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Above subsistence

| Wednesday, April 6, 2011

Among the key facts that I teach on day one -- literally -- of my Principles of Economics course is that people respond to incentives. If you want a new pair of jeans, you offer money to Abercrombie & Fitch in exchange for jeans that it owns and that you desire. You don't expect altruism to prompt that company to give you the jeans free of charge.

And the more money you offer merchants for jeans, the more eager merchants will be to stuff your shopping bag with pairs of those quintessentially American trousers.

As obvious as this point about incentives is, it's vital to drive it home early and often in an economics course. The reason is that too much popular discourse today about government suggests -- always vaguely and gauzily -- that "public servants" are exempt from the influence of the crass incentives that operate on the rest of us and that the mere act of "passing a law" brings about that legislation's ostensible goal. Pondering the often thick and intricate web of new incentives that a piece of legislation creates is too seldom done. How many advocates of the minimum wage consider that it reduces employers' incentives to hire low-skilled workers?

Tracing out the influence of incentives on human actions is central to economics.

But it's a mistake to conclude that, because incentives matter a lot, only incentives matter. Unfortunately, this mistaken conclusion is frequently reached even by some of the world's greatest economists. And by some of the world's not-so-great, run-of-the-mill economists. Until about 10 years ago, I believed that incentives explain everything.

Sometime around the year 2000, I began to see that culture matters, although I wasn't quite sure just how.

Now, "culture" itself can be a vague and gauzy term. It is difficult to quantify, measure and observe. Even defining it is a challenge. So economists resist including culture in their explanations of how economies work. This resistance is understandable, for it's tempting for lazy scholars to use culture as a generic explanation for any economic fact that isn't easily understood by using the tools of basic economics.

Nevertheless, the fact that a phenomenon is impossible to quantify does not mean that that phenomenon doesn't significantly influence human affairs. If culture does play a role in human society, we economists must include it in our theories.

And surely culture does play a role. Modern human beings have existed for at least 70,000 years. Yet only in the past 200 years -- only in the most recent 0.3 percent of our time as a species -- have ordinary men and women attained a standard of living significantly and consistently above subsistence.

This startling fact -- especially given how startlingly different our lives are today from those of the vast majority of our ancestors -- demands a compelling explanation.

That explanation can't rest on any change in native intelligence or in human nature. Brainpower-wise, your ancestors of the year 15,000 B.C. were just as potentially smart as you are. And they were virtually identical to you in their fears, concerns, attachments, emotional triggers and desires for food, clothing, shelter, sex and any other creature comforts they could acquire.

Nor can the explanation be "natural resources": Nature didn't bestow blessings such as iron ore, petroleum and the electromagnetic spectrum on us suddenly during the reign of Great Britain's King George III.

Something unique to our time, starting about 200 or so years ago, must exist.

Our modern standard of living was sparked by a major cultural change that occurred only a few generations back.

That cultural change -- happening first in the Netherlands and soon afterward in Britain -- was a change in people's attitude toward the bourgeoisie. Merchants, innovators and business people came to be, for the first time in human history, not only tolerated but respected. Profit-seeking production, trade and commerce became, for the first time in 70,000 years, widely regarded as worthwhile and productive not only for the profit-earning producers but for society writ large.

And very importantly, the way that people spoke about market activity and about the bourgeoisie who are so essential to it reflected this Earth-shifting change in attitude.

This change in rhetoric about what we today call capitalism and entrepreneurs and profit-seeking and risk-taking and arbitrage and creative destruction is the theme of the most important book I've read this millennium: economist Deirdre McCloskey's magnificent new volume "Bourgeois Dignity: Why Economics Can't Explain the Modern World."

In my next column, I'll do my best -- which, alas, will inevitably be inadequate -- to share McCloskey's thesis and to explain why I believe it to be not only correct, but profound and profoundly important.

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