Let’s say there’s an apple. I want to eat the apple and you want to eat the apple. Both of us can’t eat the same apple. We can divide it. We can determine who is more hungry. We can figure out who is willing to pay a greater price for it. We can find out who wants the core and who wants the seeds. But no matter how much we deliberate, we cannot share the apple in its entirety.
Economics used to be about how to distribute the apple most efficiently, but the world is changing. Although physical resources remain scarce, human innovation has flourished to the point where we can do much more with much less, and few have bothered to explain how or why.
Arnold Kling and Nick Schulz try to tackle this phenomenon in their new book, From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph over Scarcity. In the book, the authors try to grasp this new way of thinking by terming it Economics 2.0. Where Economics 1.0 saw the market as a means for allocating scarce resources (e.g. apples), Economics 2.0 sees the market as a mechanism for channeling innovation and triumphing over scarcity.
In the beginning of the book, the authors use laundry (of all things) to illustrate the difference. Economics 1.0 would try to explain how it might be more efficient for you to outsource your ironing to someone else. Economics 2.0, on the other hand, doesn’t look at the tangible items in the equation (the number of shirts, the cost of an iron, the cost of dry cleaning, etc.). Instead, Economics 2.0 is primarily concerned with the potential for innovation. For example, what about permanent press? What about wrinkle-free shirts?
As the authors explain:
Thanks to technical progress, many shirts today do not need to be ironed at all. Perhaps in another decade or two they will not need to be washed. Given the likely progress of nanotechnology, there is a good chance that shirts manufactured in 2020 will be ‘permanent clean.’ That’s Economics 2.0.
Another way to look at this is through what Kling and Schulz call the “software layer” of an economy. While Economics 1.0 is concerned with tangible inputs like labor and capital, Economics 2.0 is concerned with the intangible factors, such as collective intelligence, the existence of property rights, and levels of corruption. You can have all of the right hardware for a productive economy, but as the authors note, “a clumsy or buggy institutional framework will hinder economic performance.”
Of course, none of this is entirely new. Several economists have been studying these areas for some time (e.g. Douglass North, Robert Fogel, Edmund Phelps), and indeed, such research makes up the backbone of this book. But Kling and Schulz aren’t trying to offer an end-all solution to how we should maximize human ingenuity. They are simply trying to promote and elevate Economics 2.0 to the forefront of our thinking.
The book also doesn’t follow a very conventional format. From beginning to end it goes back and forth between broad economic concepts and various Q&A interviews with leading economists. It flows well, and although Kling and Schulz ask many of the same questions, each economist provides such unique answers that the book easily retains its momentum. It is also clear that Kling and Schulz did not pick economists based on some sort of ideological litmus test. In fact, this lack of dogmatism is one of the most refreshing elements of the book.
In addition to their overarching attempt to define and apply Economics 2.0, the authors delve into a wide variety discussions, jumping from property rights to patent laws to foreign aid to human capital to job satisfaction, all the while maintaining a focus on how we can maximize creativity, ingenuity, and technological innovation. There is also a chapter on financial intermediation that contains some of the best insight I’ve read on the recent financial crisis.
Kling and Schulz end the book by pondering challenges for the future. If we are really serious about maximizing our intangible assets and minimizing our hidden liabilities, what stands in our way?
This question is approached on practical terms, and the authors try to narrow their response down to a few key areas. Their proposed measures include redefining the way we approach intellectual property, reforming and liberalizing our patent laws, and drawing appropriate ethical lines in the realm of technological progress (e.g. with things like bio-engineering).
But what does this mean for the Remnant Culture?
Although Kling and Schulz don’t speak of intangible assets and hidden liabilities in spiritual terms, it’s extremely difficult to ignore the spiritual implications of their argument.
As I’ve mentioned elsewhere, God seems highly concerned with what economists would call human capital, creativity, and life satisfaction. While Kling and Schulz are trying to improve such areas from a secular, policy-oriented viewpoint, what this book is really about is properly leveraging the potential of the human spirit.
Perhaps we can think of it through this dichotomy:
- Communism tried to control the physical elements (land, labor and capital) in the name of equality and the unintended consequence was poverty.
- Capitalism tried to free the physical elements in the name of individual rights and the unintended consequence was not only prosperity, but also an astounding (and continuous) triumph over scarcity.
As I’ve asked time and time again, if we are to believe that freedom leads to an efficient maximization of earthly potential, and that earthly empowerment is crucial for spreading the Gospel, what is stopping us from connecting the dots?
Click here to subscribe to Remnant Culture on Facebook.
Click here to subscribe via RSS feed.