Monday, October 01, 2007

Review: The Birth of Plenty

This is William Bernstein's book analyzing the development of economies in nations and regions, the pre-requisites, and the implications for modern economies. Why did the industrial revolution happen? What are the pre-requisites? Why do modern economies appear to have a flat 2% growth rate? Is this sustainable? What about the Bottom Billion?

Bernstein's thesis is that there are four requirements for a modern, industrial economy:
  1. Property Rights (including intellectual property rights such as patents and copyrights)
  2. A Rational Worldview (access to the scientific method)
  3. A large and efficient capital market
  4. Communications and transportation infrastructure
The first part of the book describes the rise of these properties in Western civilization, and why they are important. The second part describes the history of the industrial revolution and explains why it happened in England and Holland but not in Spain and France. The last part explores the consequences of this idea in relation to aid, development, and how economies should be managed.

I think anyone would find it difficult to argue with the first 2 requirements of prosperity. The experiments with Communism have found that without property rights, human nature just does not have the intrinsic motivation to work to produce what others want. An examination of modern contributions to well being also demonstrates that without the scientific world view, it is difficult to come up with new theories or technologies that truly improve the human condition (when was the last invention to come out of a fundamentalist mindset?).

The last 2, however, seem to me to be natural consequence of the first two. Once you've set up a good incentive system, human ingenuity will come up with good capital markets and transportation system. I am not a historian, so I won't say much about part 2 of the book, but I found it to be good reading and an illustrations of the principles involved.

The last part of the book will be more controversial, and is part of the argument between William Easterly and Jeff Sachs about development and aid. If Bernstein's thesis is right, then not only is aid in the form of food and medical improvements not helpful for developing countries, but they are harmful. A nation caught in the Malthusian trap with an increasing population just increases the number of miserable people without improving prospects for growth. This is something very important to understand: without economic development, all you get when you improve mortality rates and health is a lot more miserable people. Instead, what Bernstein prescribes is first establishing the rule of law so that incentives for people are directed towards improving productivity rather than attempting to undermine the system or corrupting it by becoming rent-seekers (gate keepers, or government bureaucrats living off bribes). Only after the rule of law has been established, with independent judiciaries can more education (providing the modern mindset), more AID (money to prime the capital markets), or more infrastructure help.

This is an extraordinary claim, and of course would be difficult to prove, but Bernstein provides two examples, both dictatorships that imposed a rule of law first, and the resulting economic prosperity eventually led to the overthrowing of the dictators themselves. (Hint to future dictators: keep your people miserable --- happy and prosperous people apparently demand democracy!) Bernstein demonstrates with statistics that democracy is not a precondition for economic success, and its correlation with prosperity is because the latter causes the former. (So observing free elections isn't all that useful if what you want to do is to eliminate poverty) What this means is that any attempt for us to reform the Middle-East is doomed to failure. None of the four properties Bernstein proposes should exist before prosperity exist in the Arab countries, and there's no sign that we're successful at imposing them on Iraq. Lawrence Wright also noted that the country of Norway created more exports than all of the Arabic countries combined, so at least with this regards, Bernstein is right.

I think it would be interesting to see what happens if we actually tried to apply this model for helping the "bottom billion." It definitely runs against what everyone else I've read recently says (except William Easterly), and is great food for thought.

Finally, Bernstein explores happiness and economic development. It seems quite clear that economic development by itself does not make people happy. All the studies show that people compare themselves relative to others for happiness, so countries like the Scandanavian countries with a low Gini Coefficient are happier than possibly wealthier countries like the United States. (A visit to the relevant countries will demonstrate this to be true)

When Bernstein visited Google, I asked him this question (not addressed in the book): "There is an argument to be made that our prosperity for the last 200 years has been due to the abundant supply of fossil fuels, which when they run out will make an end to our prosperity. What do you think?" His response was that he believed that this prosperity is largely dependent on human ingenuity, and that while fossil fuels might have helped a lot, he thinks that once on this treadmill, we'll managed to make ourselves wealthier even without fossil fuels, albeit at a slower rate.

In any case, this book is thought provoking, intelligently written, and well worth your time, especially if your first reaction when you see an article about third world poverty is to reach for your checkbook. The possibility not frequently considered is that your financial assistance may not help, but would make the very people you are trying to help even more miserable. You might not agree with Bernstein's assessment, but at the very least you should consider his very cogent arguments. As one of my colleagues said, "It is extremely pleasant when somebody whose books are so intelligent comes across as even smarter in person." I agree.

Note: Bernstein's talk that he gave at Google is now up on youtube.
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