Summary of JOIE article (15 November 2024) by Shaun P. Hargreaves Heap and Paul Lewis, Department of Political Economy, King’s College, London. The full article is available on the JOIE website.
Walter Lippmann bestrode the 20th century. He was an award winning journalist who had the ear of every President from Woodrow Wilson to LBJ. He wrote a book, The Good Society, in the 1930s that played an important role in the foundation of the Mont Pelerin Society. He also had a touchy relationship with Hayek and never went to any of its meetings. The book is important today because his argument turns on a model of productivity growth with a policy agenda that is very different from that being pursued, for example, by the new Labour government in the UK; and, so far as one can tell, that of the new Trump administration..
There are two key policy areas for productivity growth in his analysis. One is the willingness of people (everyone) to take risks. (He follows Frank Knight with the emphasis on everyone.) The other is the balance in people’s activities between the positive-sum ones and the zero or negative-sum kind.
Risk taking matters because doing new things with uncertain consequences is how knowledge advances; and these advances are what cause sustained productivity growth. For Lippmann, what undermined risk taking in the 1920s and 30s was increasing economic insecurity. People tend to stop learning-by-doing new things when they are feeling insecure and they, instead, fall back on familiar, comforting tropes about outsiders, conspiracy theories and the like that are often peddled by autocrats. In a novel turn, he suggests that it is growth itself that causes insecurity (rather than outsiders) and so, to keep productivity growth on an upward track, public policy has continuously to provide new compensating sources of economic security through social insurance schemes and the like—a basic income, perhaps, and a job guarantee—so as to reinvigorate risk taking. Ours is plausibly another age of notable anxiety and insecurity, making Lippmann’s arguments on this point not only relevant but also important, not least because no one in the discussion of why productivity has been stagnating seems to be making them.
The balance between positive sum and zero (or negative) sum activities matters for growth more simply. It is because the one expands the size of the pie and the others don’t. Assuming people take an action for a perceived gain, the point is that there are two ways that people, in principle, can gain from any action and so be incentivized to take it. One is by doing something that others find attractive and are willing to pay for at a price that exceeds is costs. The activity is positive-sum as it produces a mutual benefit. The other route to personal gain comes, in effect, from snatching something from someone else. This is obvious with theft but it can also happen in a variety of often indirect and legal ways. People, for example, may invest time and resources acquiring or shoring up a monopoly position because this enables them to charge a higher price without being undercut by competitors. The time spent doing this doesn’t add to the size of an economy’s pie and the higher price that attracts it comes at the expense of consumers. Likewise, when someone employs an accountant to exploit a loophole in the tax code, this benefits the person but the benefit comes at the expense of everyone else who have to pay higher taxes as a result.
Thus, productivity growth depends on maintaining incentives towards positive-sum rather than zero/negative sum actions. Tax reform, political reform and regulatory reform can do this. Regulators can prevent monopolies emerging. Tax reform can remove some of the obvious tax loopholes. The lower tax on capital gains than the typical rate of tax on income, for instance, encourages people to expend resources, usually through some kind of financial innovation, making ‘income’ look like a ‘capital gain’. Likewise, the encouragement to investing in land/housing when primary homes are removed from capital gains tax liability is another source of zero-sum behaviour. It provides an incentive to purchase housing, the surge in demand raises house prices relative to incomes and while this is good for the owners of land and estate agents, this benefit only comes, when the supply of housing is largely fixed, at the expense of those who are going to buy the houses in the future at these higher prices.
Lippmann’s arguments are not only novel in many respects and relevant for our times, he also had a strong sense that public policy needed to focus on the rules of the game and not be directed at the achievement of particular outcomes. The complexity and dynamism of an economy that is the potential source of insecurity in an economy enjoying productivity growth will also defeat any such attempt. This focus on the rules is, of course, also what makes him an institutionalist for our times, and very interesting one.