It is no secret that modern economic theory fails miserably at explaining the tremendous explosion in economic activity and income levels that has taken place since the 18th century. We don’t have a good story of why in 1800 an ordinary person lived on $3 a day, whereas today an ordinary person in a “bourgeois” country earns over $100 a day.
In her new book, Bourgeois Virtues, Deirdre McCloskey attempts to tell such a story of why the past two centuries have been so good to ordinary people in bourgeois countries [ht:sn]. She describes how economic theory in its current state is useful for explaining how resources are allocated – but in order to explain the economic revolution that took place since 1800, economic theory needs rhetoric:
I am claiming that the economy around the North Sea grew far, far beyond expectations in the eighteenth and especially in the nineteenth and most especially in the twentieth century not because of mechanically economic factors such as the scale of foreign trade or the level of saving or the amassing of human capital. Such developments were nice, but derivative. The North Sea economy, and then the Atlantic economy, and then the world economy grew because of changing forms of speech about markets and enterprise and invention.
She takes the usual line that innovation drove the Industrial Revolution. But she has an uncustomary explanation for innovation:
But I also argue—as fewer historians and very few economists would—that talk and ethics and ideas caused the innovation. Ethical (and unethical) talk runs the world. One-quarter of national income is earned from sweet talk in markets and management. Perhaps economics and its many good friends should acknowledge the fact. When they don’t they get into trouble, as when they inspire banks to ignore professional talk and fiduciary ethics, and to rely exclusively on silent and monetary incentives such as executive compensation. The economists and their eager students choose Prudence Only, to the exclusion of the other virtues that characterize humans—justice and temperance and love and courage and hope and faith—and the corresponding sins of omission or commission.
One will need to read the entire book to see if her argument is persuasive. I appreciate her attempts to integrate virtue into economic discourse, seemingly reminiscent of the origins of the discipline in moral philosophy. But at the same time, she endorses neoclassical economic theory as the main tool for economic analysis – a tool which grew in popularity because of its supposed value-neutrality.