I’ve begun reading an intriguing book, [amazon_link id=”019979412X” target=”_blank” ]Knowledge and Co-ordination: A Liberal Interpretation[/amazon_link] by Daniel Klein. The author, someone I’ve not come across before, doesn’t go out of his way to be accessible, and also starts out describing his close identification with hardliners of the Austrian School. So I was preparing to take a look and write the book off as eccentric. But there’s proving to be enough of interest to have kept me going. For one thing, the author is a big fan of Deirdre McCloskey on [amazon_link id=”0299158144″ target=”_blank” ]The Rhetoric of Economics[/amazon_link], and of [amazon_link id=”0393329461″ target=”_blank” ]Thomas Schelling[/amazon_link] on game theory. I also liked this comment at the start of Chapter 2:

“Economists often talk of asymmetric information, but they rarely talk of asymmetric interpretation. They rarely talk of discovery, imagination or serendipity, and consequently they tend to neglect these as vital factors of economic progress. They often carry over their mental habits to public policy.” (p11)

And he goes on to quote Hayek:

“To use as a standard by which we measure the actual achievement of competition the hypothetical arrangements made by an omniscient dictator comes naturally to the economist whose analysis must proceed on the assumption that he knows all the facts which determine the order of the market.”

The challenge to economists who comment on public policy is a powerful one: is the assumption of omniscience, an objective external perspective, on our own part – rather than the assumption of rationality – our real failing?

[amazon_image id=”019979412X” link=”true” target=”_blank” size=”medium” ]Knowledge and Coordination: A Liberal Interpretation[/amazon_image]

Thanks to a couple of decent train journeys, I’ve at last read Matt Ridley’s [amazon_link id=”0007267126″ target=”_blank” ]The Rational Optimist: How Prosperity Evolves[/amazon_link], published in 2010. Some readers will no doubt think it mis-titled, and might argue instead for The Delusional Optimist. After all, the nearly two years since publication have hardly seen a lot of economies enjoying the sunny uplands of vigorous growth. But they would be unfair to read the book as a commentary on the current state of the economy; its theme concerns the very long run of growth.

Ridley’s main thesis is that specialisation and trade are what drive innovation and growth. Indeed, he argues that trade came before agriculture, before urbanisation and is in fact part of our genetic nature, although as a non-expert on genetics, I thought this particular bit of the argument involved quite a lot of “It is a reasonable guess that…”. The book canters through history from the dawn of time, touching on everything from natural selection to the specifics of the Industrial Revolution. If, like me, you’ve read Paul Seabright’s [amazon_link id=”0691146462″ target=”_blank” ]Company of Strangers[/amazon_link] and Ian Morris’s [amazon_link id=”1846682088″ target=”_blank” ]Why The West …. For Now[/amazon_link], and some economic histories like Greg Clark’s [amazon_link id=”0691141282″ target=”_blank” ]A Farewell to Alms[/amazon_link] or David Landes’ [amazon_link id=”0349111669″ target=”_blank” ]Wealth and Poverty of Nations[/amazon_link], a lot of this material will be familiar. But for everyone else, The Rational Optimist gives an accessible and useful overview of the wide range of material. And there were inevitably some new nuggets of information – I didn’t know the Calico Act of 1722 banned the wearing of cotton in England – and was not repealed until 1774.

I share Ridley’s conviction that specialisation and trade are the key to improving the well-being of people in general, even if not that of specific producer groups, like English textile manufacturers of the 18th century. I also very much enjoyed his spluttering against what he calls the ‘green chic’ movement, rich people who enforce totemic beliefs about what is ‘natural’, often to the detriment of poor people – or even the environment. Ridley is acid about the environmental movement’s opposition to GM crops, for example, and with the authority that comes from genuinely understanding the genetics.

Why does protectionism recur again and again? The book suggests it is part of an inevitable cycle of a society’s decline. Trade creates a surplus which is increasingly appropriated by rulers or governments, encouraged by producer interests, or by priests or intellectuals who do not like the fact that nobody is in charge of trade. I think he underestimate the support protectionism gets from many citizens who do not like uncertainty or change. After all, specialisation is disruptive of livelihoods. This is an issue I touched on in my 2001 book,[amazon_link id=”1587990822″ target=”_blank” ] Paradoxes of Prosperity[/amazon_link]. Nor am I wildly optimistic about averting protectionism during the current economic crisis – let’s hope this is wrong, but rational pessimism could be more in order for the next few years.

[amazon_image id=”0007267126″ link=”true” target=”_blank” size=”medium” ]The Rational Optimist: How Prosperity Evolves[/amazon_image]

Austere times have in the past been paradoxically creative periods. In responding to the Great Depression, FDR included the arts in the Works Progress Administration alongside roadbuilding. Keynes made the formation and generous funding of the Arts Council in 1946 a central thought in rebuilding the UK after the horror of war, and just as its enduring financial and physical costs became fully apparent. Of course, good times are good for the arts as well. The economic Golden Age of the later 1950s and 1960s were the most generous period for funding the arts, and stimulated great innovation and experimentation.

But I’m not thinking about the production of artistic works so much as their ‘consumption’. When a society experiences difficult times, shared artistic evaluation becomes important, for several reasons – as a conversation about what people are experiencing, as a means of escapism, as a symbolic statement of values. This essay by J.B. Priestley in his 1949 collection [amazon_link id=”1905080670″ target=”_blank” ]Delight[/amazon_link], put it very aptly:

“What is the use of our being told that we live in a democracy if we want fountains and have no fountains? Expensive? Their cost is trifling compared to that of so many idiotic things we are given and do not want.”

The creation of the arts can be funded either privately or publicly, and the act of creation may take place inside one person’s mind in inescapable privacy; but any example of art that is not experienced jointly and debated is really consumerism, not creativity. I was struck by the importance of the social context reading this very positive review of Jonah Lehrer’s acclaimed new book [amazon_link id=”184767786X” target=”_blank” ]Imagine: How Creativity Works. [/amazon_link]The book is about the neuroscience of creativity, what happens in the individual brain. But societies as well as individuals create. Recognising that social outcomes are greater than the sum of individual outcomes was Keynes’s true and enduring legacy.

[amazon_image id=”184767786X” link=”true” target=”_blank” size=”medium” ]Imagine: How Creativity Works[/amazon_image]

What turns one high tech start-up into a global company that will survive more than a century, and another into a mere shooting star that will burn up as it hurtles down through the skies? Harold James answers that early in his interesting new book [amazon_link id=”069115340X” target=”_blank” ]Krupp: A History of the Legendary German Firm[/amazon_link], identifying four attributes:

develop new technologies and new markets hand in hand;

cultivate a relationship with the state;

find a source of finance sufficiently large and committed for expansion;

develop an organizational structure that fosters loyalty and trust.

The book traces these four strands throughout the company’s history from its initial establishment as a small enterprise in 1811 and fragile early period, with scant profitability but sustained by family money, through a number of commercial and political ups and downs in the late 19th and early 20th century (including the 1848 revolutions, the Franco-Prussian war, the Spartacist years and hyperinflation), its close and subsequently toxic relationship with the government and wartime production in the Nazi era, and post-war rebuilding. The hundred years from the mid-19th to mid-20th century were not uneventful, to say the least. The Second World War and its aftermath formed, unsurprisingly, an uncomfortable episode (dealt with relatively briefly here: Alfried Krupp was arrested and imprisoned but subsequently amnestied in 1951). The capacity of an organization to survive that, and remain a productive and profitable enterprise is rather extraordinary. Harold James relates this resilience to the Continental model of capitalism. He writes:

“Modern management theory….treats managers…as individuals driven by isolated gain-maximizing strategies. It is diametrically opposed to the traditional German and perhaps European vision of a company as an embodiment of some over-arching value system, in which a corporation is a microcosm of a general social equilibrium.”

The Krupp history certainly puts an emphasis on avoiding short-term stock market finance as opposed to family funding and subsequently a relationship form of finance; and on the inevitable links between a large enterprise and the state. The Anglo-Saxon and Continental versions of capitalism ebb and flow in their attractions depending on the context – during the ‘Eurosclerosis’ era the latter did not look so attractive, although the balance has now tipped the other way.

One company’s history cannot deliver a verdict, but this book gives a fascinating insight into the wider debate. It places the company in the wider social context of the family, the local community, the national state and the global economy. Harold James, who is a terrific writer, had access to the Krupp archives for the book. There is more detail here than the general reader will want – an abridged version, though, would make a terrific ‘short’ because Krupp’s history offers a lens on both European history and the very live debate about the best version of capitalism. There is also a [amazon_link id=”3406624146″ target=”_blank” ]German edition[/amazon_link] of the book.

[amazon_image id=”069115340X” link=”true” target=”_blank” size=”medium” ]Krupp: A History of the Legendary German Firm[/amazon_image]

I was browsing through Tim Wu’s completely excellent book [amazon_link id=”B004DUMW4A” target=”_blank” ]The Master Switch[/amazon_link] this morning, and came across this rather inspiring 1787 quotation from Thomas Jefferson:

“A little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical. …It is a medicine necessary for the sound health of government.”

Thomas Jefferson

He of course knew what he was talking about…..

[amazon_image id=”B004DUMW4A” link=”true” target=”_blank” size=”medium” ]The Master Switch[/amazon_image]