Why are some countries rich and others poor? This vexing question has preoccupied the best minds in economics since at least Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations. In the late 19th century, Max Weber asked why capitalism had developed in Europe and failed to take root in China, and in the early 20th century Joseph Schumpeter sought to understand how entrepreneurial innovation fueled the wealth of nations. From Smith to Schumpeter questions of economic development were asked without reference to the aggregate data of national income accounting. But after Keynes, it seemed almost impossible to ask questions of development without reference to aggregate measures of national income. The aggregated economics of Keynes led to a demand for aggregate economics to complement the theory, and in the wake of the victory of Keynesianism in the economics profession during and after WWII various institutions were instituted (the IMF and the World Bank most prominently) to carry out Keynesian policies to address questions of underdevelopment and international macroeconomic stability. Armed with Keynesian theory and the statistical tool-kit of refined measurement and control, Keynesian policies could guide government in the effort to correct the flaws of the capitalist system and manage the economic system appropriately so that stability and prosperity could be experienced.
But what if the Keynesian apparatus is intellectually flawed to the core as I believe it to be? Well perhaps we need to recapture the research agenda from Smith to Schumpeter and eschew the 50+ years of Keynesian inspired economic science in development theory, empirics and policy. Oh Boettke, you say, that is just your crazy Austrianism coming out. Well, damn right it is, but it is not crazy. Ludwig von Mises raised serious doubts about the "new science" of macroeconomics and statistical economics. And, F. A. Hayek summed up the problem with aggregation as follows:
The consequence of this is that in the statistical study of social phenomena the structures with which the theoretical social sciences are concerned actually disappear. Statistics may supply us with very interesting and important information about what is the raw material from which we have to reproduce these structures, but in can tell us nothing about these structures themselves. In some field this is immediately obvious as soon as it is stated. That the statistics of words can tell us nothing about the structure of a language will hardly be denied. But although the contrary is sometimes suggested, the same holds no less true of other systematically connected wholes such as, for example, the price system. (Source: F. A. Hayek, The Counter Revolution of Science, Liberty Fund 1979, pp. 108-109)
Being in the intellectual company of Mises and Hayek doesn't mean you are right, but it is company I trust more than I question. It is important to stress that neither Mises nor Hayek used this critique of aggregate economics as a way to avoid empirical analysis of economic systems. Instead, they were saying that empirical analysis done in this way would more often than not wildly miss its mark. Historical scholarship and demographics would be a much better way to conduct empirical research on economic systems. The criticisms they offered were profound and pre-dated by some 40 years the microfoundations of macroeconomics literature. And despite generations of economists being schooled to accept aggregate economics and aggregate measurement, there were serious questions raised at a conceptual level from the start by scholars who were close to the development of this Keynesian line of research and far from influenced by Mises and Hayek.
National Income Accounting has some serious problems as a tool for public policy, as Simon Kuznets warned as he worked to refine the concept. For prices in an economy to be added in a meaningful way the presumption has to be that they are market prices, and in fact that they are competitive equilibrium prices to be more exact so that any one price reflects the full opportunity cost of production for that good (P=MC). Government set prices obviously would not reflect the value produced in an economy at any given time but instead only the arbitrary decision of government official to reflect resource use in non-market settings. This was particularly important, Kuznets insisted, during wartime, when market prices were often suppressed in the effort to allocate resources to meet war demands, and unless adjustments are made the accounting will be off the mark in terms of capturing the production of economic value in the economic system. Kuznets argued throughout WWII for a "peacetime" concept of GNP that would not confuse military production with economic well-being. Robert Higgs has a very illuminating discussion of these problems and other problems in his "Wartime Prosperity?" [I pretty much recommend everything by Higgs to anyone who will listen, so please listen and read Higgs!].
What is an economist to do in assessing economic systems if he doesn't compare national income statistics? Doesn't even the Index of Economic Freedom focus on macroeconomics? Of course it does and this just demonstrates how powerful the sway and complete the intellectual victory of the Keynesian consensus really was. Even Milton Friedman, perhaps the most important intellectual-economist in beating back the Keynesian policy consensus in the economics profession and in the world, nevertheless thinks in terms of Keynesian concepts and Keynesian inspired statistical measures of the wealth and poverty of nations. Few were the economists who resisted completely the lure of Keynesianism.
PT Bauer is perhaps the most important figure in the field of development economics to reject the Keyensian hegemony. Bauer has inspired our efforts at the Mercatus Center in the Global Prosperity Initiative, and it is this research effort that underlies our work Enterprise Africa, which a team of researchers associated with Mercatus will be engaged in over the next few years due to a generous award from the John Templeton Foundation. Rather than study statistical aggregates, the focus here will be in on-the-ground study of how entrepreneurs are erasing the devastating problems of poverty in some of the poorest regions of the world. The eradication of poverty will not come from international aid agencies and the decisions by western leaders on how best to redistribute wealth world-wide, but through the entrepreneurial spirit of Africans themselves. Given the freedom to realize the gains from trade, individuals will strive to improve their lot in life and the lives of their children, etc.
From Smith to Schumpeter we basically understood this. We lost sight of this for a long time. We are gaining that understanding again ---- though the Joseph Stiglitz's, Paul Krugman's and Jeffrey Sachs's of the world resist mightily the lesson that we must retire Keynesian analytics and Keynesian command and control policies. Thankful we had brave and serious scholars such as Mises, Hayek and in this field especially P. T. Bauer to resist and uphold an alternative conception of economic science and policy. William Easterly's new book, The White Man's Burden: Why the West's Big Plans to Save the Rest Fail to Do Good is a worthy successor to Bauer and its publication should be greatly anticipated by economists. Easterly's The Elusive Quest for Growth focused on the simple point that incentives matter. In The White Man's Burden we see plenty of perverse incentives at work, but we also read extensively about lack of accountability and feedback mechanisms that undermine the workability of big plans. Assessing economic systems doesn't need aggregate statistics, but instead detailed examination of the institutional environment and economic structures in operation and how they impact the ability of individuals to realize the gains from specialization and exchange.