Thursday, November 02, 2006

The Very Origins

Tyler Cowen's latest "Economics Scene" article in the New York Times is about the oldest question in Economics: the Nature and Causes of the Wealth of Nations. He describes the work of Gregory Clark at the University of Davis.

In “A Farewell to Alms: A Brief Economic History of the World” (forthcoming, Princeton University Press), Gregory Clark, an economics professor at the University of California, Davis, identifies the quality of labor as the fundamental factor behind economic growth. Poor labor quality discourages capital from flowing into a country, which means that poverty persists. Good institutions never have a chance to develop.

Tyler believes that

Professor Clark’s analysis counters Jared M. Diamond, who in his “Guns, Germs and Steel” (W. W. Norton & Company, 1999) located the ultimate sources of European advantage in geography, like safety from tropical diseases, and a greater number of available animals that could be domesticated.

I cannot agree- Diamond's book was about the very long-term development of various continents: about why Eurasia developed so differently from Africa, Australia and the Americas over the past 10,000 years. Diamond's thesis is that Eurasia was caught in a race between technology and population, and standards of living consequently stagnated, while other continents did not manage even this. Their technology and populations were stagnant, and in Australasia, technology actually regressed. He tries to explain this difference ("dynamic" stagnation in Eurasia, and "static" stagnation in the other continents).

However, he quotes some very interesting examples from Gregory Clark's book (emphasis added)

As early as the 19th century, textile factories in the West and in India had essentially the same machinery, and it was not hard to transport the final product. Yet the difference in cultures could be seen on the factory floor. Although Indian labor costs were many times lower, Indian labor was far less efficient at many basic tasks.

For instance, when it came to “doffing” (periodically removing spindles of yarn from machines), American workers were often six or more times as productive as their Indian counterparts, according to measures from the early to mid-20th century. Importing Western managers did not in general narrow these gaps. As a result, India failed to attract comparable capital investment.


An independent estimate by two economics professors at the University of Wisconsin, Madison, Rodolfo E. Manuelli and Ananth Seshadri, (“Human Capital and the Wealth of Nations") suggests that if variations in the quality of labor across nations are taken into account, other productivity factors need differ by only 27 percent to explain differences in per capita income.

Professor Clark questions whether the poorest parts of the world will ever develop. Japan has climbed out of poverty, and now China is improving rapidly, but Dr. Clark views these successes as built upon hundreds of years of earlier cultural foundations. Formal education is no panacea, since well-functioning institutions are needed for it to be effective.

I am sure that this is not as simple as Tyler and Clark say it is, and I was reminded of this post from Stumbling and Mumbling, on the problems which confronted early European Industrialists.

Evidence from pre-capitalist society suggests that people stop working once they have achieved subsistence. Andre Gorz describes how this blighted early factories:

The worker did not ask: ‘how much can I earn in a day if I do as much work as possible?’ but: ‘how much must I work in order to earn the wage which I earned before and which takes care of my traditional needs?’

The unwillingness of the workers to do a full day’s labour, day after day, was the principal reason why the first factories went bankrupt. (Critique of Economic Reason, p21.)

It was also, he says, the reason why factory owners wanted child labour; only children were sufficiently pliable.

I suspect we are as far as ever from answering the old question.

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