November 21, 2009 by cburfield
In my last post I addressed why I thought we need to return to assuming that poverty is the natural state of man. From that assumption we could explore wealth, its sources, and its distribution. This is not to dismiss poverty or to say that nothing can be done about it. Wealth and poverty are two extremes on the same scale. You often cannot talk of one without the other.
There is a lot of research done into the causes for both and after my last post I saw more articles in my RSS feeds related to the subject. One such article was posted by Greg Mankiw on his blog. It is by Daron Acemoglu who is an MIT economist and he seeks to explain the development gap between the first world and the third world countries.
He gives credit to where its due in the explanations given by Jeffery Sachs who argues for geographical and weather differences and to Jared Diamond who argues for technology. However, Acemoglu argues for the power of institutions. His prime example is the city of Nogales on the border between Arizona and Mexico. This city has the same geography and weather and the same access to technology yet the American side of the city sees 3 times the income per citizen as the Mexican side. The difference is the institutions found on each side of the border.
I interpret this as meaning that some institutions are better than others. This can be troubling for those who choose to weigh themselves down with political correctness. Institutions are born out of the surrounding culture so this must mean that some cultures are better at producing economic success than others.
History has shown this to be true. The countries that were former British colonies are on average better off than those who were formerly run by other countries such as Spain or France. Why? The British often instilled an appreciation for private property and trade as well as a legal system that supported such rights. Of course the prime example of this is the good ol’ United States.
So institutions matter and I wholeheartedly agree with Acemoglu. I also agree with him when he says that forcibly transplanting institutions may not always be the right thing to do. If the argument is true that institutions come from culture then you cannot change culture at the point of a gun like we are trying to do in Afghanistan or Iraq. As the saying goes you can lead a horse to water but you cannot force him to drink.
Posted in Economics | Tagged Daron Acemoglu, Economics, Greg Mankiw, Jared Diamond, Jeffrey Sachs | Leave a Comment »
November 20, 2009 by cburfield
Where does it come from? It was the question that motivated Adam Smith when he wrote “The Wealth of Nations” and it is a question that came back to my mind when I started reading “The Worldly Philosophers” by Robert Heilbroner, a book that I highly recommend.
Adam Smith is widely credited with the founding of modern economic thought when he published “The Wealth of Nations” in 1776. As Heilbroner points out this is relatively late when compared with the length of all human history. Why so late? He suggests that human civilization has survived through the ages through 3 methods: tradition, authoritarianism, and markets. The first two being the most dominant through history and markets being a relatively new phenomenon.
It was through markets that Adam Smith and his generation saw the first rapid accumulation of wealth. Not through the conquering of new lands, coming across a rich vein of gold, or through theft but by adding value in a free market. Smith took it upon himself to answer the question of where wealth comes from.
The assumption that Smith made before answering the question is important and it is an assumption that is often lost today. It was that poverty is the natural state of man and wealth the exception. In Smith’s time it was an entirely safe assumption to make but today, at least in the industrialized west, the assumption is made that wealth is the natural state and poverty the exception.
Today we take wealth for granted since we have grown up with it and have never really known a world without it. I am not stating that this is true on an individual level, most everyone has experienced a time of unemployment, I am writing of an aggregate level. We forget that we come into this world naked and completely dependent on our parents for survival and it is only by our hands or by our minds that we accumulate wealth.
The danger in taking wealth for granted is that we are more apt to waste it or erect policies and institutions that limit its accumulation. Or even worse encourage policies that forcibly take it away so it can be redistributed in order to solve “poverty”. If we truly want to solve poverty then we should think about wealth, its creation, and its accumulation.
Posted in Economics | Tagged Adam Smith, Economics, Robert Heilbroner, The Wealth of Nations, The Worldly Philosopher | 1 Comment »
