Can Poor Countries Afford Democracy? Becker

 

“Poor countries cannot afford democracy” is a common refrain suggesting that poor countries need strong and authoritarian leaders to overcome the various forces that kept them poor for centuries. In apparent support for this claim is the fact that the great majority of rich countries are mainly democratic. Yet, while the effects of democracy on economic performance are controversial, democracies can have some economic advantages for poor as well as rich countries.

 

The actual effects of democracy on the economy and other aspects of life should be compared not with an ideal form of government, but with various governments that do not have a free press, do not allow open competition for political office, do not have widespread suffrage, and lack the other institutions and freedoms that define democracies. As Winston Churchill famously said, “"No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time." This is from a House of Commons speech on Nov. 11, 1947 that was delivered about two years after he was defeated in an early post- World War II election.

 

Many studies have tried to isolate the effects of democracy compared to authoritarian systems of government on economic development, inequality, education, and many other factors. Since it is very hard to separate the effects of democracy from that of many other variables, these studies fail to reach conclusive results. The tendency, however, is to find that once other suitable factors are taken into account, there seems to be only a weak relation between long-term average rates of growth in GDP and whether countries are democratic. Democracies do appear to encourage broader investments in education, and education does help promote faster economic growth.

 

While some authoritarian leaders greatly improve their economies, they are not the rule. For every example of a dictator like Pinochet and Chiang Kai Shek (in Taiwan) who produced fast economic growth, there is a Stalin or Idi Amin in Uganda with dismal economic policies. Similarly, not every democracy handles the economy well. India, for example, has been a vibrant democracy since its independence in 1947. This democracy during its first 40 years produced slow growth under a socialist government, and then India transited to much faster economic growth after the government shifted toward more market-friendly economic policies.

 

While average rate of growth do not appear to differ much between democracies and authoritarian regimes, the variability in performance does differ more among authoritarian governments. China has had remarkable growth since the 1980s, but the prolonged devastation and hardship produced by China’s “great leap forward” (when millions of farmers starved to death) and its Cultural Revolution would unlikely have occurred in a democratic country like say India. Nor is it likely that say Cuba and many African nations would have suffered so long with such terrible economic policies if they had reasonably democratic institutions.

 

One reason why persistent economic distress is less likely in democracies is that a free press would publicly report the distress and severely criticize the economic policies causing it. Similarly, political candidates would openly attack policies that lead to prolonged economic crises, and they would often be voted into office with a mandate to change the policies.

 

Some economic commentators use the strong correlation at any moment in time between wealth of countries and democratic governments to argue that democracy causes greater wealth. To be sure, many long-term democracies, such as the United States and Great Britain, grew very wealthy. So too, however, did countries like Taiwan and South Korea that started to grow rapidly under dictatorships, but became democracies, some rather quickly, when they became richer.

 

The sociologist Seymour Martin Lipset many years ago concluded from an examination of historical evidence that growing wealth mainly encourages democracy, rather than visa versa. I believe he had basically the right interpretation of the data correlating wealth with democracy. Especially in the modern world, as people get richer they travel more, learn more through newspapers, television, and the Internet about what is going on in their own and in other countries, and communicate by phone, email, texting, and in other way. People in wealthier countries want freedom not only in economic choices, but also in social and political life. These aspirations are not compatible with governments that censor what people read and hear, that try to suppress open discussions on politically sensitive subjects, and suppress challenges from political candidates outside of the officially recognized parties.

 

So yes, poor countries can afford democracy, as long as they use their democratic government to promote economic freedoms. Unfortunately, many poor countries, including democracies, fail to do this.

Comments

[an observer]

The Origins of Political Order: From Prehuman Times to the French Revolution

Francis Fukuyama (2011)

WSJ Review

http://online.wsj.com/article/SB10001424052748703806304576245411924479314.html

excerpts of review:

One question that hovered over the end-of-history argument was what political idea—and what real-life political structures—would best serve mankind's own destiny or "end." Hence the impetus behind "The Origins of Political Order," a sweeping survey that tries to explain why human beings act as they do in the political sphere. Magisterial in its learning and admirably immodest in its ambition, the book traces the history of political organization and principle from "prehuman times" up to the period of the French Revolution. Future volumes, we are told, will take the story up to the present.

For Mr. Fukuyama, politics are decisive. The ways in which societies govern themselves, he believes, create paths that may last for centuries, even millennia. Unlike the libertarians, he does not believe the state is a second-order phenomenon, a mere enabler or protector of what people choose to do in civil society or, alternatively, a saboteur of their freedoms. On the contrary, the form the state takes is of first-order importance: It can allow for human flourishing or thwart it mercilessly.

Mr. Fukuyama condemns the "curious blindness" of serious thinkers, including economists, to "the importance of political institutions." He notes, for instance, that it matters more to the destiny of a society which conqueror takes power—and when and how—than what its people's supposedly innate qualities might be or what perfect model of rational self-interest its scholars may endorse.

[Jim]

Nations are poor for vastly different reasons. Some reasons are structural, some political, some demographic. I would argue that the west indies are structuraly poor, Mexico politically poor and some areas in the Middle East demographically (culturally poor) and that changing the political model in any of those places would not change the public welfare, except in Mexico. I agree with Professor Fukuyama on his conqueror theory. The barbarian destruction of the Roman empire and the emergence of European royalty and the Holy Roman empire being the best example. The modern American idea that a little foreign aid and some voting will make a poor country into a democracy is ludicrous.

[Jack]

Jim..... mebbe, but seemingly too many exceptions to justify a theory.

Having spent time in Korea -- with government supplied wardrobe -- when I puzzled, while travelling around their few roads shared with oxen, people and trucks, how a nation with virtually nothing could ever pull itself up. When the peninsula split, the north was their industrial area and the south their agricultural area.

Still not enough arable land to feed their, then 29 million or today's 49 million with a mountainous area the size of one of our small/medium states. They've virtually no natural resources and are isolated from nearby trading by NK, and have to maintain a fairly large standing Army. So I've been a big fan of their progress, which is far more than can be accounted for by help from the OECD and our keeping 40,000 troops there since the ceasefire.
South Korea was a historical recipient of official development assistance (ODA) from OECD. Throughout the 1980s until the mid 1990s, South Korea's economic prosperity as measured in GDP by PPP per capita was still only a fraction of industrialized nations.[11] In 1980, the South Korean GDP per capita was $2,300, about one-third of nearby developed Asian economies such as Singapore, Hong Kong, and Japan. Since then, South Korea has advanced into a developed economy to eventually attain a GDP per capita of $30,000 in 2010, almost thirteen times the figure thirty years ago. The whole country's GDP increased from $88 billion to $1,460 billion in the same time frame. In 2009, South Korea officially became the first major recipient of ODA to have ascended to the status of a major donor of ODA.[2] Between 2008 and 2009, South Korea donated economic aid of $1.7 billion to countries other than North Korea. South Korea's separate annual economic aid to North Korea has historically been more than twice its ODA."

Amazing, eh? And similar to Japan managing with over 100 million on a mountainous, volcanic island smaller than CA and with much less arable land and again, virtually no natural resources, along with the other Asian Tigers who seem to make something of nearly nothing.

Arguably, it would seem the W. Indies with a start in sugar, bananas, fruit, fisheries and well positioned for tourism from US/Canada "should" be doing fairly well.

Mexico may be held back by political structure, ha! just what we're supposed to be discussing.

Though living next to a $14 trillion economy it would seem they could improve their ONE trillion economy just from table leavings of the US and their many trading partners. Still they are plugging along with $12,000 per capita GDP and fairly good growth rates, that I suppose are watered down by the high birth rate that gives them 25% unemployed even amidst reasonable, even rapid growth rates.

Average annual GDP growth by period
1900–1929 3.4%
1929–1945 4.2%
1945–1972 6.5%
1972–1981 5.5%
1981–1995 1.5%
1995–2000 5.1%
2000–2011 1.6%

This week, I'm with Posner and Becker; get the process right, as we once did, and good things will happen.

[zyyue]

I just want to say Taiwan is not a country, it is part of china.

[NEH]

zyyue, I just want too say, China is not a country, it is part of Taiwan... ;)

[Xavier L. Simon aka Xavier]

Very interesting! Becker the economist takes an eclectic view and admits uncertainty about the relation between democracy and wealth, while Posner, who I would have expected would take the more philosophical approach, grounds his case solidly on measurable variables as economists usually do, at least economists of the highly mathematical Modern Economics variety, which seems to affect and afflict the Chicago School much less and may explain Becker’s perspective.

I’ll start like Posner by laying out the territory of my own comments. I take a very long view that attempts to explain development and growth over periods of many hundreds of years, a view that tries to encompass the whole cycle of ascent and decline of societies like of Rome’s one thousand years of Republic and Empire, Venice’s roughly 1,200 years including its drop from preeminence when the major trade routes with Asia moved away from the Mediterranean, and the nearly one thousand years of Norman Britain in various shapes and forms including the spawning of the US.

In that context Becker’s empirical observations span only the upward slope or ascent of the cycle while Posner’s observations, which are extremely limited in that they apply only to the Athenian variety of democracy, are based on a premise with which I don’t agree. Indeed, I wonder if even Posner believes his own comment or whether he is just adding something for the sake of discussion.

I say this because Posner’s whole point begs the question of what is the source of liberty; whether it is something inherent to each of us, or whether it is something granted by the wealthy, who, if Posner’s logic holds also happen to be in power and are educated because they are wealthy, and extend it to the poor when these become less poor. And that begs the further question of just how wealthy one has to be to find liberty. Indeed, in the longer sweep of history how does Posner explain that as societies develop and grow they drift towards despotism, not less Europe and now even the US who is told by at least one of its more noted leaders that if the people want to know what is in a proposed law they have to pass it first. Or does Posner really believe that if we get rich enough we will then also all be educated and smart enough to have a full Athenian democracy of more than 300 million?

The subject is dear to me because for 50 years I have been trying to understand how democracy works, and I come at it from the very perspective of the current posts that try to understand why the poor don’t do better. I have concluded that the best form of governance is indeed democracy that includes free markets, but democracy in its much more limited form of representative republic; that such a form happens more by accident than design; that it can sustain itself only when certain structures, properties, and processes function relatively well and persist; and that the right circumstances for these to occur are much more likely to happen initially in and evolve from small groups. Because in a democratic society there are more unimpeded locations of change, innovation, and adjustment, a democracy is more likely to persist and grow for longer periods, long enough for us to take note.

The properties, structures and processes that are more important include, change and innovation; a capacity to reconcile the differences that arise from change; a capacity to relieve the stresses of change and to adjust to the compromises that it requires; an ability to learn from that change and to devise the new rules and institutions that it calls for; an ability to disseminate all of these to achieve a minimum working level of homogeneity; and a capacity to discard what no longer works, becomes distorted, or never worked well in the first place. The rules generated are integrated into a social glue that has to be flexible for the whole to function well, that in the West is quite secular but historically included a strong religious component, and that has to evolve. And let me emphasize that these work well only when they are flexible, and present, accepted, and function effectively throughout the society.

Thus, in other comments I have said that companies or institutions should not be allowed to grow too large. We learn by experiment or trial and error, and if something very large fails it can destabilize or even destroy the whole society. But just as important, if not more so, they are undesirable because large institutions, including governments, are much more rigid and contain fewer points where free change and innovation can take place than the equivalent number of individuals working in many much smaller organizations, including “garage” size operations or incubators. This applies not only to the markets for goods but also to the markets for ideas or democracy itself.

By way of illustration, two of the problems identified by Becker and Posner—income distribution and uneven economic growth—have a bidirectional causality with the above that explains why there is little real democracy in poor countries. Income disparity in the US is a problem but nothing like in poor countries and the even more significant disparity of participation in society. In many countries much of the heterogeneity and consequent stress is a result of corrupt bureaucrats and police. Instead of being a source of support that helps the people integrate into society, bureaucrats and police prey on the poor. Worse, because that is what they see first hand, there is no amount of reasoning that will convince the poor that their government is democratic. Without participation none of the above processes function with the consequence that countries are far from constituting anything resembling a society. This all results in victories for regressive despots like Hugo Chavez and parties like Hamas.

[Xavier L. Simon aka Xavier]

Observer, Jim, now that I entered my basic premise above let me come back to your comments of 05/03/2011 at 08:27 PM and 05/03/2011 at 09:25 PM , respectively, because they are highly relevant.

Observer, I am also reading Fukuyama’s latest and for the very reasons mentioned in your quote. If you go back to my comment above setting my premise you will note that among the key processes I identify there is reconciliation of the differences that result when there is change. When there is change different people will perceive its effects differently since we all have entirely different and unique perspectives. For change to take root there needs to be a reconciliation of those differences, usually through some sort of compromise that is acceptable to all. That is an entirely political process and arguably the sole or main purpose of politics. So I agree with Fukuyama that politics are decisive.

Jim, you say that “Nations are poor for vastly different reasons. Some reasons are structural, some political, some demographic.” I agree but please note that underlying the structural and demographic problems is that they both keep people apart so there can’t be a political process. You further say “that changing the political model in any of those places would not change the public welfare, except in Mexico.” Now, I know Mexico particularly well since I grew up there. Mexico has a very healthy and thriving political system. The problem, which I draw attention to in my prior entry, is that the structure of its society, if you can really call it a single society, keeps the various classes and ethnic groups apart and thus unable to interact politically. And yes, you are most absolutely right when you say that “The modern American idea that a little foreign aid and some voting will make a poor country into a democracy is ludicrous.” I can’t emphasize enough how absolutely ludicrous.

A fascinating case study is provided by Luisa Perez Ortiz (“Power and Politics in Native Code in Latin America,” Foreign Affairs in Spanish, Vol. 6, No. 2, April June 2006, p68), who actually spent time living among the Zapatistas in Southern Mexico. She writes that their objective is a system where they can make decisions by consensus, meaning not just agreement by a majority but that “satisfy” all of the people. What they wanted is a political process that works, that Mexico City listens and reacts to. What she found in the jungles of Chiapas screams of “We the People” and is consistent with the values and laws professed by the federal government. Yet there is an immense gulf between Chiapas and Mexico City. Decisions of the distant government are applied locally by corrupt bureaucrats. Although the ideals of the government and the Zapatistas coincide, what the latter see and how they interpret the intentions of the government are through the actions of the local bureaucrats. The result has been a failure to integrate into what is supposed to be a participatory democracy.

[Jack]

We've sorta left out religion as a factor, though I suppose it could be a subset, or even an alternative, of democratic, or dictatorial political system.

Mexico, for example had explosive population growth from the 40's until about the 80's when the nation's leadership took on the issue of population growth. As above Mexico had very decent gains in GDP but those barely stayed ahead of population growth rates. Swimming fast but against the tide.

Their birth rate has since slowed dramatically, (Ha! because 20% of their work force of family age is now having their birth rate in the US?) While the birth rate has dropped it's on the larger base of 125 million rather than the 50 million or so of the 50's and half of their population was born since the 70's. So in absolute terms they ARE going to see much higher population. This graph points to nearly 150 million by 2050.

http://webcache.googleusercontent.com/search?q=cache:XEMGfbwEH7wJ:www.data360.org/dsg.aspx%3FData_Set_Group_Id%3D213+mexico+population+graph&cd=9&hl=en&ct=clnk&gl=us&source=www.google.com

Mexico's birthrate may drop even faster as it, like most nations have experienced a huge shift from rural farms to urban living.

There's one very simple politic related to birthrate. It's providing some form of SS and retirement security. One didn't have to spend much time in a third world nation to see that "old age security" was that of having large families in hopes of a little from each supporting the parents and GP's or perhaps one getting lucky and becoming well off. Consider how one opting to be single or have just one kid would fare in such a nation.

With something like 25% unemployment, arguably Mexico could have made the same increases in overall GDP with many fewer people, lower unemployment, more per capita and likely a higher savings and investment rate.

Xavier comments: "The problem, which I draw attention to in my prior entry, is that the structure of its society, if you can really call it a single society, keeps the various classes and ethnic groups apart and thus unable to interact politically."

.......... Some author was on Booknotes with a book about cities being the centers of wealth, largely due to such interaction. While he's a New Yorker and more than a bit of an ideologue who took his thesis much too far, he has a point. As Mexicans migrate to the cities more interaction and softening of caste lines are bound to take place.

Living in a booming era in So Cal I'm reminded that the dire shortage of draftsmen and other technical skills required by the aerospace biz was one of the greatest of aides to desegregation with "blacks" and Hispanics gaining a foothold on the economic ladder.

BTW it turns out that though Mexico looks poor to us, it ranks 11th in both population and per capita GDP -- so more or less average in the world.

[an observer]

Xavier:

Fukuyama,Argues, "The ways in which societies govern themselves, he believes, create paths that may last for centuries"

Thus, rule one has to be not be: do not be Catholic.

Rule two has to be, have no natural resources like gold, silver, diamonds, oil or trees.

Rule three has to be a culture of caring about your fellow citizen. America was built by people of cared about each other

[Jack]

We should also remember that some goosestepping hatemonger conned a nation into voting away their democracy and that another gave the corporate shell "personhood" at least in terms of being able to bribe electeds openly and seemingly without limit.

[office 2010]

good thank like your "explosive" analogy, I use it in my business as well. Thanks for the great content.

[Jim]

This is a very interesting discussion: Given that The US is a "democracy" and not poor and that our current president would like an even distribution of wealth on grounds of social justice, can a universally poor country be democratic in principle and to what end. Would most prefer to be democratic and poor or some other obvious combination. Ah, human nature rears its ugly head.

[Assisted Living Seattle Wa]

I totally go along you! I have often felt that way but nobody really would like to take it as seriously as we do apparently. Excellent blog anyway, I am going to have to stop by more frequently.

[Xavier L. Simon aka Xavier]

Religion is a crucial topic! I normally stay away from it when I first present my theory. It tends to be emotionally charged and subjective—as much as, or more than politics. Yet as an organizing force it is crucial to how societies and the “social glue” of my theory function (05/04/2011 at 12:29 PM). Throughout much of recorded history secular governments have used religion as the main set of rules with which to coalesce and govern their people. In a way what my theory tries to do is to study the underlying forces, structure, properties of Max Weber’s thesis about the Protestant Ethic in order to extend it as a set of more general organizing principles that can go beyond religion.

Observer, like Fukuyama, long ago I also concluded that "The ways in which societies govern themselves…create paths that may last for centuries;" and I agree that your comment on Catholicism seems right at first glance, but it is much more complicated. Moreover, I believe that Catholicism, and Christianity more generally, is part of that path. In fact, I am currently trying to extrapolate back from Martin Luther to explore Protestant-like strains in early Norman Britain and Scotland.

Let me explain by exploring some of the reasons for the phenomenal success of Venice. Venice was a Catholic city state. Over the years I have spent many days strolling its “streets” and I recall one evening being struck by the buildings at an intersection: On three of the corners there was a church! And there is a church or two in almost every block. Then of course there is the magisterial Basilica of St. Mark with practically every surface covered with mosaics made of glass with gold embedded. If you ever want to experience the magnificence of Venice’s past sit in one of its pews for Sunday mass.

Yet its form of government kept an arms length relation to the Church. It only used religion as unifying social glue but otherwise carried on as if didn’t exist. Just look at the symbolism. The Basilica of St. Mark was only the private chapel of the Doge who himself didn’t have much power until later centuries—the Doge was like our president in a very secular system of checks-and-balances. The Bishop of Venice or representative from Rome was relegated to the furthest island within the Venetian group where he was out of the way and could not interfere in matters of State. Even today tourists don’t know of that church—San Pietro di Castello in the easternmost island of Sant’Elena (look at it on Google satellite—Isola di Sant’Elena—it is a magnificent church even from space).

Structurally I speculate that the early form of government including its religious component had many parallels to the very pluralistic Presbyterian or Calvinist form of organization of the American Settlers with its completely independent governance units around every parish. In Venice it consisted of a very individualistic self-controlling people. This city state was originally isolated with many very small islets in a swamp. These were reclaimed by small groups working on their own isle to make it stable, a little bigger, and inhabitable. It was a tough slog, with many small connected groups, each improvising, experimenting and innovating.

Then when they took to the seas each ship was a relatively independent small group of people again improvising and innovating. A fascinating bit of history is told by historian Frederic C. Lane in “Venice: A Maritime Republic,” where he describes how the crews of each ship functioned as fairly independent mini democracies where each sailor financed and owned a share of the trip and cargo and, jointly with the merchant or merchants who had financed the majority of the trip, had a say in the governance of the ship! And then even when they went to war in large coordinated fleets, each ship captain still had to exercise a lot of initiative and independent action to survive.

Moving on, growing up in Mexico I used to think that Catholicism was the main reason why it was behind the US, even though its government is rabidly secular—officially the Church is banned, it does not exist. Religion does play a role in holding back development; I have telling personal experiences, and those interested in a more scientific explanation can read and draw their own conclusions from David McClelland’s (1961) “The Achieving Society,” and Everett Hagen’s (1962) “On the Theory of Social Change.” And more generally I would argue that, due to structural differences in governance, Presbyterians are more independent than Episcopalians who are more independent than Catholics (but that also for structural reasons having to do with the emphasis on personal responsibility, Christians are more independent than many other major religions and may account for “Why The West Rules—For Now”). So all in all the social glue of the US is in fact probably more flexible than Mexico’s.

Yet in time I came to realize that structural factors were far more important (in Catholicism also the paternalism or nanny tendency that in Mexico spills over into every day life, and not irrationality as superficial analysis attributes to it). Mexico has been a very divided country since its Conquest in the 16th century. The structural divisions and obstacles to development that I mentioned in my comments of 05/04/2011 at 12:29 PM and 05/04/2011 at 12:30 PM, yesterday, have dominated since then.

In the US the Settlers pushed the native population aside and evolved and grew organically from within, much as the Venetians, and from the very beginning with a religion favorable to personal autonomy and development. By contrast, in Mexico the Spaniards comingled and absorbed a population that remained much larger than the Spanish even after the native population had been decimated by disease. Imagine the immense reconciliation and homogenization necessary (as per my theory) and that even today is only partially complete as exemplified by the Zapatistas that are in fact a group of indigenous local communities that don’t even speak Spanish.

In my comment of Apr 4, 2011 9:29:47 AM in the blog on labor unions, when comparing the proactive management by the mayor of New York City to the more passive Constitutionally constrained management of the President, I noted that “What we need is to go back to an even more decentralized form of government than we have today as a result of the drift away from Federalism, or a new major innovation in organizational technology.” By what “we have today” I was writing of the slow drift since the Progressive Movement of the 1910s to a more centralized form of government.

I want to keep this comment brief so I won’t elaborate but I hope all of the above shows how the structurally much more centralized form of government of the Catholic Church mirrors the centralization towards which the US is moving after its first three centuries of highly decentralized governance. If we actually do continue that drift then I pray for the sake of our children that we quickly develop new organizational technologies that work for very large populations without becoming too rigid and eventually self-destructing like all others in history.

I think that the ultimate form of government probably represents some sort of balance or compromise between a central authority that sets rules for a very limited number of agreed parameters and highly decentralized and independent self-governing units. And this all smells a lot like the original mix of the American Constitution and religion!

[Jack]

Jim??? In light of the facts of the last four decades it would seem your "concern" of "our current President" favoring an "even distribution of wealth" shares much with reports of Mark Twains' demise being "greatly exaggerated".

http://webcache.googleusercontent.com/search?q=cache:bB64joVfJsYJ:lanekenworthy.net/2008/03/09/the-best-inequality-graph/+best+inequality+graph&cd=1&hl=en&ct=clnk&gl=us&source=www.google.com

BTW....... in the case of an emerging nation of income only to cover the barest of life sustaining essentials, wouldn't great disparities of incomes be something of an unaffordable luxury?

Here, I'm reminded of traditions of Alaskan natives (and most folks?) going about their individual hunting and business when times are good, but coming together for the preservation of the tribe when times are tough.

[Michael Brophy]

It would have been interesting perhaps had the Geneva accords in re: VN been allowed to proceed. Eisenhower thought the population would 'have voted one time.' We prevented that from happening. Things could hardly have turned out worse. Maybe it would still be a poor, corrupt country with what may be the highest rate of HIV in South Asia.

[keylogger for Mac]

Taiwan is not a country, it is a part of china.

[an observer]

aren't there some studies showing that the best religion for economic progress is to be Methodist?

[an observer]

Venice

shows distinction between adding value and trading profits.

My hythothesis is as old as the bible, "Teach a man to fish . . ."

When the world shifted to the Atlantic, no one came back, because the population had no value adding skills

Question: Should USA (and England) be compared, today, to Venice. We have too small of a value adding populace. services and trading (banking and finance) are not value adding.

[Jack]

Observer: Drat! I get soooooooo confused trying to sort out mfg from service and trade! If Ford had some guys delivering parts or doing their accounting, I guess it's mfg, but if they use Fed-ex and the accountants form their own firm it's "service".

Sometimes I like to compare my two idyllic islands. Both have mature economies in perfect balance. Then something change on one island, for example the learn of using nets for fishing -- a productivity increase. But since they're in perfect balance there are no jobs for the liberated extra fishermen. So, the increase in wealth, and average hourly pay, must be taken in leisure time. Do we lay off ten of the 100 fishermen or reduce their work-week by 10%?

Then we've the big island of the US where we've enjoyed at least a doubling of productivity over 30 years - a bit over 2% per year, but! few have noticed a doubling of their purchasing power over the same time even with Wmt!

And, wait! are you sure about trade NOT adding value? If not, why would the trade occur?

So....... we come to Ricardo, he of the "relative advantage" theory, I've been wanting to discuss with our Profs. You'll recall that in the example the US is better at growing both tomatoes and wheat than is the UK. But! we're five times better on wheat and only twice as good on tomatoes. Thus, they're better off trading some of their tomatoes for some of our wheat.

Back when I learned comparative advantage it seemed to involve (much less trade) with nations of similar wages -- each enjoying some comparative advantage. Question today is whether LOW wage venues, with no work rules, even prison labor and laying waste to the environment are to be considered comparative advantage?

[Xavier L. Simon aka Xavier]

Observer; and this may also answer some of your questions and doubts Jack,

First of all, I absolutely agree that to “teach a man to fish…” is the key. I would only add that he then has to have the freedom—my thing about removing rigidities—and motivation to actually fish, underscore freedom and motivation. And I hypothesize, and assume for the purposes of my model, that most of us are intrinsically motivated and it is only just rigidities that keep us from bettering ourselves. (By the way, I am preparing a new comment on Posner’s blog regarding freedom and liberty because in my comment of 05/04/2011 at 12:29 PM I misunderstood him and now have to apologize. I made the very same mistake of which I accused you in my entry of 05/03/2011 at 09:11 AM under the airline regulation posts! What goes around comes around!)

Now, as to added value, and the move of trade to the Atlantic, I have two points, actually three. First, trade has value added and is just as important, and in some respects even more important than agriculture and manufacturing. At the very core of development is a specialization of functions. Manufacturing only took off when there was sufficient specialization and productivity in agriculture to generate an agricultural surplus that could then be used by people in the village or cities dedicated to manufacturing and services. That made trade and value added in trade fundamental. You may want to read W. W. Rostow’s “The Stages of Economic Growth: A Non-Communist Manifesto” (1960).

Second, and something missed by almost all except the aficionado like me is that Venice had a very large manufacturing industry, in fact it was a manufacturing powerhouse, some say among the largest in Europe. In fact, already in the 12th century it was producing ships, or capital goods, in assembly line fashion that would have made Henry Ford proud—sometimes I even wonder whether he visited Venice in his youth and somebody explained to him how the arsenale had worked since the turn of his millennium. Venice mass produced ships in an assembly line with a large number of private suppliers producing standardized parts and long supply lines including for wood. You might be interested in reading about it in Frederic Lane or Julius Norwich, it is fascinating.

Finally, with respect to Venice losing its preeminence to the Atlantic trade, I have a counterfactual that I owe to the owner of the Libreria Sansovino just off St. Mark’s square, right in front of the St. Mark gondola water “stand” (I love Venice and when I could still afford it I used to spend a lot of time there). He pointed out to me how just before the Atlantic trade routes opened the Doge in Venice had gained too much power and had been able to divert substantial resources to gaining and defending land in and around Venice and up to almost Milan, their so-called adventure in the Terra Firme. He argued rightly that Venice had no business taking land and fighting wars far inland for which it had absolutely no comparative advantage. He further argued that if all of those resources had been available to compete in the newly opened Atlantic routes where it did have a comparative advantage over nearly everyone else, Venice would have probably been able to defend its primacy on the seas.

Of course we’ll never know but it does make sense. That, by the way, is a good example of why I get very nervous when governments get too big and powerful and make mistakes. If it had competed in the Atlantic more vigorously, and even if it had not retained its supremacy on the seas, maybe a second best would have still been good enough to keep it going for another one or two hundred years, although of course Napoleon may have been too much to handle under in any circumstances.

[an observer]

Xavier

1) All freedom comes from government, like it or not. Per review, WSJ, "the form the state takes is of first-order importance: It can allow for human flourishing or thwart it mercilessly."

2) One only has to define economic growth to see the necessary conditions. Growth = efficiency. Creating more with the same or less.

3) Example: Man learns to grow a crop, corn, yielding more food.

4) Further, example: Man learns that he can plant two plantings of a particular corn, yielding twice the food from the same acre of land

5) Thus, growth = knowledge

6) Trading produces no growth, for it produces no knowledge, beyond logistics.

7) Thus, Venice relevant only so long as it was port closest to Europe's land mass (water transit across the Eastern Med. was cheaper than land travel. As soon as trade shifted to Atlantic, Portugal became the replacement of Venice.

8) The lessons are learned not from Venice but from Portugal (which with Spain built itself on talent (knowledge) from Italy (e.g., Columbus)).

9) Lesson: Issue is freedom, only in a narrow sense. Q. Are people able to acquire and apply knowledge about efficiency.

10) Hypo: Asian has gotten this right since WWII. The most lagging has been India (a democracy) which has knowledge but has prevented application

11) Lesson for us: too much or our population lacks value adding knowledge. Go to where I am from---southern Missouri Ozarks---you see nothing but people and land, with no knowledge.

[Jack]

Observer: You may have to revisit "trade". I'd put forth that at minimum it adds the to "efficiency" of your #2.

At the closest level, it's the specialization of labor, from blacksmith to wagon builder on. Then, for example, along the WA coast there are lots of buildings built of Boston bricks with interior millwork from the same area, that came around the horn as ballast for ships coming to buy cowhides and other west coast produced goods.

The expensive trip and profits were justified by moving the products to markets where they were scarce and more costly.

As for knowledge, perhaps Xavier makes an example of the export of modern ship building. I'd use the needed kick our automakers got from the Japanese. Out in a rural area I've a 79 Chev wagon that runs and all but the engineering looks "third world" compared to that of a decade later.

"Logistics" too count toward efficiency. Alaska's population has doubled, largely due to oil development. We MIGHT be able to feed our 700,000 population from local foods, but it would be heavy on fish! with veggies being seasonal with some being costly.

Intel's chip fabs need a lot of water and probably inexpensive land for the large factory, they may not have water in San Jose or it may be pricey due to demand as is land there.

Then a less developed nation able to buy Intel's chip can improve its practical knowledge by assembling components, moving to soldering up motherboards, wiring, making harddrives.

On your 11....... I've spent time in nearby OK, and remember visiting "out there" where young family's head of household worked at a fast food franchise. Some sharp young kids with potential who "loved the land" or...... feared moving on.

I talked to several of them on the theme of going to the, then, booming cities, (Tulsa and OK City are still doing well) for their much greater opportunity; they COULD always move back later though, ha! the old postwar song of "How're ya gonna keep 'em down on the farm after they've seen gay Paree" came to mind.

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[ASFD]

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