Thursday, November 8, 2007

Solow reviews A Farewell to Alms

'Survival of the Richest'? By Robert M. Solow

The last section of the book, called (after Pomeranz) "The Great Divergence," starts off fairly well, but then peters out. During the long Malthusian plateau, average living standards differed somewhat from one part of the world to another, but the range of variation was not terribly wide. In each place, living standards were governed by the level of the subsistence wage, and so in large part by common human physiology. After the Industrial Revolution, however, some parts of the world took off into an era of sustained economic growth that is still going on and may occasionally have accelerated, while other parts of the world have stagnated or even declined, with living standards still close to preindustrial levels.

In 1800, Western Europe, North America, and Oceania—including the Pacific islands of Polynesia, Micronesia, and Melanesia—had 12 percent of the world's population and 27 percent of the world's income. In 2000 they still had 12 percent of the population —relatively more of it in North America—but 45 percent of the income. To take only the extreme contrast, Africa went from 7 percent of the population and 9 percent of the income to 13 percent of the population and 4 percent of the income. That is surely a great divergence. It is in some ways as hard to explain as the Industrial Revolution itself. (The story in Asia is more complicated, both temporally and geographically, but the details are not relevant here.)

Clark shows rather convincingly that the main source of this shocking gap is a large difference in productive efficiency, or what economists call "total factor productivity." That is jargon for the quantity of output that the economy is able to generate per unit of all input, including labor, capital, and natural resources. He goes on to make a reasonable, if sketchy, case that the primary culprit is not lack of access to technology or capital, both of which are available to poor countries that can use them effectively today, and have been available for a long time in a few places, especially imperial dependencies.

Nor, he claims, is it mainly a lack of manpower with the necessary skills. He also absolves management failure, on the ground that textile factories in colonial India with British managers did no better than those with Indian managers. (This is thin evidence, but perhaps other examples would show the same thing.) In the end, Clark puts the finger on the workers—not their skills or native ability but their attitudes and aptitudes, their willingness to show up on time, work hard with little supervision, exercise local ingenuity, and so on.

In this context, too, he dismisses the prevailing view that dysfunctional or corrupt economic, social, and political institutions explain the divergence in efficiency. He reasons: if a factory in a poor country produces less than an essentially identical factory in a rich country, how can that be attributed to institutional failure? Here, too, he may be a little hasty. Cronyism at the top, failure to enforce laws, promotion by favoritism, inequitable taxation, capricious hiring and firing—all those practices could easily breed disaffection or even sabotage, and thus inefficient production. Maybe.

Clark's pessimism about closing the gap between the successful and less successful economies may derive from the belief that nothing much can change unless and until the mercantile and industrial virtues seep down into a large part of the population, as he thinks they did in preindustrial England. That could be a long wait. If that is his basic belief, it would seem to be roundly contradicted by the extraordinary sustained growth of China and, a bit more recently, India. Embarrassingly for Clark, both of those success stories seem to have been set off by institutional changes, in particular moves away from centralized control and toward an open-market economy.

In an extensive industry-by-industry comparison of productive performance in Brazil, India, Korea, the US, and some European countries, the McKinsey Global Institute arrived at a conclusion somewhat different from Clark's. It found that large disadvantages in efficiency are traceable more often to failures of internal organization in the leading firms than to deficiencies of technology, capital, or workers' skills. This is not dramatically at odds with Clark's view, but puts much more emphasis on lack of sharp incentives for management than on the attitudes of workers. It is for that reason more optimistic about the prospects for change.

Toward the end of his book Clark spends a few paragraphs in stereotypical complaint about how modern economic theory has lost touch with any reality; its endless refinements are useless for dealing with the basic problems of economic growth that engage him and the world. This amounts to a severe bite at the hand that feeds him, since much of this sometimes fascinating and thought-provoking—and sometimes irritating—book is based quite precisely on applying the insights and methods of modern economic theory.

Time Management Tips from Bob Solow


Maynard said...

Isn't Solow basically missing Clark's point?
I haven't read the book yet, just heard Clark talk about it, but at least one of his points is that, contrary to the sneering of various left and right-wing types, Malthus was basically correct --- the story of humanity until the Industrial revolution was of whatever improvements were made to productivity being dissipated in increased population.

By these lights, what is significant in Europe during the 19th century was that a set of cultural conventions arose that did NOT lead to increased wealth being translated into 12 babies per woman.
(To be fair, it certainly helped that huge stretches of the world "opened up" as places to dump excess Europeans, rather to the detriment of those who had previously been living there. I'd be interested to see the numbers as to whether it was this or controlled fertility that was moer important in preventing a Malthusian squandering.)

This could, for example, be used as a foil to Solow's claim regarding China --- China deliberately and methodically forced its citizenry away from a Malthusian trajectory, regardless of what the underlying culture may have wanted. Likewise one could argue that this is, perhaps, part of Africa's problem --- that they are still stuck in that world --- or at least they were until AIDS came along, and killing productive people, after they have spent 18 years or so as unproductive kids is hardly the way to resolve the issue, and can't be compared with the required situation of having fewer kids in the first place.

Kaleberg said...

Industrialization in the early 19th century actually increased Malthusian pressures. Children were working in factories, poorly paid unskilled labor replaced well paid skilled labor with, and poor pay meant less food, especially during the inflationary Regency era. Mortality was high. Workers lived on bread, sugar and weak tea.

It wasn't until the Chartist movement and the reforms the King pushed through Parliament that industrialization actually started relieving the Malthusian pressure. By the 1950s, the Queen was congratulating centenarians.

There are definitely differences in productivity in the use of capital. It isn't just work ethics. After all, a work ethic and good industrial values can be defeated if the hard work is not rewarded. Why even show up if it barely matters?

Like the agricultural revolution before it, the industrial revolution does require certain patterns of thought and action to be effective. You can't farm if you don't save seeds and prepare your land. You need some sort of land ownership and ownership attitudes for this to work.

The industrial revolution benefits from a respect for time. You have to be there for the machine. The machine has to be maintained, even when it is working just fine. Machines can be improved, and the work flow around them can be improved. Operating machines can be boring and dangerous, so workers have to stay alert.

As with the agricultural revolution, the industrial revolution benefits from a package. That is, it can't just be the workers. It also requires changes in the bosses, in laws and in society overall.