September 20, 2003

The Tasks of Economic Historians

And what you say at the Economic History Association annual meeting when you cannot resist making the session you chair overrun its time slot even more:

The Tasks of Economic Historians: Let me further abuse my position as chair, momentarily substitute a little planning for the ongoing decentralized agoric process, and make a point that Gail [Triner] hinted at but that I hoped would be and think needs to be made much more strongly:

The missing key, it seems to me, is an appropriately textured and useful theory of "government success" as well as "government failure": in Northwest Europe and in East Asia, heavy-handed governments interested in resource allocation, national champions, and neomercantilist industrial policies--such governments managed to orchestrate or conduct or to feebly wave their batons while the musicians did what they would have done anyway--and the result was for two generations astonishingly rapid growth and extremely prosperous, relatively egalitarian societies. Elsewhere--well, restrictions on imports to boost your terms of trade and ensure that scarce export earnings are spent on capital goods that serve as the carriers of technological knowledge turn out, in practice, to enrich the nephew-in-law of the Vice-Minister of Finance. Protected home markets to provide a garden in which to cultivate national champions--the plants that grow in them turn out to be something like the carniverous monsters from "Little Shop of Horrors." Policies motivated by a desire to improve income distribution and to tilt prices in a socially-productive dimension turn out to impoverish rural and export producers and to transfer wealth to politically-powerful urban middle classes who might otherwise riot, seize the TV station, and declare that you are your government are overthrown.

But why the difference? Successful Sweden, successful Japan, unsuccessful Argentina, unsuccessful India under the Nehru Dynasty--the rhetoric supporting their programs was very very similar. But outside of East Asia and Northwest Europe, disaster was the result.

Alice Amsden is right in her claim that mainstream economics is basically clueless. After all, mainstream economists by and large ceded political economy proper--"public choice"--to the George Masons and the Cato Foundations. Their theories are by and large that governments are always and everywhere bad and should neither spend, tax, nor regulate. This makes, in my view, a hash of both the long sweep of economic history and the more recent post-World War II experience.

Mainstream economists need better theories. But mainstream economists' theories are in the final analysis only crystalized history. And we are the masters of history.

We need to help mainstream economists. But how?

Posted by DeLong at September 20, 2003 10:59 PM | TrackBack

Comments

In places like Europe, East Asia, North America, and Australia/NZ, heavy-handed government intervention seems to work fairly well.

In places like Europe, East Asia, North America, and Australia/NZ, unfettered free markets seem to work fairly well.

In places like Africa, Southern Asia, and Central America, heavy-handed government seems to fail miserably.

In places like Africa, Southern Asia, and Central America, unfettered free markets seem to fail miserably.

Soooooooooooo we end up saying that specific policy orientations are almost negligible in the grand scheme of things and babbling about institutions and culture, which seems (to me, at least) to be about the most unhelpful disguise for ignorance since total factor productivity as an explanation for slowdowns of the mid-70s-mid-90s and booms from WW2-mid-70s and mid-90s-present.

It's almost enough to make you want to become a geographic determinist...

But I suppose if we'd figured it all out, you'd be out of a fascinating job, eh?

Posted by: Julian Elson on September 20, 2003 11:42 PM

"In places like Africa, Southern Asia, and Central America, heavy-handed government seems to fail miserably.

In places like Africa, Southern Asia, and Central America, unfettered free markets seem to fail miserably."

In saying that institutions and "culture" matter, I think you are on the right path, but another thing that needs pointing out, at least in Africa, is the Rube Goldberg nature of the nation-states that arose out of colonialism.

THE single most important factor in political life across most of Africa is ethnic tension; ethnic competition born out of the arbitrary lashing together of peoples with nothing in common means that the "common good" has no meaning in such states, and a thing is seen as good or bad only in so far as it confers advantages on one's own ethnic group relative to others within the "nation."

It is with this reality in mind that I think "mainstream economists" (whatever Brad might mean by that term) have it exactly wrong when they ignore the supposedly non-mainstream economics of Public Choice Theory, and the work of "the George Masons and the Cato Foundations." Anyone who wants to see all the failings identified by public choice theory in their full inglory should spend a few months living in an African country - there's nothing quite like seeing brazen theft of public funds being cheered on because it's being done by a member of one's own ethnic group to make one sceptical of the benign effects of government intervention.

Posted by: Abiola Lapite on September 21, 2003 07:30 AM

Making broad generalizations about southern Africa is of no help. There are 47 nations in southern Africa, with distinct histories, cultures and economies. What is a disgrace is a tirade of mistaken generalizations about the thoughts and lives of hundreds of millions of people and little little willingness to learn of specific endeavors and needs and to offer meaningful development assistance.

Yes, I am annoyed. I am glad the poorer nations would not be mocked at the World Trade Talks, but angry that the wealthy nations persist in mocking by pitching free trade while they restrict trade. I am angry that America is not even willing to keep its promise of $3 billion for AIDS assistance in Africa and the Caribbean in the coming year. We are wrangling over $2 billion, because Africa suddenly lacks the infrastructure for more. Good grief.

Posted by: anne on September 21, 2003 07:47 AM

Is there a successful case of a country which moved from underdevelopment to development without strong-government protectionism? Nominees would probably be Singapore and Hong Kong, but they are free ports without much hinterland, and HK was a colony (as was Singapore until the end of WWII). Neither was significantly democratic during its rise, either. (I don't know much about Chile).

I lived in Taiwan in 1983 and what I saw was: 200% tariffs on luxury imports (including autos); government monopolies and hidden taxes on rice, energy, tobacco, alcohol, airlines, and shipping; and a moderately soft police state. The only Cato Institute stuff I saw were a pro-management / anti-union labor policy, and very weak environmental and consumer-protection regulation. Wasn't Korea like this too? Pretty much the Japan model, as some Taiwan leaders said.

One thing I read suggested that Sweden and Finland, which were very poor countries in 1900, followe dsomewhat this model -- in particular, heavily taxing resource extraction (timber and iron).

Posted by: zizka on September 21, 2003 08:32 AM

Why is it that Africa critics fail to look at South Africa as model? The transition from deictatorship to democracy in South Africa was wondrous and should be an inspiration to all. Nelson Mandela and ANC thinkers of all ethnicities have been attempting to develop a country that had limited development and resources to 10% of the population. Mandela has always seen Singapore as a proper development model for South Africa. Even with the saddest fierceness of AIDS, South Africa should be an inspiration for us all.

Posted by: anne on September 21, 2003 08:48 AM

Even if we think in primary strategic terms, Africa should be a prime interest for America. Country after country in southern Africa would welcome our friendship and development assistance.

Africa's strategic importance to America has been mentioned to and laughed at by several Congressional leaders. Get it folks!

Posted by: anne on September 21, 2003 09:05 AM

i should think that number one on the all time hit parade for rapid economic development remains the new germany after the franco-prussian war: from a relative economic backwater to the second largest industrial economy in the world before world war 1. perhaps rapid economic development is not without its dangers? at any rate, it is obvious that economic power is not political power and vice versa, but there is a mysterious alchemy of exchange between the two. a view of the world that believes that markets are self-regulating automata rather than institutions of social regulation that themselves are dependent on social regulation would never be able to understand this (crucial) issue. furthermore, "power" signifies exploitation and domination, as well as cooperation and capacity. a view that holds to a purely functionalistic account as the only "neutral" and therefore rationally objective basis of analysis would be blind to the real nature of the transactions and conversions that take place.

Posted by: john c. halasz on September 21, 2003 02:27 PM

Again, I think there is mainly two things that matter (and explains it), (broad) capital depth that determine productivity (which together with wage levels controls capital flows), and the informal capital flow that goes under the name "productivity catch up".

Sweden, which was very poor in 1900 had nevertheless a rich resource of hidden human capital - our protestantic gov't controlled church had already (for entirely different reasons) learnt most people to read and write.

Then, as ziska suggests, there was taxation on timber, but not only taxation, the gov't saw to that companies reinvested (modified the river flows by building "the pyramides of the north" to facilitate timber transport, planting new trees)in logging.

Capital was also accumulating through productivity catch up, as we were a country similar to e.g. England, this was easy.

And I do think that compatibility with the more advanced country is important in this aspect. British engineers and businissmen were perhaps important in Swedish railway construction. But when England removed tariffs on timber (pit-props), Swedish timber was exported on Swedish vessels to Britain, then Swedish blacksmiths made simple yet reliable crude-oil (semi-diesel) engines for these vessels, engines that then mechanised fishing and farming...

And wasn't African countries too different from England to really get this sort of process going?

Posted by: Mats on September 21, 2003 03:20 PM

A thought from an ignorant/curious layman who spent too much time yesterday reading for free at the Barnes and Noble: aren't some of Hernando De Soto's ideas about capital formation relevant here? My "one liner" understanding of his theory is that effective, ascertainable, and alienable rights to property allow poor people to accumulate capital, and that this matters more than, say, national trade policy. I don't know anything about East Asia, but surely one of the reasons for European success was a well-developed property law that recognized and formalized land holdings. If that's true, then a theory of "good government" would look to local law courts as much as to finance ministries.

Posted by: williamsburger on September 21, 2003 04:14 PM

A thought from an ignorant/curious layman who spent too much time yesterday reading for free at the Barnes and Noble: aren't some of Hernando De Soto's ideas about capital formation relevant here? My "one liner" understanding of his theory is that effective, ascertainable, and alienable rights to property allow poor people to accumulate capital, and that this matters more than, say, national trade policy. I don't know anything about East Asia, but surely one of the reasons for European success was a well-developed property law that recognized and formalized land holdings. If that's true, then a theory of "good government" would look to local law courts as much as to finance ministries.

Posted by: williamsburger on September 21, 2003 04:16 PM

A thought from an ignorant/curious layman who spent too much time yesterday reading for free at the Barnes and Noble: aren't some of Hernando De Soto's ideas about capital formation relevant here? My "one liner" understanding of his theory is that effective, ascertainable, and alienable rights to property allow poor people to accumulate capital, and that this matters more than, say, national trade policy. I don't know anything about East Asia, but surely one of the reasons for European success was a well-developed property law that recognized and formalized land holdings. If that's true, then a theory of "good government" would look to local law courts as much as to finance ministries.

Posted by: williamsburger on September 21, 2003 04:20 PM

> But why the difference? Successful Sweden,
> successful Japan, unsuccessful Argentina,
> unsuccessful India under the Nehru Dynasty--
> the rhetoric supporting their programs was
> very very similar.

What wasn't similar is the balance of political power between the commercial class and the military aristocracy. Sweden has had it with Karl XII, who got defeated in Russia, hid in Turkey for the following five years, and finally returned home only to start a war with Norway and get killed at Fredriksten. As a result, not a sign of imperialist ambitions ever since. Japan... well, if I remember correctly, one of the things the U.S. did during the occupation was forcing the gentry to reduce their land holdings to token amounts (couple of acres per person, except Hokkaido, where the limit has been four times that), which greatly reduced the economic power of the military aristocracy. Argentina... Peronists have been (and still are) alive and well; clinical sadists who ran "detention facilities" in the 70s are either still in active duty or in honorable retirement. India... You tell me... Per-capita GDP of $450 and nuclear weapons? Sounds like massive income redictribution away from already poor peasants toward one of the best-oiled military machines in South Asia... Sometimes I think Indian and Pakistani governments have simply conspired to run the same con on their respective people; make up an enemy and use him to justify ever-increasing defense outlays...

Posted by: Nikolai Chuvakhin on September 21, 2003 04:31 PM

Response to williamsburger:

Hernando De Soto is a brilliant thinker who has testified before Congress on several occasions. He has some influential friends, including Newt Gingrich and Bill Clinton.

Posted by: Joe Willingham on September 21, 2003 05:26 PM

the organization of chaos, attending to the "probability of the improbable", is an excruciatingly difficult task. one of the principles of darwinian evolution is that millions of lives are sacrificed so that a few thousand prototypically can survive- call this the "devil's chaplain principle". it is dimly to be hoped and devoutly to be wished that we can improve upon this. but i doubt that markets are always the answer and not part of the problem. at any rate, historically speaking, attending to only the successful cases of economic development is whiggish.

Posted by: john c. halasz on September 21, 2003 06:39 PM

Nikolai Chuvakhin writes in his excellent comment about the costs of having an (oversized) military. Representing a collective liability to a society, it shallows (broad) capital depth, pushes productivity lower and (given wages at int'l levels) makes capital flow out of a country. Nikolai's account on Swedish king Karl XII is spot on. He got "killed at Fredriksten" all right, and we're still not sure wheather it was Fredriksten's Norwegian defenders who did it, or Karls own soldiers...

Posted by: Mats on September 21, 2003 11:39 PM

Question: are you critics of American economic liberalism and friends of European social democracy investing your savings in European securities? If so, which countries would you recommend?

Posted by: Joe Willingham on September 22, 2003 12:22 AM

Amartya Sen has argued that democracy and economic growth are not correlated (apart from his discovery of the strong inverse correlation of democracy and famine). But democracy is a good thing anyway, so go for it. Similarly for equal prosperity (including public goods) and equity, less government and more individual economic freedom are better on non-economic grounds of the value of personal autonomy.

A least-government rule may still lead to a lot of government if the democratic majority gives high priority to equity and public goods, since no-one has figured out another reliable way to get these. (Religions had a good but inadequate try; as one example, compulsory alms, unlike jihad, is one of the five pillars of Islam). Inside the model, the quality of public policy matters not because there’s a magic recipe for growth but because bad policy (Bush, Jospin, Chavez ..) can certainly make things worse.

Posted by: James on September 22, 2003 02:22 AM

Nikolai,

Your broader point about the wastefulness of fighting with Pakistan is accepted. However, India PPP per capita GDP is close to $3000--a wee bit less than Indonesia.

Two populous and ethinically diverse countries with very different colonial histories have followed very different paths to get to the same place.

Does the choice of government matter at all? I wonder.


Vivek.

Posted by: Vivek on September 22, 2003 02:23 AM

Amartya Sen has argued that democracy and economic growth are not correlated (apart from his discovery of the strong inverse correlation of democracy and famine). But democracy is a good thing anyway, so go for it. Similarly for equal prosperity (including public goods) and equity, less government and more individual economic freedom are better on non-economic grounds of the value of personal autonomy.

A least-government rule may still lead to a lot of government if the democratic majority gives high priority to equity and public goods, since no-one has figured out another reliable way to get these. (Religions had a good but inadequate try; as one example, compulsory alms, unlike jihad, is one of the five pillars of Islam). Inside the model, the quality of public policy matters not because there’s a magic recipe for growth but because bad policy (Bush, Jospin, Chavez ..) can certainly make things worse.

Posted by: James on September 22, 2003 02:30 AM

Typical. Everyone goes on and on about abstract issues of government, while the overwhelming importance of ethnic strife goes unmentioned.

It seems that many in the West are so afraid of thinking about ethnic differences that they'd rather ignore the gigantic elephant in the room, but so long as Hausas, Igbos and Yorubas hate each others guts, or Hutus and Tutsis are determined to eliminate every last member of the other side, the finest institutions of government won't make a damn bit of difference.

Why don't you armchair theorists actually listen to what the people of the region are actually thinking for a change? If ethnicity is important enough for Europeans to go to war over in the 1990s, why do you all insist on ignoring it in the African context?

Posted by: Abiola Lapite on September 22, 2003 03:54 AM

GOOD job Abiola, ethnic problems are key in Africa -- and are related to DeSoto's private property. One tribe, when it gains political power, does NOT respect the property of others.

My suggestion? Cantonization. Of Africa into tribal-based cantons, like the early states of the US or like the Swiss cantons. With weak foreign policy/ defense "central" gov't, but most (all but 1%?) tax collection and spending by tribes. Supported by the World Bank and IMF at a tribal level.

What is YOUR idea?

Posted by: Tom Grey on September 22, 2003 09:38 AM

"After all, mainstream economists by and large ceded political economy proper--"public choice"--to the George Masons and the Cato Foundations. Their theories are by and large that governments are always and everywhere bad and should neither spend, tax, nor regulate. This makes, in my view, a hash of both the long sweep of economic history and the more recent post-World War II experience."

It may make a "hash" of history, but it also makes a "hash" of Cato Institute's theories. Only people who haven't bothered to take any time to actually analyze the Cato Institute's theories would write that the Cato Institute's theories can be summarized as, "by and large that governments are always and everywhere bad."

One might also question whether the author of that statement cares much about the proper use of English: "by and large" and "always and everywhere" aren't really compatible.

Posted by: Mark Bahner on September 23, 2003 08:55 AM

"After all, mainstream economists by and large ceded political economy proper--"public choice"--to the George Masons and the Cato Foundations. Their theories are by and large that governments are always and everywhere bad and should neither spend, tax, nor regulate. This makes, in my view, a hash of both the long sweep of economic history and the more recent post-World War II experience."

It may make a "hash" of history, but it also makes a "hash" of Cato Institute's theories. Only people who haven't bothered to take any time to actually analyze the Cato Institute's theories would write that the Cato Institute's theories can be summarized as, "by and large that governments are always and everywhere bad."

One might also question whether the author of that statement cares much about the proper use of English: "by and large" and "always and everywhere" aren't really compatible.

Posted by: Mark Bahner on September 23, 2003 09:07 AM

Abiola, the basic question you are dealing with are investment incentives and investment protections. In Africa ethnic strife provides very negative investment incentives. Latin America has the same types of problems due to the historical use of government as a means of enrichment. Culture certainly plays a role.

zizka, the Japanese model worked the same way in Korea. It started out limiting import purchases to capital goods and ended up trying to protect the whole economy in a merchantilist model. The pattern is very strong. The father of Japan's industrial policy worried about it.

Posted by: Stan on September 23, 2003 12:37 PM

"What is YOUR idea?"

Well, for one thing, I don't consider the use of the word "tribe" at all appropriate. It is little more than a demeaning term applied by people who are too lazy and arrogant to bother learning anything about African history, often with the conviction in mind that there isn't any such thing even worth learning about. The pre-existing political entities that were encountered by Europeans were, in most cases, STATES, by any reasonable definition of the term. Oyo was a state, as was Benin, and Sokoto, and plenty of other such political entities in the continent.

I think the only solution is to let each polity go its' own way. "States" like Nigeria, Congo and Zimbabwe are held together only by sheer force of arms and the greed of a few elites. Rather than cajoling antagonistic peoples to stay in uncomfortable unions, as is the current practice, external mediators like the United Nations and the European Union should let them go their separate ways if they wish to do so. A map of an Africa whose borders were redrawn to reflect the ethnic divisions that exist would undoubtedly be unrecognizable to most Westerners, but it would certainly represent a more peaceful and prosperous Africa than the one we have today.

Posted by: Abiola Lapite on September 24, 2003 11:49 AM

Vivek,

> Your broader point about the wastefulness of
> fighting with Pakistan is accepted.

Thank you.

> However, India PPP per capita GDP is close
> to $3000--a wee bit less than Indonesia.

You are absolutely right, but it doesnt't make me wrong, either; the number I quoted was taken from World Development Indicators, which reports GNI per capita computed using Atlas method (which typically produces much lower estimates for poorer nations compared to the PPP method). Accorging to World Development Indicators, India's GNI per capita is about $450, while Indonesia's is about $600.

> Does the choice of government matter at all?
> I wonder.

I think it does, but not in the way political scientists describe it. The choice that needs to be made is really not that between democracy and authoritarianism, but between spending mainly on supperssion (defense/policing) and spending mainly on enablement (education/health care/infrastructure). I think that's the real difference between Argentina's "democracy" and Singapore's "dictatorship".

Posted by: Nikolai Chuvakhin on September 24, 2003 11:04 PM
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