you know, and they go through the West grew rich because of the geographic advantage or whatever. And they knock out all the hypotheses in the same way that McCloskey knocks out all the hypotheses in volume two of her trilogy about can economics explain modern economic growth? And so what we’re trying to do is contribute to that alternative set of explanations, which is grounded in property, contract, and consent, and the value systems that are built around property, contract, and consent. And how is it that we see the advancement of that argument? Because timing wise, the Magna Carta, for example, Magna Carta is here, but yet the takeoff is here. The development of all these different rights along the way, the Magna Carta makes adjacent possible the next evolution. And then the next evolution…
Marian Tupy: Well, I want to get into that. I just want to finish up on this subject.
Peter Boettke: Yeah, sorry.
Marian Tupy: By pointing out, no, by pointing out that countries which did follow the market prescriptions, such as, for example, Poland and the Czech Republic have performed much better than countries which did half-hearted efforts, such as, for example, Russia and certainly Ukraine.
Peter Boettke: Poland, by the way, just so that everyone puts a fine… Poland is going to be richer than the United Kingdom. Like, just understand this. I mean, the per capita income in Poland is going to be greater than in the United Kingdom, you couldn’t imagine that in 1989.
Marian Tupy: No, you couldn’t imagine it. I mean, I was growing up in Czechoslovakia, and for us, Poland, I mean, Czechoslovakia was a poor country by Western standards, but to us, Poland was a joke because they were much poorer than we were. They had hyperinflation. They had much bigger economic problems than even a socialist economy such as Czechoslovakia had. So you already summarized basically the institutional side of it. So it’s property rights and price mechanism, but they exist within an institutional framework, and there are different institutional frameworks, right? There is socialism, there is capitalism, and they create different levels of believable knowledge or information, right? So how does the information part of it, the knowledge problem, fit into the different institutional offerings out there?
Peter Boettke: Yeah, so there’s two issues with that. One of them is in the theoretical debate, and then the other one is actual like in the world out there, right? So just in the theoretical debate very quickly, the reason why people like Mises and Hayek ended up by focusing on the informational processing aspect of the market is because if you go through the debate, the first thing they had to assert is that private property mattered, right? So property rights matter, incentives matter. And 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 of the attitudes of the individuals in it. And so all that greedy little things that need to be organized and capitalized, they’re going to go away. And rather than homo economicus, we’re going to have homo sovieticus or something like that. And so what they wanted to say was even making that assumption, those individuals will not have the knowledge requisite to be able to accomplish the task, all right? Now, it’s not only just a matter of mobilizing that information, but the generation of that information.
Peter Boettke: The information doesn’t just exist out there, and then it’s a matter of gathering, right? It’s that it has to actually be produced. And if we don’t engage in the activity, we don’t produce it, which is, now that gets me to the world out there. So the reason why the knowledge generating process of markets is that they are empowered by private property and the freedom of contract. They give rise to prices. Those prices then help form entrepreneurs to help form wishful conjectures about a voyage into various different enterprises. The profits tell them they’re doing the right thing. The losses tell them they’re doing the wrong thing. It’s their very ex ante expectations being defeated by their ex post realizations that cause the market to constantly churn and agitate and lead to innovation and these new ideas. So as you know from reading the book, we start and we begin with this quote from Matt Ridley, which is that innovation is the child of freedom, but the parent of prosperity. And how do you get this kind of constant churning for innovation is because the signals and incentives within the system are constantly generating this new and ever fresh knowledge to tell us about what possibilities might be out there. And so it’s this generative aspect of the knowledge that is such a critical aspect of competitive markets. And outside of that process, it’s not that the information is difficult to process. It doesn’t exist. It literally isn’t there. Yeah.
Marian Tupy: So that kind of is very important for the current AI debate. I’ve encountered socialist arguments that once we have super quantum computers, they will be able to project into the future of what needs to be produced and what doesn’t need to produce and in what quantities, et cetera, because that’s the ultimate socialist dream to centrally plan an economy. And once you have enough data, you can do that. But the problem there is that actually decentralization is fundamental for the production of the information. So you cannot actually have a centralized state collecting data. You need to have a decentralized state creating information. And that’s why the hope that socialists have of supercomputing socialism in the future cannot work. Did I get that?
Peter Boettke: Yeah, yeah. So one way to think about this is they think of information as existing outside of the system. It’s just objective. So it’s like imagine that you have a sand pile, and you’ve got to move the sand pile from one part to another part. So the sand is there, and now in the old days, we were trying to remove the sand with a shovel, and now what we’ve done is we’ve developed a backhoe, and my God, look how fast we can get rid of the pile or whatever. But what Hayek and others are trying to talk about is how it is that that sand pile is generated, and that absent that generative process, you don’t even have that sand pile to play around with.
Peter Boettke: And so the knowledge is something that’s generative, not something that exists and needs to be mobilized. Now, the issue is that once we have knowledge, it does have to be mobilized. And so going back to our earlier conversations about economics, there is an aspect of economics. So 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. So the most important moment is the serendipity. That’s like Kirzner’s alertness to an opportunity. So you come along, oh, my God, look at that opportunity. That’s serendipity. Once I actually have discovered that that’s what I want to pursue, I then have to pursue it prudently. And that’s what search theory tells us about. Search theory tells us about how I explore a range of opportunities within a bound set to act prudently about it, and then I have to have ownership to be able to seize the opportunity.
Peter Boettke: So there’s these three kind of entrepreneurial moments. The problem is that a lot of times people just focus on the seizing, so they focus on resource ownership. Even within Austrians, like Henry Hazlitt used to say, “A pure and penniless entrepreneur remains pure and penniless because he doesn’t have the ability to seize the profit opportunity.” Rothbard built on that criticism of Kirzner. Other people focus on, from Stigler to Brian Kaplan, focus on this notion of search. But it’s this first notion of actually being aware of the possibility that others hadn’t seen before that is the essence of the entrepreneurial moment, that recognition.
Marian Tupy: Yeah, let me stop you there and ask you, is that why it’s so difficult for governments to identify entrepreneurs and to encourage entrepreneurs? Because you don’t know who out there, out of the 8 billion people, will have that serendipitous moment.
Peter Boettke: No, 100%. And you know what’s fascinating about this, given your podcast, is that this is a very Julian Simon point. So if you go to the beginning of The Ultimate Resource, remember he tells that story about the priest at Normandy, right? And he’s looking at all the graves. And his eulogy is basically, who among these could have been the next Mozart? Who among these could have been the next Einstein? Things like that. The ultimate resource is the human imagination. And every kind of economic thinking that pushes that to the wayside because we can’t model it, we can’t track it, things like that, I think weakens economics. And misses out on understanding the tremendous human progress that follows from innovation, and you’re going to end up by being pessimistic and all these other things. So Julian Simon and Israel Kirzner lining up on this regard, that’s kind of, again, a key issue about what is the institutional conditions that are most conducive to utilizing that ultimate resource.
Marian Tupy: Right, so let’s pursue that line of thought. And in your book, you talk about polycentric constitutional order as one that leads to the best outcomes. Can you just briefly describe what a polycentric model is?
Peter Boettke: So the best current model that’s out there to think about this is Bruno Frey has these papers on what he calls functioning, overlapping, competing jurisdictions. And so what you have is basically you have lots of governments that make up governance rather than the idea of a unified government. So you’re not seen like a state, you’re seen like a citizen. It’s constantly invoking foot voting, the idea that you can move between jurisdictions depending on the bundle of goods and services that are offered to you. This puts checks and balances on the political actors so that they don’t engage in as much predation, so forth and so on. And so this is the basic idea. Now, at a philosophical level, what we’re thinking about is Robert Nozick’s last third of Anarchy, State, and Utopia, where he’s talking about how we could have a sort of a system of meta norms which provide liberty and whatnot. And then inside of that, you can have Fondeville and Falwellville, and people can self-select into the different things or what Chandran Kukathas calls the liberal archipelago. These are all the kind of ideas that we are pushing towards in that regard, leveraging the work of the Ostroms, which they were the ones who really focused on this idea of what they call polycentric governance.
Peter Boettke: And to put it in a very American sense, this is just to kind of imagine American federalism, competitive federalism, on steroids, right? So what you’re going to do is you’re going to try to take the basic structure of these United States, right, the American federalist system, and then really push it even down further and further so that governance is at the most local levels, it’s Tocquevillian, these kind of ideas, as opposed to bureaucratic and Wilsonian.
Marian Tupy: So it seems to me that this is not a thousand miles away from Eric Jones’s emphasis on the geographical, what is it, non-centralization of Europe, that basically whereas most of the rest of the world had empires, Europe had empires overseas, but domestically it was divided into hundreds of different statelets. So there was a horizontal competition, and there was also a vertical competition where maybe your feudal lord had to compete with your king, but then there was the pope and the clergy and so forth. And so it was a mishmash of different liberties and responsibilities that people could choose from. Maybe you were a Protestant, so you could leave France and go to Holland. Maybe you were Catholic and you were fleeing the Protestant regime and going to leave somewhere else. So does that qualify?
Peter Boettke: 100%. Eric Jones, Rosenberg and Burzell, when they write in How the West Grew Rich, it’s the hypothesis. Remember I was saying how they knock out all the hypotheses? You know what the hypothesis that stands is polycentric competition is what generated. And my colleague Mark Koyama, I have a very brilliant economic historian colleague named Mark Koyama, and he wrote a book with Jared Rubin called How the World Grew Rich. It’s a textbook.
Marian Tupy: I read it, yeah.
Peter Boettke: And I asked Mark, I said, “Hey Mark,” I said, “When did the Eric Jones’s European miracle or Burzell and Rosenberg’s thesis get defeated?” And his argument, it’s never been defeated. It’s just that people got bored and they moved on to some other explanation because that’s what they thought they needed to do. But to me, I think that’s what we’re trying to do is resurrect that idea again in this book. In that particular chapter is this notion that polycentric governance provides the kind of infrastructure that allows us to pursue productive specialization and realize peaceful social cooperation among greater and greater, greater expanse of people and spread out.
Marian Tupy: Let me ask you about this because one concern I have is that the Eric Jones theory, which I like, is that it is too geographically deterministic. In other words, there is Spain because there are mountains separating it from France. There is a huge mountain range between Poland and Slovakia or back then Hungary. Are we too geographically deterministic if we embrace the Jones argument?
Peter Boettke: I don’t think so. I think that you can recognize that physical geography matters in some sense. So for example, Africa has more waterways than any other continent in the world, but not navigable waterways. So the costs of trade were actually quite high compared to like the costs of trade elsewhere, even though they had the waterways that would normally be associated with high volumes of trade, but they couldn’t navigate them. So therefore, it’s going to create a problem. So that just means that the institutional solution has to be even that much more robust in order to be able to pull that off. And so this is gonna be, and by the way, again, a book that your listeners might really want to look up because it’s in the past, but George Ayittey had this fantastic book called Africa Betrayed. And his argument was the reason why Africa languished in economic development in the second half of the 20th century. Remember the boop?
Peter Boettke: Well, the tragedy is that some of them continue down here, right? And so that’s like Sub-Saharan Africa. And his argument is because in the post-colonial period, rather than going back to the earlier governance structures, which were much more polycentric that they had, they tried to follow the British model of a much more centralized. The geopolitics of the second half of the 20th century is quite fascinating because both the United States and the United Kingdom and the Western democracies as well as the Soviet powers exported models of socialism to the underdeveloped world rather than capitalist development because they had lost faith in capitalism and all the ideas, so they were trying to push that. But the issue here is that in Africa, if you would have relied on those more indigenous governance practices, Ayittey argues, we would have actually seen more development. And that would have been more decentralized, more competitive, more ability to flow in and out between.
Peter Boettke: And so I think that the more that the geographic constraints play a role, the more robust the institutional solutions have to be in order to get the benefits to overcome those difficulties. But this is one of the things that Milton Friedman used to point out about a country like Hong Kong, right? Is that, Hong Kong, what’s its advantages? It doesn’t have any natural geographic advantages of fertile land or anything like that. But yet, boom, there you have this tremendous, because they allow trade and they lower the barriers to trade. There’s a great book called Creating the Commonwealth. I’m not going to remember the guy’s name now. But what he does is he compares and contrasts how it is that the Massachusetts Bay Colony ended up by becoming this major exporter of agricultural goods within a generation when actually it’s not like it had the fertile lands and stuff that Virginia had. But yet somehow because of the shift in the institutional environment, they were able to produce more and more and more. And so it’s thinking about those institutions and the impact on economic behavior that is crucial to this whole exercise, I think more than what challenges we particularly face in terms of geography.
Marian Tupy: Right. So one might argue that maybe Africa didn’t have the kind of geography that would have made it the first continent to industrialize. But that’s even more important reason why you should think very carefully about which economic model you are going to follow. Unfortunately, Africa in the 1960s chose the worst possible economic model. In other words, by rejecting an already centralized British model or the French model, they’ve opted for a hyper centralized model and dug themselves even deeper in…
Peter Boettke: I agree with that 100%. And I think that that’s a tragedy. And I think the other thing is, is that, again, just to relate it to the argument in the book compared to other ones, part of the issue is that we also don’t think that the problem, like human capital is important, it’s not the total determining factor because the types of investment in human capital are a function of the institutional environment within which people find themselves. And so the allocation of entrepreneurial talent is going to be a function of the institutional rewards that you find yourself in. And so, again, the whole story turns on these formal and informal institutions.
Marian Tupy: Yeah. Now, I think that my biggest takeaway from this book is that affirmed how I think about what happened in Europe, especially in the second half of the of the last millennium, perhaps even the last 1000 years, which is and I’m going to now try to paraphrase the argument in the book and then open it to to you. And that is that the European miracle is really a result of multi century, perhaps even multi millennia process of gradual liberalization or increase in liberties until we get to a point where we live in liberty, where liberty gets institutionalized. I have never seen it. I suspected that that is what was the case, but I’ve never seen it explained as well as I did in this book. So thanks for doing that. But let’s let’s just try to explain to the reader or to the listener what we mean by the difference between liberty and liberties. And I’m now going to quote directly from the book, “Accumulation of liberties leads to institutionalization of liberty, which leads to generalized increased returns, which leads to human progress.” I think that’s the that’s the heart of the book. So why don’t you take it away?
Peter Boettke: That is, thank you for finding that sentence and reading it. That is at the heart of the book. And so liberty is won through very hard earned and tough battles for particular liberties. So we don’t see anywhere, Alfred Marshall, the great economist said, “History doesn’t move in one giant leap. It moves in little marginal steps.” And so what you do is you see these little small victories where various groups that were oppressed are able to win a victory against the oppressor and have space for themselves.
Peter Boettke: So in my book, The Struggle for a Better World, I describe this in terms of winning victories against the crown, winning victories against the military or violence, winning victories against the church, the dogma of the church, winning victories against the bondage of slavery, winning victories against the mercantilist interest that that sought to get power and privilege by the government. These kind of various different victories all accumulate up and you get a tipping point. See, here’s the again, here’s the issue is that if it was if it was just every liberty, liberty that we win, every liberties that we win, it improves us. We would have a line that looked like this. Because that’s history is accumulating these and we’d have a line that looks like this, but we have a line that looks like this. Like that. And as a result of that, we have to explain that there’s got to be a tipping point where there’s enough liberties acquired so that now we have this transformation so that we, in fact, are in a different realm or different being.
Marian Tupy: And liberties get best accumulated in the polycentric model.
Peter Boettke: That’s our argument.
Marian Tupy: Okay, carry on, please. I just want to…
Peter Boettke: Just to to put the puzzle in your listeners ears. The the great economist G. Warren Nutter, who was a colleague of Buchanan at the University of Virginia, he used to ask his students, “Explain to me how a larva turns into a butterfly.” And then and then he would pause for a minute. He says, “Now try to explain it to me in a Solow growth model.” So in economics, we think about these things as Solow growth models. But this is what McCloskey is telling us. You know, that model cannot explain this. But what can explain it is some kind of transformation like larva turning into a butterfly. And so it’s that accumulation of those liberties that then when they get institutionalized, that is, by the way, meaning both formally and informally, we now talk. This is McCloskey’s point. We now start talking to one another as dignified equals. We’re now going to give it a go. You mentioned the Soviet context before. So I’ll just tell you a sort of a funny story about this. And in 1987, Gorbachev passed a law on cooperatives, which allowed individuals to start trying to have some private enterprise. Some private enterprise.
Peter Boettke: But in the Soviet culture, they had an issue of what they called like a tall poppy syndrome. Which is anyone who gets ahead, they have to cut down rather than allowing them to go ahead. And so one of the practices was is that they used to like stab people, like people who made like better income, they would get stabbed in the butt. Now, I reason why I get stabbed in the butt. It’s not a killer, but it’s a social disapprobation. Like if you’re getting ahead, I’m going to like sort of express my anger at you trying to get ahead. And that means that your society is not going to be able to give it a go. So this is McCloskey’s whole 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. And so we needed to get to a point where you could have those accumulated liberties that provided enough security for you to be able to think differently, to act differently, to pursue things in a way that no one else had before. And that’s how you get this innovation. That’s how you unleash the creative powers of a free civilization.
Peter Boettke: And that’s how you get this, that that’s the, that’s the kind of thesis that we’re trying to run with there. And we wanna see its roots earlier. So sorry for over speaking over you, but you mentioned earlier about the, the competition between the ecclesiastical and the and the and the and the crown. That’s huge. And Harold Berman laid that out in law and revolution, which is the roots of Western rule of law are found in this competition between these two jurisdictions. And our ability to go between the two jurisdictions to find more just law. And and it’s that kind of ability to do that, that helps accumulate and accumulate. And eventually you end up by having enough of a combustible combination that it just moves like a non scalar, which is the increasing returns point.
Marian Tupy: It’s a it’s a critical mass. It’s almost like a nuke going off. You have you have to have a critical mass of whatever it is that you’re trying to blow up. And then and then eventually it you achieve the ignition and whatever. It seems to me that what you are describing is that this process of liberalization, which can take hundreds, maybe even thousands of years, takes place on two different levels. One philosophical or moral and the other one political or economic. In other words, there are these tiny little liberties which get institutionalized into law, such as, for example, that you can now trade with overseas. There is no longer a monopoly on the sale of salt. You can open a new factory without being a member of the guild. So that’s the political economic level. And then you have the moral level, which is where McCloskey comes in, where she says, but on top of that, you need to have people who are comfortable with you exercising a sense of freedom and doing with your life and with your property what you want. I think there is a part in the book where you say that the difference is that it’s not just that you have a right to your property, that nobody can take it away. It’s also the right to do with it what you want. And these are two distinct things. Can you elaborate on that?
Peter Boettke: Well, I think that McCloskey’s work is genius, actually, because she explains. Now, I’m going to translate it into economies, but she basically explains that the transaction costs of enforcement for a change in a rule is going to rise or fall depending on the value systems that the people have. So, what she points out is that if we look at the introduction of when private property was first acknowledged, it’s before the takeoff. So her argument is you can’t explain the takeoff due to private property.
Marian Tupy: Private property has been there since the get go, right?
Peter Boettke: Right. And so you can’t, and so this is this is her argument. But what we’re trying to argue is that all those accumulated liberties that allow us to get property, contract and consent, what happens is when the informal value systems align to lower the costs of the respect of all of those, respect for persons and property, then what you do is you see that institution then become empowered and can take off because I’m not wasting all of my time trying to enforce it, which would be too prohibitive because everyone else doesn’t believe it. And so this is this is why you get the kind of accumulation gets to a point and they reinforce one another. They go back and forth between what’s the political and legal and what’s the social and cultural. And they weave back and forth and they have implications for the economic and financial. I think one of the problems with modern economics is that we get we got confused over a consequence versus a cause. So it is a consequence of this combustible combination that you’re going to get accumulations of capital, you’re going to. And therefore, we can correlate accumulations of capital with modern economic growth. And we say, “Oh, accumulation of capital is the cause of growth.” No, you have to ask, ”What is the cause of the accumulation of capital?” It’s because of security of persons and property.
Peter Boettke: How do I get the security of persons of property? Well, I have to have law, but I also have to have values that say that I should give people that scope of freedom in their life rather than being meddlesome and all these things. And so this is this is where we see this interaction that’s all taking place here until we go there, get to here. And then the question is, once we’re on here, how do we keep expanding that? And it’s because we’ve increased the scale and scope. Despite the fact that we’ve increased the scale and scope of the state, we’ve also increased the scale and scope of the areas by which some people now have freedom that otherwise they wouldn’t have had. And that’s where you get a lot of the civil liberties and other kinds of things reinforcing. So that dissent and you know this better than anyone because of the the collections here. Economic freedom expands, but so does social and cultural freedoms expand. And so you see the human in the, you know, any kind of social indicators are going up when you see economic growth and development going up and they reinforce each other. We argue.
Marian Tupy: Yeah, I was thinking when I was reading the book about how to concretize the difference between right to private property and then the right to do with the private property or anything, anything you want. So say, for example, that you had a house somewhere in a shanty town in Soweto and the private property system is good enough that nobody can take it away from you. But let’s say now that you want to use your house to open a little restaurant. Now, there may still be either societal or even even political reasons why you cannot do it. In other words, those four walls, nobody can take away from you, but you turn it into something else, such as maybe opening a restaurant in it, a little Shabim. That is a step further, that this is what you mean?
Peter Boettke: Yeah, I didn’t answer your question correctly the first time because I went off on my own little thing, but you’re 100% correct there. And if you think about it, think about land use regulations.
Marian Tupy: That’s a great way to, yeah.
Peter Boettke: Yeah, If you think about building right now, like we have… So it’s not only do we have limits on our ability to build, we have limits on what we can use and purpose various different place for zoning laws and other kinds of things like that, which put restrictions on stuff. And so to me, I think that right now we have a housing problem, but large part of it is precisely because of the restrictions. And so the way McCloskey puts this is that you want to have a non-equality of opportunity because you’ll never have that, but equality of permission. So what happens is we have to have the equality of permission that all of us have the permission to give it a go rather than us having to fawn to leaders to say, “Oh, please allow me to do this,” or whatever. And instead you have… And so it’s that shift from the stability of possession. So, the way David Hume puts this, and we quote this quite in the book, is right. Hume says that you have to have stability of possession, the transference of consent, and the keeping of promises. And one of the things that we ask is do the thought experiment of a world that doesn’t have those three things, right? Doesn’t have stability of possession, doesn’t have transference by consent, and doesn’t keep promises. Well, you’re going to be in terrible economic circumstances. So we have to have this foundation in property, contract, and consent.
Peter Boettke: At the same time, we actually have to have something more than that, which is what you’re talking about there, which is that we have to have the ability of individuals to ask for forgiveness rather than permission. They’re going to try to go out there and do things, and we just rely on ordinary tort law and Mill’s harm principle to be able to, you know, discipline when we engage in activities which are harmful to others rather than beneficial to others, right? And so that’s kind of the institutional ideological pattern that we’re trying to look at.
Marian Tupy: Okay, so I think that’s the key here is that there’s an institutional and also ideological, and ideally they would work together in order to produce a system of liberalization. In the book, you note in many different places that you have a slight disagreement with Deirdre McCloskey, and it is a nuanced one. So why don’t we look at that now?
Peter Boettke: Well, it’s just what you just said right there, which is that she wants to put the primary focus on the ideas, and it’s all about ideation. And as a result, she becomes quite critical of institutions because she thinks that institutionalists, and she’s correct that the main practitioners of institutions are statists, they have to be state institutions that are imposed on others. Think about the most recent Nobel laureates, Acemoglu and Robinson. I would argue very important contribution, but if you look at the narrow corridor, what they’re arguing is that you have a balancing act between society and the state, and they have three different positions. You can be absent of Leviathan, and you’re not going to get much economic outcomes that’s desirable, or you could have an unconstrained Leviathan in which you’re not going to get liberty and prosperity, or you can have the shackled Leviathan, and then you get both. But the reason why the shackled Leviathan can be shackled is because the countervailing powers of a strong society and a strong state. So if you look at the way their graph goes, state capacity goes through the roof, and societal capacity goes through the roof, and you get the shackled Leviathan where the two strong state and strong society are balancing each other.
Peter Boettke: What McCloskey wants to focus us on is strong society, not necessarily strong state. And so she looks at that and she’s like, “Okay, guys, what gives here? This is kind of goofy.” And so she wants to counteract that. And we agree with her on that. Our only argument is that those ideas, in order for them to become somehow like what you might call have traction, they have to be instantiated in something, which is in a moral code of conduct, but also liberal principles of governance and the good society. And so it’s this path is all about the evolution towards good governance. Not good government, but good governance. And so we have to get to that. And so let me just point to a quote from John Stuart Mill in 1848. It’s an essay called The Claims of Labor. And in it, what he argues is that when circumstances are met without ideas, they dissipate very quickly. When ideas come about but don’t have circumstances, they dissipate very quickly. But when ideas and circumstances align, boom, then you have the fire. And so what we’re trying to do in the book is apply that same kind of idea, but to the question of modern economic growth.
Marian Tupy: I have two last questions and I promise to let you go. But I want to go back based on what you just said to Eastern Europe. And back then after the wall fell and communism disappeared, there was the Friedmanite notion, privatize, privatize, privatize. And it has a bad rap now. I’ve been playing with it a little bit. And it seems to me that what that saying should have been, privatize, privatize, privatize mostly to foreigners. Here’s what I mean by that, is that very often when stuff was privatized in Eastern Europe, it would be privatized to the local population, many of whom had been living under the moral disfigurement of communism for many, many decades. That’s especially true for Russia, which had communism for like 70 years. And they didn’t have the mores, they didn’t have the ideas what to do with the new property they had acquired. Very often it ended up in failure. Whereas I always thought that the beauty of bringing in a foreign corporation, maybe French, American or British, is that with it, you are getting also a lot of tacit knowledge, best accounting practices, dutifulness at work and so forth.
Marian Tupy: And I wonder if more of the stuff that was privatized in Central Eastern Europe after the fall of communism have ended up in the hands of companies that have already, that could pass that tacit knowledge and the new morality onto the population, it would have worked out even better. What do you think about the argument? Is it crazy?
Peter Boettke: No, I don’t think it’s crazy. Jeffrey Sachs, many years ago in a Brookings paper, I think it’s with Lipton, but I might have his co-author wrong, but Sachs argued that the key policy for success was trade liberalization and opening up your economy to the free flow of not only goods into the economy, but also ownership and all the other kinds of stuff that went with it. And the reasons why are precisely along the lines that you have, is that it allows for a faster transition. A good colleague of mine, Ben Powell, has a book called Out of Poverty, and it’s about development mainly in sweatshops is the main thesis of the book. But his argument is, which is an interesting subtext there, is how quickly later industrializing countries went through the process of industrialization and graduated from sweatshops. And so if you think about the history of the United Kingdom or the United States even, we’re talking about a century in which these things. When we think about the history of East Asia, we’re talking about a generation, like that. And the reason is precisely because of what you say.
Peter Boettke: The companies go in to develop, Nike goes in, and then Nike also not only uses sweatshop labor, but it brings in all kinds of managerial knowledge, tools and techniques that are in the modern society, and all of a sudden it transforms the process of production in all of these societies and the behavior of the individuals in the society. And so I think that’s important. Jim Buchanan went to the Cato conference in ’92. Cato ran a conference in Moscow after the transition from the Soviet Union to Russia. And Buchanan was part of the group that went there. And when he came back, he wrote a paper called The Tacit Presuppositions of Political Economy. And it makes the point that you were just made, which is that these individuals, we shouldn’t be so romantic to think that it can happen like that, because these individuals only experience with market is a kind of experience you would have if the only people you dealt with were scalpers and black market dealings. And so it’s going to take a while for them to recognize that they were in prohibition markets. So it was like Al Capone and his cronies that were selling you alcohol, not Mom and Pop’s Liquor Store.
Peter Boettke: And so how are we going to transition to that? And that’s going to take a while for that to occur. And that’s what Buchanan sort of tries to stress. And so what you’re stressing is how does globalization actually feed into speeding up that transformation? And I think that’s right. I mean, we needed that. And then we also needed what Friedman says. So Friedman in ’79 is asked in China, “Professor Friedman, what do we do?” “Privatize, privatize, privatize.” In 2002, he’s asked, “Professor Friedman, would you change anything that you had to say? And he said, and I’m just paraphrasing him here. It’s not the exact quote. We use the exact quote in the book. But he says, “Privatize, privatize, privatize, provided there’s a rule of law.“ Now, that’s a huge change.
Peter Boettke: And so one of the things that is important going back to the emphasis that you said in property rights is that when we’re thinking about these transition economies, you have to get the property rights right. It’s not just a matter of saying you have property rights. You have to get the property rights right, and those property rights getting them right is where that angle is where McCloskey fits in, right? Because that’s where the… So, if you think about… Let me just tell you, you know, two reformers who in Russia that I knew through circumstances, because before Soviet Union fell, as your listeners, older listeners might remember, there wasn’t really email, but there was Usenet boards. So used to communicate with people. I was a comparativist. So the Russians under Glasnost were starting to more and more do that. So Anatoly Chubais, who became the head of privatization in Russia, the Soviet Union, and then Russia, he was a young academician just like me. I was 28 years old, I think he might have been like, you know, 27 or maybe 29, we’re in roughly the same age.
Peter Boettke: And also Gaidar was also on these things too, a young academician trying to figure out what the hell’s going on. And so they all used to debate on these things. And one of the things that was happening is in the late 1980s, all these people were reading Western thinkers, Milton Friedman, Hayek, they all started paying attention to him. In the Czech Republic, Tomáš Ježek translated Hayek into Czech, so it was widely available and discussed and debated. And Ježek was like the right-hand man to Klaus in the academic world. Klaus was more of a Friedmanite. Cezak was more of a Hayekian. Okay, so all these people are there. Well, then all of a sudden they become these like people in charge. Just go look up how young Boris Fedorov was when he was the finance minister in Russia under Yeltsin. These people were ridiculously young and, you know, given all this power or whatever. But, and they knew all these arguments and they were gung-ho. I mean, I will tell you, prior to them being in politics, they were as hardcore of a Friedmanite or hardcore of a Hayekian as you’ll meet at like any Cato University thing or whatever. And Gaidar, when he stepped down, what did he create? This giant scientific research center for himself. That’s his last act, he created this giant, the study for the Russian economy.
Peter Boettke: What did Chubais do? Chubais ended up by getting multi-million dollar contract for a book he never wrote. And the second thing was he ended up by taking control of Gazprom. So these guys became oligarchs. And those were all violations of the rule of law, what they did, right? But it was under the guise of privatization, like, oh, look, and so how is it that you’re going to constrain that? You need to have the rules, but you also need to have the morals that justify those rules or legitimate the rules. Otherwise, the rules will have a legitimation crisis. And that’s, and then you don’t get the scalar. So McCloskey is 100% right. I just wish she would also appreciate a little more how people are trying to fit those institutions on the bedrock of the value systems that she’s talking about, yeah.
Marian Tupy: Get it. My last question is as follows. So very often when trying to study human progress, people will make declarations such as Steve Pinker will say it’s due to the enlightenment. Deirdre McCloskey says it’s due to liberalism. But after reading your book, once again, the historical path to liberty and human progress, could we say that they are a part of the same process of gradual liberalization? You call liberalism the political philosophy of the enlightenment. It’s a wonderful new way of putting it that I never heard before. I think that certainly works. But it’s the same process, is it not?
Peter Boettke: So we believe so, and that’s the argument that we make. Scottish Enlightenment more than the French Enlightenment. So I’ll admit that. But also, and I should point out that Joel Mokyr, the great economic historian who works closely with Deirdre, over the years, Joel Mokyr has a book called The Enlightened Economy and other kinds of books where he makes this connection. So it’s not like we’re trying to be new and original here. I gave a talk on the book in Vienna when I was teaching there last month. And one of the persons in the crowd stood up and said, “I’ve read everything by Hayek and, and Mises,” and everything like that. And he says, “And I got your book on Kindle and I read it and I thought to myself, you know, I’m not learning anything new that I didn’t already know. What do you react to that?” And I said, “Well, that’s a compliment to me because what we’re trying to do is explain how Hayek’s ideas in the Constitution of Liberty and these other things help explain modern economic growth. So thank you.” You know, like that. He meant it as a knock. I view it as a compliment.
Peter Boettke: I said, “The book wasn’t written for you. It was written for the people that have never read Hayek, have never read Mises, have never read these people. And we’re trying to get them to appreciate these arguments about the relationship between institutions and the entrepreneurial market process and all of that.“ And so to me, I think that this enlightenment project is so critical to us understanding the co-evolution of both liberal political and legal institutions and liberal economic institutions. And so it’s a co-evolution of those two things, the political and legal and the economics and financial liberalization that ends up by being played out over centuries until it gets to a point where it’s at a tipping point. And at that point, it creates this combustible combination, which leads to the world that we benefit from to this day, even in spite of the increasing role of the state. We still have enough space, enough elbow room, as Thomas Sowell refers to it at the end of Knowledge and Decisions, enough elbow room so that ordinary people can do extraordinary things, not relying on extraordinary people with great power to do extraordinary things. We can rely on ordinary people to unleash the creative powers of a free civilization. And that’s, I hope, the message that we want to get across.
Marian Tupy: That’s beautifully put and a perfect place to stop. So I want to thank you for your time. I want to thank you for writing this book, which, by the way, I have learned a lot from. So I highly recommend it to our listeners, and we will, of course, discuss it and talk about it on our social media. Thank you so much for your time.
Peter Boettke: Well, thank you. And it’s a great honor to have these conversations with you. I think what you guys are doing is vital work in this day and age, actually, to be honest with you. We really need people who document and defend the tremendous human progress that comes from a free society. So thank you.