Free Minds & Free Markets

Creative Forces

For those who, with Marshall McLuhan, have been prophesying a "global village" in which national boundaries have less and less economic and social significance, the last decade must seem perplexing, to say the least. Integration and disintegration have been conducting an indecisive battle in two dozen battlefields all over the world. The rise of an aggressive regional nationalism in Eastern Europe and Central Asia has been coupled with a growing sense of unity in Western Europe and North America.

Should economists be in favor of centripetal forces and support greater and greater centralization? To be sure, the opinion of intellectuals and college professors probably means little to Slobodan Milosevic or Margaret Thatcher (to name two of the more visible of the centrifugal camp) or their more internationally inclined opponents, such as Jacques Delors or George Bush. But in the very long run, the thoughts of ivory tower academic economists have had political influence beyond their wildest dreams: Adam Smith, for one, strongly believed in the folly of mercantilist policies that saw the state as the unit whose welfare should be central to economic policy. He pointed out that it was the consumption of the individual that counted. In order to achieve the most consumption for the most individuals, Smith taught, free trade was essential.

Modern economists, on the whole, still believe that Smith's insight was right. The vast majority of them would subscribe to the common-sense view that when Serbs try to do as well as they can for Serbia while Croatia does as well as it can for Croats, both Serbs and Croats will be worse off than if they maximize some joint objective and cooperate. The most obvious reason for this is that nationalism at times leads to war, which leaves everyone worse off. But even without war, single, small countries with closed boundaries tend to do less well than large, integrated economies. Open borders and trade allow specialization and thus make all trading nations wealthier, a statement that has been axiomatic to economics for more than two centuries.

Moreover, forcing local producers to compete not only with each other but also with foreign firms increases the pressure for efficient production and stimulates the adoption of more-productive technologies. It is hard to imagine, for instance, what the American car industry would have looked like without the growing competition of Japanese and European products in the 1970s. Furthermore, through trade and travel, nations learn from each other, imitate each other, and discover that some new ideas generated outside their cultures are useful and pleasurable. When Europeans imported Chinese cuisine, the Chinese learned to ride bicycles. Everyone gained.

All the same, an argument can be made that too much integration has costs as well. Trade and the exchange of ideas and knowledge are one thing, the coordination of policy, institutions, and laws quite another. In the extreme case of a world that has fully integrated its institutions and laws and is ruled by a central global government, no matter how benevolent and enlightened, economic progress would sooner or later come to an end and stagnation ensue. In part, this is simply because the gains from integration will eventually run into diminishing returns. Once we have fired all customs agents and eliminated all export subsidies, and workers and capital are free to settle wherever they maximize their returns, any additional increments would be harder and harder to achieve. But the main reason for stagnation is that in a global village the engine of economic growth would run out of fuel.

That engine is, was, and will always be technological creativity. Of course, other things are necessary for an economy to grow—capital accumulation, skills, motivation, well-functioning markets, and so on. But all other factors tend to have short-lived effects. They can increase income, but they tend to burn out after a while. Technology is the only thing that does not run into diminishing returns. There are no known limits to the human ability to control and manipulate the forces of nature.

Will globalization, assuming it defeats the surging powers of nationalism, enhance technological creativity? Again, based on past experience, the answer is ambiguous. A global village would, if its government is effective and peaceful, be a land of milk and honey. Such benefits have been realized in our own time in Western Europe and the Far East: Once Germany and France, or Japan and Korea, ceased fighting each other, they could redeploy their ingenuity from military to civilian objectives, with rather remarkable effects on living standards. The United States, which maintained peaceful coexistence among its constituent states over its history (with one major exception), is another example of this model.

Too much peaceful coexistence, however, may weaken international competitiveness and thereby dull the spur to technological creativity. Technological progress, even in civilian technology, is often made in tooth and claw. Without the pressure of competing neighboring states, societies may lose their cutting edge. Closed large empires, such as China, Russia, and the Ottoman state, though not entirely impervious to progress, could not sustain their creativity in the long run. In Western Europe, political fragmentation and the "states system" prevented such stagnation. No single European ruler ever managed to unite the entire continent under a single government. Competing political units held each other in check and guaranteed a high degree of political diversity. At different times Spaniards, Frenchmen, Germans, and Englishmen aspired to hegemonic power, but because they failed to establish a long-lasting empire, diversity and competitiveness were maintained, and creativity and innovativeness could not be suppressed.

In some cases, of course, reaction won: The heretic-burning Inquisition plunged much of Southern Europe into darkness after it had led the continent a century earlier in the great discoveries, and in Eastern Europe and the Balkan despotic regimes, rulers did all they could to keep their nations in the dark age. But the competitive nature of the states system is a guarantee against such oppression. The threat that a new idea would be adopted by a rival nation and that innovative subjects would migrate elsewhere if ill treated was a powerful incentive to overcome the inevitable opposition to progress from conservative circles or vested interests.

From Peter the Great to Ataturk, the rulers of conservative nations realized that political survival required giving more freedom to technologically creative individuals. The "European miracle," to use a term coined by economic historian Eric L. Jones, could happen because the states system created a unique opportunity for gifted individuals to overcome the normal resistance of the establishment and to convert their creativity into a blessing for society.

Furthermore, competition spurred technology in direct ways. Especially after 1870, when the major European powers became steadily less friendly toward one another, the sense of one national identity competing against another was a powerful stimulus to many of the great inventors of the time, especially in Germany. Technical advances could save the fatherland. German, British, and French engineers tried to outdo each others in steel, chemicals, and electrical engineering, knowing full well how important this knowledge was to national security. Some of Germany's greatest inventors (Fritz Haber, the inventor of the nitrogen-fixing process, immediately comes to mind) were also ardent nationalists. Governments increasingly encouraged and subsidized research and development for national-security purposes.

The Cold War has had similar effects, and one might call this competitive creativity "the Sputnik effect": The shocking fear that the United States might fall behind in the "competition for technology" with the Soviet Union stimulated research and development in the United States after 1957 like nothing else. Indeed, some economists have been tempted to view competition between nation-states as comparable to the healthy and cleansing competition between firms in the free market. This is a simplification, because competing firms do not start wars against each other. But it has a kernel of truth.

A stronger version of this theory relies on what I have called "Cardwell's Law," after the British historian Donald Cardwell. This law states essentially that every society, when left on its own, will be technologically creative for only short periods. Sooner or later the forces of conservatism, the "if-it-ain't-broke-don't-fix-it," the "if-God-had-wanted-us-to-fly-he-would-have-given-us-wings," and the "not-invented-here-so-it-can't-possibly-work" people take over and manage through a variety of legal and institutional channels to slow down and if possible stop technological creativity altogether. Technological leaders like 17th-century Holland or early 19th-century Britain lost their edge and eventually became followers.

Many feel that the United States in 1993 is on the verge of succumbing to Cardwell's Law. After having led the world technologically for most of this century, the United States is gradually conceding many industries, from automotive to consumer electronics, to other nations. In many ways, reading Business Week today reminds one of the British press around 1900. An urgent sense of "we are not what we used to be" permeates the writing. It is as if technological creativity is like youthful vitality: As time passes, the creative juices gradually dry up, and sclerosis sets in. Societies become increasingly risk-averse and conservative, and creative innovators are regarded as deviants and rebels.

From a global point of view, the historical process can be likened to a relay race: Each society carries a torch for a short time before it hands it on to the next bearer; but all bask in the light. As long as there is a society to hand the torch to the next one, once the current bearer has worn itself out, technological progress can continue. There is thus safety in numbers: If there are enough states whose institutions are independent of each other, a replacement is likely to be found when the institutions of a technological leader turn against innovation, as they almost inevitably will.

The exact form that technological reaction will take differs from society to society. In some cases, reactionary governments simply close economies off to the rest of the world, and an iron bureaucracy either suppresses innovation altogether or channels it in directions deemed worthy by the rulers. This happened in Tokugawa Japan, Qing China, and Communist Albania; it is happening in Myanmar (Burma) and North Korea today.

In other cases, vested interests will use violence to block progress. The Roman Emperor Tiberius is reported to have executed an inventor who claimed to have come up with unbreakable glass, out of fear for his interests in glass making. Nineteenth-century inventors often fled for their lives to escape vengeful artisans. Professional trade associations, craft guilds, and regulations ossified the production process and made it impossible to deviate from established rules. Labor unions, with some exceptions, have been traditionally hostile to machines, which they feared would take their jobs.

In our time, well-meaning environmentalists, greedy product-liability lawyers, and feather-bedding unionists are contributing to the problem. Simply put, Cardwell's Law works because technological creativity is a delicate and fragile flower that needs just the right institutional environment to thrive. Yet in a truly dialectical manner, its very success usually destroys the environment it needs to survive.

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  • LifeStrategies||

    Yet free trade - the freedom for people to choose who or not to trade with - has been proven to increase living standards by freeing those creative juices everywhere. But it does penalize those who seek an unfair advantage.

    Makes you wonder what unfair advantage its opponents seek to gain...

  • ahmed kamel||

    Eh bien, je suis un bon poste watcher vous pouvez dire et je ne donne pas une seule raison de critiquer ou de donner une bonne critique à un poste. Je lis des blogs de 5 dernières années et ce blog est vraiment bon cet écrivain a les capacités pour faire avancer les choses i aimerais voir nouveau poste par vous Merci
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