The popular understanding of the development of the British railways is that the greatest and most extensive rail network on earth came about through the grand visions of men like Isambard Kingdom Brunel. Righty, this man is lionised for his staggering achievements and imagination. The Great Western Railway encapsulated what this man was about: always risk-taking, always innovative and always big.
IKB's legacy, in the minds of many people, is less the things he engineered than the positive disposition he engendered: a visionary with spirit for grand things. He's the sort of man that is seen to epitomise the optimism of the Victorian era and what we have lost in modern society.
The truth of the development of the British rail network is rather different, however. There was no grand plan for the network. It grew in a piecemeal, utterly uncoordinated way. Moreover, lines and branch lines emerged not because of grand dreams of linking up towns or to show off engineering talents but to meet the market for the efficient movement of goods and/or people. What we ended up with, though, is something that is grand. Collectively, these bits of track merged into a network which can now be seen to have advanced human development in a fundamental way.
The lesson from this is that big advances rarely come about through a single grand plan, directed from above and often we only know it was a significant advance in retrospect. Krishan Kumar in his book Prophecy and Progress rightly argues that this experience was unique to British development. In other nations development did follow unified, grand plans usually instigated by the state. But these plans were merely about playing catch-up and not innovation. We see the state playing this role often. It’s what the Soviet state did through its ten year plans. It’s what the Japanese government did by sponsoring private industry to copy British motorbike designs. And it’s what the Chinese government is doing now in supporting Chinese companies that buy up foreign car companies with the technological know how that goes with them.
IKB's legacy, in the minds of many people, is less the things he engineered than the positive disposition he engendered: a visionary with spirit for grand things. He's the sort of man that is seen to epitomise the optimism of the Victorian era and what we have lost in modern society.
The truth of the development of the British rail network is rather different, however. There was no grand plan for the network. It grew in a piecemeal, utterly uncoordinated way. Moreover, lines and branch lines emerged not because of grand dreams of linking up towns or to show off engineering talents but to meet the market for the efficient movement of goods and/or people. What we ended up with, though, is something that is grand. Collectively, these bits of track merged into a network which can now be seen to have advanced human development in a fundamental way.
The lesson from this is that big advances rarely come about through a single grand plan, directed from above and often we only know it was a significant advance in retrospect. Krishan Kumar in his book Prophecy and Progress rightly argues that this experience was unique to British development. In other nations development did follow unified, grand plans usually instigated by the state. But these plans were merely about playing catch-up and not innovation. We see the state playing this role often. It’s what the Soviet state did through its ten year plans. It’s what the Japanese government did by sponsoring private industry to copy British motorbike designs. And it’s what the Chinese government is doing now in supporting Chinese companies that buy up foreign car companies with the technological know how that goes with them.
For Hayek, the development of the British railways I've just described, is a perfect example of what he called the 'spontaneous order'. Through the decisions of self-interested individuals, and with no central plan or grand goal in mind, the giant unthinkable glory of a railway network emerges. Because the achievements are sometimes so grand - the market economy, the internet etc - post-hoc we have a tendency to view the 'spontaneous orders' as planned or we tend to think that planning needs to be done to ensure the continued existence of the spontaneous order. This is directly analogous to the creationism where those unwilling to comprehend the spontaneous order of evolution invoke a planner (God).
Why have I chosen to write this blog? It's due to the proposed High Speed Two railway between London and the Midlands. This story got me thinking about whether it would have been built 150 years ago. Based on what I’ve said here, the answer must be 'no'. Certainly it will rival some of the engineering plans of 150 years ago in its complexity and cost. Certainly it is big. On the other hand, it is entirely contrived. A top-down plan which seems to be more about grand gestures than meeting the demands of what consumers want. It's hardly innovative either. Such plans run the real risk of becoming 'white elephants'. Concorde was a classic white elephant: a cross-nation state plan to build a supersonic passenger plane which always ran at a loss because the real market (i.e. people's wishes) is in carrying a large number of passengers reliably.
A market-based spontaneous order might have led to the development of more a reliable network to meet consumer wishes or it might have meant more money going into road building projects or more runways, or more planes (just as the market shifted from canals to railways 170 years ago). At any one point in time, it would be easy to criticise these as 'conservative', a 'patchwork' or 'piecemeal'. But the critic thereby presumes some special knowledge of how to construct a future world which is superior to that provided by the market and he/she also suffers from the cognitive failure to understand that most grand achievements came through serendipity and incremental change.
Why have I chosen to write this blog? It's due to the proposed High Speed Two railway between London and the Midlands. This story got me thinking about whether it would have been built 150 years ago. Based on what I’ve said here, the answer must be 'no'. Certainly it will rival some of the engineering plans of 150 years ago in its complexity and cost. Certainly it is big. On the other hand, it is entirely contrived. A top-down plan which seems to be more about grand gestures than meeting the demands of what consumers want. It's hardly innovative either. Such plans run the real risk of becoming 'white elephants'. Concorde was a classic white elephant: a cross-nation state plan to build a supersonic passenger plane which always ran at a loss because the real market (i.e. people's wishes) is in carrying a large number of passengers reliably.
A market-based spontaneous order might have led to the development of more a reliable network to meet consumer wishes or it might have meant more money going into road building projects or more runways, or more planes (just as the market shifted from canals to railways 170 years ago). At any one point in time, it would be easy to criticise these as 'conservative', a 'patchwork' or 'piecemeal'. But the critic thereby presumes some special knowledge of how to construct a future world which is superior to that provided by the market and he/she also suffers from the cognitive failure to understand that most grand achievements came through serendipity and incremental change.
Beneath Drabux’s analysis is an old debate about whether grand planning or incremental decision-making offers the best route towards a radically different future. This debate is often politicised with (central) planning characterised as state socialist, and incrementalism identified with the operation of the free market. Certainly there is no shortage of examples of the failings of centralised state planning, and there are also plenty of examples of the market generating radical and progressive change. Even so, I have a number of problems with this argument:
ReplyDelete1) It simplifies the relationship between product development and market testing. The market mechanism is good at signalling to producers whether consumers want their products or not. Also if there is a shortage in supply of goods the price will rise and encourage new producers into the market. Where the market is less effective is in signalling to producers what the next big thing will be, for example, did we know that we needed an iPad until Steve Jobs showed us one? The market mechanism may provide an impetus towards innovation, by offering rewards to people who develop useful new products, but it is not sufficient to determine the magnitude of innovation, which often depends upon the confidence, creativity, vision and hunger for change that people like Brunel have exemplified and which, I would argue, is currently diminished.
2) It overlooks the centrality of planning to capitalist production. Even incremental advances, like the production of a new model of car that is 95% identical to the previous one, will take years of detailed planning and coordination before it is brought to market. This planning is obviously informed by analysis of what has sold well in the past, but it is also shaped by other factors, including technological advances, regulatory constraints, etc. Moreover, even a development as apparently spontaneous as the internet, depends upon planned coordination and agreement between producers, for example over allocation of domain names and basic aspects of the infrastructure. See the chaos that occurs when such agreements are not in place, e.g. over the gauge of railway tracks, or the format for video or DVD recordings.
3) It implies that the kind of future we envisaged in the 1970s has failed to materialise either because the state has stifled the operation of the free market, or because the state has usurped the right to plan our future but is incapable of delivering it. There might be an element of truth in both of these arguments, but it is too simplistic to argue that curtailing the state and freeing up the market would be sufficient to deliver a radical new future. Indeed, with a few exceptions, venture capitalists appear to be suffering from the same pessimism, risk aversion, lack of imagination and innovation that everyone else is suffering from, and it is hard to believe that this would change much even after a bonfire of red-tape.
I think that we both agree that during the last 40 or so years there has been a decline in the imaginative, risk-taking spirit and that this is probably an important factor in explaining why it might appear that the rate of innovation has slowed and some of our dreams have not been met. Notwithstanding this, we still need to agree on the best system for promoting innovation and advancement and perhaps explore why this system has proven so successful in the past. Without this agreement there is a danger that we try to impose a system that is less successful or try to impose elements from a system that have proven to be less successful. In short, I’m not convinced you agree that capitalism is the best system we know of to deliver what you and I want.
ReplyDeleteThe capitalist mode of production has produced greater advances in the last 150 years than in the rest of human history combined. No known system, be it feudalism, slave society or communism, has come even close. You probably worry that the rate of advancement is slowing (as I do) but you also need to recognise that the capitalist mode of production is the only show in town. If you have an alternative then please speak up now.
I also think you should also ask yourself why capitalism is so innovative. On reason is freedom – freedom from the coercion of others, including coercive state planning – so that people are able to innovate. It’s why Mill valued liberty most of all, because it allows us to experiment. So, freed from the tyranny of others, what encourages us to innovate? Within capitalism it’s the potential gains. In countries where people are the most free to maximise those potential gains (those societies where there are fewest restrictions on markets and from capitalising on profits) they also tend to be the societies that are most innovative. This is something nicely illustrated by Saunders in his book – Beware False Prophets – where he demonstrates that the more unequal societies of the US and UK are more innovative than the less unequal societies such as Sweden and Denmark.
This evidence also gives us a clue as to why innovation may be slowing. Look at this table of total tax revenue as a percentage of GDP http://www.oecd.org/dataoecd/48/27/41498733.pdf On average the percentage taken from the government in taxation has increased significantly in the last 35 years. In some countries the rise has been shockingly fast in recent years. For instance, the Red Book forecasts a tax rate of 46% for the UK in 2011 against a rate of 36% in 2006. Old hat it may sound but, taxation stifles innovation because (a) companies have less money to reinvest in R&D (or what you call ‘planning’) and (b) because profits are taxed so heavily there is less incentive to take risks in innovating. The latter point is nicely shown by looking at oil exploration. When tax rates on oil extraction are high, companies are put off oil exploration with the riskiest ventures going first. While Greenpeace thinks this is a good thing even this organisation recognises the close relationship between taxation and risk taking: http://www.greenpeace.org.uk/blog/climate/tax-breaks-riskiest-oil-drilling-20110527
You worry that the free market does not offer an impetus for innovations of a large magnitude. This is incorrect. On average, small innovations will yield smallish gains e.g. some extra feature on a new phone, while big innovations will yield big gains e.g. a drug that cures a cancer. The big innovations are far riskier because of the investment needed and chance of failure but, in a free market there will be an enormous financial incentive. It’s true that at different times in history and in different cultures these incentives might be viewed differently. At present people do seem to be risk averse and quite conservative. I do hope we can investigate the reasons for this in coming discussions.
ReplyDeleteYou are right to point out that the market does not tell us what to innovate since it only tells us about past events. But past information from the market is also useful in signalling the direction of future innovations. The IPad probably came about because Jobs cleverly decided to fuse the popular IPhone with the increasingly popular laptop. The market provided him with the signals that something like the IPad might work, he took the risk and he won. Others see this and they too are encouraged to innovate in seeking out the rewards. Many will fail but some will succeed. Perhaps you are right that the impetus to innovate has diminished in recent years but I think you need to focus on factors beyond the market mechanism to understand why.
In your second point you elide central planning with the need for R&D and internal company coordination. The spontaneous order is the sum of the actions of individuals and companies in the market. There is no need for a central plan in order for it to emerge. No one needs to create a national plan for innovation because it will occur through competition and the drive for profit. For Adam Smith, it comes about through the invisible hand. For Hayek it creates the spontaneous order. What both mean is that conscious, planned, coercive intervention is not required to achieve this order.
ReplyDeleteYou seem to think this order results in chaos but what you are really witnessing is competition. Different technologies compete, one begins to win out over the other and eventually one comes to dominate. This can take years or there may never be a resolution before a new technology makes the old competition redundant. It seems that you would prefer central regulation in order to save us from this ‘chaos’, suggesting that you have some unique insight into the best technology. More importantly, by imposing your order you stifle competition and, with it, innovation. This is a key reason why British companies are so vocal in their opposition to EU regulation.
You cite the management of domain names and the infrastructure of the internet as an example of why the conscious coordination of capitalism is required. I fail to see why this it is required. We don’t need to coordinate street addresses or a coordinating body for the names we give our children or even to coordinate brand names (Trade Marks are a slight different thing). You also fail to recognise that the body that does the domain coordination job – the Internet Corporation for Assigned Names and Numbers - is answerable to the US Federal government and is often seen as a mouthpiece for US interests. This is a good indicator of why it exists. It is frequently seen as a body that stifles competition, internet freedom and some want to see it abolished.
At the level of the company, of course conscious planning happens. GM, Ford and Nissan spend billions a year on R&D and in developing strategies (planning, if you like) in order to sell products to consumers. This is where innovation can happen but might not if the rewards are limited.
I do not think that open and free markets will automatically banish the problems we both agree exist. I’m not a crude materialist and accept that something within our culture that is not directly linked with the mode of production may explain the malaise. But what I do want us to agree is that a capitalist society is a necessary (if not sufficient) condition for innovation, risk taking and rapid progress.
Plenty to go at here. Let’s begin with the issue of whether capitalism is a necessary condition for innovation. At the level of abstraction we would agree that there is a mode of production that is recognisably capitalist and that its emergence in northern Europe in the late 18th century contributed significantly to the rapid increase in production and many of the other social changes that we have seen since then. Marx incidentally would have agreed with this. I also agree that capitalism is vastly superior to any actually existing or previously existing mode of production including the various attempts at socialism and communism.
ReplyDeleteThe problem I have with your analysis is the implication that capitalism is a fixed category, or at least one which has achieved its optimum level of development. As soon as one moves from the domain of theoretical abstraction towards that of empirical observation, the absurdity of this position becomes immediately apparent. Today’s capitalism would appear very different not just to Marx, but also to Hayek. Similarly, contemporary Chinese capitalism is very different to contemporary African capitalism, or US capitalism. These variations have tremendous significance in terms of economic growth, innovation and personal freedom.
I predict that your response to this will be to suggest that there is a core model of capitalism that has been interfered with or diminished by political and cultural factors, (not least the evils of socialism), and that all we need to do to re-capture the old dynamism is strip away those constraints, by cutting public spending and de-regulating the market. There is some truth in this, but there are also problems. Not least of which is the base-superstructure problem. You are suggesting that there is a recognisably capitalist economic base, (presumably private ownership of the forces of production, the production of commodities for exchange in the market, etc.), that is independent of the superstructure, (the institutions of the state and civil society). A moments thought punctures this myth. How are property rights to be recognised without legal institutions? How is the financing of capitalist enterprise going to happen without banks and other financial institutions? As soon as you recognise that these social institutions (the superstructure) are not simply parasites built on the top of capitalism (the economic base), but are actually capitalisms essential conditions of existence then your fundamentalist position collapses like the twin towers.
The question is not how can we free the economy from institutional constraints, but what set of institutional arrangements best serves economic activity at a specific point in human development. It seems to me that many of the global institutions put in place to promote capitalist growth in the post war period are beginning to fail, or at least constrain progress, and that the political elites in charge of them don’t appear to have a coherent or cohesive response that is likely to work. New institutional arrangements will eventually emerge, (they always do), and the market and commodity production will central to this, but whether you call this ‘capitalist’ or not is neither here nor there. As you noted, no one is putting forward an alternative mode of production.