Chapter 5: Ethics and Economic Progress Chapter 5: Ethics

Chapter 5: Ethics and Economic Progress

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Chapter 5: Ethics and Economic Progress: Innovation and a Better Life

These revolutions periodically reshape the existing structure of industry by intro-ducing new methods of production—the mechanized factory, the electrified factory, chemical synthesis and the like; new commodities, such as railroad service, motorcars, electrical appliances; new forms of organization—the merger movement... Every piece of business strategy acquires its true significance only against the back-ground of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull (Schumpeter, J. [1942/2012], Capitalism, Socialism, and Democracy [KL 1519–1521, KL 1844–1847]).

I. Introduction: On the Possibility of Progress

The previous three chapters provide a possible explanation for how communities with mar-

kets emerged in ancient times. Stable patterns of life tend to emerge as rules of conduct are worked

out, internalized, and serviceable ones are passed on from one generation to the next. The rules that

produce attractive communities tend to survive and those that do not tend to be weeded out. Suc-

cessful patterns include more or less peaceful relationships among community residents, more or

less self-sustaining use of local resources, and at least a subset of “things” over which persons exer-

cise control and are able to transfer that control from one person to another. The latter allows trade

to emerge within and among communities. After the problems of fraud and shirking have been ame-

liorated, the extent of trade expands, and with it, greater specialization and team production are sus-

tainable, which further expands trade and production within and among communities.

At this point, some village and urban specialists may be said to reside in commercial societies

because they rely upon markets for most of their necessities. A blacksmith might buy his food from

local farmers and his cloth from local millers, and his raw materials from local miners, and pay for

them with money earned by sales of metal goods or by trading such goods for things desired. Or-

ganizations—mostly family based—may be created to undertake specific market activities such as

transport of goods among communities, mining, construction, textiles, and large-scale farming. As

specialization increases, connected networks of communities (societies) emerged. In many cases, the

combination of internalized norms and customs established produce stable pattern of life that largely

repeated for dozens of generations or more.

Such societies are in “equilibrium” in the sense of the models developed toward the ends of

Chapters 3 and 4. Their general patterns of life and networks among communities change little over

time. Such stable patterns of community life are and have been commonplace in world history. For


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example, patterns of life were evidently stable for several thousand years in the period before settled

communities based on farming emerged. After that revolution, life in the countryside was remarka-

bly stable in the period that followed until around 1500 AD. More or less the same crops were

grown in more or less similar manners. And, much of the agriculture undertaken was for subsist-

ence rather commerce.1 This is not to say that life was entirely static, nor that rural life is all that mat-

ters. Life in large towns and cities experienced greater changes, but in most places and times, a city

dweller would not find life radically different in the same place a hundred years later.

During the 16th century, things began to change in Europe. Systems of rules that had de-

scribed the nature of the universe, what could be altered by human action, and how to rank it had

been relatively stable for centuries. These were disrupted by new facts, new theories, and new prac-

tices. New lands were discovered by Columbus. A heliocentric view of the solar system began to

replace the geocentric one. Religious dogma throughout Europe was being “protested” by groups of

influential theologians, who came to be called Protestants. A new government was founded in the

Netherlands that departed from the medieval norms for Europe in that it lacked a proper king and

official church but nonetheless prospered.

These and other changes helped induce the so-called Western Enlightenment, sometimes

called the Age of Reason. Rates of innovation and discoveries in fields as diverse as geography, the-

ology, politics, ethics, and metallurgy all increased. As a consequence, the extent of commerce

throughout the West began to expand. As this took place, the centrality of farming in most people’s

lives gradually diminished and largely disappeared in the course of a few centuries. The date at which

this great acceleration of economic development in what came to be known as “the West” began

1 Subsistence farming remained the norm for independent farms, as opposed to noble land grants, until well into the 17th century by many accounts. See, for example, Fagan (2017, Ch. 6) for an ac-count that links farming and farm output to climatic changes in Northern Europe. He notes, for ex-ample, “Surprisingly few archaeologists and historians have had a chance to observe serve subsist-ence farming at firsthand, which is a pity, for they sometimes fail to appreciate just how devastating a cycle of drought or heavy rainfall, or unusual cold or warmth, can be. Like medieval farmers, many of today’s day’s subsistence agriculturalists in Africa and elsewhere have virtually no cushion against hunger. They live with constant, often unspoken environmental stress. The same was true in Europe at the end of the 16th century, where well over 80 percent of the population was engaged in subsist-ence agriculture, by definition living barely above subsistence level and at the complete mercy of short-term climatic shifts.” Such lives at the edge of survival were partly generated by Malthusian population pressures. Families would tend to expand during decades of plentiful harvests and con-tract (via starvation) during lean ones.


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can be debated, but not that rates of innovation were far faster in nineteenth century than they had

ever been.

With the great expansion of commerce from the nineteenth century onward, ordinary life

began to depart from its perennial agricultural cycle linked closely with the seasons. Both individual

lives and patterns in communities began to resemble a spiral more than a circle, as new products and

new modes of production were continually introduced, and patterns of life constantly adjusted to

take advantage of new possibilities. Urbanization increased, subsistence farming largely disappeared,

and fewer and fewer people worked on the commercial farms that remained. Agriculture and many

patterns of life still remained linked to the seasons, but less so because of agricultural necessities.

In previous centuries, many had believed that social evolution or divine providence had al-

ready caused their communities to be as good as possible, and that any deviation from their long-

standing patterns of life would lead to disaster. This was, in fact, true for many earlier deviations

from the productive rules upon which their communities rested, given that so many communities

lived at or near the edge of subsistence. Fortunately, it was not true of all changes. The changes in-

duced by the enlightenment cause progress rather than disaster to take place. The “new ways” that

emerged were widely acknowledged to be better than the old, which would have surprised thought-

ful traditionalists and cultural conservatives of previous centuries in essentially every town and vil-

lage around the world.

Both material comforts and reserves increased as commerce expanded. New products and

mechanical marvels were invented and refined: the steam engine, railroads, telegraph, telephone,

phonograph, central heating, toilets, electric lights, automobiles, airplanes, and so on. By 1900 farm-

ers and their employees had become a minority of the producers in Western societies, rather than

the most commonplace. Populations expanded but less rapidly than the availability of food and ma-

terial comforts for the first time since the agricultural revolution ten thousand years before. As a

consequence, the average length and quality of life increased and improved.

That the “new” could be in some sense be “better” was a radical idea and would not have

been obvious or much tolerated in earlier times. The old ways, after all, had stood the tests of time

and had been in place for ages, albeit with many small adjustments across the centuries. They were

products of hundreds or thousands of years of puzzles solved and lessons learned. Chapters 2 and 3

demonstrate that such beliefs can be defended and were substantially true. Stable, reasonably com-

fortable societies emerged because of systems of subtle internalized rules of conduct that solved a

wide variety of social dilemmas.


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Thus, most thoughtful members of attractive communities would naturally regard most in-

novations as frivolous uses of resources or as risky enterprises that might undermine their communi-

ties. Most communities, for example, would have “do-no-harm” norms and maxims. Such norms

when rigorously internalized tend to impede rather than support innovation, because most economic

innovations harm others. Innovations that significantly reduce the cost of producing a good or ser-

vice tend to drive rival firms out of business. Those working at the firms driven out of business

must search for new jobs, their families suffer, and comfortable relationships between those firms

and their customers disappear. Many of these effects are similar to those of arson, and those harmed

would naturally oppose such innovations and attempt to block them.

Cultural conservatives would also tend to oppose innovations because they might undermine

their community’s longstanding norms and patterns of life. The intense rivalry of innovators and

those opposed to innovation might return their communities to the Hobbesian jungle or undermine

their sustainable methods of providing food and other necessities. For all these reasons and others,

disruptive forms of economic development of the variety that Schumpeter regarded to be a defining

characteristic of thriving commercial systems were resisted and often deemed immoral in earlier

times.

Characterizing “progress” is an ethical rather than a technological undertaking. Whether a

particular innovation is good or better than what preceded it requires judging whether one’s life and

society have been improved by a change or not. To argue that some changes constitute progress is

to argue that some changes improve our character, our lives, our communities, or our society. The

metrics by which “improvements” are assessed are thus largely ethical in nature. Is deprivation good

for the soul or should it be avoided? Are material comfort and longevity proper aims of a good life

or evidence of decadence and a lack of character? Beliefs about the nature of good character, a good

life, a good community, and a good society largely determine our conclusions about whether a par-

ticular innovation or series of innovations are improvements or not—instances of progress, rather

than retrogression. The Amish, for example, do not regard the past century or two of innovations to

be improvements.2

2 J. B. Bury (1921) provides an intellectual history of the idea of general progress written at about the same time that Weber, Schumpeter, and Knight were analyzing economic development. Bury notes that two broad conceptions of progress were present in the West during the 19th century (Ch. 12). “Theories of progress are thus differentiating into two distinct types, corresponding to two radically opposed political theories and appealing to two antagonistic temperaments. The one type is that of


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Conclusions about such questions also determine the moral merits of the four main drivers

of economic development: two of which have already been examined--solutions to social dilemmas

and specialization—and two others are examined in this chapter: capital accumulation, and innova-

tions. Their moral merits will, of course, influence the decisions of the ordinary idealists who might

undertake them.3

II. A Digression on Equilibrium as Stability

The term equilibrium is sometimes used as an ideal and sometimes as a descriptor. It can be

regarded as a reasonable description of life of contentment and also a variety of systems that are sta-

ble in the sense that repetitive patterns are evident as in the orbits of the planets, the pattern of life

in a stable ecosystem, the process of lawmaking in a stable system of government, the pattern of

production and exchange in a market with little innovation, and so forth. Change takes place within

such stable systems, but the main properties of such systems are stable in that they are repetitive or

cyclic—as when one generation of residents replaces the previous one and engages in similar behav-

constructive idealists and socialists, who can name all the streets and towers of ‘the city of gold,’ which they imagine as situated just round a promontory. The development of man is a closed sys-tem; its term is known and is within reach. The other type is that of those who, surveying the gradu-al ascent of man, believe that by the same interplay of forces which have conducted him so far and by a further development of the liberty which he has fought to win, he will move slowly towards conditions of increasing harmony and happiness. Here the development is indefinite; its term is un-known, and lies in the remote future. Individual liberty is the motive force, and the corresponding political theory is liberalism” (p. 236). Bury’s book is available online from the Gutenberg project: www.gutenberg.org/files/4557/4557-h/4557-h.htm#link2HCH0011. 3 For example, one might be tempted to argue on technological grounds that a new machine is better than an older machine if it can do everything that its predecessors could and “more.” However, “more” must be desirable or morally acceptable. A new production method that produced as much or more than earlier machines but harmed many more operators than previous machines would not be regarded as progress unless other benefits more than compensated for this new feature. Similarly, self-driving cars may be considered an instance of progress or not. They make transporta-tion easier and safer; however, critics argue that such vehicles are instances of retrogression, because they undermine the character of drivers by simultaneously removing their responsibility for actions on the road and reducing their competence at the various skills required to drive their vehicles. If in the end, self-driving cars dominate the highways, those that have internalized the first conception of the good life would conclude that progress has occurred. Those that have internalized the second would disagree, even if they themselves use self-driving cars. The normative theories used to evalu-ate the merits of a given innovation affect the conclusions reached.


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ior throughout their lives. The terms contentment and stability are sufficiently elastic that they in-

cludes cases in which “unimportant” shocks temporarily disrupt or slightly change the patterns of

interest, but which can be ignored without loss for most purposes of discussion, analysis, and plan-

ning during the period of interest. The orbits of the planets change a bit every year but can be ig-

nored for many pedagogical and astronomical purposes without loss.

Within human social systems, equilibrium is an apt description of patterns of life that largely

repeat themselves. Such repetition has long been evident for the seasonal patterns of life of subsist-

ence farmers; the biological cycle of a human life, and more recently, the seasonal inventory cycles

of contemporary grocery stores and other businesses. This is not to say that there are no changes in

those stable cycles of life. Gradual improvements in crops and plows did occur in the period after

settled agricultural communities emerged. With respect to urban life, “fashionable” and “practical”

food, spices, and clothing varied somewhat as innovations in clothing and cooking took place and

also as trading networks expanded and contracted. The manner in which seasonal demands are ad-

dressed have changed a bit as the frost resistance of crops increase and as “just in time” production

reduced inventories held to deal with such seasonality. Yet in all these cases the basic patterns of life

did not change all that much. There were seasons for planting, growing, and harvesting. There were

shops and shopping streets. There were warehouses and seasonal variations in production and asso-

ciated work hours.

The models of the last two chapters demonstrated conditions under which stable patterns of

life can emerge. Stable patterns of life are supported by a stable knowledge base concerning the uni-

verse, human possibilities, and routines and norms for decisionmaking. They can be disrupted by

changes in any of those three collections of rules, although not every change does so.

Historians and anthropologists refer to stable periods with terms such as “age,” “era,” and

“epoch.” Stable patterns of life allow historians and anthropologists to describe various periods and

states of development with short useful phrases such as the Stone Age, the Bronze Age, the Iron

Age, the medieval period, classical Greece, the Modern Period, and so forth. Shifts from one “age”

to another are often referred to as “revolutions”—as with the shift from the Paleolithic to the Neo-

lithic period, from the Stone Age to the Bronze Age, and from the Bronze to the Iron Age. Particu-

lar shifts in technology are often used to characterize when they begin and end, but other markers

could also be used.

Equilibrium and stability concepts are also commonplace in ethics, theology, political science

and economics. A philosopher reaches a “reflective equilibrium” when his or her conclusions about


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a phenomena or philosophical issue does not change in the period of interest. Such conclusion are

often regarded to be Platonic ideal types or fixed features of the universe. The possibility of equilib-

rium is itself one such notion. The meaning and likelihood of progress are others. Ethical principles

are often regarded to be timeless, because they are regarded to true and thus unalterable. For exam-

ple, the word progress does not appear in Rawl’s (1971) highly regarded Theory of Justice. The word

innovation appears just a single time. However, this book suggests that such reflective equilibria may

be disrupted and the ethical progress is possible.

It was equilibrium-based economic theories that induced Schumpeter (1912, 1947) to suggest

a new model of economic progress. And, it was the finality of the claims made by many philoso-

phers of the 19th century that induced Spencer to develop his evolutionary theory of ethics. Howev-

er, it is clear that neither was able to disrupt their fields’ respective reflective equilibria significantly at

the time they first expressed them. The reflective equilibria of economists and philosophers were

locally stable.4

Replacing the Ideal of Stability with the Ideal of Progress

Part of the appeal of the concept of “equilibrium” as it is applied to societies is that after

critical social dilemmas are ameliorated, the new equilibria generate communities that are relatively

safe and comfortable. Both of these properties are widely regarded to be features of attractive lives

and societies. In contrast, the concepts of perturbation, deviation, disequilibrium, and crisis sound

unsettling and threatening—events to be avoided rather than embraced. A crisis might cause a social

collapse for reasons noted by Hobbes and Hardin. Thus, after a crisis, a return to attractive equilib-

rium patterns—a return to normalcy—tends to be regarded as “good” or desirable. Why change or

give up on what works well or at least well enough?

As a consequence, innovations are naturally discouraged because stability and equilibrium to

be features of good lives and attractive communities. Innovations are mistakes to be avoided, rather

than acts that create new desirable possibilities or results. For example, several Chinese innovations

4 More recent critiques of the equilibrium view of social continued through the 20th century. See Schackle (1961), Kirzner (1973), Cowen and Fink (1985), Grossman and Helpman (1991), and Han-usch and Pyke (2007). It should be acknowledged, however, that these critiques and modeling exten-sions were minority views in economics for most of the 20th century. Growth was acknowledged to be possible and commonplace, but a tendency toward equilibrium growth paths was nearly always assumed.


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were underappreciated because of such conservative dispositions, including at least two innovations

that subsequently changed the world: steam propulsion and gun powder.5 Europe’s medieval period

was also characterized by social conservatism, although by the nineteenth century the idea that pro-

gress was possible began to take hold.

The idea of the universe which prevailed throughout the Middle Ages, and the general orientation of men’s thoughts were incompatible with some of the fundamental assumptions which are required by the idea of Progress…Again, the medieval doc-trine apprehends history not as a natural development but as a series of events ordered by divine intervention and revelations. If humanity had been left to go its own way it would have drifted to a highly undesirable port, and all men would have incurred the fate of everlasting misery (Bury, J. B. [1921/2011], The Idea of Progress: An Inquiry into Its Origin and Growth [KL 321–332]).

That innovation is risky would seem even more “obvious” when social evolution comes to be un-

derstood. Our accumulated of knowledge about the world, understandings of what can be changed,

and rules for evaluating the changes that are possible have all survived numerous tests successfully

for centuries.

This natural conservatism began to change with the experience of eighteenth and nineteenth

centuries. A wide variety of innovations were introduced, and many were found to be improvements

on the old ways. In most cases, the individual innovations induced small changes in the manner in

which people lived, rather than major disruptions, as the Franklin stove resembled a fireplace, but

used less wood to produce more heat or the toilet replaced chamber pots. Other more significant

changes also tended to be either invisible to most persons, as most shifts in the techniques for pro-

duction tend to be, or took place slowly enough that the adjustments made to each innovation were

each relatively small, even if cumulatively they were substantial .For example, the use of early steam

engines to pump water out of mines was invisible to all but miners working at the places where such

machines were used. After the first useful steam engines were developed, it required less insight to

realize that refinements of such engines can also be used to power saw and textile mills or to propel

sledges, ships, and other vehicles. As these are introduced over the course of several decades, they

become increasingly visible, but also increasingly useful. Innovation tends to both encourage and

5 Note that the term “underappreciated” is normative and for most persons in the West an unexcep-tional interpretation of these Chinese “mistakes.” This perspective itself reveals a more appreciative perspective on scientific and economic development, that is to say, it incorporates the idea of pro-gress. A true conservative would regard the Chinese behavior as appropriate and unexceptional.


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support further innovation, but the ones that are most widely adopted tend to be most useful and

least disruptive, because their use is a voluntary choice of the persons or organizations using them.6

By the early 20th century when Schumpeter worked out an economic theory that took ac-

count of innovation, it had become “obvious” that useful innovation was possible and that the new

more extended markets that had emerged in the late 19th and early 20th centuries were at least partly

consequences of those innovations. Rather than sustaining a circular flow or evenly rotating socie-

ties, constant innovation became part of a new normal spiraling pattern of life, commerce, and soci-

ety. Continual progress came to be taken for granted and progress—continual improvement—

became a virtue.

One of the earliest defenses of innovation was penned by Jeromy Bentham, one of the

founders of modern utilitarianism.

So soon as a new die, more brilliant or more economical than the old ones, a new ma-chine, or a new practice in agriculture—has been discovered, a thousand dyers, ten thousand mechanicians, a hundred thousand agriculturists, may reap the benefit: and then—though the original author of the invention have been ruined in the bringing the discovery to perfection—as it respects the national wealth, of what consequence is this, when considered as the price of so much gain? (Bentham, J. (1800/1843) A Manual of Political Economy. Kindle Edition.)

That an innovation often makes many more people better off than worse off implied to Bentham

that innovation was a moral activity, whose analysis provided an early ethical defense of innovation.

Both Smith and Bentham’s analysis suggests that the shift from ethical discouragement of innova-

tion to ethical support for innovation was associated with experience—experiences that induced a

reevaluation of old norms.

Schumpeter termed this process “creative destruction” (Schöpferische Zerstörung) because

major innovations create new patterns of life that are much different than earlier ones, as with in-

door plumbing, steam engines, factories, electric motors, telephones, automobiles, radios, jetliners,

televisions, computers, and the Internet. However, the shift from the ideal of stability to the ideal of

progress most likely took place, not because of creative destruction per se, but because of a long se-

quence of gradual improvements in life that were far less threatening to individuals. One’s conclu-

6 Isaac Newton is known for the expression “If I see further it is only by standing on the shoulders of giants,” written in a letter to Robert Hooke in 1676. The possibility of progress, in effect, requires Newton’s giants to multiply or grow taller through time, and their innovations to provide the basis for seeing new possibilities previously unseen.


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sions about whether continuous innovation generates progress or needlessly disrupts life ultimately

depends on one’s views concerning the nature of a good life and good society, but also one’s experi-

ence with innovations.

III. Economic Growth (1): Capital Accumulation and Community Norms

Given that notions of progress have normative foundations and that some ethical—but not

all—theories imply that a steady increase in material comforts is an instance of progress, we next

focus on two of main drivers of economic development. We have already discussed how solutions

to social dilemmas and specialization can generate progress, and now turn to two other factors: capi-

tal accumulation and innovation. The least disruptive of these—capital accumulation—was the one

first incorporated into mainstream economic models.

Although the importance of capital equipment has long been recognized—a person can

move more dirt with a shovel than his hands, with a wheelbarrow than with a shovel alone, and with

a backhoe than a wheelbarrow, and so on—the first mathematical models of growth based on capi-

tal accumulation were worked out after World War II. The first models assumed that there was just

one homogenous type of capital, which was usually imagined as a general form of physical equip-

ment. This reduced mathematical complications. Human capital (knowledge, training, experience,

and organization) was added to the second generation of neoclassical growth models. As human and

physical capital accumulate, economic output increases, because both forms of capital increase the

productivity of an individual’s time spent producing goods and services. As a consequence of in-

creased productivity, more can be produced with a given amount of labor. This in turn implies that

consumers can obtain more of many of the products they are familiar with at a lower price, in par-

ticular those that can be efficiently produced with capital- or skill-intensive methods. 7

For a given stock of capital, market prices operate in the usual manner and equate demand

with supply in all competitive markets. These prices establish rates of return among firms and mar-

kets. Entrepreneurs that realize higher returns from capital have the ability to purchase more of it,

and so tend to use more of it than those realizing lower returns. The stock of capital increases as

when saving takes place—either from a firm’s own “retained earnings” or borrowing that of others

through sales of bonds or loans from banks and other financial organizations. Thus, as argued by

7 For an overview of early growth theory grounded in capital accumulation, see Solow (1970). For an early model of economic development that includes human capital accumulation, see Romer (1990).


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Adam Smith and Max Weber, an increase in propensities to save tends to increase capital accumula-

tion and thereby economic development. Capital accumulation is not simply about saving or hord-

ing, however, but about using resources to produce equipment and intermediate goods that allow

more efficient production and transport of the final goods and services that consumers want.

Because of complementarities in the equipment used in capital-intensive production, there

are also social dilemmas associated with capital accumulation. When several types of physical and

human capital have complementary effects on productivity, capital may be underinvested in because

those purchasing the relevant equipment fail to take account of the productivity effects of their in-

vestments on other producers. For example, a firm may hire two independent contractors who pro-

vide capital and labor to a production process. Each contractor’s capital, by indirectly increasing the

other contractor’s productivity, generates a positive technological externality. Similar complementari-

ties may take place when, instead of hiring to subcontractors, a firm purchases output of two con-

tractors for use in producing a final good sold to consumers. And there are cases in which two or

more firms produce capital goods that are used in the production processes of all firms, as would be

true of many specialized software products and automated production equipment. One may use

one’s own and another firm’s robots to make additional robots of each type.

Table 5.1 illustrates choices to make capital investments in cases in which technological ex-

ternalities exist, and a community’s norms are neutral with respect to capital accumulation. The

technological externalities imply that each enterprise can in a sense free ride off the other’s capital

accumulation, because the capital accumulation of the other(s) increases its own productivity or re-

duces its production costs. Capital accumulation is assumed to be self-financed, which is to say fi-

nanced out of each firm’s own net revenues. The payoffs of Table 5.1 are indices of each commer-

cial organization’s net revenues. Note that the capital accumulation problem is analogous to the

shirking problem developed in Chapter 3. Underinvestment in capital equipment is in effect a form

of shirking on the joint enterprise (providing inputs for final products sold to consumers). The equi-

librium investments are below those that maximize their joint profits.


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Table 5.1: Technological Externalities and the Accumulation of Capital

Robert (Investments in Capital)

8 unit 6 units 4 units 2 units

Paul 8 units (P, R) 6, 6

(P, R) 4, 7

(P, R) 2, 8

(P,R) 1, 7

Investments in Capital

6 units 7, 4 5, 5 3, 6 2, 5

4 units 8, 2 6, 3 4, 4 3, 3

2 units 7, 1 5, 2 3, 3 2, 2

There are several possible solutions to this dilemma, including mergers and complex con-

tracts among relevant firms. However, when the number of interdependent firms is large or interna-

tional, such solutions are difficult to implement. An alternative solution is generalized cultural sup-

port for capital accumulation.

Cultural support for producing and accumulating capital goods is most likely in societies

whose norms also support long-term material comfort and the accumulation of wealth. Residents of

such communities may regard an entrepreneur’s purchase of new equipment for their labor force to

be associated with praiseworthy traits such as generosity, foresight, prudence, and industriousness.

Those that believe the good life requires immediate gratification or a simple ascetic lifestyle would

tend to be less supportive of capital accumulation and the patience required to make use of rounda-

bout methods of production. Table 5.2 illustrates the effects of community norms that generally

support capital accumulation.

Table 5.2: Technological Externalities, Social Norms, and the Accumulation of Capital

Robert (Investments in Capital)

8 units 6 units 4 units 2 units

Paul (Investments in

Capital)

8 units (P, R)

6+V, 6+V (P, R)

4+V, 7+V (P, R)

2+V, 8+V (P,R)

1+V, 7

6 units 7+V, 4+V 5+V, 5+V 3+V, 6+V 2+V, 5

4 units 8+V, 2+V 6+V, 3+V 4+V, 4+V 3+V, 3

2 units 7, 1+V 5, 2+V 3, 3+V 2, 2


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In such communities, feelings of virtue or pride would be associated with capital accumulation and

more would be accumulated. For example, if V>1, the new equilibrium is the upper right-hand cell

(6+V,6+V). Thus, if praise or virtue is associated with the prudent accumulation of capital—as Max

Weber argues was a consequence of the Protestant Reformation—then capital accumulation would

be larger than in the original case. More technological economies in production would be realized,

more output would be produced, and more material comforts available during nonwork hours.

Change in the degree of support or opposition to capital accumulation causes the virtue pay-

off to change through time as cultural support waxes or wanes for mass production and large capital

projects. As it does so, rates of capital accumulation and economic development would also tend to

wax and wane—other things being equal. Similar fluctuations in support for the accumulation of

human capital are also likely. As support for the accumulation of productivity increasing human cap-

ital increases, so would the extent and growth of economic output. In periods of support, more of

the complementarities among types of human capital types are realized and economic development

increases. In periods of opposition for all or a subset of investments in human capital, fewer com-

plementarities are realized and rates of economic development decrease.

There may be cultural cycles in the level of support. For example, there might be decades in

which “market towns” take pride in the size of their markets, “mill towns” in the number and varie-

ty of their mills, “steel towns” in the size of their steel mills, “rail towns” in the extent of their rail

networks, “electrified towns” in the extent of electrification, and “digital towns” in the extent and

speed of their Internet or cell-network services. Periods of support might be interspersed among

decades of indifference or opposition to capital-intensive methods of production because of ethical

concerns about mass production itself (making work less satisfying or praiseworthy) or major or mi-

nor annoyances associated with industrial production because of their more concentrated waste

products may be perceived to be of greater concern as prosperity increases. Such changes in norms

clearly affect both the extent and rate of a community’s economic development.

Similar normative effects and potential variation in growth rates are, of course, also associat-

ed with cycles in forms of moral education and training that tend to increase team productivity or

indirectly support the accumulation of capital.8

8 Buchanan and Yoon (1994) provide a very nice collection of essays on the possibility of increasing returns that may be generated by technological externalities and increased specialization. Buchanan’s


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IV. Economic Growth (2): Creative Disruption and Community Norms

The Solow family of economic growth models assumes that production becomes more effi-

cient as more capital and more human capital are used in the production of final goods and services

(those desired by consumers). However, increases in the production of familiar products through

increasingly capital-intensive methods are only a subset of the many components of economic de-

velopment. In what might be called the “middle run,” much, perhaps most, of the economic devel-

opment associated with a commercial society occurs through refinements in the nature of both capi-

tal goods and the goods and services previously produced. In the long run, however, economic de-

velopment occurs through the the invention of new goods and services, new lifestyles, and analo-

gous refinements and inventions of production methods. Although canoes, sailboats, and container

ships all provide “transportation services,” they are produced with quite different methods, provide

substantially different services, and support less or more extensive networks of trade.9

Joseph Schumpeter (1883–1950) was among the first to recognize and analyze the innova-

tion-induced growth that characterizes modern commercial societies. Writing in the first half of the

20th century, Schumpeter argued that innovation and disruption were essential features of economic

development.

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or trans-portation, the new markets, the new forms of industrial organization that capital-ist enterprise creates (Schumpeter, Joseph [1942/2012-12-19]. Capitalism, Socialism, and Democracy [Kindle Locations 1823–1825], Routledge, Kindle Edition).

Economic innovation is generated by unusually creative and ambitious men and women who as-

semble teams that refine old production methods and products or who invent entirely new methods

and products.

Innovation, like many other aspects of mass production, is enhanced by specialization. Much

of it is generated by formeteurs who create new economic organizations that are substantially devot-

ed to innovation.10 Of course, not all innovations are economic in nature or profitable in intent. In-

introductory chapter provides a very nice overview of the issues and possible roles that ethical dis-positions play in the Marshallian and Solow approaches to economic development. 9 Oddly enough, jet-setters have a nostalgic fondness for old-fashioned sailboats and horses. 10 That innovation produces uncertainty is self-evident within microeconomics. That it generates macroeconomic uncertainty is nearly self-evident, as developed in Schumpeter’s research on busi-


page 15

novations can take place in each of the three categories of rules mentioned in Chapter 1. New and

refined rules and principles can be developed that improve our understanding of the universe (sci-

ence), how its course can be changed through human action (what economists refer to as technolo-

gy), and how best to assess the merits of the changes that may be pursued (as with philosophical in-

novations in our understandings of a good life, attractive community, or good society). Many of

such innovations, however, indirectly increase the rate of economic innovations. They do so by

modify the knowledge base that individual innovators and teams of innovators draw on to create

improvements in products and lifestyles. As a consequence, innovations in fields having little to do

with commerce often make new economic possibilities easier to imagine and less costly and contro-

versial to implement, although the reverse is also possible.

Innovations are not, as discussed above, harmless. New and improved products necessarily

compete with older products for sales and inputs. Successful product introductions thus affect the

equilibrium price vector toward which prices tend to gravitate and pattern of income, consumption,

and employment associated with those prices. Some products and firms lose market share and other

gain. Some prices and incomes rise and others fall as demand and supply change in response to new

or improved production methods or products. Because wages are simply another name for the price

of various kinds of labor, they are among the prices affected by innovation. Similar effects occur on

the rates of return on particular capital goods and related assets. Significant innovations thus cause

some sources of income and wealth to increase and others to fall.

Indeed, when new products or production methods are far better than previous ones, some

old products and sources of income may essentially disappear as, for example buggy whip manufac-

turing and sales largely disappeared after widespread adoption of automobiles. Similarly, slide rules

disappeared after the introduction of digital calculators and computers, and rotary dial telephones in

the age of digital dialing and cell phones. Persons who made their living by developing, manufactur-

ing, and selling such products were induced to pursue often less-rewarding opportunities than the

ones they had pursued. Innovations in production methods can have similar effects. New more effi-

cient production methods, such as assembly lines, Bessemer and Hall smelting processes, or com-

puter-aided manufacturing, reduced the cost of a subset of existing products, which bankrupted

ness cycles. Toward the end of the 20th century, a new school of macroeconomics emerged that ar-gues that many if not all business cycles are generated by “productivity shocks,” which is simply an-other name for innovations affecting manufacturing methods. See, for example, Greenwood, Her-cowitz, and Hoffman (1988) or McCallum (1988).


page 16

their less-efficient rivals or induced them to make new investments in plants and equipment to re-

main competitive. Innovation thus causes some markets and modes of production to disappear and

new ones to appear; this is what Schumpeter had in mind when he referred to “the gale of creative

destruction.”

The Gradual Impacts of “Ordinary” Innovation

Although there are a few cases in which a single innovation quickly disrupts long-standing

patterns of life, the more usual case is that in which a long series of minor disruptions gradually in-

duce major changes in lifestyles through a long series of adjustments in production methods, prod-

ucts, consumption, and associated specialities. For example, as the cost of steel fell in the 19th cen-

tury, manufacture of alternatives to steel diminished, rather than disappeared and secondary innova-

tions in the possible uses of what previously had been a relatively expensive “high-tech” metal

emerged. New applications were developed for construction of buildings, bridges, military equip-

ment, railroads, engines, household appliances, and automobiles. New forms of old structures could

be larger, taller, and stronger. They also had a new “look,” as skyscrapers transformed the skylines of

major cities and new steel bridges spanned bodies of water thought too wide for anything but fer-

ries. Similarly, engines could become more powerful and smaller as steel became stronger and less

expensive.

Tertiary innovation in all these new product areas followed. Contemporary automobiles are

still steered with a wheel, ride on rubber tires, and propelled (at the time of this writing) by gasoline

engines with four or more cylinders and spark plugs. Nonetheless, modern mass-produced automo-

biles differ from Henry Ford’s old Model T in thousands of ways. Contemporary automatic trans-

missions, cabin heating and cooling systems, music sources, energy-saving shapes, mapping pro-

grams, and self-driving capabilities were beyond the technical understandings of the most creative

engineers of 1910. Contemporary automobiles go farther and faster on less fuel, carrying more stuff,

while providing far greater comfort than possible with Ford’s pioneering and very popular “Tin Liz-

zy.” However, they were not invented whole cloth but are products of more than a century of minor


page 17

and major innovations in design and manufacturing, rather than a single great leap forward. They are

an instance of continual progress rather than singular breakthroughs.11

Technological Externalities Among Innovators

A recent book by Jason Potts (2019) reminds us that there are positive technological externalities in

innovation. As the work of Potts (2019) and Burke (1978) before him remind us, transformative in-

novations are very rarely single revolutionary leaps of imagination; rather, innovations stimulate oth-

er new ideas, which stimulate still others and so forth; some new combinations of ideas, materials,

and machinery are more transformative than others. Thus, normative support for or against innova-

tion has effects similar to those analyzed above for capital accumulation in Table 5.2. Rates of inno-

vation may be increased or diminished by moral support or opposition. And, innovation-induced

economic development will accelerate or decelerate as a consequence.

Table 5.3 illustrates how conditional norms that oppose innovation reduce innovation rates

and thereby impede economic development.

Table 5.3: Technological Externalities With Social Opposition to the Innovation Commons

Robert (Rate of Innovation)

Rapid Moderate Slow Minimal

Joseph

(Rate

of Innovation)

Rapid (J, R)

6–G, 6–G (J, R)

4–G, 7–G (J, R)

2–G, 8–G (J,R)

1–G, 7

Moderate 7–G, 4–G 5–G, 5–G 3–G, 6–G 2–G, 5

Slow 8–G, 2–G 6–G, 3–G 4–G, 4–G 3–G, 3

Minimal 7, 1–G 5, 2–G 3, 3–G 2, 2

The initial equilibrium in the slow-slow cell can be regarded as the rate that would have occurred

without normative opposition or support for innovation. Normative opposition to innovation (here

G>1) would reduce that relatively slow rate to the level that typified most of the period after agricul-

tural methods and supporting rules were worked out 10,000 years ago (minimal-minimal).

Such opposition is not uncommon. Even in England, a fount of innovation in the 18th and

19th centuries, there were instances of significant opposition to the production of familiar things by

11 Although a long time coming, Schumpeterian growth models are by now commonplace. See, for example, Mueller (2005) or Van den Berg and Lewer (2007) for short overviews and Bento (2014) for a nice synthesis of microeconomic and macroeconomic Schumpeterian approaches.


page 18

new more capital-intensive methods during the late 18th and early 19th centuries. That opposition

was less an opposition to the use of more capital of the familiar variety in production than of inno-

vations in machinery and production methods that impacted a community’s distribution of income.

New machines created new, more capital-based methods of production that required fewer skilled

workers than in the past. The so-called Luddites of the late 18th century opposed the new more capi-

tal-intensive methods of producing textiles. A few decades later, the Swing Riots in England of 1830

protested the mechanization of agriculture with new threshing machines. In both cases, new ma-

chines created new more capital-based methods of production that required fewer and (mostly) less-

skilled workers than in the past.12

Fortunately, for the economic development of England, these protests against innovation in

production methods opposed the economic consequences of particular innovations rather innova-

tion itself. This may explain why innovation proceeded apace in England rather than diminishing in

the face of opposition or increased economic regulation. Nonetheless, opposition to technological

change and the technological externalities associated with production and innovation doubtless

postponed the great acceleration until opposition declined and technological externalities were ame-

liorated.

Table 5.4 illustrates the opposite case in which normative support for innovation accelerates

growth rates by encouraging creative individuals and teams to refine old rules, old production meth-

ods, and old products or to replace them with new ones that require complementary leaps of imagi-

nation and a better understanding of the possibilities for change. If the virtue supplement is suffi-

cient (here V>1), rapid innovation equilibrium emerges and, insofar as the innovations prove profit-

able for producers or beneficial for consumers, economic development accelerates. Moral support

for innovation increases rates of innovation by increasing both the efforts of individual innovators

and the size of the innovation commons.

12 For example, the Swing Riots in England of 1830 protested the mechanization of agriculture with new threshing machines. These protests against innovation in production methods were preceded by the Luddites in the late 18th century, who opposed the new, more capital-intensive methods of pro-ducing textiles.


page 19

Table 5.4: Technological Externalities: With Social Support for the Innovation Commons

Robert (Rate of Innovation)

Rapid Moderate Slow Minimal

Joseph

(Rate

of Innovation)

Rapid (P, R)

6+V, 6+V (P, R)

4+V, 7+V (P, R)

2+V, 8+V (P,R)

1+V, 7

Moderate 7+V, 4+V 5+V, 5+V 3+V, 6+V 2+V, 5

Slow 8+V, 2+V 6+V, 3+V 4+V, 4+V 3+V, 3

Minimal 7, 1+V 5, 2+V 3, 3+V 2, 2

Societies that encourage the accumulation of capital and innovation tend to prosper and indirectly

accelerate economic development by reducing the importance of technological externalities. As new

ideas are tested and provisionally proved, and as new machines and organizations are developed and

found profitable, the knowledge base of potential innovators increases which makes it easier for

successive generations of entrepreneurs to see the “obvious” improvement or new product. As

knowledge accumulates, the creative leaps required to imagine the next steps become smaller. In this

manner, an expanding innovation commons tends to increase rates of innovation and, insofar as

useful ideas occur in the same or an increasing fraction of the ideas and refinements imagined, eco-

nomic development tends to accelerate.

V. The Great Acceleration and the Acceptance of Uncertainty

Both profitable new ideas and new products tend to improve lives, because otherwise the

ideas would not be accepted, nor the products purchased. However, they also increase uncertainty.

Rather than the evenly rotating society that typified pre-commercial societies, commercial societies

are constantly being altered by innovations of various kinds. Schumpeter explained why this is a nat-

ural part of relatively rapid economic development.

Uncertainty has economic consequences that were recognized at about the same time that

Schumpeter began incorporating innovation into economic models. Among the most important and

earliest consideration of the effects of uncertainty on economic development were those penned by

Frank Knight. Knight argued that markets can adapt to shocks that have a statistical pattern (risks)

and that, in those cases, markets tend to concentrate risks on those individuals and organizations

that are most risk tolerant and to shift it away from individuals who are most risk averse, for exam-

ple, those who purchase insurance products of one kind or another. Such innovations tend to reduce

risk for most persons rather than increase it.


page 20

Uncertainty thus exerts a fourfold tendency to select men and specialize functions: (1) an adaptation of men to occupations on the basis of kind of knowledge and judgment; (2) a similar selection on the basis of degree of foresight, for some lines of activity call for this endowment in a very different degree from others; (3) a specialization within productive groups, the individuals with superior managerial ability (foresight and capaci-ty of ruling others) being placed in control of the group and the others working under their direction; and (4) those with confidence in their judgment and disposition to “back it up” in action specialize in risk-taking (Knight, F. [1921/2009-02-05], Risk, Uncertainty, and Profit [KL 3154-3159]).

Knight also noted that that not all shocks have well-known or knowable statistical character-

istics. Some disruptions are what might be termed “one of a kind” and so cannot be characterized

with statistical models. These include the unique insights of innovators as well as those associated

with natural phenomena that are poorly understood because they are generated by complex or cha-

otic systems. He termed these unpredictable events as “uncertainty” and argued that uncertainty is

the ultimate source of significant profits and losses for entrepreneurs. It also accounts for the ex-

traordinary profits and individuals and organizations that just happen to own or purchase the right

asset at the right time or the wrong time—where both “right” and “wrong” times are essentially un-

knowable matters of luck at the time of purchase.

Here contemporary readers might recall that Amazon stock sold for around $2 a share in the

early 2000s when it was not certain that the company would survive. At present, it sells for more

than $3,000 a share, a more than 40% annual rate of return for those who bought AZM for $2 a

share around the year 2000. These lucky investors may have had plausible reasons to believe that the

firm would survive and prosper but had no way to predict that a $1,000 of a $2 stock would be

worth well over a $1,500,000 two decades later.

Both risks and uncertainty would naturally affect ideas about virtue, attractive communities,

and good societies, and 20th century developments suggest that they have. Market adjustments and

public policies that reduce risks from many problems associated with high rates of innovation and

large scale production, have clearly made continuous innovation less controversial. Nonetheless, it

must be acknowledged that new risks were introduced by more extensive specialization and extend-

ed markets.

VI. New Social Dilemmas Produced by Innovation and the Great Acceleration

It must also be acknowledged that besides unsettling patterns of life new social dilemmas

also emerged with the acceleration of economic development in the nineteenth century. As is usually


page 21

the case as society progresses, solutions to old problems produce new better circumstances with

problems not confronted before. Other social dilemmas were similar to previous dilemmas but

emerged from new sources. For example, the more intensive and mechanized methods of produc-

tion associated with industrialization increased the use of air and water systems as methods of dis-

posing of waste products, making water in some rivers less than safely drinkable and air inside and

outside of factories less than safely breathable. These were similar to earlier waste disposal problems

but had numerous differences from the earlier versions. Similarly, as automobile became more

widely used for transportation, new sources of congestion were added to roads and new kinds of

accidents emerged. These were addressed through various combinations of refinements of old rules,

new informal rules, and new formal regulations adopted by local, state, and national governments.

For example, new applications of informal “rules of the road” emerged regarding speeds and

routines for staying to the right (or left). As automobiles became faster and more powerful, such

rules became more important than they had been for the various forms of the muscle-powered traf-

fic that had preceded them. Insofar as those norms were not sufficient to reduce the dangers associ-

ated with newer, more numerous, more powerful automobiles, governments were asked (or felt it

necessary) to intervene by creating new formal rules of the road and enforcing them. In this manner,

new social dilemmas tend to stimulate both the evolution of ethical maximums (“keep to the right”),

principles (“drive defensively”) and new formal rules and regulations enforced by rule-enforcing or-

ganizations such as governments. Together, the new machines and new rules increased the produc-

tivity of road networks as methods of transport. Road deaths fell (as a fraction of the population)

while road usage increased.13

When innovations disrupt long-standing patterns of life, the old rules do not necessarily

produce comfortable or good lives; nor does the evolution of norms take place rapidly enough to

solve all new social dilemmas. Nonetheless, norms do change in response to new circumstances. For

example, as innovations produced praiseworthy changes, lists of virtues were revised. Foresight,

flexibility, and resilience become virtues and their opposites (myopia, rigidity, and fragility) become

vices. What might be called dynamic tranquility also increased through various ethical and planning

innovations. Conditional rules of conduct became, in a sense, more fruitful, as a wider range of con-

ditions were routinely confronted. In addition, governments were often tasked with devising new

13 Pinker (2018), for example, provides statistics on the declines in highway deaths and accidents in the United States in the period after automobiles and trucks were introduced.


page 22

formal rules to address the new problems not sufficiently ameliorated by preexisting ethical theories

and internalized norms.

Ideas about an attractive community and society also changed. On the one hand, a good so-

ciety was increasingly regarded as a prosperous society, and a disposition that increased one’s contri-

bution to that society (thriftiness, industriousness, creativeness) tended to be added to lists of other

virtues. On the other, it was also acknowledged that uncertainties associated with life in commercial

societies implied that some persons failed through no fault of their own. Bad luck was clearly possi-

ble as well as good in a dynamic setting. In such settings, various insurance-like services become val-

uable as noted by Frank Knight. In cases in which markets for one reason or another did not pro-

vide the insurance at least cost, voters may ask or demand that governments provide what came to

be called social insurance.

Thus, along with innovation came a variety of revisions to normative theories and an ex-

panded demand for governmental interventions in areas of life that had formerly mostly been mat-

ters of custom and internalized norms. Analysis of the roles that ethical ideas and dispositions play

in what might be termed “good” governance begins in the Chapter 6. As will be seen, governance

has its own dilemmas that have to be overcome for governing organizations to contribute to a good

life and good society, rather than undermine them, and perhaps surprisingly, democratic governance

comes with its own unique dilemmas.

VII. The Great Acceleration as An Impulse for Ethical Innovations

Intellectual histories often present the innovations of philosophers as reactions to the inno-

vations of previous generations of philosophers, which is not entirely false; however, such narratives

ignore the empirical and experiential foundation of most ethical maxims, principles, and theories.

Innovations in ethical theories are often grounded in personal observations about the behavior of

persons in their families and communities as well as well as the epiphanies of individual philoso-

phers. Observation may lead a given philosopher to conclude that some lives are better than others

and that those living good lives have followed various common strategies including either or both

secular and religious principles including conscious efforts at personal development, or as conse-

quences of education, hard work, friendship, honesty, creativity, sympathy, and so forth. Similarly, it

may be observed that some communities are more attractive than others and that the more attractive

ones have various rules that seem to promote relationships that produce the attractive outcomes.


page 23

The same person or persons may conclude that individuals would be wise to develop particular vir-

tues or follow particular rules if they want to live a good life or live in a good society.

The empirical foundation of philosophical speculation also implies that ethical and economic

developments are at least in part codetermined. They affect one another. Although ethical disposi-

tions tend to respond more slowly to changes in circumstances than market prices, they also are af-

fected by other social developments. The empirical foundations of many ethical theories also implies

that philosophy can be a scientific enterprise. Indeed, all of what we now refer to as science was

considered to be an area of philosophy until the 19th century and scientific theories were considered

to be exercises in philosophical speculation.14 Both types of interdependencies imply that new facts

and changes in circumstances can induce philosophical innovations. They do so by disrupting the

reflective equilibria of thoughtful men and women with sufficient time and interest in grappling with

ethical ideas.

For example, events may induce further analysis of the good life or good society in order to

devise more satisfactory maxims and principles through which the routes to a good life or good so-

ciety can be described. When the revisions influence future developments in ethical maxims or prin-

ciples, this creates a feedback system through which ethical innovations may generate consequences

that in turn lead to further ethical innovation—just as innovations in technology often begets further

innovation. With respect to ethics, changes in norms would also tend to induce new speculations

about the nature of ethics and its influence on individuals, as was, for example, the case for J. B.

Bury’s (1921/2011) analysis of the history of ideas about progress.

Changes in experience with innovations thus naturally stimulated developments in ethical as-

sessments of innovators and philosophical speculations about the proper role of innovation in a

good society. Adam Smith’s (1776, Ch. 1) favorable analysis of pin factories provides one such in-

stance. He realized that that specialization in combination with innovative equipment and organiza-

tion increased the productivity of labor used to produce pins by a factor of approximately 400. (A

productive team of pin makers could make 48,000 pins in contrast to the 200 produced by ten arti-

san pin makers.) Similarly, Jeremy Bentham’s descriptions of the process of innovation a few dec-

14 Given this, it should not be surprising that many of the persons remembered as pioneers in eco-nomics held positions in philosophy departments at universities and that their theories were stimu-lated, at least in part, by economic developments taking place around them. For example, two of the most famous English-speaking economists held chairs in moral philosophy: Adam Smith and Alfred Marshall.


page 24

ades later (cited above)—acknowledges both its failures and successes—but also reaches a favorable

conclusion about the consequences of innovation—one meant to blunt criticism of it that was also

common at the time of his writing.

That most technological advances are gradual tends to facilitate the reaching of positive as-

sessments about innovation for several reasons. First, only relatively useful innovation tend to sur-

vive. Second, the gradualness of their effects on patterns of life tend to reduce the cost of adapting

to the new circumstances generated by them. An old industry is not suddenly eliminated, but gradu-

ally disappears or is transformed, allowing easier less disruptive adaptation by firm owners, suppliers,

and employees. Third, it provides time for ideas about the good life and good society to be informed

by the trajectory of innovation. Together, such effects may induce the “do no harm” principle to

modified into something like “do no harm” unless there are great benefits associated with the

harm—that is, benefits greater than their costs in disrupted lives.

As such supportive norms emerge, the rate of innovation tends to increase for reasons dis-

cussed earlier in this chapter. Innovators tend to be encouraged rather than discouraged by both the

praise of their friends and families and by supportive public policies. Innovators would, for example,

gain more praise from their beneficiaries than disparagements from those harmed. When beneficiar-

ies are thought to be more commonplace than harms, innovation may be added to lists of virtues.

For example, invention is listed as a praiseworthy activity—a virtue—in Adam Smith’s (1759) Theory

of Moral Sentiments.

VIII. Conclusions: Ethics, Progress, and Prosperity

A variety of critical social dilemmas have to be solved to generate the attractive communi-

ties, promote, trade, specialization, capital accumulation, and productive innovations that character-

ize commercial societies. Part 1 has demonstrated that a subset of common ethical dispositions can

ameliorate or solve such social dilemmas and that a subset of the rules that do so also tends to pro-

mote commerce and specialization. A subset of those rules also supports capital accumulation and

increased rates of innovation and thereby facilitates the emergence of prosperous commercial socie-

ties.

Social evolution proceeds in a manner analogous to innovations in markets. It is generated

by a series of useful innovations—a new maxim, principle, or rule system—that are internalized by a

few and, when the results turn out to be as attractive as expected (or at least claimed), others follow.

When they are not, even early adopters may abandon the new rules or principles of conduct. Thus,


page 25

through a process of trial, and acceptance, or rejection, the systems of rules that comes to be inter-

nalized becomes more fruitful in the choice settings ordinarily encountered.

The internalization required for norms to affect behavior implies that this process is slower

than decisions about new products and services, which usually do not require changes in internalized

norms to appreciate. Nor are alternative norms laid out before us in nice displays for us to choose

among while walking through an idea shopping center. Most of the dilemmas to be overcome, as

well as their solutions, are subtle and difficult to recognize. Moreover, innovation tends in general to

be culturally discouraged—and for quite good reasons in communities that live at the edge of sub-

sistence.

A variety of social equilibria are thus possible with a variety of levels of economic develop-

ment, and ethical innovation provide a mechanism for moving from one to another. Such equilibria

include ones with stable patterns of life with only modest support for markets, as well as others with

greater and lesser support for commerce. Many societies before the great acceleration had solved the

essential social dilemmas required to sustain a community, markets, and produce reasonably attrac-

tive lives. In communities with extended trading networks there were many individuals and places

(towns and cities) where lives depended on commerce—that is to say, the purchase of most necessi-

ties of life from income generated by selling various things and services. However, most persons in

most societies still lived in agricultural societies and, for Malthusian as well as technological reasons,

lived close to subsistence.

To move beyond medieval societies with their more or less stable trade networks required

innovations in norms as well as the accumulation of capital and innovation in products and produc-

tion methods. These were not separate phenomena, because the shift from manorial and merchant

lives to those to manufacturers required shifts in norms that tolerated or encouraged the accumula-

tion of productive capital and innovation. The development of machines and productive procedures

for particular products, firms, and industries is nearly always an innovative activity. Such support is

most likely when the possibility of progress is generally acknowledged and the uncertainties associat-

ed with creative disruptions are regarded as an acceptable cost to realize progress.

In normative terms, this requires revised rules for judging what might be called “betterness”

and general agreement that the innovations observed tend to satisfy the principles of “betterness.”

In such cases, individuals would conclude that they are on balance better off because of the innova-

tion that takes place in spite of the disruptions and other uncertainties that it generates. And, they

would support or tolerate both innovation and investments in new forms of capital.


page 26

If economic development tends to be catalyzed by changes in norms, we should find shifts

in norms in periods before economic development accelerated or declined. Several instances of such

innovation were mentioned in this chapter and several more are developed in Part III, which pro-

vides more systematic evidence of shifts in norms that tended to lend greater support to market ac-

tivities and markets in general. However, before providing evidence in support of the theory, the

role of governments in this process needs to be worked out. Part II explores dilemmas that must be

overcome for governments to encourage, rather than discourage the emergence of attractive, pros-

perous, societies.


page 27

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Appendix: Reducing Uncertainty: On the Superficial Appeal of Central Planning

Mid-20th century utilitarians moved beyond Pigou’s welfare economics to argue that an

economy could, at least in principle, be directed by a utilitarian central planner who would produce a

more attractive pattern of life by eliminating commerce while increasing aggregate utility, much as

More’s magistrates did in his imagined utopia. It was argued that such a planner could increase ag-

gregate utility by reducing uncertainty, improving the distribution of income, and eliminating exter-

nality problems. Such conclusions were consistent with mainstream economic models of the 20th

century, which implied that a perfectly informed, all-powerful, utilitarian ruler analogous to Plato’s


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philosopher king could improve on the commercial society by replacing it entirely or by administer-

ing a broad subsection of it.

The equilibrium models of neoclassical economists provided support for this new strand of

utilitarian reasoning. Indeed, Russia and its Soviet Union maintained that such a system was success-

fully being implemented in Northern Asia.15 This was a radical challenge to mainstream utilitarians,

who had long favored commercial societies. This debate involved many technical economic issues,

so it is unsurprising that the central planning debate took place largely among economists. What

might be surprising is that much of the debate over central planning relied upon utilitarian reason-

ing.16

Those who challenged the analysis of the proponents of central planning used several lines

of attack. First, critics argued that using neoclassical models as the foundation of their analysis gen-

erated several misleading conclusions. The commercial society was far more innovative and dynamic

than those models implied. Moreover, the implicit informational assumptions of neoclassical models

implied that planners and market participants had far more information at their disposal than they

were likely to have in reality. Second, they argued that the “first best” outcomes of utilitarian plan-

ning were not feasible. This was partly for the same reasons. Planners would not be able to produce

an innovative society, nor would they have sufficient information to replicate the equilibrium alloca-

tion of resources generated by markets in the short term. Moreover, it was also argued that the per-

sons that become central planners were not likely to be utilitarians. Thus, the outcomes associated

with even perfectly informed planning are not likely to maximize aggregate utility or attempt to do

so. As a consequence of all these factors, the result of central planning would have far lower aggre-

gate utility (as proxied by economic output) than that generated by a dynamic commercial society.

15 Note that such a society, without markets but with ideal production and distribution, resembles Thomas More’s Utopia with its sharing of labor and distribution squares. It seems clear that such a society could not exist without ethical foundations, in that shirking rather than working tends to be more prevalent when work is unrelated to salary than when it is. The ethical foundations for such a society are beyond the scope of the present volume. 16 A useful collection of essays on the original central planning debate was assembled by Hayek (1935), which has been reprinted several times. Interest in somewhat more limited forms of central planning continued after World War II, as in Tinbergen (1964). The arguments were not often con-ducted in terms of utility per se but, with respect to economic output and growth, more or less in the manner pioneered by Pigou. Late 20th century commentary and critiques of central planning include Lavoie (1985) and Boettke (2002).


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For example, Friedrich Hayek (1899–1992) reminded proponents of central planning that in-

formation is not freely available at a central depository but remains disaggregated in the minds of

individuals. This, in combination with the heterogeneity of the knowledge that we each possess (and

our ignorance) implies that planners would not know all that was necessary to coordinate the behav-

ior of market participants as well as market prices do.

It is useful to recall at this point that all economic decisions are made necessary by un-anticipated changes, and that the justification for using the price mechanism is solely that it shows individuals that what they have previously done, or can do now, has become more or less important, for reasons with which they have nothing to do (Hayek, F. A. [1968/2002], “Competition as a Discovery Process,” Quarterly Jour-nal of Austrian Economics 5: 9–23).

Hayek also argued that markets take account of far more information than a real benevolent central planner could.

[T]he two advantages of a spontaneous market order or catallaxy: it can use the knowledge of all participants, and the objectives it serves are the particular ob-jectives of all its participants in all their diversity and polarity. The fact that catallaxy serves no uniform system of objectives gives rise to all the familiar difficulties that disturb not only socialists, but all economists endeavoring to evaluate the perfor-mance of the market order (Friedrich Hayek [1968/2002], “Competition as a Discovery Process,” Quarterly Journal of Austrian Economics 5: 9–23).

In Hayek’s view, this ignorance extends to the common understanding of markets themselves.

Even today the overwhelming majority of people, including, I am afraid, a good many supposed economists, do not yet understand that this extensive social divi-sion of labor, based on widely dispersed information, has been made possible entirely by the use of those impersonal signals which emerge from the market pro-cess and tell people what to do in order to adapt their activities to events of which they have no direct knowledge. That in an economic order involving a far-ranging division of labor it can no longer be the pursuit of perceived common ends but only abstract rules of conduct—and the whole relationship between such rules of individual conduct and the formation of an order which I have tried to make clear in earlier volumes of this work (Hayek, F. A. [1979], Law, Legislation and Liberty, Volume 3: The Political Order of a Free People [p. 162]).

Another crucial issue was whether the central planner would tend to be benevolent or not

(utilitarian or not), an issue that goes back at least as far as Plato’s and Aristotle’s analyses of ideal

governments. Post-war public choice analysis suggested that the persons most likely to rise to posi-

tions of authority are unlikely to be utilitarians or altruists.


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The rapidly accumulating developments in the theory of public choice, ranging from sophisticated analyses of schemes for amalgamating individual preferences into con-sistent collective outcomes, through the many models that demonstrate with con-vincing logic how political rules and institutions fail to work as their idealiza-tions might promise, and finally to the array of empirical studies that corroborate the basic economic model of politics—these have all been influential in modifying the way that modern man views government and political process. The romance is gone, perhaps never to be regained. The socialist paradise is lost. Pol-iticians and bureaucrats are seen as ordinary persons much like the rest of us, and politics is viewed as a set of arrangements, a game if you will, in which many players with quite disparate objectives interact so as to generate a set of out-comes that may not be either internally consistent or efficient by any standards (Bu-chanan, J. M [1984], “Politics Without Romance,” The Theory of Public Choice II).

What Hayek, Buchanan, and many other economists suggest is that feasibility cannot always

be deduced from economic models, because the models necessarily abstract from many details in

order to facilitate theoretical developments. Unfortunately, those details cannot always be ignored in

practice. The disintegration of the Soviet Union in 1992 affirmed most of their conclusions. It re-

vealed that Soviet planners had not been able to replicate the production efficiency or the material

comforts of Western commercial societies after more than a half century of active central manage-

ment. Moreover, that economy generated very few innovations.

In the centralization debate, differences in normative theories were arguably less important

than differences in the expected implications of central planning, because the debate was largely

among utilitarians or persons who had accepted the neo-utilitarian approach of Pigou. Nonetheless,

assumptions about the ethical dispositions of persons in the societies to be centrally managed were

also central to the argument.

A central planner that had internalized utilitarian theory would do better at maximizing ag-

gregate utility—to the extent this can be discerned—than a pragmatist interested in maximizing his

own income and authority. Economic incentives matter less if all persons have internalized a strong

work ethic and a rule-following norm.17 The argument in favor of central planning thus implicitly

17 It is interesting to note that markets tend to reward these core ethical beliefs insofar as they tend to increase firm profits, individual incomes, and consumer satisfaction. Without such market re-wards, it is clear that the distribution of internalized norms in centrally planned societies would be different than those of market-based societies. Market rewards for a work ethic and for rule follow-ing behavior tend to cause such ethical dispositions to be more commonplace and strongly internal-ized, as demonstrated in part II.


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assumed a very complementary normative foundation for their society. Without that ethical founda-

tion, it was behaviorally infeasible, regardless of whether it was economically feasible or not.

Life in the former Soviet Union would doubtless have been far more attractive had their

leaders been utilitarians rather than pragmatists seeking personal authority and its citizens ascetic

idealists without interests in material comforts and leisure. Central planners would still have been

limited by the information at their disposal, but the results are likely to have been far better than

they were.

In the end, economic analysis, many ethical theories, and social evolution favored commerce

over central planning, and attention returned to improving the commercial society rather than re-

placing it.

Documents

Chapter 5: Ethics and Economic Progress Chapter 5: Ethics