[with my comments] November 2, 2006 / New York TIMES Economic Scene What Makes a Nation Wealthy? Maybe It's the Working Stiff By TYLER COWEN
Economists typically explain the wealth of a nation by pointing to good policies and the quality of a country's institutions. But why do these differences exist in the first place? In "A Farewell to Alms: A Brief Economic History of the World" (forthcoming, Princeton University Press, http://www.econ.ucdavis.edu/faculty/gclark/papers/FTA2006.pdf), Gregory Clark, an economics professor at the University of California, Davis, identifies the quality of labor as the fundamental factor behind economic growth. Poor labor quality discourages capital from flowing into a country, which means that poverty persists. Good institutions never have a chance to develop. [Michael P, do you know Clark? [how is "labor quality" measured? what are "good" institutions? Are these normative terms?] Professor Clark's pessimistic view is that most forms of policy advice or financial aid do not solve the problem of economic development. Unless the quality of labor rises, those would-be remedies are addressing symptoms, not causes. ["most" forms? that says that some forms do solve the problem. Why didn't Clark study those? Or did Cowen skip that part of the book?] Professor Clark's analysis counters Jared M. Diamond, who in his "Guns, Germs and Steel" (W. W. Norton & Company, 1999) located the ultimate sources of European advantage in geography, like safety from tropical diseases, and a greater number of available animals that could be domesticated. [This totally misrepresents Diamond. For him, it's not _European_ advantage as much as _Eurasian and North African_ advantage. The victory of Europe over the rest of E&NA is pretty much unexplained in Diamond's book. [His theory is also much more _ecological_ than portrayed here: the large ecological area of E&NA allowed for a lot of competition and interdepency, which allowed the "fittest" to win out, giving them the immunity to diseases, more robust organizational forms, and more productive technology that could beat others. The Spanish Empire -- because it was a product of a long process of military and economic competition -- were able to beat the Incas hands-down. The Spaniards had greater immunity (not to everything, of course), guns, and superior organization. The Incas had had the luxury of not facing much competition from other cultures and inadvertently set themselves up for a fall. It's akin to what happened to US manufacturing in the 1970s, when it faced competition from the lean and mean Japanese and Germans after a long time when US corporations had been resting on their laurels. [I get the strong feeling tha Cowen hasn't read Diamond's book. I can't tell if Clark has or not. Even if one disagrees, it's a very interesting book.] A simple example from Professor Clark shows the importance of labor in economic development. As early as the 19th century, textile factories in the West and in India had essentially the same machinery, and it was not hard to transport the final product. Yet the difference in cultures could be seen on the factory floor. Although Indian labor costs were many times lower, Indian labor was far less efficient at many basic tasks. [this example, of course, takes place pretty much at the end of Diamond's story. The factors that he stresses had already played their role, so that any dismissal of his hypotheses on this basis is shallow at best. [In addition, to his detriment, Diamond ignores the subcontinent almost completely. [Cowen -- and Clark?? -- ignore the British efforts to cripple the Indian textile industry.] For instance, when it came to "doffing" (periodically removing spindles of yarn from machines), American workers were often six or more times as productive as their Indian counterparts, according to measures from the early to mid-20th century. Importing Western managers did not in general narrow these gaps. As a result, India failed to attract comparable capital investment. [this example is far after Diamond's story is over. The early to mid-20th century period is part of the British Raj, a period when India's development was done for the purposes of promoting English, not Indian, interests. It's interesting that the _laissez-faire_ types like Cowen are willing to ignore the negative role of the state when it's convenient.] Professor Clark's argument implies that the current outsourcing trend is a small blip in a larger historical pattern of diverging productivity and living standards across nations. Wealthy countries face the most serious competitive challenges from other wealthy regions, or from nations on the cusp of development, and not from places with the lowest wages. Shortages of quality labor, for instance, are already holding back India in international competition. [this is strange. Why can't India improve its labor "quality"? How we able to extrapolate from the early 20th century to today in such a blithe way?] An independent estimate by two economics professors at the University of Wisconsin, Madison, Rodolfo E. Manuelli and Ananth Seshadri, ("Human Capital and the Wealth of Nations," (http://www.ssc.wisc.edu/~manuelli/research/humcapwealthnation5_05.pdf) suggests that if variations in the quality of labor across nations are taken into account, other productivity factors need differ by only 27 percent to explain differences in per capita income. [to what extent do these estimates of "labor quality" simply reflect differences in per capita income, so that causation is reversed? if these authors use the standard "growth accounting" method, they are making a large number of bogus assumptions that undermine any validity of their study. It may be okay to make some bad assumptions now and then, as Milton Friedman argues, but doing growth accounting is not the same as prediction, where MF's dictum is supposed to apply.] Professor Clark argues that as late as the 18th century, most Europeans had not exceeded the standard of living in hunter-gatherer societies. Until recent times, the early advantages of Europe did not allow it to escape what economists call the Malthusian trap, in which rising populations periodically offset temporary gains in living standards. [It's interesting that this conclusion about the low level of majority European living standards at that point has been shared by so many, from Adam Smith to Andre Gunder Frank to Bob Brenner.] The turning point came when England, and some other parts of Europe, managed a small but persistently positive rate of growth, starting around the 17th century. Pro-business values spread through English society. The Industrial Revolution was not so much a revolution as a continual building of small improvements, and indeed its history shows the difficulty of achieving regular growth. The explosion of technology came only in the late 19th century, well after many incremental gains. ["pro-business values"? can these be pinned down? [the argument of the Rostovian "take-off" vs. gradual improvement is quite old and will likely never be settled.] The world's poorest countries, which now have about one-fiftieth the per capita incomes of the wealthiest countries, have not kept pace. According to Professor Clark, the relative advantage of a highly disciplined and properly acculturated work force is greater for the more complex production processes of the modern world. Low morale and lax discipline will curtail simple factory production but the problem is far worse as production and management become more complex. [Clark seems to be agreeing with Karl Marx here! Marx argued that the institutional change called the "rise of capitalism" led to increased disciplining of labor, increased work hours, and pro-capitalist acculturation. This subjugation of labor -- often using violence -- allowed the capitalists to introduce "modern" technology, including machinery. I wonder if Clark knows he's reinventing the wheel? Or is Cowen exaggerating the originality of his thesis?] The poorer countries remain stuck at the bottom as growing populations mean fewer resources for everyone else. Paradoxically, advances in sanitation and medical care, by saving lives, have driven down well-being for the average person. The population is rising in most of sub-Saharan Africa, but living standards have fallen below hunter-gatherer times and 40 percent below the average British living standard just before the Industrial Revolution. [strange how the role of imperialism is totally forgotten. I presume that Clark is smarter than Cowen here.] The upshot is this: The problem with foreign aid is not so much corruption but rather that the aid brings some real benefits and enables higher populations. [Thomas Malthus, presente! it's a mistake to drain the swamp, because it allows people to breed. If imperialism and the like are ignored, it's standard practice to dredge up the Malthusian bromides.] Professor Clark questions whether the poorest parts of the world will ever develop. Japan has climbed out of poverty, and now China is improving rapidly, but Dr. Clark views these successes as built upon hundreds of years of earlier cultural foundations. Formal education is no panacea, since well-functioning institutions are needed for it to be effective. [what are "well-functioning institutions"? the ideological nature of this discussion is shown by the total failure to ask such questions or (worse) that the answer is self-evident. [what about mass education? one of the big problems that India had in the decades immediately after independence was its emphasis on advanced education, seeminging in the service of the urban elites. That doesn't work as well as the emphasis on mass literacy and the like applied in S. Korea, Cuba, Taiwam, etc. [By the way, how do we tell if the "hundreds of years of earlier cultural foundations" (sic) were right to produce the rapid growth of a country. All countries have cultural foundations. The "good" ones are likely defined as those that produce "good" results. It's an after-the-fact rationalization, or true by definition.] A more optimistic take might cite the power of cultural globalization. It is hard to reshape workplace norms in poor countries, but in the modern world religious and cultural ideas spread with a hitherto unprecedented speed. Perhaps television and missionaries will prove more important for economic development than privatization plans or exchange rate adjustments. [I think I'll start tithing to the Mormon church again. And I'll chip in a few bucks to NBC, which seems to be having hard times, poor dears. You know, if those wogs were like us, they would enjoy more economic development.] Professor Clark's idea-rich book may just prove to be the next blockbuster in economics. He offers us a daring story of the economic foundations of good institutions and the climb out of recurring poverty. We may not have cracked the mystery of human progress, but "A Farewell to Alms" brings us closer than before. [It _is_ a cute title.] Tyler Cowen is a professor of economics at George Mason University and co-writes a blog at www.marginalrevolution.com. He can be reached at [EMAIL PROTECTED] -- Jim Devine / "Mathematicians are like Frenchmen: whatever you say to them, they translate it into their own language, and forthwith it means something entirely different." -- Johann Wolfgang von Goethe
