Why Latin American Economies Fail (in Spanish)

This was a talk for a group at the Colombian University together with the co-editor of the book of the same title published by University of California Press. On the discussion of Commons, which is not accepted by many Institutionalists go to this paper (which has other concerns, but shows clearly the marginalist basis of his views).

Acemoglu, the Dems and Tuesday's election

I missed this. CEPR blog posted on Thomas Edsall's column and quoted this nugget from Daron Acemoglu (and this guy might get a "Nobel"):

As long as the Democratic Party shakes off its hard-core anti-market, pro-union stance, there is a huge constituency of well-educated, socially conscious Americans that will join in.

I don't agree with all of the CEPR proposals. I always found the free trade on professionals a peculiar idea. At any rate, that would alienate a constituency of the Democratic Party. But it is very instructive of what mainstream economists, even some considered liberal, might say, and what we should expect in case Hillary wins and brings these kind of economists as advisers to her administration (if she wins, which as I said earlier, is not guaranteed; it seems now it's going to be very close).

Acemoglu also said, according to Edsall: that Dems, “should seek a coalition that stands for the most vulnerable people in society,” but he believes “such a coalition could not stand by itself without the support of influential, well-off members of American society.”

The solutions for the poor (vulnerable is a nicer euphemism) will come from the educated elite, which is "socially conscious." So forget about Bernie and the progressive wing of the Party and just become the old GOP, an aggiornamento of the Rockefeller Republicans. And that's why, in a nutshell, many working class people are going to vote for Trump. These guys think, against logic and evidence I would add, that minimum wages are bad, that powerful corporations are fine, but strong unions hurt the economy, and that trade deals have had only positive effects.

Acemoglu seems to know very little about how the actual rights of workers were obtained in this (or any other for that matter) country. Nobody gave workers their rights for free, and even FDR and Frances Perkins (his Labor Secretary), which were socially conscious members of the elite, would not have passed some of the labor legislation without the sit-down strikes, and the pressure and organization from below.

Institutions, what institutions?

There are many explanations for why some nations are rich while others are poor. The dominant view, in mainstream (neoclassical) economic circles is that institutions are the central cause of the divide between developed (center) and underdeveloped (periphery). I discussed before (here and here) the role of institutions vis-à-vis geography and culture. I have also noted how the New Institutionalist argument concentrates on the institutions (fundamentally property rights) that act on the supply side of the economy. That is growth arises because property rights provide incentives for productive investment. I also noted (here) that the historical evidence for patents, copyright and other forms of property protection for explaining growth is limited at best. Note that mainstream authors and heterodox authors, at least the majority, tend to agree that institutions rather than geography or culture are central for development.

Also, the table above suggests that cultural and geographical explanations tend to put an emphasis on the supply side, but that is not necessarily the case, and it would be difficult to speculate about what Jared Diamond, for example, thinks about the relative role of supply and demand. Also, it’s worth noticing that while in his early work economic historian David Landes favored a demand-led view (which I tentatively put in the institutional box) he clearly moved to a cultural supply-side interpretation in his later work.

So if you believe most heterodox economists institutions are relevant, but not primarily those associated to the supply side; the ones linked to the demand side, in Keynesian fashion are more important than the mainstream admits. Poor countries that arrive late to the process of capitalist development cannot expand demand without limits since the imports of intermediary and capital goods cause recurrent balance of payments crises. The institutions that allow for the expansion of demand, including those that allow for higher wages to expand consumption and to avoid the external constraints, are and have been central to growth and development. The role of the State in creating and promoting the expansion of domestic markets, in the funding of research and development, and in reducing the barriers to balance of payments constraints, both by guarantying access to external markets (sometimes militarily, like in the Opium Wars) and reducing foreign access to domestic ones was crucial in the process of capitalist development.

In this view, for example, what China did not have that England did, was not lack of secure property rights and the rule of law, but a rising bourgeoisie (capitalists) that had to compete to provide for a growing domestic market that had acquired a new taste (and hence explained expanding demand) for a set of new goods, like cotton goods from India, or china (porcelain) from… well China, as emphasized by economic historian Maxine Berg among others (for the role of consumption in the Industrial Revolution go here). Or simply put, China did not have a capitalist mode of production (for the concept of mode of production and capitalism go here). Again, I argued that Robert Allen’s view according to which high wages and cheap energy forced British producers to innovate to save labor, leading to technological innovation and growth, and the absence of those conditions in China led to stagnation is limited since it presupposes that firms adopt more productive technologies even without growing demand.

The same is true of Latin American economies, which several authors like Engerman Sokoloff suggest fell behind as a result of absence of secure property rights. Latin American economies entered the world economy to produce silver (mining-economy/Amerindian population), sugar (plantation-economy/African-American population) and other commodities, for external markets. They were exploitation colonies, less reliant on the development of domestic markets, typical of settlement colonies in the Northeast United States or of the central countries in Western Europe.

The economies that depend on the production of commodities for world markets and import everything else are more vulnerable to the fluctuations of the price of commodities. Booms in commodity prices lead to growth, albeit very concentrated in the hands of the owners of capital, but they leave very little in terms of infrastructure for future growth. Further, since the economy must import everything to satisfy domestic demand, the economy is dependent on external sources of production, and when the export of commodities does not allow for enough imports, then either demand must be curtailed or the economy must become indebted to be able to continue to consume. A thriving domestic market is central for economic development, and the ability to diversify production to provide for the market is the key to catching up.

Finally, since the economy was based on the mono-production of commodities (and the size of the domestic markets is relatively limited) there were little if any incentives for technological innovation and higher productivity. Note also, that once a country falls behind, and almost all countries were essentially at the same level of income per capita around 1800 (or at least differences were considerably smaller than now), it is very hard to catch up, since the distance to the technological frontier is increasingly steep. It is not the same to copy a textile mill that uses a steam engine than to emulate the development of the Silicon Valley. In this sense, the institutions associated to the colonization period are central, rather than property rights, to explain underdevelopment in Latin America. Capitalism and its institutions both caused growth in the center, and stagnation in the periphery.*

* I discussed here how the industrialization of Britain meant the deindustrialization of India and China.

On Argentina's secular decline: why The Economist is wrong

The Economist had a few weeks ago an issue on Argentina (here; subscription required), which I wanted to address, but had no time before today. The argument implies that the current Argentine woes (discussed here before) are part of a pattern which is associated to the long decline in income per capita from the late 19th century and early 20th century until now.

The Economist suggests that:

"In 1914 Argentina stood out as the country of the future. Its economy had grown faster than America’s over the previous four decades. Its GDP per head was higher than Germany’s, France’s or Italy’s. It boasted wonderfully fertile agricultural land, a sunny climate, a new democracy (universal male suffrage was introduced in 1912), an educated population and the world’s most erotic dance. Immigrants tangoed in from everywhere. For the young and ambitious, the choice between Argentina and California was a hard one."

In a sense that's true. According to Maddison's data in 1913 Argentina per capita GDP (in 1990s dollars) was 3,797 while France and Germany had respectively 3,485 and 3,648 (data available here). However, the reasons for the decline in the 20th century are based on simplistic notions, typical of the so-called New Institutionalism of North and more recently Acemoglu and Robinson (for a critique go here). In their words:

"Building institutions is a dull, slow business. Argentine leaders prefer the quick fix—of charismatic leaders, miracle tariffs and currency pegs, rather than, say, a thorough reform of the country’s schools."

They blame corruption and populism (mind you currency pegs were actually typical of liberal governments, both the ones that adopted the Gold Standard, an international institution, back when the economy was fine according to The Economist, and during the 1990s during the Neoliberal experiment, that The Economist fully supported; but I'm glad that now they admit that currency pegs might be sometimes dangerous. The Economist is not for the Gold Standard anymore, it seems. Any day now they will abandon their beliefs on free trade).

On a different note they also suggest that commodity production might be a problematic path to development (yes, The Economist again has a positive take on Prebisch-Singer; see before here). They say:

"Commodities, Argentina’s great strength in 1914, became a curse. A century ago the country was an early adopter of new technology—refrigeration of meat exports was the killer app of its day—but it never tried to add value to its food (even today, its cooking is based on taking the world’s best meat and burning it). The Peróns built a closed economy that protected its inefficient industries; Chile’s generals opened up in the 1970s and pulled ahead. Argentina’s protectionism has undermined Mercosur, the local trade pact. Ms Fernández’s government does not just impose tariffs on imports; it taxes farm exports."

In other words, Pinochet was great (Chile is developed it seems; again according to Maddison's data the Chilean GDP per capita in 1990 dollars in 2008 was 13,185 while the Argentine was 10,995. Not much of a difference; back in 1913 Chile's was 2,968 and like Argentina's high for Latin America's standards. In other words, while France and Germany had in 2008 22,223 and 20,801 respectively in 2008, both Chile and Argentina had fallen behind), and redistribution towards the poor (read Perón and the Kirchners) is bad. That's why the lesson is "that good government matters."

Don't get me wrong, the State matters, and a developmental state matters a lot. However, when and how you connect with global markets also matters. While France and Germany might have had a slightly smaller GDP per capita in 1913 than Argentina, they were quite ahead in the second Industrial Revolution, with firms that were leaders in steel production, in the chemical and pharmaceutical sectors, and with a developed network of firms and universities producing first rate scientists and technological innovations. Meanwhile, Argentina (but also Chile) produced mostly commodities (and only adopted imported technology) and the vast majority of their exports were concentrated in one or two commodities exported to a limited number of countries. Hence, only someone with the limited understanding of The Economist would have thought that Argentina and Chile were in 1913 as developed as France and Germany.

The lesson is more complex than The Economist's 'the state matters' (interestingly enough if markets did matter, which is their traditional motto, specialization in commodities due to comparative advantage should pose no problems). The state matters, but so does your colonial past (being an exploitation colony rather than a settlement one is a problem), what you export matters, and the access to international capital markets also matters (France and Germany got a Marshall Plan to reconstruct, since the US was afraid of Uncle Joe, but in Argentina we weren't that lucky). The parable of Argentina is a rich one, from which many should learn, but The Economist still has no clue.

PS: Don't get me wrong, building schools is nice, and Argentina actually produced three Nobel prizes in sciences (the last one in the 1980s), but schools alone do NOT produce development.

PS': Also, why is Messi a symbol of Argentina's secular decline?

Geography, culture, institutions and economic growth

Acemoglu, Johnson and Robinson (p. 406) used a very effective visual aid to show that institutions and not culture of geography are the main or fundamental determinants of economic growth. A version of the graph using Maddison's data is shown below.

The graph does show that even though South and North Korea share the same culture and geographic conditions, they do have significantly different growth patterns after the 1970s, with GDP per capita in South Korea reaching more than US$20,000 by 2008, while North Korea never takes off, and after the collapse of the Soviet block reverts to the initial levels. This would suggest that institutions are central for growth.

There is the whole issue of which institutions are relevant, of course. Acemoglu et al. emphasize private property rights and the rule of law, which would allow entrepreneurs to invest. In their view, supply side factors are central. I would argue that demand forces are more relevant, and that symbiotic relation with US has played a role in South Korean success, in particular in lifting the balance of payments constraint that is the major hurdle for developing countries. At any rate, the figure below is meant to put the notion of South Korean success in perspective.

Note that both Koreas are unified in the graph (again using Maddison's data). Chile is a good comparison in Latin America in terms of GDP per capita. Yes Korea, both of them, were catching up in the 1950s and 60s, but from the mid-1980s onwards, all the growth of South Korea means that they keep the pace with Chile.

I am certainly not suggesting that the Chilean model, which relies on the export of commodities (fundamentally copper), which the neoliberals never privatized after Allende's nationalization by the way, and strict integration to world markets with Free Trade Agreements (FTA) with the US and everybody else, is a good strategy. Yet, the alternative of diving your country in two and becoming a satellite of the dominant hegemon at best makes you a middle income country. And of course is not open to all.

Peter Temin on the strange death of economic history

Peter Temin recounts in this paper the vanishing (apparently complete by 2010) of economic history from the MIT curriculum. History of thought has probably vanished even before, if it was taught at all. He says that:

"Economic history at MIT reached its peak in the 1970s with three teachers* of the subject to graduates and undergraduates alike. It declined until economic history vanished both from the faculty and the graduate program around 2010."

He notes that the most famous economic historian graduated from MIT was Christina Romer, which, it must be emphasized, in her famous paper on the Great Depression claims that fiscal policy (and to a great extent the New Deal) was not responsible for the recovery. For her it was the non-sterilized inflows of gold that increased the money supply [yep, the most important historian graduated at MIT is more of a Monetarist than a Keynesian; New Keynesians are peculiar that way; for more go here].

Ideologically this is the result of the same forces that led to Fukuyama's hubristic announcement of the death of history after the fall of real communism in Eastern Europe. And the New Economic History, that received two of the Sveriges Riksbank Prize in Economics (aka the Nobel, but not really) given to North and Fogel, is part of the problem, as Temin notes. He says:

"In terms of the class struggle ... the coalition of theory and econometrics left economic history out of power in the counsels of economics. Proponents of the New Economic History were using more and more econometrics in their work, but they were no match for theorists."

That is why Temin does not consider the work of Acemoglu, including his recent Why Nations Fail to be good economic history. In his words the book:

"is an example of Whig history in which good policies make for progress and bad policies preclude it. Only transitions from bad to good are considered in this colorful but still monotonic story. The clear implication is that if countries can copy the policies of English-speaking countries, they will prosper."

For my critique of the book go here. At any rate, economic history, as well as history of economic thought, should be at the center of the teaching of economics.

* Temin who was hired to replace W.W. Rostow, Evsey Domar and C. P. Kindleberger.

What is really neoclassical economics?

So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term. In fact, in the post he links to, in which I do criticize his views on Graber's work, I do say this on neoclassical economics: "mainstream (neoclassical) notions about debt are really problematic." So nothing derogatory or abusive is suggested. What is said there is that certain views of that particular school of thought are not necessarily free of problems. So no, neoclassical is not a slur.

But before I get back to what I think Noah is trying to get to, we need to address the actual meaning of neoclassical economics. For starters neoclassical is a bit of a misnomer. Veblen invented the term to suggest continuity between the old classical school and the new marginalist school of his time, fundamentally based on Laissez Faire providing an intellectual link between both groups. But the continuity between classical authors and marginalists is not defensible, once one goes beyond certain policy stances and concentrates on the main theoretical propositions of both schools [in this respect the book by Krishna Bharadwaj is still worth reading]. But we are to some extent stuck with the name. So be it.

The core propositions in neoclassical economics are associated to what Garegnani referred to as the data of the system, that is, the variables that are taken as exogenous and allow explaining the functioning of the system, namely: the endowments of factors of production, the preferences of the economic agents, and technology. On the basis of these variables the supply and demand functions of all goods, including the so-called factors of production (capital, labor and land), can be determined, and as a result the relative prices of all goods and the efficient allocation of resources is established. Central to the approach is that supply and demand for labor and capital determine the remuneration of these factors of production, and as a result, and in contrast to classical political economy and Marx, income distribution is endogenously determined [there are insurmountable problems with this theory, as Paul Samuelson accepted, subscription required; for more go here]. And there are differences between the old version of neoclassical models based on the notion of a long term equilibrium (which is what is still taught in undergrad courses) and the intertemporal version, but for our purposes we can just omit the differences.

Note that Noah says that neoclassical economics is: "Assumption of individual rationality, utility maximization, and supply/demand." But this is at best incomplete, and at worst simply incorrect. Yes they assume individual rationality, but that was also true of classical authors like Smith, Ricardo and Marx, who wouldn't assume that capitalists did not rationally pursue profits. And a more relevant discussion would be about types of rationality, substantive or bounded (like in Simon, but I'll leave that for another post). And also, social utility, not personal individual subjective utility, was essential for classical authors, since nothing that didn't have use value (utility) would be produced. Finally, market prices, but not long term natural or production prices, were determined by supply and demand, and disequilibrium played a role in gravitation towards normal prices. So the three characteristics are not enough to distinguish Ricardo and Marx from Marshall or Noah Smith. The essential thing is that supply and demand determine the long term normal prices of everything including factors of production (endogenous distribution).

Noah then points out that papers that deal with the issues in the core are almost not published. He says that publication of papers that deal with the theoretical core fell "from over half of top-journal econ papers in 1963 to less than 28% in 2011." As it should be, in particular with a core that has been revealed to be so full of problems since the capital debates. And yes, most developments like the Acemoglu et al. paper (discusses here in various places by Cesaratto and I, also here) are orthogonal to the core. But these are developments outside the core, but still within the so-called protective belt of the neoclassical paradigm or research program (for protective belts and paradigms go here and here). The problem is that they still presume that the neoclassical theory in the core holds. Note that they suggest that a minimal government that protects private property rights is enough for development, something that goes hand in hand with the neoclassical core. So a lot of the time what seems to be the use of neoclassical economics as an insult is just frustration about the inconsistencies that appear between the empirical research in the protective belt and the incoherence in the core.

Mind you, as students and newly minted PhDs like Noah have never heard or read on the capital debates, and have not been exposed to the authors of the surplus approach and Marx (besides reading less in other disciplines in the social sciences) it is not surprising that the term neoclassical is seen as an insult hurled at them by crazy and older heterodox economists. But it's not. Don't get me wrong, the core of neoclassical economics is not good or bad in itself, but it is logically flawed.

* By the way, it should be required at both the graduate and undergraduate level, since many graduate students come from other disciplines. A discipline that does not understand its own history is bound to move blindly rediscovering old truths, accepting already discarded myths, and forgetting useful ideas. And you might have, also, the paradoxical situation of a neoclassical economist that does not know what neoclassical economics is (like Dave Chappelle's black white supremacist).

PS: Note that Noah is not responsible for the definition of neoclassical economics he uses, which was lifted from Wikipedia. And yes Wikipedia is not the best source.

Property rights and the Industrial Revolution

I have discussed here a few times (here, here and here, for example; last one by Cesaratto) the role of institutions in the process of economic development. Within the mainstream the dominant view is that property rights are the essential institution for promoting growth. I only now came across the excellent paper by Julian Hoppit.* He says:

"Such views of the interrelated importance of property and the rule of law have led to major interpretations of the interplay of Britain’s economic, social and political histories, including that secure property rights were a vital foundation for the first industrial revolution. Yet property was often heavily taxed, frequently expropriated and, exceptionally, eradicated through redefinition. Such vulnerabilities did not diminish after the Glorious Revolution, they increased—mainly because parliament now met annually, had greater sovereign power than earlier monarchs and legislated prolifically regarding property. After 1688, Britain’s economic precocity rested less on the enhanced ‘security’ of property in any general sense of the word, much more on respect for parliament’s authority and its willingness to allow property to be alienated, most usually by particular interests claiming to act for the public or wider good. At times this required the reversal of commitments made only a generation earlier, raising doubts about central government’s credibility. Taken together, these uncertainties over property rights were sufficient for some to question whether property had a sound theoretical basis at all.
...
The scale of that expropriation was such, and the consequences so profound, as to undermine an important thesis that property rights became more secure after the Glorious Revolution, developed in a notable essay by Douglass North and Barry Weingast and now conventional amongst some ‘new institutional economists’."

Hoppit looks at the extensive expropriations in financial markets, after the South Sea Bubble, in heritable jurisdictions (offices granted by the Crown), and in the property of slaves. Very little is left of the new institutional argument.

* Julian Hoppit in "Compulsion, Compensation and Property Rights in Britain, 1688-1833," Past and Present, No. 210, Feb. 2011 (here; subscription required).

Reversal of fortune and settlement colonies

Acemoglu and others have discussed the concept of reversal of fortune, the idea that the areas with high income per capita around the 1500s (basically the areas colonized by Europeans in the Americas and Asia) became relatively poor, and vice versa. The idea is that there is a negative relationship between economic prosperity in 1500 and income per capita today. They suggest that the type of settlement and the institutions built by colonizers explain the apparent paradox.

The idea is that in settlement colonies, were more equalitarian societies were built, institutions protected property rights and led to higher investment and growth (à la North). They use the mortality rates associated to a particular region as an instrument for the type of settlement and institutions built by European colonizers. High mortality rates imply low European population density, more indigenous or African slaves, and more unequal institutions, with less protection of property rights.

It is a clever argument, no doubt (put forward by Engerman and Sokoloff, in fact), and more importantly a creative use of the notion of settlement colonies.* I have several problems with it, nonetheless. It is far from clear that equality is really connected to growth, and that causality runs from Western type property rights to growth, rather than vice-versa. I tend to spend quite a bit of time on this in my Latin American History classes. There are also significant problems with Engerman and Sokoloff's notion that institutions responded to factor endowments [fundamentally the idea that in capital-abundant/labor-scarce societies, wages were high leading to technological development; yes the capital debates again, but I'll leave this for another time].

Recently I found the graph below in Angus Maddison's Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History.

The graph shows that Southern Europe, North Africa, and the Eastern Mediterranean were the high income regions, while Northern Europe was relatively poor. In this case, in fact, disease is not a good guide for the type of institutions built in the different regions. Other than the Italian Peninsula, it is the Nile Valley, i.e. Egypt, that had the highest income per capita during the Roman Empire. The Reversal of Fortune is also evident in this case, with France having a significantly higher income per capita than Egypt, for example. It is hard, however, to think that mortality rates associated to tropical diseases (with Southern Europe and North Africa closer to the Tropics) would have something to do with this particular reversal of fortune.

It was the region of older agricultural settlement, more urbanized, more directly connected with Eastern trade, the Eastern Mediterranean part of the of the Empire that was more developed, and that survived for a longer period (until the Turkish conquest of Constantinople in 1453). The reasons for the reversal of fortune in this case, are connected to the rise of the Atlantic economy, related to the Great Discoveries, and the expansion of the African route to Asia. If you ask me, more relevant than the incentives provided by property rights in explaining the Portuguese (and then Dutch and British) search for the alternative routes to Asia, is the rising and changing patterns of demand in Western Europe (and success is based on the naval-military advantage, Guns and Sails, Cipolla would say). But for our purposes here it is only relevant to note that mortality rates no longer seem a relevant instrument for the types of institutions.

* Moses Finley suggests that the idea of settlement versus exploitation colonies (note that Acemoglu et al., avoid the use of the term colonies of exploitation referring only to the settlement ones) was originally developed by Wilhelm Roscher of the German Historical School and later by Paul Leroy-Beaulieu, a liberal (in the European sense of the word) French economist.

The surplus approach and institutions: Diamond vs. Acemoglu & Robinson

By Sergio Cesaratto (guest blogger)

The European crisis absorbs me so much – also politically and personally since our lives are involved – that not much time is left for what now appear as a divertissement, more abstract economic research. So not much time to devote to this post then. Somebody might like, however, to develop this line of research.

If anybody wants to be persuaded of the correctness and fruitfulness of the 'surplus approach' by Sraffa (1951) and Garegnani (1984), a reading of Jared Diamond Guns, Germs, and Steel would be enough to convince herself.[1] What is surprising – but not really at a closer scrutiny – is that Diamond does not quote any classical economist in his book – he does not mention any economist at all indeed. The likely explanation is that he has only been exposed to neoclassical economics and, of course, he could not find anything interesting there.[2] Also Acemoglu and Robinson (A&R) are neoclassical economists. Their neoclassicism is shown by the role that they attribute to the 'right' institutions in setting the correct incentives to individual entrepreneurship. Although in a very diplomatic way, Diamond is very critical of their attempt to explain why some regions developed earlier while other developed later or not at all. In his review of Why Nations Fail in the New York Review of Books Diamond (2012a) aptly summarises A&R’s thesis:

“Different economists have different views about the relative importance of the conditions and factors that make countries richer or poorer. The factors [A&R] most discuss are so-called “good institutions,” which may be defined as laws and practices that motivate people to work hard, become economically productive, and thereby enrich both themselves and their countries… Among the good economic institutions that motivate people to become productive are the protection of their private property rights, predictable enforcement of their contracts, opportunities to invest and retain control of their money, control of inflation, and open exchange of currency. For instance, people are motivated to work hard if they have opportunities to invest their earnings profitably, but not if they have few such opportunities or if their earnings or profits are likely to be confiscated.”

The indictment Diamond moves to A&R is that, although the institutions they refer to are relevant:

“as readers may quickly confirm for themselves, it is indeed a fair characterization of Acemoglu and Robinson’s book to say that their theory is as if institutions appeared at random. Although their letter describes institutional variation today as a systematic outcome of historical processes, much of their book is actually devoted to relating story after story purportedly explaining how institutional variation developed unsystematically and at random, as a result of particular events happening in particular places at critical junctures.” (Diamond 2012b)

“Acemoglu and Robinson’s view of history is that small effects at critical junctures have long-lasting effects, so it’s hard to make predictions. While they don’t say so explicitly, this view suggests that good institutions should have cropped up randomly around the world, depending on who happened to decide what at some particular place and time.” (Diamond 2012a)

As well known, according to Diamond, complex political institutions emerged around 3400 BC in specific parts of the globe where material circumstances related, to the climate and to the availability of domesticable vegetable and animals (there are not so many) made profitable for the humans to transit from populations of hunter/gatherers to sedentary civilisations. With agriculture a surplus of food emerged that unlashed the possibility of creating a class of people not engaged in a daily fight to collect food and survive, but that could dedicate themselves (exploiting the rest, of course) to the political organisation of society, to write legal codes, to philosophy (that includes science and technology) and to war.

Any student of the classical economists will recognize the echo of Petty, Turgot and Adam Smith in this approach. It worth quoting at length:

“it’s obvious that good institutions, and the wealth and power that they spawned, did not crop up randomly. For instance, all Western European countries ended up richer and with better institutions than any tropical African country. Big underlying differences led to this divergence of outcomes. Europe has had a long history (of up to nine thousand years) of agriculture based on the world’s most productive crops and domestic animals, both of which were domesticated in and introduced to Europe from the Fertile Crescent, the crescent-shaped region running from the Persian Gulf through southeastern Turkey to Upper Egypt. Agriculture in tropical Africa is only between 1,800 and 5,000 years old and based on less productive domesticated crops and imported animals.

As a result, Europe has had up to four thousand years’ experience of government, complex institutions, and growing national identities, compared to a few centuries or less for all of sub-Saharan Africa. Europe has glaciated fertile soils, reliable summer rainfall, and few tropical diseases; tropical Africa has unglaciated and extensively infertile soils, less reliable rainfall, and many tropical diseases. Within Europe, Britain had the further advantages of being an island rarely at risk from foreign armies, and of fronting on the Atlantic Ocean, which became open after 1492 to overseas trade.

It should be no surprise that countries with those advantages ended up rich and with good institutions, while countries with those disadvantages didn’t. The chain of causation leading slowly from productive agriculture to government, state formation, complex institutions, and wealth involved agriculturally driven population explosions and accumulations of food surpluses, leading in turn to the need for centralized decision-making in societies much too populous for decision-making by face-to-face discussions involving all citizens, and the possibility of using the food surpluses to support kings and their bureaucrats. This process unfolded independently, beginning around 3400 BC, in many different parts of the ancient world with productive agriculture, including the Fertile Crescent, Egypt, China, the Indus Valley, Crete, the Valley of Mexico, the Andes, and Polynesian Hawaii.” (Diamond 2012a)

The graph (see the original in Diamond 1997) summarises the chain of material circumstances (including the easier communications and similarity of climate in Eurasia) that Diamond advances as an explanation of the variety of growth experiences.

As said, had Diamond been exposed to Classical Political Economy, he would have recognised the ancestors of his theory in Petty, Turgot and Smith. As known, Turgot and Smith shared a “stage theory” of growth very similar to that by Diamond (see Meek 1971; 1976).[3]

Few quotations from “On Universal History” (1750 [2011]) will confirm the similarity between Turgot and Diamond (and Adam Smith, of course) (my italics):

"Without provisions, and in the depths of forests, men could devote themselves to nothing but obtaining their subsistence. (p. 351)

There are animals which allow themselves to be brought into subjection by men, such as oxen, sheep, and horses, and men find it more advantageous to gather them together into herds than to chase after wandering animals.

It did not take long for the pastoral way of life to be introduced in all places where these animals were met with: oxen and sheep in Europe, camels and goats in the east, horses in Tartary, and reindeer in the north.

The way of life of hunting peoples is maintained in the parts of America where these species are lacking. …

Pastoral peoples, whose subsistence is more abundant and more assured, were the most numerous. They began to grow richer, and to understand better the idea of property. (p. 352)

Pastoral peoples in fertile countries were no doubt the first to move on to the state of agriculture. Hunting peoples, who are deprived of the assistance of animals to manure the soil and to facili­tate labor, were unable to arrive so soon at agriculture. If they culti­vate any land at all, it is only a small quantity; when it is exhausted they move their habitation elsewhere; and if they are able to aban­don their nomadic life it is only by infinitely slow steps.

Husbandmen are not by nature conquerors; the cultivation of the land keeps them too busy. But, being more wealthy than the other peoples, they were obliged to defend themselves against vio­lence. Besides, with them the land can sustain many more men than are necessary in order to cultivate it. Hence people who are unoc­cupied; hence towns, trade, and all the useful arts and accomplish­ments; hence more rapid progress in every sphere, for everything fol­lows the general advancement of the mind; hence greater skill in war than in the case of barbarians; hence the division of occupations and the inequality of men; hence slavery in domestic form, and the sub­jection of the weaker sex (always bound up with barbarism), the hard­ship of which increases in proportion to the increase in wealth. But at the same time a more searching enquiry into government begins." (p. 355)

From these quotations the sequence food surplus à complex institutions is clear.[4]

In their reply to Diamond, A&R (2012) argue that:

"Diamond’s theory predicts that the Neolithic Revolution would happen first in Eurasia, but cannot account for differences in prosperity today, which are huge within Eurasia and not explained by the timing of the Neolithic Revolution."

This is the challenge to future research. How the surplus approach may help to explain recent growth episode and differentials? Of course the theory of long-period effective demand is central in this regard. Possibly, the efficiency of the wage-goods sector has had a role in facilitating growth in episodes of strongly export-led growth, by allowing a constant increase of the standard of living of workers in a non inflationary environment. Or, on the other hand, a too big size of the social surplus becomes a problem in advanced capitalists economies as Marx, Rosa Luxemburg and Kalecki taught us. Workers must share a part of it, letting wages to go beyond the subsistence level, to let the system to work. Well, it time to stop and leave the stage to other voices (see the post by Matias Vernengo for a start).

AppendixEGT, Diamond and the surplus approach on population growth and human development

In Cesaratto (2010) on EGT I wrote (inspired, at least partially, by Franklin Serrano):

“According [to the EGT exponent Charles Jones, e.g. 2002, 2004) productivity growth depends on population growth. Jones fervently defends this sort of causality (e.g. 2002, pp.103-104). After all, he argues, humans are the ultimate fuel of the process of research, and it should not be surprising that faster population growth has a positive effect on the generation of new ideas. Jones’ favourite quotation is from Phelps (1968, pp.511-512), according to whom: ‘One can hardly imagine …how poor we would be today were it not for the rapid population growth of the past to which we owe the enormous number of technological advances enjoyed today. …If I could re-do the history of the world, halving population size each year from the beginning of time on some random basis, I would not do it for fear of losing Mozart in the process’. One might certainly argue that halving the German speaking population of the eighteenth and nineteenth centuries would entail the risk of losing many of the greatest musicians ever, but this could be done to other populations of comparable size, in that or other periods, without much fear of losing outstanding talents. Ruling out genetic factors, something therefore seems to be missing from this population-driven mechanics of growth.

Jones (2004, pp. 48-56) discusses these possible objections at some length. Looking at different regions of the world in the very long term (12,000 years or so), some relationship seems to emerge between population size at the beginning of the period and their technological rank measured at the year 1000/1500 or so (before European explorations ended the isolation of various areas). The rationale of this correlation (ibid, p. 56) would lie in the following virtuous circle: at the beginning a small population could only generate ideas over long periods of time. Low productivity levels and subsistence kept the population constant. However, once one idea was produced subsistence levels and fertility rose, leading to a larger population. This in turn facilitated the production of new ideas over shorter lapses of time, and so on and so forth (see also Jones and Romer, 2009, pp. 10, 14, 24-25).

A scholar quoted in this regard is Jared Diamond (1997) who is, however, totally misinterpreted by these authors. In his famous book, Diamond argues that some environmental advantages, in particular the availability of suitable vegetable and animal species, made possible to some luckier populations some 10 thousand years ago to realise a food surplus and to become “large, dense, sedentary, stratified populations” (1997, p.87 and passim). More precisely, the realisation of food surpluses permitted these populations to grow more rapidly and to support a political class that, at the price of the exclusive control of the surplus, provided organisational, institutional, and military leadership. Moreover, the surplus allowed for the sustenance of those who Adam Smith would have called ‘philosophers or men of speculation, whose trade it is, not to do anything, but to observe everything’ (1776 [1979], p.21). It is clear from Diamond that population growth is not and cannot be the original source of “ideas” since both division of labour and population growth both logically and historically originate from the emergence of food surpluses. This is enough to show the closeness of Diamond to the Classical economists’ surplus approach, as well as his distance from the poor growth mechanics of EGT.”

This was what I wrote few years ago. I may add this. Turgot puts the question in a way similar to Smith: given two populations of the same size, it is education (that is the degree of division of labour) that makes the difference:

“The original aptitudes are distributed equally among barbarous peoples and among civilized peoples; they are probably the same in all places and at all times. Genius is spread through the human race very much as gold is in a mine. The more ore you take, the more metal you will get. The more men there are, the more great men you will have, or the more men capable of becoming great. The chances of education and of events either develop them, or leave them bur­ied in obscurity, or sacrifice them before their time, like fruits blown down by the wind.)” (p. 378).

Diamond, as the Classical economists, regards the size of the population, or its concentration in smaller territories towns etc. as an advantage from many points of view. But the material conditions that set off the emergence of a food surplus are the trigger:

“correlations suggest strongly that regional population size or population density or population pressure has something to do with the formation of complex societies. But the correlations do not tell us precisely how population variables function in a chain of cause and effect whose outcome is a complex society. To trace out that chain, let us now remind ourselves how large dense populations themselves arise. Then we can examine why a large but simple society could not maintain itself. With that as background, we shall finally return to the question of how a simpler society actually becomes more complex as the regional population increases. We have seen that large or dense populations arise only under conditions of food production, or at least under exceptionally productive conditions for hunting-gathering. Some productive hunter-gatherer societies reached the organizational level of chiefdoms, but none reached the level of states: all states nourish their citizens by food production. These considerations, along with the just mentioned correlation between regional population size and societal complexity, have led to a protracted chicken-or-egg debate about the causal relations between food production, population variables, and societal complexity. Is it intensive food production that is the cause, triggering population growth and somehow leading to a complex society? Or are large populations and complex societies instead the

cause, somehow leading to intensification of food production?

Posing the question in that either-or form misses the point. Intensified food production and societal complexity stimulate each other, by autocatalvsis. That is, population growth leads to societal complexity, by mechanisms that we shall discuss, while societal complexity in turn leads to intensified food production and thereby to population growth. Complex centralized societies are uniquely capable of organizing public works (including irrigation systems), long-distance trade (including the importation of materials to make better agricultural tools), and activities of different groups of economic specialists (such as feeding herders with farmers' cereal, and transferring the herders' livestock to farmers for use as plow animals}. All of these capabilities of centralized societies have fostered intensified food production and hence population growth throughout history.

In addition, food production contributes in at least three ways to specific features of complex societies. First, it involves seasonally pulsed inputs of labor. When the harvest has been stored, the farmers' labor becomes available for a centralized political authority to harness—in order to build public works advertising state power (such as the Egyptian pyramids), or to build public works that could feed more mouths (such as Polynesian Hawaii's irrigation systems or fishponds), or to undertake wars of conquest to form larger political entities.

Second, food production may be organized so as to generate stored food surpluses, which permit economic specialization and social stratification. The surpluses can be used to feed all tiers of a complex society: the chiefs, bureaucrats, and other members of the elite; the scribes, craftspeople, and other non-food-producing specialists; and the farmers themselves, during

times that they are drafted to construct public works.

Finally, food production permits or requires people to adopt sedentary living, which is a prerequisite for accumulating substantial possessions, developing elaborate technology and crafts, and constructing public works.” (pp.185-6)

References:

Cesaratto, S. (2010), Endogenous growth theory twenty years on: a critical assessment, Bulletin f Political Economy, vol.4, n.1, working paper version Quaderni del Dipartimento di Economia politica, Università di Siena, n.559

ID (con F.L.Serrano) (2002), As Leis de rendimento nas teorias neoclasica de crescimiento: Una critica Sraffiana, Revista Ensaios FEE, vol.23. (English version www.networkideas.org – International Development Economics Association).

ID (1999), Savings and economic growth in neoclassical theory: A critical survey, Cambridge Journal of Economics, vol.23.

ID (1999), New and Old Neoclassical Growth Theory: a Critical Assessment , in G.Mongiovi, F.Petri (a cura di), Value, Distribution and Capital: Essays in Honour of Pierangelo Garegnani, Routledge.

Acemoğlu, D. & Robinson, J. A. (2011) Why Nations Fail: The Origins of Power, Prosperity and Poverty, Profile.

Acemoglu D. and Robinson J.A., reply by Jared Diamond, The New York Review of Books, 16 August 2012.

Diamond J. 2005 [1997], Guns, Germs and Steel: A short history of everybody for the last 13,000 years (London: Vintage).

Diamond (2012a), ‘What Makes Countries Rich or Poor?’, The New York Review of Books, June 7:

Diamond J. (2012), Reply to A&R, The New York Review of Books, 16 August 2012.
Garegnani, P. (1984) Value and Distribution in the Classical Economists and Marx, Oxford Economic Papers, 3: 291–325.

Meek R. (1971) Smith, Turgot and the Four Stages Theory, History of Political Economy, 3, 9-27.

Meek, R.L. (1976) Social Science and the Ignoble Savage. Cambridge: Cambridge University Press.

Jones, C. (2002) Introduction to Economic Growth, New York: Norton.

Jones, C.I. (2004) ‘Growth and Ideas’, NBER Working Papers: no. 10767.

Jones, C.I. and Romer P.M. (2009) ‘The New Kaldor Facts: Idea, Institutions, Population, and Human Capital’, NBER Working Papers: n. 15094.

Phelps, E.S. (1968) ‘Population Increase’, Canadian Journal of Economics 1: 497-518.
Sraffa, P. (1951) Introduction to Ricardo's Principles, in Ricardo, D. (1951-73) Works and Correspondence of David Ricardo,(Cambridge: Cambridge University Press) Vol. I.

Turgot (2011), The Turgot Collection, Writings, Speeches, and Letters of Anne Robert Jacques Turgot, Baron de Laune, Edited by David Gordon, Mises Institute, available at http://mises.org/document/6298/The-Turgot-Collection-Writings-Speeches-and-Letters-of-Anne-Robert-Jacques-Turgot-Baron-de-Laune


Notes:

[1] Franklin Serrano suggested to me to read Diamond many years ago.

[2] On Endogenous Growth Theory (EGT), the most ambitious attempt by the mainstream to explain economic growth, see Cesaratto 1999a, 1999b, 2010, and Cesaratto & Serrano 2002. See also the appendix.

[3] Meek (1976) points out that both Turgot and Smith regarded the protection of property rights as a result of development rather than a cause of it.

[4] True, Turgot as much as A&R dismiss the role of the climate as a determining factor: “A reason for these differences which are found between nations has been sought in differences of climate. This view, modified a lit­tle and rightly restricted only to those climatic influences which are always the same, has recently been adopted by one of the greatest geniuses of our century. But the conclusions which are drawn from it are hasty, to say the least, and are extremely exaggerated. They are belied by experience, since under the same climates peoples are dif­ferent; since under climates which resemble one another very little we very often find peoples with the same character and the same turn of mind” (379-80) But I do not believe that this would change much my argument.

PS: Also read the following post on the same topic here or here where the argument extends to William McNeill and other historians.

Why economists fail

The new book (and the accompanying blog) by Daron Acemoglu and James Robinson Why Nations Fails is a popular version of their academic papers (several with Simon Johnson, the ex IMF chief economist) on the topic [brief summary here]. The main idea is that institutions and not geography or culture are the key to economic development. That is for the most part true.

They use South and North Korea (and Nogales, México and Arizona) as an example of countries that share the same culture and geography, but have very different institutions, and, as a result, a huge disparity in income per capita. Jared Diamond is correct to point out that, in part, technology is geographically determined. No plants and animals to domesticate, and provide for a large surplus (Diamond uses the old classical notion of surplus), and higher population density (with the diseases and immunities associated to those Germs) and no advantages associated to a more developed division of labor (Diamond is also Smithian in that sense), with the consequent development of technology (Guns and Steel). But the problem is that this won’t help you understand why England and not China industrialized (the opposite extremes of the Eurasian continent).

Read the rest here.