Wednesday, August 31, 2005

The Data of Development

Professor Boettke discusses the approaches economists have taken to understanding the process of economic development. He concludes with:
". . . The eradication of poverty will not come from international aid agencies and the decisions by western leaders on how best to redistribute wealth world-wide, but through the entrepreneurial spirit of Africans themselves. Given the freedom to realize the gains from trade, individuals will strive to improve their lot in life and the lives of their children, etc.

From Smith to Schumpeter we basically understood this. We lost sight of this for a long time. We are gaining that understanding again ---- though the Joseph Stiglitz's, Paul Krugman's and Jeffrey Sachs's of the world resist mightily the lesson that we must retire Keynesian analytics and Keynesian command and control policies. Thankful we had brave and serious scholars such as Mises, Hayek and in this field especially P. T. Bauer to resist and uphold an alternative conception of economic science and policy. William Easterly's new book, The White Man's Burden: Why the West's Big Plans to Save the Rest Fail to Do Good is a worthy successor to Bauer and its publication should be greatly anticipated by economists. Easterly's The Elusive Quest for Growth focused on the simple point that incentives matter. In The White Man's Burden we see plenty of perverse incentives at work, but we also read extensively about lack of accountability and feedback mechanisms that undermine the workability of big plans. Assessing economic systems doesn't need aggregate statistics, but instead detailed examination of the institutional environment and economic structures in operation and how they impact the ability of individuals to realize the gains from specialization and exchange."
I too like Easterly's The Elusive Quest for Growth. I would also suggest Mancur Olson's Power and Prosperity .

One of the important things I learned from Olson's book was the distinction between self-enforcing exchanges and "socially-contrived exchanges." The idea is that markets are pervasive. We see market exchange everywhere in the world today, even in countries we call developing or less developed. The difference between developing and developed is not that one economy lacks markets. The difference is that in the developing economies most market activity involves self-enforcing exchanges. In these exchanges the individuals involved do not have to rely on government to help enforce the property rights that are exchanged. But, self-enforcing exchanges are contemporaneous in the sense that neither party to the exchange has to wait for some period of time to enjoy the benefits of the exchange. Olson suggests that economic prosperity comes (and I think Easterly does as well) when individuals see incentives to save and invest. But, this requires waiting and a passage of time. In countries with "bad" governments, such incentives are weak or nonexistent because there is always the risk the government will intervene to take the returns to the individual from the personal sacrifice of saving and investment.

Olson asks why some economies with markets are economically prosperous while others aren't. The answer he finds is that there are two necessary conditions for economic prosperity: (1) strong protection for private property and enforcement of contracts, and (2) the lack of predation, or rent seeking, of any kind. Good government, then, might be defined in terms of the extent to which government protects private property, enforces contracts, and minimizes rent seeking. In the less developed economies of the world, it seems that government is pretty much the opposite of this vision of good government.

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