…For a well-functioning economy to function well, it not only requires appropriate property rights, but also what can be vaguely called “economic freedom.” We need workforce mobility. Guilds need to be abolished. We need to get rid of monopolies both locally and globally. All kinds of regulations need to be removed. And above all, we need free trade. Without it, we will end up with a society that cannot grow. —Joel Mokil
The normal case for free trade is not the best case for free trade. The normal case is based on static efficiency, which means making better use of a fixed set of resources. Economists use the term comparative advantage to explain that if humans choose to specialize and trade with each other, they may end up better off for each other than if they produced everything themselves.
But trade plays an even more important role in what economists have come to call dynamic efficiency, or the ability of an economy to take advantage of innovation and improve its standard of living over time. This dynamic efficiency is a central concern of economists Philippe Aghion, Peter Howitt, and Joel Mokyr, who shared the 2025 Nobel Prize.
Aghion and Howitt investigated a process that Joseph Schumpeter famously called creative destruction. One hundred years after Schumpeter, the process is still visible in the realm of computers, communication technology, and software. Mainframe computers have been replaced by personal computers and the Internet, landlines have been replaced by smartphones and mobile communications, and artificial intelligence now threatens to transform many industries.
Mokil was known for his study of economic history, especially the Industrial Revolution. He pointed out that technology progresses through a virtuous cycle in which practical inventions stimulate curiosity, lead to scientific discoveries, and enable improvements to practical inventions.
Mr Mokyr also highlighted how protectionism can stifle the process of innovation and growth. When trade barriers are erected, dynamic efficiencies are stimulated. This is an important lesson that today’s policymakers are unwilling to learn.
In our 2011 book Invisible Wealth, Nick Schultz and I were fortunate to include Nick’s interviews with Mokyr and other proponents of dynamic efficiency, including Douglas North, Robert Vogel, and Paul Romer. Given that he recently won the Nobel Prize, it’s worth revisiting the subject of that interview.
Mokyr argues that the Enlightenment included a revolt against economic protectionism.
I argue in my book that one of the things that was happening in 18th-century Europe was a reaction against what today we would call in economic terms “rent-seeking,” which to a large extent was what the Enlightenment was all about: religious freedom, tolerance, human rights, all of those things. But it was also a reaction against mercantilism…
Adam Smith was not as original as people sometimes give him credit for… All of these people were essentially saying the same thing: we need to get rid of guilds, monopolies, and restrictive regulatory laws of all kinds. And above all, we need free trade, both domestically (Britain had it but the continent didn’t) and internationally.
…If you look at some parts of Europe where the Enlightenment did not penetrate or was fought back by established interests, those are precisely the countries that failed economically. I think of Spain and Russia more than anything else. (p.119-120)
Mokyr argued that ideas spread through the circulation of people.
In fact, much of our communication about technology takes place through personal communication…and there’s still only so much you can learn from books. (p.122)
Tacit knowledge is acquired privately.
Mokyr warned that protectionist interests are always lurking in rich societies.
Looking back at the record, it is clear that no one has held technological leadership for very long. The reason is primarily because technology creates vested interests, and these vested interests have a vested interest in trying to prevent new technologies from displacing them in the same way that they dislodged previous generations…and they have all sorts of mechanisms. One is regulation in the name of safety, environment, and employment protection. They seek to fend off new technologies in order to protect the human and physical capital embedded in old technologies. (p.123)
Without the pressures of international trade, industry can stagnate.
Let’s take a look at the American automobile industry in the 1950s. No technological changes at all… In the late 1960’s they were still making things like Vega and Pinto and they were the worst cars ever…
But then something happened. The Japanese came along…the Japanese made better cars from better materials. They made them cheap. Your car will last longer. And guess what? American cars today are much better than they were in the late 1950s to early 1970s. Not because Americans couldn’t do it before, but because openness forced them to do it. (p.126)
Many politicians in America today are listening to the siren song of restrictionists. Industrial policy, or protectionism, is thriving. Globalization and neoliberalism are bad words.
But if the past is any guide, anti-globalization will degenerate into crude special interest politics. Instead of dynamic efficiency, we will find ourselves in economic stagnation. The 2025 Nobel Prize winners remind us of this.
[1] Excerpted from an interview with Arnold Kling and Nick Schulz in Invisible Wealth. 119.
[2] Invisible Wealth was originally published as From Poverty to Prosperity in 2009.
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