Liberalism and Growth

Recently, I said I would try to make the case that liberalism causes growth. Certainly, correlations suggest that this is the case. For instance, income is substantially higher in Blue states than Red states. The inability of the Soviet Union to match the productive output of the United States is another example. A more remote example was the lack of growth in Western Europe prior to the Reformation. I’ve even heard the case made that the reason China and the Middle East failed to capitalize on their respective technological leads over Europe going into the second millennium is that those countries never had similar reformations. China remained a dictatorship and the Middle East remained largely theocratic, preventing the emergence of capitalism.

In a recent book, The Free-Market Innovation Machine, widely respected (i.e., neither known as left nor right, just a really smart guy) economist William Baumol makes the case that over the long run, the important feature of capitalism is not that it leads to static efficiency, meaning supply equals demands and labor and resources are directed to their most productive uses. While those are important, the key distinguishing feature of capitalism is that it forces firms to compete on the dimension of innovation. Firms that innovate more consistently and prolifically outperform; those that are innovative laggards vanish by the wayside. Innovation has positive externalities, is fecund, and leads to economic growth. Ideas and knowledge fuel innovation and, in turn, education and an open society fuel ideas and knowledge.

This is where the connection between liberalism and wealth lies. A society that, for example, burns and bans books, will not be innovatively prolific. George Orwell, writing as Emmanuel Goldstein, expresses it well; Goldstein is describing the slowdown in innovation that accompanied the rise of The Party:

Science and technology were developing [before The Party took over] at a prodigious speed, and it seemed natural to assume that they would go on developing. This failed to happened, partly because of the impoverishment caused by a long series of wars and revolutions, partly because scientific and technical progress depended on the empirical habit of thought, which could not survive in a strictly regimented society. [p. 193 of the 2003 edition]

Liberal societies are less regimented; within liberal societies, cities are generally the least regimented areas, which I hypothesize explains the Blue-Red income and wealth gap. The causal chain is that the receptiveness to new ideas that accompanies liberalism leads to the production of more ideas, leading to more innovation, leading to more growth.


P.S. In another recent book,

The Rise of the Creative Class
, Economist Richard Florida of Carnegie Mellon argues that “scientists, engineers, architects, educators, writers, artists, and entertainers” constitute a creative class (about 30% of the population) that generates most of society’s new ideas. This class is drawn to cities, he argues, precisely because cities are most open to new ideas. Florida’s arguments are generally strong, but unfortunately, I thought the writing was a bit burdensome. On the other hand, I wholeheartedly recommend Baumol’s book to anyone interested in Capitalism, innovation, and growth.