Volume 4 NOV 2008
Feature articles When a firm is market-oriented
Accounting induced performance
anxiety
Understanding global imbalances
An interview with Robert E. Lucas Jnr.
The use and misuse of intelligent
systems in accounting
Alumni refresher lecture series
Real options analysis and
investment appraisal
New economic geography and
manufacturing
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An interview with Robert E. Lucas, Jr.
A Nobel Laureate welcomes the closure of the huge gaps of inequality
and incomes across societies
by Ian King
I’d like to start by asking you some questions related to your lecture ‘The Industrial Revolution and the Macroeconomics of Ricardo and Marx’. What do you see as the key lessons, if any exist, that we can learn from the experiences of the industrial revolution?
It’s still going on. What has to happen, though, bearing in mind that people are more or less the same everywhere, as are the laws of economics, is that it can’t be a permanent situation where people on one continent have living standards that are a tenth or a fifteenth of people on some other continents. It just doesn’t make any damned sense!
I think the industrial revolution, in the sense that it creates huge gaps of inequality and incomes across societies, has to end some time. It has to be a story with an end. And I think, in the end, economies will be rich and growing, more or less equally. So how’s that going to play out? I don’t know.
What have we learned from the industrial revolution? Everything! That sustained growth is possible!
How does Karl Marx fit in?
Ricardian theory evolved a dynamics that returned the living standards of ordinary working people to some equilibrium point – a kind of Malthusian subsistence equilibrium level. If you had the blessing of technology, an invention, or the discovery of new lands, you would get a temporary increase in living standards, but this would ultimately come out as population increase, and living standards of working people would be restored back to subsistence.
So, when the industrial revolution got under way, Marx thought that this was just as transient. It’s like all the other innovations in human history (and there were many of them): growth is just a transition dynamic to some new steady state, in which some people are going to own everything, and the ordinary working people are no better off than they were in the Middle Ages.
Everything we knew about economic theory, at that time, was on that side. So Marx thought we had to break into this process of private ownership. Override this process – these dynamics that kept returning us to the same point – and somehow create something different. Bust out of this recurrent process of discovery and new class growth and then returning to the old equilibrium. We had to break out of that.
The thing is that industrialisation created a new class that didn’t just peter out – instead, it just keeps going and going. I think that’s what we’ve learned as an historical observation. The Ricardian/Malthusian model just didn’t work.
Do you feel that capitalism generates a long run equilibrium distribution of income that we can live with?
Absolutely. Let’s just take Japan, as an isolated society. Suppose that was the whole world. There are some differences – some people work harder, some people have a little more luck, but it’s not like there’s one class that’s ruling over everybody else. That’s not what a capitalist society is about … there’s not some barrier. Children from parents with modest incomes can go anywhere in these societies.
Now, as you start looking at countries that have disadvantaged groups, and that’s why I picked Japan, you start getting little blots on this happy picture. And if you start looking at it as the world as a whole, you get huge blots in the picture because two-thirds of the world is left out.
But I think we are heading to the point where the whole world, more or less, looks like Europe, or North America, or Japan. Now, is there too much inequality? I don’t see it. I think people who drop out of high school, take drugs and so on are going to be poorer than the guys who worked hard. It doesn’t bother me at all. Why shouldn’t they be poor? It’s hard to work!
You think that the distribution of income reflects effort more than it does, say, luck?
Both.
But how do you get all this luck? How did Bill Gates get all this good luck? He wasn’t sitting on his ass smoking dope or something like that!
But how can we observe that? You say he’s rich because of effort, but there are lots of guys who work very hard and get nowhere.
Let me get back to Gates. Gates’ dad is a pretty prosperous lawyer in Seattle. In fact, my brother was a partner in his law firm, Gates and Lucas. And Gates went to Lakeside, which was the only really first-class private high school in Seattle. So his dad was not only pretty well off, but he spent his money on education for his kids as opposed to a big yacht or something. He cared, and I’m sure the Gates household, when he was growing up, was a stimulating environment. So Gates had a lot of things going for him. But there were plenty of people who put in a huge amount of devotion, hard work, and risk taking.
Your assessments of the long-run prospects for humanity and the global economy seem considerably more upbeat than many others today. To what do you attribute this difference of views? Why are you so optimistic when others seem to be so pessimistic about the future?
Give me an example. Most people don’t know anything…
Particularly with regard to, say, global warming, resources running out, the ‘doomsday-scenarios’ that people have.
I have no idea what the relative price of oil is going to look like 100 years from now. It could be higher than it is now. When you add taxation, environmental problems are orthogonal [unrelated] to what I’m talking about.
So, you don’t feel the development process itself somehow has environmental implications?
It’s a pseudo-question. We may not like the fact that China is going to be as prosperous as we are, demanding materials in competition with the rest of us – but that’s what’s going to happen. Do you seriously think we would rather keep the Chinese in some sort of concentration camp, and deprive them of their access to markets?
Surely it’s a blessing that people in China are moving into the modern world and doing very well out of it. And the fact is that it means the things that we rich people want to buy are going to sell at higher prices because the Chinese are going to want them too! If that’s a problem, then we should always have such problems. That’s related to your questions and concerns about distribution. Now you’re saying you’re concerned about distribution, but when the distribution problems start to resolve themselves we say, ‘Oh-oh, this has gone too far.’
The Chinese are going to be as rich as we are one of these days. We’ve got to get used to it. My view is we ought to take pleasure in it, and do everything we can to help it.
I’d like to turn to your advice for graduate students in economics. For students considering a career in academic research, if they’re on the cusp and they’re doing their honours, is there one key piece of advice you’d like to give to a bright student?
Hang around with smart people, idealistic people. The number of people that really want to advance knowledge, and are good enough, well trained and smart enough to actually be doing it, is a lot fewer than you think. So, do your best to hang out with smart, idealistic people. Avoid careerists. If that involves some sacrifices, to be in good places or have opportunities to interact with good people, do it!
Think about the trade-offs people make – a guy getting a degree in economics can double his salary if he decides to teach accounting. That’s OK, those guys are going to enjoy their wealth but they’re not going to be contributing to the future development of social sciences in the way they could be.
When choosing a topic for a PhD thesis, it seems to me there is a trade-off between going after a truly fundamental question and possibly failing and not being able to publish their piece….
…and you never get over it.
There’s a trade-off between going for a big one or going into more established ways of thinking and making marginal but safer contributions.
You want to work on a problem where you could learn something. It usually turns out that if what you learn is new to you then it’s new to a lot of the rest of us, too. It’s going to get recognised. Maybe not – it’s hard to say.
There are a lot of good problems out there. You’ve got to try to avoid short-cuts and try to understand the issue in a way that satisfies you, yourself. Chances are it will end up being, some of the time anyway, a contribution the world knows and recognises – you could make a living out of it. That’s what I think. That’s not very operational advice but it’s hard to make it explicit.
When I think of conversations with people I’ve worked with – guys like Edward Prescott and Leonard Rapping – when we get deep into a problem, we don’t give a damn about anything except for solving the problem and satisfying ourselves that we’ve got the answer.
It’s hugely exciting to work with people who have the same goals, same high ambitions as scientists. It’s different from what I call careerism. You just want to solve a problem, get really into something. Of course, sometimes you don’t end up solving it, but when I start out on something I just think, ‘God, I’m going to really blast this problem.’
If you don’t quite make it – no problem, it’s OK. Just go onto the next one.
It seems to me that, for a lot of papers, the actual end product of the research can be quite different from the original question.
I know. It can’t be helped. Sometimes it’s better!