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Sentences of wisdom
What’s missing is a recognition of how mysterious the secret of economic growth remains, despite all the energy that economists have poured into solving it.
That's James Surowiecki, reviewing Ha-Joon Chang's Bad Samaritans and writing on free trade; the piece is interesting throughout. The pointer is from Ben Casnocha.
Posted by Tyler Cowen on April 18, 2008 at 09:51 PM in Economics | Permalink
Comments
There is no secret to economic growth. Freedom + Secure Property Rights = Growth.
Posted by: Kevin Nowell at Apr 19, 2008 1:36:53 AM
Out of nothing, the nooosphere, with all its tendrils. I'll go with mystery, indeed.
Posted by: David Sucher at Apr 19, 2008 1:53:23 AM
Kevin puts it very succinctly. You have to be a two-dimensional thinker to disagree.
Posted by: Jacob Oost at Apr 19, 2008 3:39:34 AM
There is no secret to economic growth. Freedom + Secure Property Rights = Growth. -Posted by: Kevin Nowell
Even a cursory glance across the world will demonstrate that neither of those two ingredients is necessary nor sufficent to generate growth. Property rights are of course important but by no means a panacea.
The fact is that it is that growth of an economy is an emergent phenomena of a complex adaptive system and we as of yet don't have any really good models for it.
I find Jacob's comment amusing considering Kevin's formula is literally two-dimensional.
Posted by: goodnessOfFit at Apr 19, 2008 9:06:22 AM
Ok. Cursory glance around the world.
China -- Transition from socialist, command economy to capitalist, freer economy has yielded huge gains in economic growth.
India -- See above.
Europe -- Stifling regulations and socialism/welfarism has stunted the growth of what was once the richest region in the world; except for places that have recently liberalized their economy (Estonia, Ireland, Latvia)
USA -- Stifling regulations and socialism/welfarism/militarism has stunted the growth of what still is the richest large region in the world; whose wealth was built on a legacy of freedom and strong property rights.
Please show me an example that disputes my claim.
Posted by: Kevin Nowell at Apr 19, 2008 10:34:13 AM
Another thing Chang points out in the book is there is more than one form of property right. Neo-liberals have focused in a myopic, fundamentalist manner on private property rights. However, public property (e.g. railroads, highways, state owned enterprises, government linked companies) have been engines of economic growth throughout history in every country on earth.
Posted by: ideogenetic at Apr 19, 2008 11:06:22 AM
There is probably a difference between developing modern economic growth ab initio (North Italy, then the Netherlands, then Britain, say) from copying it (the USA, Germany, Japan, China, say).
Posted by: dearieme at Apr 19, 2008 12:00:39 PM
Kevin, you are overlooking endogeneity. Certainly freedom and, perhaps to a degree, property rights are a result of growth as well as causes of it. There are too many examples of intervals of democracy that ended when economic troubles appeared.
There is a correlation between freedom and growth but we cannot say with confidence that freedom causes growth and not vice versa.
Posted by: kerimcan at Apr 19, 2008 12:54:10 PM
"I find Jacob's comment amusing considering Kevin's formula is literally two-dimensional."
Ditto - actually laughed out loud.
Posted by: meter at Apr 19, 2008 1:41:04 PM
I think Kevin is missing culture and informal institutions. If you put an American entrepreneur in a nation with strong property rights, he is going to create wealth (or try to). But would a Russian in 1991 know what to do? Put the same American in Rothbardia where even the roads are privatized, and would he know what to do? Would enough entrepreneurial people know of and trust the mechanisms which can fund things like private roads? I doubt it. If the knowledge isn't there, I don't think property rights are going to work miracles. I'd argue that property rights create an entrepreneurial culture, but if true, that would take time.
It seems to me that foreign investment is the most sure way to expect growth in nations with strong property rights. If foreign investment isn't occurring in those places, why not just ask entrepreneurs why they aren't investing in country X? They are probably going to give good answers; though maybe not ones that show up in studies.
Posted by: Grant at Apr 19, 2008 3:00:36 PM
Unfortunately, even the most intelligent and sophisticated economists do not know what definitively causes economic growth. There are a few attributes that successful economies share, mainly: property rights, stable institutions, educated citizenry, high rates of national savings and technological innovation. But even a combination of these does not fully explain why some economies grow and others are stagnant. Gregory Clark in his book, A Farewell to Alms, explains that many countries before the industrial revolution had seemingly hospitable circumstances for economic growth such as low taxes (relative to today's standards), a mobile labor force, and established legal systems. Despite all this, the economies remained stagnant until the 19th century. So even today, after a plethora of research in the field, economic growth continues to be a mystery.
Posted by: Rob at Apr 19, 2008 3:46:02 PM
A two-dimensional-illustration isn't the same as two-dimensional thinking.
And I notice nobody is rising to meet Kevin's challenge. Economic freedom and strong property rights are the main ingredients of capitalism and they have spread economic growth and a rising standard of living wherever they have been allowed to spread.
Try reading Hernando De Soto's The Mystery of Capital for some of the *real* reasons why "capitalism" doesn't seem to work in a great many countries where it is allegedly tried.
Posted by: Jacob Oost at Apr 19, 2008 4:47:21 PM
Kevin Nowell: USA -- Stifling regulations and socialism/welfarism/militarism has stunted the growth of what still is the richest large region in the world; whose wealth was built on a legacy of freedom and strong property rights
And yet, the period of America's immense economic growth between the years 1945-1975 came to a screeching halt at just about the same time that Milton Friedman and his acolytes got their feet firmly in D.C.'s door. It certainly wasn't FDR or his followers who made the monumentally inept and fatal decision to give the nation's primary economic golden goose - its domestic manufacturing apparatus -the unceremonial boot.
Agee with you about the "militarism", though.
Posted by: rangergranger at Apr 19, 2008 4:50:52 PM
No, that was the unions. :-D
And you need to brush up on your economic history, not neo-Keynesian revisionism. Friedman and his acolytes saved us from stagflation, something Keynes' followers couldn't explain.
Your analysis misses some other factors as well:
1) The US went into massive debt after WW2
2) The US had far less rebuilding to do after WW2 than other nations, giving us a competitive edge. Keynesianism and the big-government policies of the New Dealers had nothing to do with this.
3) The New Dealers prolonged the great depression by stifling the market, and the big-government types *created* it with the huge contraction of the money supply by the Federal Reserve.
4) The economic boom after WW2 was less than it could have been, were it not for the inefficiencies in the market due to higher taxes, regulations, union protectionism, etc.
5) An economy expands to fill the space allotted to it. Is China's economic growth proof that quasi-communism is good for the economy? No, but it shows what a *loosening* of the market can do. Eventually China's growth will reach its government-imposed limit, just as the US economy did in the 70s.
5) A slow-down in economic growth coincided with the Vietnam War, an explosion in Federal gov't social spending, and, as I mentioned, stagflation--which Friedman and his followers didn't *cause* but *remedied*, jettisoning over-regulation, stabilizing the dollar, and allowing the economic expansions of the 80s and 90s.
Posted by: Jacob Oost at Apr 19, 2008 5:46:33 PM
Here's a counterexample for Kevin: India appears to me to have decidedly better property rights and especially freedom. Why isn't it outperforming China bigtime?
Jacob, China isn't remotely Communist. It's a capitalist oligarchy.
Posted by: Jon Kay at Apr 20, 2008 12:58:56 AM
China does not have "strong property rights" by any Western standard, let alone "freedom." South Korea, during the years that its economy went from a Third World backwater to an industrial powerhouse, had strict capital controls, heavy government interference with investment decisions, restrictions on free trade. When Western Europe went from a bombed-out region to an area with the world's biggest GDP, it had all those things that Kevin insists are stifling it now: heavy government regulation, a social welfare state, strong unions, etc. As others have pointed out, the US was at its most prosperous during a period when the top marginal tax rate was above 90% and nearly 40% of the workforce was unionized. If you look at the biggest economic success stories of the last century, the idea that the "freedom + property rights" equation explains everything is simply nonsensical.
Posted by: K. Williams at Apr 20, 2008 1:08:23 AM
With all due respect, K. Williams, the appropriate question is not whether countries can be successful under economically illiberal regimes; the appropriate question is whether, all other things equal, a country with free trade is better than one without. China seems to be an ideal case; it's not free by any means now, but it is economically more liberal than it was twenty, thirty years ago. India's case likewise supports free trade; it was governed by very socialist thinking, with very strict foreign exchange controls and very limited free markets until the early 90s, when the present Prime Minister, an economist, was instrumental in structuring more open economic policies.
Posted by: johnleemk at Apr 20, 2008 4:13:01 AM
If economists are looking for a natural experiment, the economies of the British colonies that achieved independence after WWII comes to mind. All of them started off with similar legal and political systems. In the 30 to 60 years since, some have grown economically and others have not.
Comparing the former Caribbbean colonies with the African ones, I'll bet some factor such as "per capita trade with wealthier nations" is a major determinant.
Posted by: Bob Knaus at Apr 20, 2008 8:51:02 AM
John, that's not actually the appropriate question: the question is what are the major sources of economic growth? And there's just not much evidence to suggest that free trade (in the sense of allowing the free flow of goods into your borders) has much of an impact one way or the other. More important, China is not an ideal case, at least not for the truisms of free-market thought. It still has foreign-exchange controls, tightly restricts foreign investment, and doesn't allow the convertibility of its currency (along with massive state ownership, etc.) The issue that's at stake in this debate is not whether some form of capitalism is superior to state ownership or whatever: of course it is. The issue is whether the kind of unfettered capitalism that developing countries were pushed over the last twenty-five years is beneficial or inimical to economic growth. And I think the answer is that the empirical evidence can't really tell us.
As for India, the evidence there is far more ambiguous than you suggest. As you can see from this Dani Rodrik paper for the IMF (www.imf.org/external/pubs/ft/wp/2004/wp0477.pdf), India's productivity and growth surge began in the early 1980s, long before any of the liberalization occurred, and appears to be uncorrelated with any market reforms. Those reforms might have helped keep the ball rolling, but they did not set it in motion.
Posted by: K. Williams at Apr 20, 2008 9:04:37 AM
John Kay: India isn't as stable, which is where the "strong" part of "strong property rights" comes into play. And you'll notice I said "quasi-communist."
K. Williams: And what happened when those economies reached the limits of their growth, thanks to high taxation, regulation, and unionization? You see, economies expand to fill the space allotted to them. Just because an economy is expanding by leaps and bounds doesn't mean its trajectory is constant and certain. That expansion would never have happened without a loosening of the markets, but you seem to be implying we need some mix of intervention and markets. Based on what? The relationship between a free market and economic growth is well-understood, despite those who claim it is a mystery.
What's the relationship between high taxes, heavy unionization, and heavy regulation that causes sustainable, real economic growth? Apart from broken window fallacies, and theories that don't think beyond stage one, I can't think of many.
Posted by: Jacob Oost at Apr 20, 2008 2:30:44 PM
"The issue that's at stake in this debate is not whether some form of capitalism is superior to state ownership or whatever: of course it is. The issue is whether the kind of unfettered capitalism that developing countries were pushed over the last twenty-five years is beneficial or inimical to economic growth."
I'm not sure I see the meaningful difference, to be quite honest. More capitalism, ceteris paribus, seems to produce more economic growth. I don't think we know exactly why this is the case, but the evidence points to this conclusion.
I think Vietnam is a pretty good example. Their economy went nowhere until they introduced limited market reforms in the early '80s. The economy grew a bit, then stagnated again until they introduced more far-reaching market reforms - Doi Moi. Since then they've been on an upward trend.
I would hasten to add that although comparing countries before and after they change economic policies is the best we can get to experimental economics proving or disproving hypotheses about the provenance of the market, this is by no means a perfect method. Sometimes global economic conditions lift all boats, even the ones leaking like crazy. I don't know much about the Indian case in the early '80s, and indeed global economic conditions were probably not too conducive to growth then, but generally research in this area is subject far too much to the "correlation does not imply causation" caveat. All we can do is hypothesise to the best degree that the data let us; I'm open to the suggestion that markets don't produce growth, but my reading of the data is that, all other things equal, they do.
Posted by: johnleemk at Apr 20, 2008 8:42:51 PM
K. Williams: http://www.imf.org/External/Pubs/FT/staffp/2005/02/srinivas.htm
Posted by: Jacob Oost at Apr 20, 2008 11:01:04 PM
