Kling starts by making the case for why the social sciences are so different from the hard sciences. “First, more causal factors are at work in economics than in physical science. Second, although physical relationships are relatively stable, the economy evolves rapidly, including evolution in response to government’s attempts at regulation.” Instead of falsifiable facts, economics operates on “frameworks of interpretation” in which one “single anomaly does not lead someone to abandon an interpretative framework.” There are no controlled experiments for the economy as a whole and so multiple causal facts influence economics in the real world.
No one in today’s world is self-sufficient and that is a good thing. Because of specialization the economic pie has been able to grow beyond any single human’s capabilities to satisfy his own wants. Trade is the other side to the specialization coin. Since we no longer produce all that we need, we must trade for those things. “When the value of different tasks can be isolated, specialization will tend to take place between firms, coordinated by the price system. When the value of a particular task is difficult to measure, because its value varies a great deal depending on how it is combined with other tasks, specialization will tend to take place within the firm, governed by instructions.”
Kling tries to move beyond looking at the whole national economy as one giant GDP factory with homogenous lumps of labor and capital. “A job does not consist of producing a fraction of generic output.” Instead, he describes an economy moved by “patterns of sustainable specialization and trade”, which are constantly evolving slowly. This is a world full of Schumpeterian creative destruction. “Substitution takes place on the basis of existing technology. Innovation represents the successful implementation of new methods of production or new means of satisfying consumer wants.”
Another big piece of the modern economy is financial intermediation. “If trade entails trust among strangers, then financial intermediation entails trust over time.” Destruction in trust in financial intermediaries can be so destructive because of the role they play in facilitating business production across a number of otherwise unrelated industries. “With specialized, roundabout production, financial intermediation is embedded in every business. If financial intermediaries must shrink because of a sudden loss of reputation, then that could disrupt many patterns of specialization and trade, and it could lengthen the time it takes for new patterns to emerge…. That does not mean that all economic fluctuations originate in the financial sector. Instead, it could be that shifts that take place elsewhere are amplified as they hit the financial sector.”
Kling also makes a couple of tangential points which are worth pondering. Kling does not minimize the role of government in facilitating business. However, he emphasizes the roles of ever-fluctuating prices in gaining the specialized knowledge necessary for sustainable patterns of growth. “Competition and reputation are a form of decentralized regulation.” In the realm of sustainability, he quotes Solow, “it is an obligation to conduct ourselves so that we leave to the future the option or the capacity to be as well off as we are… Sustainability is an injunction not to satisfy ourselves by impoverishing our successors.” Again, however, Kling sees the price system as the best means of accomplishing this goal, “if two methods of producing a given output exist, the market will select the method that uses the fewest resources when those resources are valued at market prices,” with the huge caveat that, “market prices reflect costs only when resources are owned and priced.” He cites the successful achievements of reducing water and chemical use, such as nitrates, in America even as agricultural yields have grown, as well as the reforestation of most of Western Europe and America in the latter twentieth century, due to efficiencies in paper production and substitutions in ship and home building. For a short book, Kling packs it in with contentious big ideas and unorthodox viewpoints, but he certainly makes you think about an alternative framework for viewing macroeconomics.
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