Author and Oxford University economist Eric Beinhocker spoke at this year’s portfolio institutional awards on the subject of ‘True Prosperity and Inclusive Growth’. Chris Panteli sat down with him to find out more about the growth of capitalism.
You argue that while capitalism works very well, we’ve never quite understood how or why it works. Can you explain?
We have a great historical perspective on capitalism. There’s more and more information available on the history of it and we know that living standards have risen dramatically, particularly since the Industrial Revolution. We’ve also seen the evidence from emerging economies more recently, how capitalist reforms have dramatically changed living standards for hundreds of millions, if not billions, of people. Yet if you crack open an economics textbook and ask, “What’s the theory? How is this happening? Do we really understand it?”, we find that there actually aren’t a lot of good answers. The standard theory of economic growth says that growth comes from a mixture of population – having human talent – and capital, and then this mysterious thing called ‘knowledge’. But it leaves it to the imagination as to where this mysterious thing, ‘knowledge’, is coming from. So what we’ve been trying to do is come up with an account for how growth works at a much more fundamental level.
What have you come up with so far?
Well, it’s a long-term project, but we think we’re making some progress. The basic idea is that human beings are creatures that are motivated to improve their environment, their standard of living. We have some basic drives to want to have things such as food on our table, shelter over our heads, clothes and other things. But getting those things requires us to solve these various problems: “How am I going to get food on my table? How am I going to get a roof over my head?” This process of problem-solving that goes on in the economy is inevitably evolutionary; there’s no optimal or perfect way to grow food or make an article of clothing or more modern things, like a car or a telephone. But rather, we learn how to do these things through a process of experimentation, of
trial and error and tinkering. That’s an inherently evolutionary process where we’re creating lots of experiments, lots of things don’t work out and fail, and then occasionally we hit on something that works and we do a lot more of it. People learn from that. There’s been some very good work recently showing how all technologies are made out of other technologies. This is something Brian Arthur, formerly of Stanford, has noticed. The innovation process is, in essence, a kind of combining and recombining in new forms things that already exist today to create new things.
So it’s a case of standing on the shoulders of giants?
Exactly. It’s a bootstrapping process. So take for example one of the great inventions of our age, the smartphone: everyone looks at the genius of Steve Jobs, and he truly was a very innovative and creative person, but he was taking a whole host of things that already existed – touch screens, GPS, mobile phone technology, software, motion sensors – and he combined them into a new format, a new package that could do a whole new set of things that couldn’t be done before. That then created a platform for a whole business of apps and all kinds of things to be built off of.
So this is what you mean when you say capitalism is evolutionary, it is effective but hugely inefficient with significant waste. It is survival of the fittest.
Yes, exactly. Economists have historically tended to be very focused on the efficiency of markets, but when you look at what markets are actually really good at – they’re quite often not so efficient, but what they’re really good at is this effectiveness in finding new and better ways to do things. The capitalist system is very effective at driving this evolutionary process and of course it’s wasteful; the garages of Silicon Valley are filled with start-ups that will fail, but that’s a good thing because out of those garages will also come the next Googles and Facebooks and so on. It has to be a
wasteful process because we can’t sit here today and say with certainty what the next big thing will be. We might not even be able to imagine it.
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