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.

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