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New page: #'''Economic Growth: Institutions or Culture and Genes''' #*Focus on Gregory Clark’s new book A Farewell to Alms: A Brief Economic History of the World #*Clark dismisses institutional vi... |
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#'''Economic Growth: Institutions or Culture and Genes''' | #'''Economic Growth: Institutions or Culture and Genes''' | ||
#*Focus on Gregory Clark’s new book A Farewell to Alms: A Brief Economic History of the World | #*Focus on Gregory Clark’s new book A Farewell to Alms: A Brief Economic History of the World | ||
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#*The question is: What caused this sudden rapid economic growth and why did it happen in England? Why not in India, China, Japan, and Africa? | #*The question is: What caused this sudden rapid economic growth and why did it happen in England? Why not in India, China, Japan, and Africa? | ||
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#'''Stagnant Malthusian Economy''' | #'''Stagnant Malthusian Economy''' | ||
#*Malthusian and Ricardian model of subsistence economy | #*Malthusian and Ricardian model of subsistence economy | ||
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#*England escaped the Malthusian grip circa 1800 | #*England escaped the Malthusian grip circa 1800 | ||
#*'''Question''': So what caused England to escape this tight Malthusian grip circa 1800? And, why in England? | #*'''Question''': So what caused England to escape this tight Malthusian grip circa 1800? And, why in England? | ||
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#'''“Survival of the richest” and the IR''' | #'''“Survival of the richest” and the IR''' | ||
#*Clark argues that it was not the right set of institutions that Smith and neoclassical economists insist caused IR in England | #*Clark argues that it was not the right set of institutions that Smith and neoclassical economists insist caused IR in England | ||
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#*Richer people bred more than the poor…well cared, fed, and educated children with riches inherited by birth…richer kids replaced poorer classes (downward social mobility)…basically the survival of the richest | #*Richer people bred more than the poor…well cared, fed, and educated children with riches inherited by birth…richer kids replaced poorer classes (downward social mobility)…basically the survival of the richest | ||
#*English society subjected to natural selection during the tight Malthusian grip…good virtues cumulated over the course of time… culturally and genetically capitalistic and entrepreneurial… | #*English society subjected to natural selection during the tight Malthusian grip…good virtues cumulated over the course of time… culturally and genetically capitalistic and entrepreneurial… | ||
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#'''Does institution matter for growth?''' | |||
#*Clark challenges the idea that getting “the institutions right” first is essential for growth | #*Clark challenges the idea that getting “the institutions right” first is essential for growth | ||
#*Shows that medieval England had all the incentives that the Washington Consensus recommended (see Table 1), but there was no growth at all | #*Shows that medieval England had all the incentives that the Washington Consensus recommended (see Table 1), but there was no growth at all | ||
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'''Objection''': Population growth alone cannot explain the acceleration in efficiency growth rates ex-post 1800 | '''Objection''': Population growth alone cannot explain the acceleration in efficiency growth rates ex-post 1800 | ||
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'''Objections to Clark’s ideas:''' | '''Objections to Clark’s ideas:''' | ||
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-'''Botswana''' attained sustained growth rates because good policies were chosen after instituting good institutions, particularly property rights (Acemoglu, Johnson, and Robinson 2001) | -'''Botswana''' attained sustained growth rates because good policies were chosen after instituting good institutions, particularly property rights (Acemoglu, Johnson, and Robinson 2001) | ||
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b)'''“Survival of the richest” and “Genetically capitalistic”:''' | b)'''“Survival of the richest” and “Genetically capitalistic”:''' | ||
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'''Pomeranz''': (The Great Divergence)…institutions played a crucial role if we trace back the source of economic growth…tapping new sources of energy, chiefly coal and bringing new land into cultivation (from colonies) | '''Pomeranz''': (The Great Divergence)…institutions played a crucial role if we trace back the source of economic growth…tapping new sources of energy, chiefly coal and bringing new land into cultivation (from colonies) | ||
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c) '''Adam Smith, ‘Chicago Adams’, and Clark:''' | c) '''Adam Smith, ‘Chicago Adams’, and Clark:''' | ||
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'''Bowles''': for Clark getting institutions right for poverty reduction and development is less important than “people getting their virtues right”…England’s riches came from its colonies, and the feudal and mercantile economy is not consistent with Clark’s free market medieval England… | '''Bowles''': for Clark getting institutions right for poverty reduction and development is less important than “people getting their virtues right”…England’s riches came from its colonies, and the feudal and mercantile economy is not consistent with Clark’s free market medieval England… | ||
- (East India Company’s looting and forcing of people)…Indian from net cotton exporter to importer… | - (East India Company’s looting and forcing of people)…Indian from net cotton exporter to importer… | ||
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'''Growth and the Third World''' | '''Growth and the Third World''' | ||
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-Entrepreneurship, a crucial bourgeois virtue, cannot be foster if there is market imperfection…microfinance in Bangladesh…citizen entrepreneurship mushroomed after loans were given to people who were neglected by the commercial banks | -Entrepreneurship, a crucial bourgeois virtue, cannot be foster if there is market imperfection…microfinance in Bangladesh…citizen entrepreneurship mushroomed after loans were given to people who were neglected by the commercial banks | ||
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'''Conclusion:''' | '''Conclusion:''' | ||
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-But it cannot fully dismiss the necessity of institutions for sustained growth | -But it cannot fully dismiss the necessity of institutions for sustained growth | ||
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Revision as of 04:09, 5 December 2007
- Economic Growth: Institutions or Culture and Genes
- Focus on Gregory Clark’s new book A Farewell to Alms: A Brief Economic History of the World
- Clark dismisses institutional views on economic growth and argues that culture and “perhaps genes” played a role in England during the Industrial Revolution (IR)
- Genetically capitalistic” and good bourgeois virtues
- Contrasted with neoclassical and institutional argument that institutions play a crucial role in spurring economic growth
- Introduction
- Discussion on growth starts with the IR
- Fig 1: shows the stagnation of income until 1800; then IR sets in with rapidly increasing income per person
- The question is: What caused this sudden rapid economic growth and why did it happen in England? Why not in India, China, Japan, and Africa?
- Stagnant Malthusian Economy
- Malthusian and Ricardian model of subsistence economy
- The world economy was in a Malthusian trap until 1800
- Income per person stagnated
- Fertility increased with income; vices of today such as diseases, plague, natural calamity, food scarcity, and bad sanitation were virtues during this era because it increased death rate! Less population in the same stock of land and capital means more income per person
- Income per person is independent of technological change
- Whatever technological change occurred until 1800 was not sufficient enough to outweigh the negative effects of increasing fertility rate.
- In fact, slow technological change resulted in lower income per person and high population!
- Institutions, incentives did not matter
- England escaped the Malthusian grip circa 1800
- Question: So what caused England to escape this tight Malthusian grip circa 1800? And, why in England?
- “Survival of the richest” and the IR
- Clark argues that it was not the right set of institutions that Smith and neoclassical economists insist caused IR in England
- Cause: good bourgeois virtues like patience, low interpersonal violence, stability, hard work, etc…labor quality and downward social mobility
- Increased rate of innovation did not stem from higher incentives offered to innovators…there is something else…
- Why England:
- Richer people bred more than the poor…well cared, fed, and educated children with riches inherited by birth…richer kids replaced poorer classes (downward social mobility)…basically the survival of the richest
- English society subjected to natural selection during the tight Malthusian grip…good virtues cumulated over the course of time… culturally and genetically capitalistic and entrepreneurial…
- Does institution matter for growth?
- Clark challenges the idea that getting “the institutions right” first is essential for growth
- Shows that medieval England had all the incentives that the Washington Consensus recommended (see Table 1), but there was no growth at all
- He argues that even in the presence of poor incentive fostering institutions (high personal taxes), the Nordic countries still are growing… so incentive-centered economic agents do not make much difference
- Institutions and people subjected to natural selection under resource constraint
- Three institution related theories:
i)Exogenous growth theories: North argues that under a right set of legal, economic, and social institutions required for growth…it helps create an environment of certainty amidst uncertainty surrounding saving, investment, and entrepreneurial activity…caused rapid economic growth in England
Objection: Even Japan and China had fairly similar set of institutions that North is talking about…why did they not experience rapid growth ahead of England?
ii)Multiple equilibrium theories: based on political economy of institutions…bad institutions promoted by vested interest people leads to bad equilibrium…when replaced by good leaders, the economy would shift to an optimal equilibrium… Sudden political change occurred circa 1800 whereby a social structure conducive to growth was created in England Also, Becker’s human capital argument: low number of children per family in England…better care and education…better human capital…entrepreneurial instincts
Objection: No evidence of a market signal to parent that better educated had a higher premium in the market.
iii)Endogenous growth theories: positive correlation between rate of efficiency and population and the endogenous role of technology…growth rate of knowledge a function of the size of human community
Objection: Population growth alone cannot explain the acceleration in efficiency growth rates ex-post 1800
Objections to Clark’s ideas:
Solow: Even if a collection of right institutional practices is not a sufficient condition for IR and growth, it cannot be concluded/ is not shown that institutions are not a necessary condition for growth…there might be instances of no sustained growth in the presence of right institutions but there are no instances of rapid growth without right institutions!
-Arnold Kling: the Nordic countries might have a high growth rate and high standard of living because they might have low corporate tax (which is higher in the US) despite a high income tax (which is lower in the US)…on average incentives same…both economies growing…
-Bowles: Institutions have played a crucial role in all kinds of economic systems: be it limited government or activist government or feudal regime and empires
-Rodrik argues that private initiatives and incentives would be better when there are adequate institutions that promote secure property rights, appropriate regulation, macroeconomic stabilization, social stability, and conflict management…unlike the feudal England, democracy provides better incentives and help attain predictable long-run growth rates…
-Botswana attained sustained growth rates because good policies were chosen after instituting good institutions, particularly property rights (Acemoglu, Johnson, and Robinson 2001)
b)“Survival of the richest” and “Genetically capitalistic”:
-Concept borrowed from Malthus and Darwin -When societies are under the Malthusian constraint, then natural selection kicks in… gradually successful people emerge…or whatever remains are influenced either culturally or genetically have better qualities (both labor and knowledge) -During the Malthusian era, rich people bred more than the poorer…survival rate high…downward social mobility… “Survival of the richest” -Good bourgeois virtues in all the sections of the society… “Genetically capitalistic” -“Unified growth theory” from Galor and Moav in 2002 on ‘Natural Selection and the Origin of Economic Growth’
Objections:
Bowles: More fertility of richer class was not unique to England No clear evidence regarding transmission of bourgeois values even though personality traits do transmit from parents to children No clear evidence that low interest rates and low interpersonal violence leads to proliferation of good virtues
Caste system in India and Nepal: richer class bred more but why did not downward social mobility occur and “good virtues” not generated across generations
Solow: Data on downward social mobility is not clear in Japan and China…so comparing English statistics with these undocumented countries is not sound!
Cowen: IR not only due to cultural factors but also due to geographic (island economy) and military (navy power) advantages…
Diamond: (Guns, Germs, and Steel) natural endowments like geography and environment spurred growth of the English economy
Pomeranz: (The Great Divergence)…institutions played a crucial role if we trace back the source of economic growth…tapping new sources of energy, chiefly coal and bringing new land into cultivation (from colonies)
c) Adam Smith, ‘Chicago Adams’, and Clark:
-Clark dismisses Smithian and neoclassical insistence on “getting the institutions right” -Table 1 incentives and institutions were far better in 1300 than in 2000
-For Clark Smith, neoclassical economics, and the Washington Consequences are the same!
-Sen disagree, as was discussed in the class
- Smith’s call for restraint on government taxation and expenditures misguided because Malthusian economy was dependent on population only
-1/3 of growth is due to capital accumulation and 2/3 due to efficiency advancement…knowledge advancement view confirms Hayek’s importance in knowledge (The Use of Knowledge in Society)
-Agents not homogenous, and preferences changed over time
-Incentives not driven by market reward…innovators worked relentlessly despite market reward being low based on today’s standard…not exactly profit-driven
-Dismisses the view that inefficient capital stock leads to underdevelopment…relatively mobile market for labor and capital…labor quality matters…Endowment to finance capital stock in the first place?
-Problems in the SSA cannot be solved from Smith’s prescription…hobbles this with IMF policies…
Bowles: for Clark getting institutions right for poverty reduction and development is less important than “people getting their virtues right”…England’s riches came from its colonies, and the feudal and mercantile economy is not consistent with Clark’s free market medieval England… - (East India Company’s looting and forcing of people)…Indian from net cotton exporter to importer…
Growth and the Third World
-SSA growth possible from high quality labor and good capitalistic virtues (implies cultural and genetic stuff!)…Chinese workers in Zambia…Chinese commercial interest rather than Zambia’s low quality labor, if any?...
-Increasing aid to Africa, as argued by Sachs, is not going to make a difference…it will make them even worse…leave to natural selection and free markets…industrialization of Africa is the only way out to get rid of poverty…
-Letting the societies either “sink or swim”…
-Liberalize immigration if the developed countries really wan to help the underdeveloped countries…
-No justification for the rise of India, China…labor quality argument does not hold
-Institutions does matter for growth and poverty reduction as shown by Bowles, Azariadis, Rodrik, Sachs, Acemoglu, Johnson and Robinson…
-Entrepreneurship, a crucial bourgeois virtue, cannot be foster if there is market imperfection…microfinance in Bangladesh…citizen entrepreneurship mushroomed after loans were given to people who were neglected by the commercial banks
Conclusion:
-Cultural and genetic arguments interesting…cultural aspect of the argument quite impressive and plausible…labor quality and downward social mobility does matter…
-But it cannot fully dismiss the necessity of institutions for sustained growth
