Public Welfare and Economic Growth
Adam Smith grounded his famous critique of the political economy of mercantilism on the charge that it was a system inimical to advancing the material and social welfare of people. Instead of looking primarily to the needs of the consumer, mercantilism privileged the financial interests of those who produced and sold goods, and by extension the interests of those with the power to tax that production. In what was for the late eighteenth century a remarkably bold and unusual claim, Smith pictured a very different kind of world. He argued that, “consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.“1 Looking back on this statement from the vantage point of more than two centuries of economic development, it is easy to overlook what a radical departure this assertion represented from the dominant thought of Smith’s day, and certainly from the economic expectations of all those who had come before him. For his was a claim that was itself a product of the already significant economic achievements of the late pre-industrial period in England and a harbinger of what would eventually come to be known as modern economic growth. Without the sustained growth of goods and services that came to outpace even sizable increases in population, a political economy based on the needs and wants of the general consumer would not have even been conceivable.
Writing in the half century after the publication of The Wealth of Nations, Thomas Malthus still conceived of a world governed strictly by the iron law of population. According to the rhetorical premises of Malthus’ political economy, the consumption possibilities of the common man were not of themselves a good worth even striving for. Not only did Malthus believe that population would always outstrip any advance in productive capacities, but he was also not terribly concerned about the implications of that (ultimately dubious) fact for the quality of life for the mass of poor people. The stark difference between the dismal world of the Reverend Malthus and the hopeful vision of Adam Smith is captured remarkably well by an exercise I do regularly with the undergraduate students in my European economic history survey course. We begin with the cost of outfitting Columbus’ first voyage in 1492, and attempt to make a price index that will allow us to estimate the cost of the same voyage in contemporary dollars. What the students discover is that the choice of metric matters a great deal. When the expedition is priced out using labor costs (building wages from the late 15th century compared with those of a carpenter’s assistant today) the current cost appears to be on the order of 30 to 2002 times more expensive than if we utilize the price of gold (with the highest relative cost of the available comparison commodities), silver (the lowest), or wheat (in between the other two) as our standard of comparison. This is, of course, because the relative remuneration of labor, even unskilled labor, has increased many times over the price of any given commodity during the centuries that separate us from the voyages of Columbus.
In other words, we now live in a world, at least those of us in the fortunate regions of it, where the value of labor has increased many times faster than the value of everything else. It is only under such circumstances that Adam Smith’s proposition makes any sense, that the consumer needs or desires of society can be seen as the most appropriate ends of all economic activity. This is, of course, just another way of saying that economic development has taken place. For development is fundamentally about being able to set great value on human beings and the labor power and human capital they embody, not just for an elite few, but for many, most, or ideally even all.
My own work as an economic historian has concerned itself not only with the emergence of a distinct north-western European society in the late Middle Ages and Early Modern period, but in a number of macro-economic phenomena which impact directly the quality of human life as well. Most importantly, these include the sources and stimulants of economic growth, the development of propitious social institutions that contribute to such growth, the standard of living (and alternative ways of measuring it), the distribution of economic and other resources across social and geographic boundaries, and the interplay of demographic forces on all of the above. This has led me to particular concerns regarding the distribution of resources within, as well as across, households, the emergence of different types of family systems, the organization of work by gender and/or age, the provision of social welfare from institutions outside of the family, and the progress of child welfare more generally. While these questions have been at the forefront of the research agenda of development economists working with contemporary populations, their historical manifestations remain still less well understood than we would like on account of the scarcity of available data with which to pursue them. Moreover, historians working with more traditional forms of literary, intellectual, or political documentation have not particularly addressed themselves either to the material or the quantitative indications of standard of living in the past.
When economic historians have taken up the challenge to better understand human welfare in the past, they have been perhaps most successful when they have compiled micro-level data sets that can speak in a relatively focused (and reliably testable) way to the macro questions posed above. Micro studies are especially helpful when they address not simply the experience of the already well-studied elite populations most likely to have left written and material evidence, but the experience of the broadest possible cross-section of the population, i.e., the masses largely neglected by historical inquiry until the computational revolution associated with the use of social science methods in historical research over the past half century. It is to the historical experience of these populations that we must look to really understand the roots of economic development. For even in the poorest societies, both today and in the past, a small number of powerful elites have managed to carve out for themselves great wealth. Yet despite the abundance of documentation that exists for these elites, their history is not the relevant one for understanding the broad prosperity we associate with modern economic growth.
So what have we learned from our studies of the past? Above all else the historical record suggests that economic development blossoms best in those places that have sowed generously the seeds of public infrastructure investment and human capital cultivation. The quality of the garden matters as well, with a great deal of evidence to suggest that those places characterized by relatively straightforward and reliable rules of exchange set in a context of harmonious social relations produce by far the highest yields. The need for public infrastructure, the roads, bridges, marketplaces, and courts that facilitate exchange, among many other facilities of collective use, is obvious enough. The work of Peter Lindert, among others, confirms that investments in these things not only do not stifle private initiative, but indeed they stimulate growth despite the public tax collection required to construct them.3
Human capital cultivation is a somewhat trickier category to pin down. By it I do not mean simply an appreciation for the importance of formal schooling and work training, although the work of Claudia Goldin and Lawrence Katz demonstrates the payout of investments in those areas amply enough.4 What I would include here along with formal education are all of the often small, and notoriously difficult to document, cumulative investments in people that depend on the activities of care workers. Many of these care providers are mothers, or increasingly now parents of both sexes; but neighborhoods, churches, charities, and in some places the public sector writ large have also played a critical role in the provision of goods and services that promote human development. Much of this work is performed solely within the context of the household and is unpaid, making it invisible within the paradigm of standard economic analysis. Moreover, even when such care work does originate from outside the household it is typically provided by the social sector of the economy, a sector whose existence is always precarious, subject as it is to the whims of political ideology and the shifting fortunes of social cohesion.
As already noted above mothers (and wives) play a huge role in this largely overlooked sector of the economy. They are still the central providers of prenatal and early childhood nutrition, language acquisition and socialization of children, the maintenance of labor market participants in a state fit for work, and end of life care and comfort. In most historical settings wives and mothers, or their female surrogates in form of sisters, daughters or servants, were responsible for all household maintenance and nursing services for the young, the old, and the infirm. It would be difficult to overestimate the value of all this invisible work (for human welfare but also for the formal economy as measured by output), but in fact we have mostly erred in the opposite direction of ignoring it altogether. With a few notable exceptions, those of Nancy Folbre, Joel Mokyr, and Jan deVries in particular, most economic models work from the assumption that people arrive either to school or work ready to learn or produce without any thought to including the true cost of making that possible.5
Of course both care work and public infrastructure investments require resources as well as the personal and/or political goodwill to expend those resources in the ways outlined above and not in others. No amount of goodwill around the care and feeding of children, for example, can compensate for a failure to secure the food entitlements needed to make such care possible. Likewise, a willingness to build bridges will only result in actual bridges if the materials and the know-how to fashion them are within grasp. So while investments in people and infrastructure are surely constitutive of economic development, they are equally the products of the same. Hence it is that societies find themselves easily trapped in either virtuous or vicious circles, the latter being especially hard to work one’s way out of. If poverty causes households and society more generally to skimp on investments in health, education, and/or the common facilities needed for production and exchange, further poverty is not likely to be far behind. Virtuous feedback mechanisms on the other hand, that is to say those characterized by the expenditure of the fruits of prior investment on yet further investment, will move in the opposite direction towards increasingly greater wealth. It should perhaps not be so surprising then, given the hetero-static properties of this mechanism at work, that the gap between the haves and the have-nots of our world has widened, and considerably so, over the past two centuries characterized by the most rapid economic development known in history. Divergence is, after all, the defining characteristic, and the most reliably predictable outcome, of hetero-static processes.
One useful way of thinking about development then, is to recognize the very strong influence of the forces of path-dependence on economic growth. Starting endowments are critical to the kinds of investments that a society can make, which are in turn critical to the kinds of success that it can hope to enjoy. It is no accident that one of the strongest predictors of future economic performance is past economic performance, a finding that has been confirmed repeatedly by those in the neoclassical economics tradition who privilege market forces to explain individual behavior as well as by those who view the struggle for power as the most reliable predictor of social behavior.6 If we want to stimulate development then, we must first understand the kind of shocks to the system most likely to dislodge entrenched cycles of the vicious kind, i.e. those factors that would allow for starting investments to be made even in the face of scarce resources. Well functioning capital markets come to mind here as one potentially transformative factor. Ideally such markets would allow for individuals and households to borrow in the present to make investments in human capital that would more than pay for themselves in the long run in the form of increased labor productivity; they would also allow for larger collective bodies (communities or indeed state governments) to engage in deficit spending to facilitate the building of public infrastructure of the kind that has a reasonable expectation of being conducive to economic exchange and growth. Both of these kinds of investments are the stuff of Peter Lindert’s “free lunch puzzle” in his important (but seemingly under-appreciated in the current political climate) book Growing Public: Social Spending and Economic Growth Since the Eighteenth Century.7
An economics that accounted for the silent and invisible contributions of care work to the production of the labor force; that recognized the output benefits of publically funded networks of social services; that valued time spent outside of paid work at more than the zero estimate that current GDP calculations assume; that allowed for spending on well crafted infrastructure investments now to be paid for later out of the gains there from; and that valued for its own sake the quality of life available to all, and not just the quantity of goods and services sold in the marketplace; would go a long way toward realizing the hopeful vision that Adam Smith first articulated at the dawn of the age of modern economic growth: a vision of an economy grounded in the service of people’s needs and desires, rather than a disembodied labor force valued only for its contribution to production goals designed to ensure the wealth of a few. The roots of development when understood in this way will not just take hold of their own accord. We must actively cultivate them in this garden that is our home.
1Smith, Adam. The Wealth of Nations. London, 1776, p. 424.
2These calculations can vary considerably from one year to the next depending on fluctuations in the spot prices of gold and silver, and future prices for wheat. However, the order of
3Lindert, Peter. Growing Public: Social Spending and Economic Growth Since the 18th Century. Cambridge University Press, 2004.
4Goldin, Claudia and Lawrence Katz. The Race Between Education and Technology. Harvard University Press, 2010.
5Folbre, Nancy. Valuing Children: Rethinking the Economics of the Family (Family and Public Policy). Harvard University Press, 2010. Mokyr, Joel. The gifts of Athena: Historical Origins of the Knowledge Economy. Princeton University Press, 2002. Especially Chapter 5: “Knowledge, Health and the Household;” and de Vries, Jan. The Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present. Cambridge University Press, 2008.
6See for example North, Douglas. Understanding the Process of Economic Change. Princeton University Press, 2005; and Mahoney, James. Colonialism and Postcolonial Development: Spanish America in Comparative Perspective. Cambridge University Press, 2010.
7Lindert, Peter. Growing Public: Social Spending and Economic Growth Since the Eighteenth Century. Cambridge University press, 2004, especially Chapter 10 of Volume 1 and Chapter 18 of Volume 2.
