Cereal crops vs root crops in the development of civilization

Did the potato and other root crops hinder the development of complex societies among those who cultivated it? A group of economists present a case that they did in a recent article, "The sinister, secret history of a food that everybody loves," in the Washington Post. Their thesis in short is that when cereal grains are harvested at the end of a growing season their storage attracts thieves. Those who grow the crop want it protected. Because the stored crop is easily taxed, it encourages the rise of a protector class. Thus cereal crops provide both the demand for protection and the supply of protection. Root crops, on the other hand, are not harvested and stored but are dug and used as needed. Without storage bins full of wealth, there is less temptation for thieves because they would have work digging a crop and they cannot store it. Hence, the demand for protection is less and the way to finance that protection is also more difficult. The result is that societies that grew cereal crops developed complexity and hierarchy that the societies that grew root crops did not.

This is a logical way for economists to view the issue. Not all anthropologists are convinced.

Your help is hurting

From an interview in Forbes, "Your Help Is Hurting: How Church Foreign Aid Programs Make Things Worse:"

There’s an author Bob Lupton, who really nails it when he says that when he gave something the first time, there was gratitude; and when he gave something a second time to that same community, there was anticipation; the third time, there was expectation; the fourth time, there was entitlement; and the fifth time, there was dependency. That is what we’ve all experienced when we’ve wanted to do good. Something changes the more we just give hand-out after hand-out. Something that is designed to be a help actually causes harm.

Read the whole thing.

Why Nations Fail: A Review

In Why Nations Fail: The Origins of Power, Prosperity, and Poverty Daron Acemoglu and James Robinson argue that elites promote stasis because change can undermine their positions in society. Elites uses their positions to channel wealth and income to themselves and protect those positions by erecting political and economic structures that keep others from prospering. Acemoglu and Robinson call these structures extractive institutions. In contrast, sustained economic growth must allow the creative destruction that flows from technological change. Only those political and economic institutions that allow participation by outsiders generate the innovations that create sustained economic growth. Acemoglu and Robinson call these structures inclusive institutions. Both extractive and inclusive institutions tend to create forces that perpetuate themselves, which is why it is so hard for poor countries, those with the most extractive institutions, to break away from the status quo and begin the process of growth. The bulk of the book consists of examples that develop and illustrate this theme.

An attraction of this thesis is that it is an extension of the most basic idea in economics, that people respond to incentives. When people have the opportunity to structure incentives to favor themselves, they usually will do so, which is why countries impoverished by elites are so resistant to economic growth. When one tyrant is overthrown, the usurper is usually just another tyrant who wants to use the system to enrich himself and his cronies. The thesis of this book is quite similar to that developed by Hernando De Soto in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, yet De Soto is not included in the bibliography of sources.

The authors dismiss culture as a factor that explains differences in income level. They point out that the North and South Koreans had similar cultures, yet have had completely different growth paths. Yet within countries different cultural groups can have very different levels of success, and sometimes the successful groups are subject to discrimination. Perhaps the authors should have argued that cultural differences are secondary in explaining what happens to different nation states. Culture is a nebulous concept that is impossible to measure with any precision and thus does not fit readily into economic discussions. But the same can be said for the notion of institutions at the basis of Acemoglu and Robinson's argument.

One of the changes that opened up the economic system of the U.S. was the reforming of laws of incorporation that took place before the Civil War. Originally the granting of corporate charters was tightly controlled by the political process, creating the temptation to create economic rents. The reform of the process took politics out of the process, allowing anyone meeting a set of requirements to get a corporate charter. This change removed a major hurdle in organizing large businesses, and Acemoglu and Robinson completely ignore this development even though it fits into their narrative. (A book with a similar emphasis on the importance of institutions, Political Institutions and Financial Development, edited by Stephen Haber, Douglass C. North, and Barry R. Weingast, has a paper that notes that between 1842 and 1852 eleven states rewrote their constitutions to take the power of chartering corporations out of politics.)

Instead they highlight the anti-trust attack on the so-called robber barons of the late 19th century as a victory for inclusive institutions. They seem unaware that the pejorative term "robber baron" was popularized not in the 19th century but only in the 1930s or that the "monopolists" owned much of their success to exploiting the economies of scale that new technologies brought. The people who most objected to the so-called robber barons were not those who bought from them but those who could not compete with them, the rivals who were the victims of the creative destruction that the Carnegies and Rockefellers of the era unleashed.

Chapter 11 concludes with a section called, "Positive Feedback and Virtuous Cycles." Chapter 12 concludes with a section called "Negative Feedback and Vicious Cycles." Economists do not give the concept of feedback nearly enough emphasis, so perhaps the authors were unaware of what the definitions of positive and negative feedback are. Positive feedback tends to amplifying results while negative feedback dampens or stabilizes things. Hence, both vicious cycles and virtuous cycles result from positive feedback. The authors could have argued that negative feedback creates a stagnation or poverty trap, but a trap is not the same thing as a vicious cycle.

Acemoglu and Robinson give Venice as an example of a state that developed an inclusionary institution, the commenda, which set it on the road to growth and prosperity in ninth and tenth centuries. The commenda was a risk sharing agreement for trade missions that gave ambitious and talented outsiders a chance to prosper. Eventually, early in the 14th century, the elites chose stagnation by closing avenues of upward mobility. Although stagnation and decay are possible paths for today's developed nations, no attention is given to this topic. The omission may be because Acemoglu and Robinson are focused on why so many nations have failed to develop economically, and decay is best left for a different book (though they include one such book, Mancur Olson's The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, in the bibliography). Or perhaps they do not consider decline an important threat; their emphasis on the virtuous cycle of inclusive institutions supports this possibility.

One of the concepts that Acemoglu and Robinson stress is "contingent events," episodes that can break a pattern and send a nation down a path to different institutions. They repeatedly refer to the Glorious Revolution of 1688 as the event that changed the trajectory for England, leading to a process that generated ever more inclusive institutions. In the post-World-War-II era the world underwent massive decolonization, which provided a host of contingent events sending countries on new paths. In almost all of these cases the new regimes made their institutions more exclusive rather than more inclusive, further impoverishing their countries. Acemoglu and Robinson blame the exclusionary institutions that the colonizers left behind for today's poverty in Africa, Asia, and the Americas. What they do not explain is why independence led to more exclusionary institutions rather than more inclusionary institutions.

On page 389 they write, "It is impossible to understand many of the poorest regions of the world at the end of the twentieth century without understanding the new absolutism of the twentieth century: communism." The irony of communism and socialism is that although their rhetoric about equality suggests that they will usher in inclusive institutions, the nature of socialism requires that it be highly exclusionary. Acemoglu and Robinson spend few pages developing this idea despite their declaration of its importance.

In the final chapter Acemoglu and Robinson look at foreign aid and come to the same conclusion that William Easterly found, that it can often be counterproductive, reinforcing the power of the elites to maintain the status quo. However, they conclude that foreign aid is here to stay not because it is effective but because "many Western nations feel guilt and unease about the economic and humanitarian disasters around the world, foreign aid makes them believe that something is being done to combat the problems." (p 454) They also make the case that though China has been growing rapidly for the past few decades, that growth will soon slow down dramatically. They argue that some growth is possible under extractive institutions, and point to the USSR as an example. By massively investing in technology that had been developed by others, the USSR grew rapidly until the 1970s. At that point it had exploited what was possible with that strategy. For growth to continue, they would have had to allow creative destruction, but authoritarian and totalitarian regimes abhor creative destruction. Acemoglu and Robinson see the same process playing out in China. There is no rule of law, property rights are insecure, and the political trumps the economic. What is possible given their institutions is limited.

Acemoglu and Robinson end the book with a story from Peru where Fujimori and his crew tried to ensure their dominance. They paid off various officials and judges, but the really big payments were to the press. They recognized the key to control was control of the press--nothing else really mattered much. If Acemoglu and Robinson had not dismissed culture as unimportant, perhaps they might have played with the importance of the media in shaping culture, which in turn can limit what elites can do in the political sphere.

Update: Here is William Easterly's review of the book in the Wall Street Journal.

Why Nations Fail

From the New York Times Magazine, a piece on a book by two economists, Daron Acemoglu and James Robinson

According to Acemoglu’s thesis, when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help. I observed this firsthand when I visited a group of Haitian mango farmers a few years ago. Each farmer had no more than one or two mango trees, even though their land lay along a river that could irrigate their fields and support hundreds of trees. So why didn’t they install irrigation pipes? …. But these farmers also knew that nobody in their village had clear title to the land they farmed. If they suddenly grew a few hundred mango trees, it was likely that a well-connected member of the elite would show up and claim their land and its spoils. What was the point?

If national institutions give even their poorest and least educated citizens some shot at improving their own lives — through property rights, a reliable judicial system or access to markets — those citizens will do what it takes to make themselves and their country richer.

Read the whole thing--it is worth the time.

The book that prompted the article is Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

The book seems to agree with Hernando de Soto, who made a similar argument about economic development in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. I suspect that their arguments about economic decline share a lot with Mancur Olson's The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities.

(Also on the topic of property rights, I see a lot of buzz for the movie The Lorax. I doubt if more than one person in a thousand who reads the original book or watches the movie will think, "The problems here is poorly defined property-rights. If someone owned the trees, that person would speak for the trees." To understand the problem, one must know a bit about economics, a type of knowledge that is rare.)

Update: William Easterly reviews the book for the Wall Street Journal here.

 Update 2: Francis Fukuyama eviews it here He likes it, but has reservations. A couple quotes:

If growth is a byproduct not just of good policies like trade liberalization, which can in theory be turned on like a light switch, but rather of basic institutions, then the prospects of foreign aid look dim. ... Bad institutions exist because it is in the interests of powerful political forces within the poor country itself to keep things this way.

What is wrong with Greece?

Greece is plagued with regulations that were designed to protect special interests, according to this article in the New York Times. The result is an economy that discourages entrepreneurship.

The Greek economy is riddled with distortions — the number of trucking licenses has remained unchanged in Greece since 1971, for example, and the country is among the world’s leaders in lawyers per capita. It has one lawyer for every 250 people, compared with about one for 272 in the United States.

Is the ratio of lawyers to population a rough measure of the amount of rent-seeking a society has?

China is now the largest auto market

From the TimesOnline:

In 2009, Chinese sales of cars, trucks and other vehicles soared to 13.6 million, a 46 per cent rise from the previous year’s levels and comfortably higher than the 10.4 million equivalent vehicles sold in the United States last year. Only 33 years ago, there were only one million privately owned cars in the whole of China.

Trends in world GDPs

Mark Perry has a graph on Carpe Diem that shows that the US has produced about 25% of the world GDP from 1969 until the present. Europe's share has fallen, while the share due to Asia has rise, and both are also closing in to 25%.

Europe will become increasingly less important in the world, while Asia will grow in importance, at least for much of the next century. Why? Demography.

fiscal policy or economic development

Found here:
http://www.zerohedge.com/article/other-side-chinas-8-gdp-growth-ghost-cities
http://www.youtube.com/watch?v=0h7V3Twb-Qk



Does it illustrate the problems of fiscal policy or of economic development?

(It is a bit unsettling that Al Jazeera has better youtube clips on the world economy than any of the American networks.)

De Soto on PBS

Hernando De Soto will have a documentary on PBS in October. It should be worth watching. Here is the preview:

Doing Business report

The World Bank publishes a ranking of countries by how easy it is to do business in each country. The new ranking is here.

Markets in education

City Journal reviews The Beautiful Tree, A Personal Journey Into How the World' Poorest People Are Educating Themselves:

But while on a sightseeing excursion to the city’s teeming slums, Tooley observed something peculiar: private schools were just as prevalent in these struggling areas as in the nicer neighborhoods. Everywhere he spotted hand-painted signs advertising locally run educational enterprises.
...
When he related his Hyderabad discovery at the World Bank office in Delhi, for example, one staffer “launched into a tirade”: such private schools, she said, were ramshackle and shoddy; they ripped off the poor by charging money for worthless instruction; their owners were motivated solely by profits; and their teachers were unqualified, unskilled, and ineffective.
....
The data Tooley unearthed are fascinating. Not only do networks of private schools for the poor exist across the developing world—networks that emerged without any government- or NGO-sponsored help—but their students learn far more than do those of government- and NGO-funded public schools.

Milton Friedman would love this book.

Barbados vs Jamaica

From Newmark's Door.

The forge of Christendom

A book review of the transformation of Europe after 1000AD in The Wall Street Journal.

The years after 1000 were the classic age of feudalism, a form of social organization that used to be dismissed as the darkest part of the Dark Ages but that historians now see as dynamic, even entrepreneurial.

The little people make a difference.

Aid to Africa

I have been looking for books that might work in a course on economic development, and Dead Aid may be one.
Update: National Review has an article on the book.

The informal sector

The Wall Street Journal has an article on the growth of the informal sector in the undeveloped economies.

Economists have stressed the negative aspects of informal trade for decades. Informal businesses often don't pay taxes, and they routinely lack the capital and expertise to be as productive as big enterprises, leading to less innovation and lower standards of living.

I guess the reporter never read Hernando De Soto.