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THE LIBERTY OF PROGRESS: INCREASING RETURNS, INSTITUTIONS, AND ENTREPRENEURSHIP*

  • Peter J. Boettke (a1) and Rosolino A. Candela (a2)

Abstract:

This essay argues that liberty generates progress via the generalized increasing returns to commercial activity. These increasing returns to expanding commercial activity follow from the gradual, cumulative process of institutionalizing particular liberties. As a society adopts an institutional framework from accumulated liberties, there is greater scope for productive specialization and social cooperation under the division of labor. Greater scope for market exchange also delivers social norms and commercial values that tolerate experimentation and innovation. Taken together, the accumulation and institutionalization of liberties gives rise to generalized increasing returns to commercial activity. It is through this cumulative process that the creative powers of a free civilization are unleashed, delivering societies from poverty and subjugation.

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1 Hayek, F. A., The Constitution of Liberty (Chicago: University of Chicago Press, 1960), 19.

2 Buchanan, James M., The Collected Works of James M. Buchanan Volume 19: Ideas, Persons, and Events (Indianapolis, IN: Liberty Fund, 2001), 290.

3 Our definition of an institution follows that of economist Douglass C. North. According to North, “[i]nstitutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).” See Douglas C. North, “Institutions,” Journal of Economic Perspectives 5, no. 1 (1991): 97.

4 F. A. Hayek, The Road to Serfdom, Fiftieth Anniversary Edition (Chicago: University of Chicago Press, 1994), 101.

5 Ibid., 101.

6 Adam Smith, An Inquiry Into The Nature and Causes Of The Wealth Of Nations (Indianapolis, IN: Liberty Fund, 1981), 31.

7 Stigler, George J., “The Division of Labor is Limited by the Extent of the Market,” Journal of Political Economy 59, no. 3 (1951): 187.

8 In his seminal paper, which attempted to restore the fundamental importance of Smith’s theorem, economist Allyn Young writes: “[t]hat theorem, I have always thought, is one of the most illuminating and fruitful generalizations which can be found anywhere in the whole literature of economics.” See Allyn Young, “Increasing Returns and Economic Progress,” Economic Journal 38, no. 152 (1928): 529.

9 Buchanan in making this argument believed he was simply carrying on the tradition of classical political economy. Reading Lionel Robbins’s The Theory of Economic Policy in English Classical Political Economy, one would be hard-pressed to deny Buchanan’s claim. Robbins argued on page 4 that it “is no exaggeration to say that it is impossible to understand the evolution and the meaning of Western liberal civilization without some understanding of Classical Political Economy.” And, he added later on page 12 that you cannot understand the “invisible hand” doctrine of the classical political economists “unless you see it in combination with the theory of law and the functions of government which its authors also propounded.” It was central to the intellectual system of Hume, Smith, and Bentham, according to Robbins, that “the idea of freedom in vacuo was entirely alien to their conceptions.” (ibid.) In short, neither self-interest nor harmony of interests provide the explanatory “oomph” in the classics. Institutions channel self-interest and either produce a harmony of interests, or exacerbate conflicts of interest. The location of intellectual attention was found in comparative analysis. See Lionel Robbins, The Theory of Economic Policy in English Classical Political Economy (London: Macmillan, 1965).

10 Alchian, “Summary Notes on Misleading Jargon,” The Collected Works of Armen A. Alchian Vol. 1: Choice and Cost Under Uncertainty (Indianapolis, IN: Liberty Fund, 2006), 546.

11 F. A. Hayek, The Road to Serfdom, 81.

12 Quoted in F. A. Hayek, The Constitution of Liberty, 154.

13 McCloskey, Deirdre N., The Bourgeois Values: Ethics for an Age of Commerce (Chicago: University of Chicago Press, 2006).

14 See Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (Chicago: University of Chicago Press, 2010). Also see Peter Boettke and Rosolino Candela, “Comparative Historical Political Economy and the Bourgeois Era,” The Journal of Private Enterprise, forthcoming.

15 Deidre N. McCloskey, Bourgeois Dignity, 48.

16 Angus Deaton, The Great Escape: Health, Wealth, and the Origins of Inequality (Princeton, NJ: Princeton University Press), 44.

17 Robert E. Lucas, Jr., “On the Mechanics of Economic Development,” Journal of Monetary Economics 22, no. 1 (1988): 5.

18 Christopher J. Coyne, “Economics as the study of coordination and exchange,” in Peter J. Boettke, ed., Handbook on Contemporary Austrian Economics (Northampton, MA: Edward Elgar, 2010), 15–17.

19 Adam Smith, Essays on Philosophical Subjects (Indianapolis, IN: Liberty Fund, 1982), 322.

20 Peter Bauer, From Subsistence to Exchange (Princeton, NJ: Princeton University Press, 2000).

21 Douglass North writes in his Nobel Prize address: “The very methods employed by neoclassical economists have dictated the subject matter and militated against such a development. That theory in the pristine form that gave it mathematical precision and elegance modeled a frictionless and static world. When applied to economic history and development it focused on technological development and more recently human-capital investment but ignored the incentive structure embodied in institutions that determined the extent of societal investment in those factors. In the analysis of economic performance through time it contained two erroneous assumptions: (i) that institutions do not matter and (ii) that time does not matter.” See Douglass C. North, “Economic Performance Through Time,” The American Economic Review 84, no. 3 (1994): 359.

22 Buchanan, James M., “What Should Economists Do?” Southern Economic Journal 30, no. 3 (1964): 214.

23 David Schmidtz, “Adam Smith on Freedom,” in Richard Patrick Hanley, ed., Adam Smith: His Life, Thought, and Legacy (Princeton, NJ: Princeton University Press, 2016), 209.

24 James M. Buchanan, “What Should Economists Do?” Southern Economic Journal 30, no. 3 (1964): 218.

25 Smith, Wealth Of Nations, 13.

26 Deirdre N. McCloskey, Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the Modern World (Chicago: University of Chicago Press, 2016), XIII.

27 David Schmidtz and Jason Brennan, A Brief History of Liberty (Malden, MA: Wiley-Blackwell, 2009), 150.

28 Schmidtz, “Adam Smith on Freedom,” 211.

29 James M. Buchanan, Ethics and Economic Progress (Norman, OK: University of Oklahoma Press, 1994), 14

30 Schmidtz, “Adam Smith on Freedom,” 209.

31 James M. Buchanan, Ethics and Economic Progress, 25.

32 James M. Buchanan and Yong J. Yoon, “Constitutional Implications of Alternative Models of Increasing Returns,” Constitutional Political Economy 6 (1995): 193.

33 Holcombe, Randall G., “Entrepreneurship and Economic Growth,” The Quarterly Journal of Austrian Economics 1, no. 2 (1998): 5051.

34 McCloskey, Bourgeois Dignity, 65.

35 Quoted in Schmidtz, “Adam Smith on Freedom,” 211.

36 Schmidtz, “Adam Smith on Freedom,” 211.

37 Smith, The Wealth of Nations, 710.

38 Schmidtz and Brennan, A Brief History of Liberty, 150.

39 Hayek, The Road to Serfdom, 81.

40 Hayek, The Constitution of Liberty, 151.

41 Israel M. Kirzner, Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985), 29.

42 Schmidtz, “Adam Smith on Freedom,” 211.

43 Phelps, Edmund, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change (Princeton, NJ: Princeton University Press, 2013), 47.

44 Schmidtz, “Adam Smith on Freedom,” 209.

45 Israel M. Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973), 16–17.

46 F. A. Hayek, “Competition as a Discovery Procedure,” Quarterly Journal of Austrian Economics 5, no. 3 (2002): 9–23.

47 Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” in F. A. Hayek, ed., Collectivist Economic Planning, reprint (Clifton, NJ: August M. Kelley, 1975 [1935]), 111; Ludwig von Mises, Socialism: An Economic and Sociological Analysis (New Haven: Yale University Press, 1951), 119; Don Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (New York: Cambridge University Press, 1985), 48–77; Peter J. Boettke, “Economic Calculation: The Austrian Contribution to Political Economy,” Advances in Austrian Economics 5 (1998), 134.

48 Schmidtz and Brennan, A Brief History of Liberty, 84.

49 Peter J. Boettke and Ennio Piano, “Baumol’s Productive and Unproductive Entrepreneurship after 25 Years,” Journal of Entrepreneurship and Public Policy 5, no. 2 (2016): 130–144.

50 Adam Smith, Essays on Philosophical Subjects (Indianapolis, IN: Liberty Fund, 1982), 322.

51 See F. A. Hayek, The Road to Serfdom, 148–67, and Peter J. Boettke, Calculation and Coordination: Essays in Transitional Political Economy (New York: Routledge, 2001), 52.

52 Smith, The Wealth of Nations, 343.

53 Ibid., 540. We can perhaps see this as a race between Smithian gains from trade, Schumpeterian gains from innovation, and the stupidity of government policies that thwart trade and innovation. As long as Smithian and Schumpeterian forces outpace stupidity, economic progress will continue to improve the lives of individuals. But if the forces of governmental policy outpace the forces of progress, we can see economic retrogression. See Peter J. Boettke, “Pessimistically Optimistic about the Future,” The Independent Review 20, no. 3 (2016): 345.

54 Ludwig von Mises, Liberalism: The Classical Tradition (Indianapolis, IN: Liberty Fund, 2005), 34.

55 Our earlier discussion of the exchange paradigm emphasized the dynamic adjustments that economic progress entails, rather than the static and technical efficiency that the allocation paradigm emphasizes. We are now emphasizing not just the growth aspects of economic progress, but the doux-commerce thesis that was also crucial to the classical political economists’ theory of human betterment. See Peter J. Boettke and Daniel J. Smith, “The Theory of Social Cooperation Historically Contemplated,” in Robert F. Garnett Jr., Paul Lewis, and Lenore T. Ealy, eds., Commerce and Community: Ecologies of Social Cooperation (New York: Routledge, 2015).

56 Rothbard, Murray, Man, Economy, and State: A Treatise on Economic Principles (Princeton, NJ: Van Nostrand, 1962), 85.

57 See Peter Boettke and Rosolino Candela, “Development and Property Rights,” in Alain Marciano and Giovanni Battista Ramello, eds., Encyclopedia on Law and Economics (New York: Springer, forthcoming), and Peter Boettke and Rosolino Candela, “Comparative Historical Political Economy and the Bourgeois Era,” The Journal of Private Enterprise, forthcoming.

58 Adam Smith, The Theory of Moral Sentiments (Indianapolis, IN: Liberty Fund, 1982), 86.

59 Schmidtz, “Adam Smith on Freedom,” 216.

60 Hayek, The Constitution of Liberty, 29.

61 Ibid., 19.

62 Mokyr, Joel, The Lever of Riches: Technological Creativity and Economic Progress (New York: Oxford University Press, 1990), 266.

63 Niclas Berggren and Therese Nilsson, “Does Economic Freedom Foster Tolerance?” Kyklos 2 (2013): 183.

64 Charles de Montesquieu, The Spirit of the Laws [1748], ed. Anne M. Cohler, Basia C. Miller, and Harold S. Stone (New York: Cambridge University Press, 1989), 338.

65 Niclas Berggren and and Mikael Elinder, “Is Tolerance Good or Bad for Growth?” Public Choice 150, nos. 1/2 (2012): 290.

66 Bauer, From Subsistence to Exchange, 8.

67 See Douglas B. Rasmussen and Douglas B. Den Uyl, Norms of Liberty: A Perfectionist Basis for Non-Perfectionist Politics (University Park, PA: The Pennsylvania State University Press, 2005).

68 Douglass C. North, Structure and Change in Economic History (New York: W. W. Norton & Company, 1981), 20.

69 Ibid., 22.

70 Ibid., 20.

71 Ludwig von Mises, The Anti-Capitalist Mentality (Indianapolis, IN: Liberty Fund, 2006), 24.

72 Nathan Rosenberg and L. E. Birdzell, Jr., How the West Grew Rich (New York: Basic Books, 1986), 113.

73 Rosenberg and Birdzell, How the West Grew Rich, 138.

74 Tyler Cowen, “Economic Effects of a Conflict-Prone World Order,” Public Choice 64, no. 2 (1990): 123.

75 Nozick, Robert, Anarchy, State, and Utopia (New York: Basic Books, 1974), 18.

76 Mokyr, The Lever of Riches, 266.

77 Tyler Cowen, “Economic Effects of a Conflict-Prone World Order,” Public Choice 64, no. 2 (1990): 123.

78 Armen A. Alchian, “Uncertainty, Evolution, and Economic Theory,” Journal of Political Economy 58, no. 3 (1950): 216.

79 Schmidtz and Brennan, A Brief History of Liberty, 34.

80 North, Structure and Change in Economic History, 27.

81 Baumol, William J., “Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Political Economy 98, no. 5 (1990): 901.

82 Hayek, The Constitution of Liberty, 29.

83 Ibid., 29.

* We wish to thank David Schmidtz, Bas van der Vossen, and an anonymous referee for their very helpful comments in drafting this essay. We also gratefully acknowledge Christopher Coyne, Douglas Rasmussen, and Virgil Storr for reading this essay and for providing helpful feedback.

Keywords

THE LIBERTY OF PROGRESS: INCREASING RETURNS, INSTITUTIONS, AND ENTREPRENEURSHIP*

  • Peter J. Boettke (a1) and Rosolino A. Candela (a2)

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