I recently purchased and read "From Poverty to Prosperity." It is a succinct and insightful take on the profession of economics as it stands today, and I want to review it here.
“For years, the story economists told to describe the world around us was incomplete.”
-Arnold Kling and Nick Schulz
On the other side of the coin, how is it that for other countries such as Haiti’s next-door neighbor The Dominican Republic, progress seems to happen organically, without much outside help? In many cases, the modernization process happens quickly, sometimes taking as little as a single generation to transform an entire economy.
Is it possible to know why? And are these phenomena related from an economic perspective? According to AK and NS, the answers are yes and yes, and the secret lies in how we understand the growth of technology and its economic implications.
Technology can be defined as anything that increases productivity. It is often seen as the economic equivalent of a free lunch, a sort of deus ex machina that lets workers accomplish more with less, allowing the standard of living to rise for everyone.
But technology as an economic phenomenon is not very well understood. Traditional economics tries to explain the world using static models, and because the factors of technological growth are often quite subjective, it gets left out of many economic analyses or treated as a kind of afterthought.
But the omission only serves to highlight the question: Why is it that technological progress is not only increasing, but increasing at an ever-increasing rate?
AK and NS believe they have they answer, and it revolves around the book's central conceptual model, the relationship between hardware and software. The hardware consists of traditional economic inputs (land, labor, and capital). As tangible things, they are limited to fulfilling one purpose at a time. A piece of land cannot both have factory on it and be used to grow wheat, just as a worker cannot not both farm a piece of land and work in a factory.
That is is why the hardware segment of an economy does not keep pace with the exponential growth of the knowledge economy and why foreign aid seems to do so little for economic development. A single computer or factory can only serve one purpose at a time, whereas the design of the computer or factory can be spread across infinite applications.
But this knowledge economy has a very special need without which it cannot take root, and that is the software layer. For example, without clear intellectual property rights and legal recourse for disputes, a modern economy could not exist. This is the dividing line between countries that develop and those that do not.
According to NK and AS, this software layer is made up of a combination of cultural traditions and government/economic institutions that create and align incentives for entrepreneurship and economic growth. It is in "buggy" software that impediments to progress such as corruption, weak property rights, and lack of intellectual property laws occur.
In other words, without a robust, modern software layer, no amount of aid or capital investments will ever address the plight of undeveloped economies. And while many of these insights may seem to like common knowledge, the authors do an excellent job of paring back the layers of the modern economy and showing us how fragile and complex such a thing really is.
All this and more is served over an illuminating, non-technical narrative of the economic history of developed and undeveloped economies. Interspersed between chapters are interviews with leading economists such as Douglass North, Robert Solow, and others who operate just outside the current economic mainstream, but whose ideas in these areas are slowly gaining acceptance.
All in all, From Poverty To Prosperity is an intelligent, well-grounded critique of modern economics and a necessary read for anyone trying to understand the role of technology in the modern economy.
No comments:
Post a Comment