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The Deep Roots of Economic Development

Economics lately, since the ‘Great Recession’, has been getting a lot of beating. So it’s not unusual nowadays to see titles such as “Is Economics Dead?” or “The Death of Economics.”

I am not one to join in this Economics-bashing. Yes, there are lots of problems – much sterile mathematical theory in Economics, an over-reliance on equilibrium models, and a tendency to treat people as ‘homo economicuses’ (yes, I know it should be something like homines oeconomici, but we are not purists here). On the other hand, Economics was the first social science to become thoroughly mathematized. Also, in the last decade or two Economics has been reinventing itself. One only needs to point to Behavioral Economics and to Evolutionary Economics (in fact, I am going to an Evolutionary Economics conference in September – stay tuned for a report to appear on this blog).

These developments are mostly taking place within the academic science, however, and have not yet impressed themselves on popular consciousness. For example,  Freakonomics, probably the most popular recent book about Economics, stays resolutely within the classical paradigm.

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A standard approach that treats people as homines oeconomici perhaps can be useful in asking some questions, but the realm of application is a very limited one.

For example, Freakonomics promises to answer such questions as:

Which is more dangerous, a gun or a swimming pool? What do schoolteachers and sumo wrestlers have in common? Why do drug dealers still live with their moms? (from the blurb on the Amazon)

My response is, who cares? Is this really the “hidden side of everything”? Why don’t you explain to me why some nations are rich and some are poor? And, even more pressingly, why some rich nations suddenly become poorer, and vice versa? How can we get out of the economic doldrums we have been stuck in for the last few years? For that matter, how can Japan, or southern Europe (which are in much worse shape) get out from the hole they are currently in? Freakonomics does not even attempt to answer such questions – because if you are stuck with the traditional approach, you can’t.

Understanding economic growth is, of course, the Holy Grail of Economics. Except you can’t do it with a purely economic approach – this has become quite clear in the last few years. You need other social sciences and, perhaps, even biological ones (especially if some current claims that there is a genetic component to economic development are true, something I am rather skeptical of). I would argue that you need something like Cliodynamics to answer this question. In particular, because evidence accumulates that modern economic development has deep historical roots.

There is no question that today there is a staggering degree of variation in economic performance and effectiveness of governance among nations. Understanding the causes of these disparities is one of the greatest intellectual puzzles in the social sciences, and one of the most pressing problems for economic policy.

We have pretty good idea of who are the winners and who are the losers (and I am not just talking about GDP per capita; human quality of life is a much more multidimensional quantity than that). But why are some nations wealthy, happy, and politically stable, while others are poor, miserable, and in the state of constant civil war? That is very much in dispute.

In answering this question, at first economists emphasized capital accumulation and technological progress; then, personal incentives and specific policies. In more recent years, the attention has moved to the institutional framework. Daron Acemoglu and James Robinson, for example, have been arguing that economic growth can only be made possible by developing inclusive institutions enabling broad sections of the population to participate in economic and political activities (see a review of their book, Why Nations Fail, by Tom Currie in the last issue of Cliodynamics).

Others think that there is a direct effect of geography on economic growth, focusing on such mechanisms as disease burdens. For example, Jeffrey Sachs and co-authors have pointed to a striking correlation between malaria and poverty. Another ‘geographic determinist’ (unlike most, I don’t think that this is a pejorative term), Jared Diamond, thinks that biogeographic conditions affect current wealth indirectly. The more time has elapsed since the agricultural revolution in a region, the wealthier the region is likely to be.

On the other hand, economists, such as Enrico Spolaore and Romain Wacziarg, make a strong case that it is not the geographic region that is of key importance. Rather, it is the ancestral composition of current populations. An even more extreme idea is the one by Oded Galor and Quamrul Ashraf, who recently concluded that countries with intermediate levels of genetic diversity, such as the United States, have the most productive economies (see this News Feature in Nature).

So we have lots of explanations of why some nations are rich and others poor. They invoke a variety of factors: economic, sociological, geographical, and even genetic. How do we decide which of the competing theories is true?

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Next installment: The Imperfect Time Machine

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15 Comments

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15 Comments

  1. Rob Lim says:

    I’m looking forward to the continuation =)

    I hope you have read Joe Studwell’s How Asia Works and comment on that. It is a book unlike Freakonomics that does tackle why some countries are rich and others poor.

    link to amazon.com

  2. Dr.No says:

    “why some nations are rich and others poor.”

    You must be kidding me if you are asking such a simple question.
    Because the answer would terrifying that why you dancing with no music.
    So let me break this down for you.

    When Agriculture started in river valleys. India and China became the richest
    because they had technology and agriculture product that the world was willing
    to pay for. For India it had monopoly on Cotton and Sugar Cane.
    Farming in middle east didn’t last long so the farmers moved to Europe. But
    for Europe didn’t have any innovation but on Weapons but spent most of their
    money on Eastern goods that passed thru Middle east middle man (think Islam).
    Eurpose discover lands that it could exploit. organized in corporations to finance
    the whole enterprise and patted themselves on the back for being superior
    enough to kill 98% of local population in 4 of the 5 continents.
    Soon Oil was discovered. Farming was put on back burner.
    So Now we have rich states which deal or control oil and farming is commoditized
    because of Oil and Nitrogen (fertilizer and bomb).
    Most of General Economics principals are socializing for the Rich.
    Money is Debt. Banking system is controlled by US. Oil is traded in Dollars.
    Inflation is passed on to the poor. Lifestyles are subsidized by the 3rd world.

    That was short history of the World.
    Hope that is enough to get to the answer you are looking for.

  3. Every one seems to want to stimulate the economy. I think the economy is too stimulated already. This country is enormously productive, maybe 20 times or more so than 200 years ago. There is no reason why we can not go to a 6 hour day or a four day week. That much work would provide us with all the necessities and all the comforts we need, and most of the luxuries. I suspect it would even provide us with gambling casinos, mansions, monuments, and even million dollar bonuses to parasites. If some of the last did have to be cut back on, I would not be distressed.
    A mandatory 6 hour day or 4 day week with time and a half for overtime in corporations would solve the unemployment problem almost over night. With the extra time people could enjoy themselves. There is no divine law of the Universe that says we must work exactly 8 hours, not a second more or less, each day. Indeed it is said that Kellogg cut the work week to 30 hours without loss of productivity [Schwartz]. The important matter is for everyone making money, no one destitute. A fringe benefit would be a drastic reduction in unemployment benefits that plague the government.
    If there was not enough production that way to make gambling casinos, no problem. People could gamble by card games in their own homes if they wished. Of course it would be necessary to HAVE their own homes for that. Foreclosure could be prevented by the federal or state government paying the full amount immediately (thus bank liquidity solved) provided the owner agreed to pay back by an agreement to pay 20% or so, or whatever was enough, additional income tax, which would include principle amortization, 6% or so interest, and cost of life insurance to cover the remaining principle. That would eliminate most foreclosures. It would also eliminate the federal loss currently incurred arising from multi billion gifts to our nobles in the financial sector channeled through subsidies, bailouts, low interest rates or etc, with citizens having a whole life time to pay back if necessary.
    Sincerely, Charles Weber

    Schwartz M 2009 Quick study: The future of work. Reader’s Digest (June) p 120-123.

    • Peter Turchin says:

      Many years ago John Maynard Keynes made the famous prediction that by now we would all be working short weeks – instead Americans are getting second and third jobs just to keep their heads above water.

  4. radek says:

    To be fair, Steven Levitt is a microeconomist, so the kind of questions you’re asking are just out of his area of expertise. Still, it’s very much true that economics, including macroeconomics has abandoned (given up?) asking “big questions” (or, if I was going to be cynical about my profession, even “non-inane questions”). Some of that may be turning around due to the economic crisis and all, though even there it’s more of a “let’s think again about the big questions for the already rich countries” rather than going back to the more fundamental “why are some countries rich and some poor”.

    Paul Krugman actually has a recent blog post on why the last academic effort at answering the latter big question – the so called New Growth Theory – fizzled out (NYTimes). Basically it comes down to the fact that trying to come up with an answer to it ends up relating how “unmeasurable things affect other unmeasurable things.” And as we all know, economists tend to look for their keys not where they lost them but where the light is brightest. So people switched to things like “Applied Micro Theory” – Levitt’s area – where they thought actual progress could be made.

    At the end of the day, to quote Krugman a bit more, “the reasons some countries grow more successfully than others remain fairly mysterious, with most discussions ending, as Robert Solow remarked long ago, in a “blaze of amateur sociology”” (which is where I’d put some of the papers you reference, no offense to amateur sociologists intended). As someone who went to grad school when New Growth Theory was a “Big Thing”, I can concur and agree with that. Still, the big questions are way way more important, and they, not sumo wrestlers or swimming pools, are the reason why people become interested in economics in the first place.

    • Peter Turchin says:

      Radek, good points all. But what was unmeasurable yesterday may become measurable tomorrow. That’s how science proceeds. Think back to the times when we couldn’t measure temperature. It took a lot of theorizing and experimentation to get to the point where we think of temperature as an unproblematic quantity. Same thing will happen to other unmeasurables. That’s what Cliodynamics is about! More on this in the next blog…

    • Dear Mr. Turchin,
      There are many reasons why a society becomes economically depressed. The most important one is disease.
      The so called “developing nations” are usually tropical nations afflicted by tropical diseases. Nations with very poor soil devoid of phosphorus because of soil borne termites (see link to angelfire.com ) such as Australia are also at a considerable disadvantage, especially in North Australia. Even northern nations that have had the cream of their manhood murdered such as Russia are at a lower ebb than would be otherwise, and of course nations afflicted by permanent drought such as North Africa can not make much progress either, especially when over populated (Egypt imports more water in the form of food than flows down the Nile river). Luckily the USA is largely only afflicted by insane politics. Our agriculture on glacial loess and our industry equipped with marvelous recent technology are very productive. There is little wrong with this country that eliminating political fraud and gifts would not fix, along going to a 6 hour day or 4 day week (at least at present).
      Sincerely, Charles Weber

    • radek says:

      Peter, I agree, and there certainly has been a lot of work devoted to trying to measure “unobservables”. For example “institutions” or even something more ethereal like “social capital” (more or less what you refer to in your post on the decline of cooperation in America). This is part of the reason why I think that if you’re a Growth Economist it’s worth sticking it out.

      There is another problem though (I know I sound like the perennial pessimist here) that Krugman doesn’t mention, and that has more to do with the empirical results on economic growth. At some point economists involved in the area came to two conclusions which more or less killed off a good bit of the literature (*):

      1. While there are some commonalities among the successful countries, there is a lot of diversity among the growth failures. In a way, every “(non) growth story” is unique, which makes it very hard to tease out general lessons. This criticism is captured in something like Dani Rodrik’s “One Economics Many Recipes” or his general critique of using cross-country data to draw these kinds of lessons. On the other hand, there’s the humorously titled paper by Xavier Sala-i-Martin “I Just Ran Two Million Regressions” which establishes the variables which are strongly and generally correlated with growth. (link to faculty.lebow.drexel.edu)..

      Unfortunately most (but not all) of them are either sort of obvious (revolutions, coups, and wars are bad), or are in the “unobservable” category (“Africa” or “religion” – ok, it’s correlated, but why?). That gets us to the second reason.

      2. And that’s the all-pervasive problem of endogeneity and causality. Does better health contribute to economic development or is it that richer people can afford to be more healthy? Does better government help or is it simply that richer countries can afford better governments? What you can get out of the data is that the two variables are correlated, not that one causes the other. Almost any variable that correlates with economic development is subject to this problem. Even something as straight forward as a country’s investment rate (addition to its stock of capital and infrastructure) is suspect – the standard Solow model of economic theory tells us that in an economy’s steady state, it’s technological growth (an unobservable) which causes investment and increases in income, rather than vice versa (firms invest more because return on investment rises due to technological improvements).
      There are some statistical methods designed to deal with these kinds of problems (using lagged pre determined values and long run averages or other “instruments”, trying to account for auto-correlation etc. ) but overall I don’t think people were ever convinced that any these really worked.

      That’s sort of why a lot of economists gave up in asking these questions (too soon!).

      (*) Or at least it switched interest to very micro level studies along the lines of “does building a very specific kind of a well in this one village in this one country at this one point in time affect household expenditure on this one particular good more than building a somewhat different kind of a well?” Those are important questions as …well, but they have little to say about the general reasons for development or no-development.

      • Peter Turchin says:

        Radek, I don’t think these 2 problems are unsurmountable. To deal with (1) we should not run a million of regression, a mindless data trawling. Instead, we should start with mechanistic theories and test them against each other. This cuts down on the number of meaningful regressions to run.

        A theory-first approach, instead of mindless empiricism, also will help with problem 2. But even more helpful is to have dynamical data – that is the time component. This capitalizes on that generally causes precede effects. Things are, of course, not as simple as that, because in many dynamical systems ’causes’ and ‘effects’ may be linked by nonlinear feedback loops. Still, temporal data help. In any case, having time depth gives you richer datasets to test theories.

        So things are indeed difficult, but not hopeless.

  5. Jonas says:

    One theory (or hypothesis?) about the causes for economic growth not mentioned is industrialization. The argument given by economists like Erik S. Reinert is that industrial production can expand and produce wealth (grow) much more than agriculture can. The reason for this is that agriculture is limited by the quality of land, the best land is put to use first, and the subsequent growth will not be as great as the initial growth (diminished returns i think it is called in economics). This is a constraint manufacturing industries does not face.

    Do you have any thoughts on this? Looking forward to the next part.

  6. Igor Demić says:

    Concerning the predictive powers of cliodynamics, it being a “macroscopic” theory (not exclusively, of course) is there a future prospect of a synthesis with micro and “pico” levels of behavioural studies, and if there is, what would it look like? (Reworking a popular adage: A thump of a foot of a sumo wrestler in Japan causing a bubble on Wall Street… :-))

    • Peter Turchin says:

      Igor, this is a big question in need of much more work. My current thinking on it is in Chapter 12 of War and Peae and War (titled War and Peace and Particles: The Science of Cliodynamics)