BY JAMES PETHOKOUKIS
I’m always up for a good story about the now-defunct Soviet Union, and I sure like this one from the new book More: A History of the World Economy from the Iron Age to the Information Age by Philip Coggan of The Economist:
In the aftermath of the Soviet Union’s break-up, the economist Paul Seabright was contacted by a Russian official who was keen to learn about the workings of the markets. “Tell me, for example,” he asked “Who is in charge of the supply of bread to the population of London?” To anyone brought up in a Western economy, the question is laughable. Bread appears in the shops and we don’t have to think about it. The big supermarkets know roughly how much their customers will buy every day and they order that amount from the big bakeries; smaller specialist shops make the same calculation. The result is that no one queues for bread, even if they complain about the price.
Coggan (who will be on an upcoming episode of my Political Economy podcast) argues that global economic history is in large part a story of connections. And the complexity that comes with more and more connections between people — making successful central planning an impossibly difficult task — is a big reason why the world is so much richer than it used to be. These connections facilitate the exchange of both goods and ideas. As important as the World Wide Web is to the global economy, the economy itself is a planetary web of connections that any politician should show great humility before attempting to disrupt. Coggan, again:
Unilever, the Anglo-Dutch consumer products company, operates in 190 countries and reckons that 2.5 billion people use its products every day, whether they are drinking a cup of PG Tips tea, cleaning their face with Dove soap, or disinfecting the toilet with Domestos. Many more people must be involved in producing and distributing those products, not just those who work in Unilever factories, but those who produced the raw materials the company uses, drive the trucks and operate the ships that take those goods round the world, and manage the shops where they are sold. If it takes a village to raise a child, it takes the world to stock your house with goods.
This vast network does more than just fill your cabinets and make the global economy work. It is the global economy. National economies are also networks. In the slim, but thought-provoking, book Why Information Grows: The Evolution of Order, from Atoms to Economies, MIT statistical physicist Cesar Hidalgo offers an economic model of national economies as computational machines formed of networks. And the size and depth of these networks (one kind of which we call “companies”) determine the sophistication of a national economy in terms of the complexity of activities it can accomplish. And the complexity of those networks is partially dependent on the level of trust in a society and the ease of making connections. Example: Hidalgo notes that his native Chile has a trade surplus with South Korea. But while Chile exports low-information copper, Korea exports high-information cars and car parts. As such, Korea, the wealthier nation, demonstrates its higher computational capacity. Korea is a higher-trust society than Chile with, for example, 30 percent of Koreans agreeing with the statement “most people can be trusted” compared to 13 percent of Chileans, according to the World Values Survey.
Global connections. National networks. Individual trust. Some factors policymakers might not typically consider when, you know, making policy. From my 2018 chat with Hidalgo:
I think if you asked some economists what we need to do to produce economic growth, some would say cut taxes. Others might say get rid of regulations. And maybe some would say build more roads, something like that. But when I listen to you and when I read the book, what I think of as pro-growth economics is really pro-connection economics — we need policies that help people connect with each other and more easily and efficiently exchange information. And we need to make sure that people are as well-educated as possible. So it’s a different view of what constitutes pro-growth economics; it’s pro-connection economics.
Yes. It’s pro-connection and pro-learning more than anything. So a lot of economic growth here in the United States comes from the talented migration that the US receives in all of the grad school programs of the country. Now if you go to any grad school program in physics or chemistry or computer science, at least half of the students there are going to be very talented kids from all over the world. And in that context, all of these talented groups of people bring together the ability to create and produce vast amounts of new knowledge, and that ends up becoming part of the economy a few years down the line, and sometimes even quite immediately.
So it is a very much pro-learning policy, and to learn you have to have different people interact because you don’t learn from someone that is just like you. It’s impossible for you to learn like that, because you learn from differences — by trying to reconcile them, by trying to understand someone who knows something that you have no experience in. You learn by listening to someone that had a different educational background or different life backgrounds.
So in that context, the policy implications are ones that are very much pro-movement of people, because people are the carriers of knowledge. That knowledge only gets combined as people get to interact. So the big policy implication, based on the simple consideration that knowledge is something that is too large for a single person to hold, is therefore that we need to create diverse networks and diversity in the minds of people, so that we can create the things that eventually can give us a bit of an edge with respect to others. You create these unique things when we combine different knowledge.
Learn more: Creative destruction works unless undermined by crony capitalism | If prosperity and freedom aren’t enough for you, there’s also the ‘moral’ case for market capitalism | Yeah, market capitalism really is “the greatest thing that ever happened to mankind”
James Pethokoukis is editor of AEIdeas and is the DeWitt Wallace Fellow at the American Enterprise Institute.