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Thoughts on Developmental Economics

November 27, 2012

Between MRU and the recent immigration stuff, I’ve been thinking a bit more about developmental economics, which was my favorite branch of economics for a long time before I started my business cycle kick. A field of study should be judged by how it impacts people’s lives. While business cycles do impact people quite a bit, very few subjects are as critical to humanity as the search to discover why some nations are rich and others poor.

Microeconomics contributes surprisingly little to the quest for growth. With only a very basic education in economics, you could correctly diagnose whether a policy is a good idea or a bad one. Theoretically, even a cursory glance at the history of agricultural organization should have deterred the Communists from collectivizing farms. But even that had some theoretical support among academics. Most of the policies which keep poor countries poor have virtually no academic support whatsoever: protectionism, national monopolies, monopolistic marketing boards, price controls, high entry costs for new firms, poorly defined property rights, etc. Everything anyone needed to know to make a poor country rich could be found in “The Wealth of Nations” back in 1776.

There are many explanations for poverty floating around: culture, institutions, geography, or even access to good ideas. Jared Diamond focused on ancient conditions, such as domesticatable animals and geography to explain development, but at best, such explanations can only take you up to 1700 or so, since at that time, cows, horses, wheat, and rice were available throughout the world. But in 1700, the difference between the richest and the poorest country was about 2:1. Perhaps that difference is worth explaining, but the 100:1 difference which exists today is surely a bigger mystery. Geography (and any other slow changing explanation such as culture or institutions) can’t explain growth today simply because there are too many exceptions and “reversals of fortune” where once rich countries become poor and vice versa. Every explanation for growth yet tried has some flaw. Unfortunately for the world’s poor, there is no magic bullet.

How can I reconcile these two positions? On one hand, you have “the answers are obvious to econ 101 students”, and on the other you have “no solution works”. The trouble lies in the “how”. Economics needs political science to complete its Weltanschauung. You have to be able to figure out why a country would choose unfree trade, or other stupid policies, not just which policies are good. I think Daron Acemoglu, James Robinson, Bruce Bueno de Mesquita, Doug North, and other institutionalists have done a great job studying why seemingly bad institutions persist. The best summary might be that the policies which help the dictator to hold on to power don’t help the rest of the populace. If you are a dictator, you need goodies to hand out to cronies in order to maintain control. A free market has zero long run profit, which is no good if you’re the one who controls the profit. Creative destruction sucks if you’re the one on top, because you’re the one who is going to get destroyed. Hence stagnation is optimal for the powerful.

What is to be done? “There’s no solution” style thinking is just too depressing for me to believe that it is true. First, make the best case for the first best policy, and convince all the smart unbiased people you are right. Read intellectuals from the 50s and 60s and they are much more statist than intellectuals today. Secondly, make the bootleggers stand alone without the Baptists on their side. Call a dictator a dictator, and don’t pretend like they are legitimate. When an issue really is “public interest vs. cronyism”, tell people as much. Maybe there will be come entrenched dictatorships which can survive on military strength alone, but legitimacy helps a lot. It’s really hard to maintain a social order without relying on “intimate order” level goodwill and virtue. How long will a government survive if everyone is acting purely on their own self interest and they all know it? Capitalism relies on “bourgeoisie virtues” to survive, and perhaps there’s a “dictatorial virtue” varient as well.

The fact is, the world is improving. Progress is being made and poor countries are converging with rich ones. It’s just that in terms of human welfare, speeding the process up is mind bogglingly valuable. I feel like I have to devote at least some of my time to thinking and writing about development.

2 Comments leave one →
  1. November 30, 2012 10:20 pm

    Interesting thoughts… I haven’t spent any time on MRU, except for maybe one video clip that was circulating. Development economic stuff seems complicated enough for everyone to have their own pet theories and lens through which to interpret history… my bias would definitely include religion as a major factor.

    It’s also interesting to think about the political barriers to implementing foundational “free market” economic policies in poor countries, especially since I’m more used to US columnists bemoaning the political barriers to implementing more advanced “interventionist” economic policies here…

    • December 1, 2012 8:31 am

      Religion is one of the best correlations of growth. The problem with it is that it is confounded by a region dummy variable, aka, Protestant is pretty much a dummy variable for Europe, Buddist is a dummy variable for East Asia, etc. Secondly, it’s really hard to find instrumental variables for it. So, you can’t just go around randomly assigning people religions and see what happens to their growth rates. Personally my pet theory is basically “how close do you get Adam Smith right?”.

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