A few weeks ago I wrote an initial reaction to Matt Ridley’s The Rational Optimist.  Ridley’s thesis is that the key to prosperity lies in economic growth, and that economic growth is caused primarily by innovation fueled by the exchange and mating of ideas.  As long as ideas are allowed to move freely they will inevitably mate, mutate, and produce innovations that will drive economic growth and improve the quality of life:

The perpetual innovation machine that drives the modern economy owes its existence not mainly to science (which is its beneficiary more than its benefactor); nor to money (which is not always a limiting factor); nor to patents (which often get in the way); nor to government (which is bad at innovation). It is not a top-down process at all. Instead, I am going to try now to persuade you that one word will suffice to explain this conundrum: exchange. It is the ever-increasing exchange of ideas that causes the ever-increasing rate of innovation in the modern world.

Why is Ridley a “rational optimist”?  Because, in his words, he has “arrived at optimism not through temperament or instinct, but by looking at the evidence”.  As Ridley sees it, throughout history, when the free exchange of ideas has been hampered by natural disasters, disease, war, wrong-headed government policy and monopolistic business practices, the result has been a reverse in development and a regression of health and happiness.  Despite these periods of regression, Ridley remains optimistic that the world will continue to get better as long as we ensure that society remains open.  Recent developments in communication technology have only accelerated what Ridley sees as an already robust atmosphere for ideational mating.  This, combined with the progress already achieved in medicine, agriculture, and human rights gives him more hope than not that as a global society we will avoid the many catastrophic predictions making the rounds.

Overall, the book was quite enjoyable.  Ridley spares no sacred cows and marshalls logical and empirical evidence to make his point–whether he is eviscerating the organic farming and climate change movements or patent rights.  He traces over 200,000 years of human history to make the case that we are, on balance, far better today than we have ever been.  This isn’t to gloss over the many problems that persist.  Rather, Ridley freely admits the issues we face while arguing that the past should give us confidence that these issues will also be overcome.  History has shown us that when ideas are allowed to freely move about and reproduce with each other, society is able to drastically improve itself and solve seemingly intractable problems.  I would have liked to see more explicit discussion of ideational “mating”, rather than it’s sprinkling through various chapters, but overall the point is well taken.  My biggest peave with the book is Ridley’s treatment of government.

Ridley is clearly not a “big government” advocate, and that is a totally reasonable position.  The idea that innovation and economic growth is primarily driven by bottom-up activity versus top-down planning and decree is correct.  However, at many points in the book, Ridley seemingly fails to adequately wrestle with the fact that much of the progress he lauds is a by-product of optimal government policy, not despite it.

For example, when discussing how the country of Botswana could have developed at an incredible rate despite facing many of the same crushing obstacles as other perpetually underdeveloped African states, Ridley succintly notes that the main difference was that Botswana had “good institutions”:

In particular, Botswana turns out to have secure, enforceable property rights that are fairly widely distributed and fairly well respected. When Daron Acemoglu and his colleagues compared property rights with economic growth throughout the world, they found that the first explained an astonishing three quarters of the variation in the second and that Botswana was no outlier: the reason it had flourished was because its people owned property without fear of confiscation by chiefs or thieves to a much greater extent than in the rest of Africa. This is much the same explanation for why England had a good eighteenth century while China did not.

I agree whole heartedly with Ridley’s emphasis on property rights. Here, he is following such eminent economic historians as Douglass North (whom he cites) by emphasizing that good institutions are critical to shaping the economic outcomes we hope to achieve.  However, Ridley goes on to argue that property rights cannot simply be imposed from above by government, but must evolve from the bottom-up.  The bottom-up evolution of institutions and the importance of government are not mutually exclusive or at odds.  Optimal property rights, particularly those that allow for robust exchange in an impersonal economy, must at some point be formalized and enforced through fully functioning legal and court systems.  Additionally, they must be codified in a such a way where they can be changed if necessary to improve their efficiency and functionality.  The only way to formalize such rules, ensure their proper enforcement, and allow for occasional “tweaking” is to have in place a government system that is at once robust in it’s authority and responsive enough to citizens to minimize the abuse of property rights (e.g. through the creation of a rentier class).  In other words, liberal Democracy.  This is not to say that governments are optimal or do not, in some cases, harm innovation and economic growth (surely they do).  Rather, the point is that the dynamics that Ridley so covets cannot flourish despite government, but rather require “good” governments and institutions that can facilitate free idea exchange and commerce.