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What makes a nation wealthy?
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?
Professor Greg Clark of UC Davis, in his new book-length manuscript, resurrects Malthus, counters Jared Diamond (only recently has the European standard of living surpassed that of hunter-gatherer societies), shows the Industrial Revolution came only slowly, and argues that economists overrate the importance of good policy. We can separate out the influence of policy by looking at the differential productivity on the factory floor, across regions. The sheer quality of labor matters more than we used to think. Quality labor attracts capital, which in turn supports good institutions.
Here is the conclusion to my column:
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.
Clark also argues that sub-Saharan Africa is poorer than ever before, and that foreign aid worsens a zero-sum Malthusian trap. He makes the startling claim that gains in health are the worst thing we can bring to modern Africa. Here is the full column (by the way, I don't write the titles or subtitles), which includes a link to Clark's manuscript.
The book is not yet out, but it is the best of its kind since Guns, Germs, and Steel.
Posted by Tyler Cowen on November 2, 2006 at 06:39 AM in Books, Economics, History | Permalink
Comments
How does the quality of labor argument stand-up given the success of Indian and other immigrants from developing nations in the United States? Admittedly self-selection is involved but isn't the lack of opportunities in the home country due to poor instititutions and other conditions the reason they left? Not having access to the book how did Clark treat the historical immigration patterns in that respect. Wasn't capital availability and good institutions the source of the opportunities available to German, Irish and Italian immigrants in the 1800's?
Posted by: pkohl at Nov 2, 2006 7:51:30 AM
"...as late as the 18th century, most Europeans had not exceeded the standard of living in hunter-gatherer societies."
Seems rather hard to believe. Very much in the spirit of Rousseau? How does Clark get to that conclusion? What indices does he use to support such a statement? Child birth? Life expectancy? Average height?
So the 18th century English peasant (assuming that is "most Europeans") and the 18th century Shawnee had the same "standard of living?" That's a pretty bold claim. Makes one wonder what "standard of living" means.
Posted by: David Sucher at Nov 2, 2006 8:01:11 AM
cute idea.
why does foreign aid does not help Afirca, though?
Let's say, you cross before a starving, poor health beggar at a street corner every morning, and you give him 10 bucks each time out of sympathy. The beggar would not be so unhappy anymore, and if someone says "you need a job",he might angrily respond "hey, don't block my sunlight!"
Basically there are two ways you can help the beggar. the first is to give him a large sum of money so that he need not come out again next morning. the second is to hire him to get you a newspaper at 8:00 every morning for 10 bucks; soon, you will look for rich people who want newspapers to be delivered to their office; some time later, he might have a newspaper stall at the corner. He would be specializing on newspaper delivering then.
The second explains why Japan recoverd so fast after WII during the Korean war.
The aid to Africa are mostly final products in nature; they are soon consumed up. though we give cash, they basically quickly turn that into living needs. so, no accumulation of capital, and no Keynesian multiplier. In a sense, should there had been no aid, they might now have impressive outputs.
Posted by: SL at Nov 2, 2006 8:03:45 AM
Hmm. I find Robert Fogel's argument that health influences productivity more convincing. Yes, improvements in health can lead to a Malthusian trap, but they can also improve the quality of labor, if the improvements give workers greater energy, greater strength, and in some cases such as malaria, less risk of brain damage.
Posted by: DK at Nov 2, 2006 8:34:02 AM
The claim about hunter-gatherers having a superior standard of living is not especially far-fetched, although of course there were so many different hunter-gatherer cultures that generalizing can be misleading. Roughly the argument goes that in an industrialized agricultural society you are able to sustain a lot of people because you can produce calories cheaply in the form of grain, but other nutritional complements don't become cheaper as quickly, so a large portion of the population ends up alive but malnourished. In the hunter-gatherer situation the balance of nutrients is likely to be better even if the total carrying capacity is less.
As for height, I seem to recall it did decline in Europe from two thousand years ago, reaching a low sometime during the industrial revolution and then increasing dramatically in modern times.
Posted by: bbartlog at Nov 2, 2006 8:53:06 AM
Supposedly switching from a hunter-gather society to an agricultural
society was a big drop in living standards. Of course that seems to
ignore the point that the reason for the switch was that the hunter-
gatherers had reached a population density too big to continue supporting
a hunter-gathering economy. So there living standards would have fallen anyway.
Posted by: spencer at Nov 2, 2006 9:01:23 AM
Malthusian trap argument was very popular in the 60's, but then it was applied to the whole world. When the birth rates dropped in the 70's combined with the discovery that the lower the infant motality rate the lower the brith rate in poor nations, it disappeared. In the 90's some economist were claiming that the very high birth rates in Kenya was good for economic growth. They even had regressions to prove it. We seem to have come a full circle, and it is back to Malthusian traps.
Posted by: joan at Nov 2, 2006 9:57:51 AM
Just from the review, the book seems like mostly nonsense. Apparently the fact that a huge swath of Asia lifted itself out of poverty in 2 generations is because of "generations of history", not education and hard work. Why are population growth rates dropping so dramatically even in the most backward parts of India - which have sub-saharan rates of poverty?
Overall, why is "quality of labor" explanatory - what explains quality of labor differences?
Posted by: Vish Subramanian at Nov 2, 2006 10:29:29 AM
The Malthusian Trap assumes that if there is one person in all of England rather than two, the one person can produce more food per capita than the two people. Diminishing returns and all that.
Malthus can be refuted by observing that there are productivity gains from specialization. Adding more people to a fixed amount of resources (land, say) can increase per capita output rather than necessarily decreasing it - if the greater number of people leads to greater specialization. Rather than the marginal person being less productive than the previous average, the marginal person allows everyone else to abandon their marginally less productive activities.
Posted by: eddie at Nov 2, 2006 10:34:26 AM
It doesn't really ignore the point, though, unless one is trying to argue that switching to agriculture was a mistake.
It doesn't seem far-fetched to me that the life of an 18th century Shawnee might be more pleasant than that of an 18th century European peasant, at least before the europeans got here in numbers and started competing for resources. A sometimes forgotten bit of US history is that a small but significant percentage of our european ancestors were assimilated into native american communities in the early years, much more than the opposite happened. Obviously some people preferred the native-am way of life enough to undergo a pretty severe culture and language shock.
It wasn't until there were enough europeans to make for a serious resource clash ending up as warfare that this stopped happening. And that took a while because of the depopulation that immediately preceded our arrival in North America. I sometimes wonder about what kind of alternate history we'd have if racism hadn't been so prevalent and there had been a more market based mix of cultures on this continent.
The other problem with that comparison is that NA tribes in 1607 were already agricultural, though on a much smaller scale than europeans (and gathered a greater percentage of their food from hunting and gathering), largely because of the difference in grains available to domesticate here vs. europe.
The big win for agriculture was the mass scale of societies it enabled, and the amount of wealth that could be siphoned off in rent-seeking. That was a big win for the societies, but not much of a win for the individuals in them, unless they were in one of the rent-seeking classes (warriors, nobles, etc.) which were necessarily a small fraction of the total population. It's only in societies that successfully plundered other societies, or developed enough critical mass to support cities with real markets and innovation that the typical individual ever became noticeably better off than hunter-gatherers, and even there, city dwellers were a small fraction of the total population.
I'd guess it was really the renaissance that marked the turning point in europe though, rather than the industrial revolution. The IR happened because of changes in markets and information spread during the 14th-16th centuries (esp. the reformation and the printing press). Things were probably getting better for most of that time as well, just not as fast as they did once industrialization kicked in.
Posted by: Michael Sullivan at Nov 2, 2006 10:35:32 AM
I like the idea that agricultural societies developed not because they offered better living conditions to the peasants but so that the chiefs could increase the size of the populations they controlled, increasing their wealth and power. Like Kim Jong-Il, lords of agricultural societies couldn't care less whether their peasants were smaller and sicker than their hunting-gathering ancestors. There were more of them and they were easier to control, which made the lords richer and their lives easier.
Posted by: Robert Speirs at Nov 2, 2006 10:39:41 AM
Pondering the transition from hunting and gathering to agriculture in the context of a economics blog makes me think of is the old testament story of the Israelites clamoring for a King, to be like all the other societies around them, presumably to keep them from being conquered by one of them. Adonai, through the judges, lets them establish a king but warns them of all the evils that a King will do to their society. Here's the basic text from KJV. It's 1 Samuel 8:10-18:
And he said, This will be the manner of the king that shall reign over you: He will take your sons, and appoint [them] for himself, for his chariots, and [to be] his horsemen; and [some] shall run before his chariots. And he will appoint him captains over thousands, and captains over fifties; and [will set them] to ear his ground, and to reap his harvest, and to make his instruments of war, and instruments of his chariots. And he will take your daughters [to be] confectionaries, and [to be] cooks, and [to be] bakers. And he will take your fields, and your vineyards, and your oliveyards, [even] the best [of them], and give [them] to his servants. And he will take the tenth of your seed, and of your vineyards, and give to his officers, and to his servants. And he will take your menservants, and your maidservants, and your goodliest young men, and your asses, and put [them] to his work. He will take the tenth of your sheep: and ye shall be his servants. And ye shall cry out in that day because of your king which ye shall have chosen you; and the LORD will not hear you in that day.
I think it's a story of a society that managed to develop free-market agriculture[1] that succumbs to the fear of barbarians at the gate and it all goes downhill for the common (wo)man from there.
Apparently, God is a libertarian. :)
[1] they are ruled by judges and held together by a common moral understanding -- sounds vaguely like the night-watchman state, no?
Posted by: Michael Sullivan at Nov 2, 2006 11:26:32 AM
According to the Malthusian analysis, the subsistence level of income is that at which the death rate equals the birth rate. Assuming birth rates stay constant, the analysis implies that an improvement in technology will result in an increase in population but not an increase in income level - incomes rise at first, but then rising incomes lead to falling death rates which lead to rising population which leads to falling incomes until at equilibrium you're back at the subsistence level of income.
Hooey.
Say technology improves so that food output doubles. Incomes rise, death rates fall, population rises, marginal food output declines, incomes fall, death rates rise, equilibrium again. Fine. But that assumes that death rates are tied to a given level of food production per person (income here is measured in food) regardless of technology. If the only technological development is in food production, then sure, that makes sense. But technology improvements happen in every aspect of life - and unlike the Malthusian assumption about food production, they scale with population size rather than with land mass.
Say sanitation improves. That means a given level of per-capita food production will mean fewer deaths. That means at the Malthusian equilibrium the "subsistence income level" (as measured in food production) will be lower. Lower per capita food production means that a smaller percentage of the population can be engaged in activities other than food production, which is why we assume that mortality is higher with lower per capita food output - there's fewer doctors available to treat the sick, for example.
But at equilibrium, there's just enough excess food to pay for just enough doctors to keep the death rate the same as it had been before sanitation. Sanitation gives us better productivity per doctor, thus the same health care output with fewer doctors. But there's no reason to think that sanitation is the only improvement that's happened. Just as there will be fewer doctors per capita, there will also be fewer stonewrights and architects and shipbuilders... but if masonry and architecture and shipbuilding technologies have all improved along with sanitation, then real income can rise even if per-capita agricultural output has fallen.
Clark conflates "level of food production" with "standard of living" and concludes that the average Joe in 1800 was no less miserable than cave dwellers.
Posted by: eddie at Nov 2, 2006 11:47:45 AM
"Quality of labor" sounds like just a new label
for "human capital." Do we not already have a
large literature on the importance of that for
economic growth? Apparently, though, Clark wants
to say that some parts of this do not count, such
as basic education, rather it is something else,
culture or whatever.
What I have read is that European populations
had standards of living in 1800 about the same
as in the later stages of the Roman Empire. But
I find it hard to believe that hunter-gatherers
do as well as Romans did.
There would seem to be all kinds of refutations
of this argument. Maybe India did not do well
in 1800 compared to UK or US, but it is growing
more rapidly than either right now. Did the
"quality of labor" suddenly improve? Maybe there
is more to this book than you have been telling
us, Tyler, but based on what you have reported it
is no Guns, Germs, and Steel. Sounds more like
a potential recipe for racism (and just why is it
that sub-Saharan Africa has such a low "quality
of labor"???).
Posted by: Barkley Rosser at Nov 2, 2006 1:03:07 PM
"How does the quality of labor argument stand-up given the success of Indian and other immigrants from developing nations in the United States? Admittedly self-selection is involved but isn't the lack of opportunities in the home country due to poor instititutions and other conditions the reason they left?"
In the "old country", there's a hell of a lot of idiots and a few smart people that can't make full use of their abilities because all the idiots are saddling them with poor institutions. The smart people come to the United States, leave the idiots behind, and make better institutions to attract even more smart people. There's not that many of them in any given country, but when the US draws them from all over the world, they add up pretty quickly.
It's consistent with the "quality labor attract capital, which makes better institutions" theory, anyway.
Posted by: Ken at Nov 2, 2006 1:13:03 PM
"Supposedly switching from a hunter-gather society to an agricultural
society was a big drop in living standards. Of course that seems to
ignore the point that the reason for the switch was that the hunter-
gatherers had reached a population density too big to continue supporting
a hunter-gathering economy. So there living standards would have fallen anyway."
Not only that, but if you remember that the hunter-gatherer society didn't have birth control, the only way for their numbers to remain low enough to support hunter-gatherers at their standard of living was for large numbers of them to die prematurely. Factor them in, and their standard of living doesn't look so good compared to the later high-population agricultural societies, which still didn't have birth control but had a lower death rate.
Also, the agricultural society will leave behind less healthy skeletons because those who had slightly less than excellent health tended to die quickly, while the less healthy in agricultural societies could survive quite a while, and sometimes deteriorate due to underlying health problems that would have long since made them tiger food or spear fodder in a hunter-gatherer society. So idiots from a much later civilization look at skeletons from the two civilizations and conclude that the hunter-gatherers had a higher standard of living because there weren't any skeletons whose owners survived with health problems long enough to deteriorate from them!
Posted by: Ken at Nov 2, 2006 1:18:41 PM
"Also, the agricultural society will leave behind less healthy skeletons because those who had slightly less than excellent health tended to die quickly"
That should be "... those in hunter-gatherer societies with slightly less than excellent health tended to die quickly"
Posted by: Ken at Nov 2, 2006 1:20:11 PM
Personally I think it all comes down to leverage.
Imagine what goes into throwing a football. First, try to keep your entire body still excepting your hand and wrist. Your throw won't have a lot of speed, and you won't likely get a nice spiral which won't therefore be able to leverage whatever speed you achieve. Now allow yourself to also bend your elbow, and you do considerably better. Add in shoulder movement, and you do even better. Add in hip movement, better still. Add in leg and feet positioning and thrust, and you do better still. And this is all before training and practice, practice, practice.
Each step multiplied the value of what came before. The same holds true for economies as well. Law that is growth friendly (contract enforcement, low corruption etc.), a pro-growth tax structure, physical infrastructure (roads, seaports, airports, sewage, electricity etc.), human capital, investment capital (along with the money there is also "know how"), proximity to "outside" markets and suppliers, natural resources* are all in and of themselves not realy enough for economic growth. They all need each other to leverage into more than the sum or their parts. Leave out one or more part, and you have substantially less than you would have otherwise.
* In my opinion so called "natural resources" are in the eye of the beholder. Oil used to be useless (or negative value added) black gunk. Desert sand is today considered virtually worthless, or even or negative value as it seems to spread simply via proximity. However sand is what glass is made out of, and an essential ingredient to today's silicon (sand derived) computer chips (we could substitute for the sand of course, but it would cost more). Who knows what composites sand will eventually be used for when the price of alternatives gets high enough due to high demand relative to easily accessible supply? Currently we use very little solar energy except via natural warming of the air around us. When we leverage our brains with that essentially limitless supply of energy, we create solar panels and "solar towers" which use thermal energy. Again, it is an issue of relative supply and relative demand for already invested R&D and our current time and brainpower that keeps us using "valuable" yet inexpensive oil instead of currently "expensive", limitless sun energy that is actually "free".
The Earth has a gargantuan amount of natural resources that is essentially limitless. What is lacking is the human capital to leverage it into something we value enough to make it into a "natural resource".
Posted by: happyjuggler0 at Nov 2, 2006 1:35:53 PM
One of the more compelling arguments in the 'institutions' case is that, when a migrant moves from a poorer country to a richer one, his real income increases. It's the same person, so there is no difference in human capital or work ethic, or whatever, to talk about. In the richer country, the same laborer gets hooked up with more capital and is more productive. Something was preventing him from being appropriately capitalized in his home country, but many kinds of capital are mobile, so what was it?
But even taken on its own terms, the case for reducing health aid puzzles me. If you need quality labor to develop, then you need to have people living long enough to develop the appropriate skills and recoup the costs of acquiring those skills. Premature death and disability is a barrier to labor quality.
Posted by: Cyrus at Nov 2, 2006 2:00:28 PM
"Gains in health are the worst thing we can bring to modern Africa." Thank God for AIDS, then. Surely the best thing to happen for Africa's growth prospects since Mr Mosquito met Mr Falciparum. Although strange that that one didn't seem to help much. Clearly we need Diseases That Try Harder, the DoD has got to have some lying around. And why won't the avian flu hurry up and mutate? that should add a good couple of percentage points to the region's GDP, and probably send Vietnam into triple-digit growth. Or a good Hoffman-esque ebola outbreak, maybe? So many choices. Shame we got rid of polio and smallpox, mind. I blame the WHO.
Posted by: Adamsmithee at Nov 2, 2006 2:13:53 PM
Ken: There's some evidence for your (implicit) model in my new paper here:
http://www.siue.edu/~garjone/iqcoop.pdf
It looks like high-IQ groups are better at playing repeated prisoner's dilemmas than low-IQ groups. A study published in Evolution and Human Behavior, looking only at twins, found the same thing:
http://www.towson.edu/~jpomy/behavioralecon/SegalHershtwins.pdf
Since so much of successful society-building is (we're told) the process of avoiding prisoner's dilemmas--i.e., choosing cooperative outcomes when it's tempting to cheat in the short-run--it would seem that high-IQ societies would build better, more trustworthy societies all-around. Then a few low-IQ folks could pop in now and then and reap the fruits of the society built by the cooperation of others.....A great gift from the IQ-haves to the IQ-have-nots.....
Oh, and if you're looking for an easily-verifiable difference in "labor quality" that can generate Manuelli and Seshadri's 27-percent difference in productivity, it appears that you need look no further than IQ. I point that out on page 22 of this paper:
http://www.siue.edu/~garjone/naive.pdf
Posted by: Garett Jones at Nov 2, 2006 2:52:40 PM
IQ is decreased by poor maternal nutrition, as well as poor nutrition in the first few years of life. The result is still the more you have the more you will have.
Posted by: joan at Nov 2, 2006 3:27:18 PM
Ken,
Hunter-gatherer societies have a natural form of
birth control in the fecundity-fertility difference.
Their low carb diets tended to make women infertile
while they were breast feeding, thus naturally reducing
the birth rate.
Garrett Jones,
Interestingly, in the original repeated PD game
experiments put on by Dresher and Flood at RAND
that annoyed Nash, it was the economist Alchian
who kept "cheating" and a mathematician (forget
his name) who complained that Alchian was an
"idiot" who could not see the advantages of
cooperating.
Posted by: Barkley Rosser at Nov 2, 2006 3:28:24 PM
While we are talking about all this stuff about the quality of
labor do not forget that one of the origins of the modern world
is the black death in europe that made labor the scarce resource
and capital the abundant resource.
You can also find labor being the scarce resource is a reoccuring
theme in US economic development with the period of abundant labor
being the periods of subpar economic performance.
Maybe another way to express this is that expensive labor may
be the key factor that drives economic progress.
Posted by: spencer at Nov 2, 2006 3:39:46 PM
The idea that had occurred to me a while back regarding aid to Africa was this: If African countries are in the Malthusian trap, then giving them aid without increasing productivity will result in population growth beyond (or closer to for those countries close to climbing out) subsitance level. Suffering and famine ensue. Is this anything like Clarks argument?
Posted by: josh at Nov 2, 2006 3:42:54 PM
