'From Poverty to Prosperity' by Kling & Schulz (2009)

‘From Poverty to Prosperity’ by Arnold Kling and Nick Schulz is subtitled ‘Intangible Assets, Hidden Liabilities and the Lasting Triumph over Scarcity’, and it’s an attempt to plot out the direction of what the authors call Economics 2.0.  They describe Econ 1.0 as “about scarcity” whereas 2.0 is “about abundance, which arises from technical progress”  (p. 4).  Another way they describe the difference is by saying that 1.0 is about the hardware – physical materials, their handling and transport, while the new economics pays more attention to the software – the innovation of techniques and recipes, which are not subject to the same laws of scarcity that physical goods are, since recipes can be shared and used simultaneously by many.  Traditional economics has not focused in on where technical innovation comes from, treating it instead as something that just appears.

A line I liked: “Maybe there is no free lunch, as the saying goes; but we do not have to work nearly as hard to put food on the table as we used to” (p. 4).  Economists do seem fond of claiming that ‘there’s no free lunch,’ implying the necessity of tradeoffs, and yet what can come closer to free than a new idea which, for instance, increases the productivity of group of workers (perhaps through a different divisiion of labor), so that the same input effort produces more output?  Kling and Schulz make the case that innovation and new technology are what has brought us to a level of prosperity that make everyday life in the developed countries close to what only the wealthiest could enjoy not so long ago.

The book consists of chapters by the authors and interviews with a variety of noted economists which shed light on the interesting topics.  The initial section uses a number of statistics to show how the developed countries have increased health and lifespan, while the mix of jobs and skills has transitioned over the last century to greatly emphasize thinking and people skills over manual labor.  I am in general agreement with their notion that we in the developed countries have benefited greatly from the many innovations that have revolutionized so many areas of production.  I would argue however that there are some tangential factors that go along with the technical recipes, such as the important role of cheap energy in the form of oil (though the cheap days seem to be ending), and the role of culture and values.

There are many intriguing issues raised in the book, such as the reminder from Paul Romer that “everyone wants growth but nobody wants change,” (p. 104) but they come together.  If indeed the speed of innovation will continue to increase, that seems to imply ever more change, and while technology can change quickly, people and skills can have a hard time keeping up.

The big lurking dilemna, which the book touches on, is why, given all the advances in our recipes, there still exist so many areas of the world that still suffer great poverty.  A chapter in the middle describes the so-called ‘bugs’ in the software, which they name as tribalism, insecure property rights, corruption, unearned income curse (from, for instance, oil), and the lack of knowledge and skills.  And these problems are certainly part of the problem to be overcome in the developing world.  But there are hints of a deeper issue.

A couple times the authors raise the idea that in principle the developing countries could simply adopt the techniques of the developed countries, without any new innovation, and they would reap huge gains.  But in general we don’t see this happen.  Economist Paul Romer says to get development going, you need establish what he calls the “institutions of the market”;  “Get property rights, the basic institutions of security, personal security, a legal system that supports property rights, get those in place and things will be fine” (p. 90), and he then adds that you also need institutions of science.  This seems very much easier said than done.

I found Joel Mokyr’s answer to be more realistic.  When asked about his confidence that institutions can be developed where they don’t exist today, he says “I am hugely skeptical about it.  Precisely because if you change the institutions but don’t change the culture, you’re not going to change the institutions” (p. 128).  Development economist William Easterly follows up on this point when he says “I don’t think anyone has figured out how to create or change values, or even understands very well the origins of different values in different countries” (p. 176).

The development question is not merely a matter of distributing recipes and watching prosperity develop.  Recipes often come with buried cultural assumptions that we take for granted, because they are so ingrained for us.  These things could include very basic cultural attitudes about the importance of work, the attitudes about the proper role of the two genders, the religious attitudes about older values and change, attitudes about money and trust, as well as more technical attributes like the available skills, the physical infrastructure, the financial infrastructure, etc.

Examining and understanding the roots of cultural values may go well beyond the intentions of Economics 2.0, but if they are the foundation of economic institutions, then a shaky understanding at the ground level will continue to be a problem.

Update:  Take a look at Arnold Kling’s thoughts on the review along with comments.

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