Diane Coyle on The Soulful Science

Your first book is The Company of Strangers by Paul Seabright, which reflects on how amazing it is that we let strangers make our clothes, serve us food, and we even allow someone we don’t know fly the plane we’re on…

It’s really about how the division of labour – which Adam Smith first wrote about in the 18th century – has become so extensive that everything we do in the economy means that we’re tightly connected to a huge number of other people. This is really remarkable if you think about humanity’s evolutionary origins: very tight-knit social circles, where if somebody wasn’t a member of your immediate family or kinship group, you’d probably kill them as soon as you saw them. So this extension of trust to millions of other people who make products and services that we depend on every day is really quite extraordinary. The book is about how miraculous this is – and we normally don’t think about it in those terms very much. Also, how fragile that makes the economy in some ways. The new edition looks in particular at the global financial crisis as a demonstration of the kind of fragility that comes about through those interconnections.

Does that mean the system is at risk, that we might again become suspicious of strangers at times like this?

Paul Seabright isn’t hugely pessimistic: he’s not one of the people who are saying that civilisation is bound to collapse because it’s become overextended and overcomplicated. There are some books that do that – Jared Diamond’s Collapse is a good example of a book that is pretty pessimistic about our ability to sustain the kind of global economy and society that we’ve developed. But in The Company of Strangers Paul Seabright says we need to think about the way human beings relate to each other. We need to think about what we can learn, as economists, from anthropology and sociology, in order to understand how better to govern what we’ve created. Because if you think about it, there are lots of examples of how we don’t have very good rules and systems for making sure that the world economy is well related between countries. It’s still a very nation-state based system.

This is something that people had started to say about globalisation anyway. If you look, for example, at what’s been happening at the Foxconn factory in China…when we think about the standards that those kinds of factories have, compared to the standards in our own country. What do we think about international trade rules that mean that we import things from low cost countries? What kind of intellectual property rules do we have between different countries, where what a US court decides about an American company, in the Google Books case, for example, has implications for writers and artists around the world? So the argument of the book is the need to think about how to do it better and how to draw on psychology and anthropology to allow us to do it better.

Economics isn’t enough; it needs the insight of other disciplines?

That’s right, and although I think the insights of economics are essential, actually, good economists have never thought economics was enough. There’s a kind of caricature about economics, that it’s all about the false assumption that people are rational, calculating machines who don’t care about anybody else. That’s never been true. There was a high tide of economics that was like that in the Thatcher and Reagan era, but that was well over 20 years ago now. For the past generation economists have moved very far away from that kind of caricature. And good economists always drew on history, they drew on mathematics, they understood psychology (even if they didn’t incorporate psychology formally in their models), they were interested in political science and political decision-making. It’s always been a subject that’s been at the cusp of a lot of other disciplines, and I think that interdisciplinary strength has been revived recently and is very much to the fore in a book like Paul Seabright’s.

Next is the David Landes classic, The Wealth and Poverty of Nations, looking at why some countries are so rich and others so poor.

I’m one of those economists who love reading history books. I think we can learn an incredible amount from past episodes, because while I do think that economics is a science, it’s a science of a historical kind. It’s a bit like geology, where you have to understand past processes through the bits of evidence that you can see in the rocks around you. You can’t carry out experiments in geology, and you can’t really carry out experiments very widely in economics, though there are special cases.

So history books are really important source material for economists. As well as historical data, we need all the additional detail and colour you get from reading history. The Wealth And Poverty of Nations is one of several really fantastic economic history books of recent times that address the big question, the main question in economics, which is: ‘What makes people prosperous? What makes an economy grow?’ And we have to be humble and say we don’t actually have a very good answer to that question… We’re still searching for what the right answer is.

Different historians emphasise different aspects. Landes’s book emphasises the importance of culture in economic history, and there are other economic historians, like Joel Mokyr, who would emphasise the same kind of thing. So the idea people have about the economy, and how society ought to work, will affect economic growth and how it turns out.

There’s a fantastic example that’s always stuck with me. It’s about Jacob Rothschild, who died of an infected abscess. He died through want of an antibiotic that would cost $10 these days. He was the wealthiest man of his era, but he couldn’t be cured of a simple infection because innovation just hadn’t taken us to that point yet. It’s a really powerful example for me, because it points out that the thing about capitalist economic growth that makes people better off isn’t more stuff – it’s different stuff. It’s the innovation and it’s the variety, and it’s the new products.

Another terrific example was a television series that was on in 1999, ahead of the millennium, called The 1900 House. A family was asked to live their lives as if they were living in 1900 and not 1999, down to every last detail. And the thing that nearly made the mother want to give up the experiment was that she didn’t have shampoo and she couldn’t get her hair properly clean. When you think of the new, fantastic high-tech innovations there have been, like cars and computers and so on, they didn’t matter to her. She could live without those, but she could not live without shampoo. And those apparently minor innovations actually make a fantastic difference to people’s wellbeing and their prosperity. That is what economic growth is all about – understanding, over time, the conditions that allow people to have new ideas and to innovate. That’s what’s fundamental and that’s what The Wealth and Poverty of Nations is all about.

You say he puts the emphasis on culture. I never really know what that means.

I think it means the conditions in a society that determine how people think. Is it possible to have new ideas, or will you be regarded as a dangerously subversive heretic for having new ideas or doing things differently? Are there certain ways for women to behave that mean it’s very difficult to increase the general level of education in the society? Are there belief systems that people have that mean things have to be done one way, and not another? So that’s how I think about it. Another aspect I suppose is the social capital dimension of culture, how much people trust each other, because trust is fundamental to any economic exchange. Unless you’re handing over one item for another in a face-to-face barter, then you’re depending on trust. So the level of social capital is very important – how tight-knit the community is, how much people in the society will trust strangers, can you transact with people outside your own village, outside your own town, or in a different country? Globalisation actually places huge demand on the level of trust in the world economy – you really have to have confidence that if you place your order on the internet, somebody in the factory in China is going to deliver the product so that it will eventually turn up on your doorstep.