Arnold Kling  

Growth and Economic Literacy

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Bryan Caplan writes,


studying the public's beliefs about economics...income growth seems to increase economic literacy, even though income level does not. In other words, poor people whose income is rising—like recent immigrants—have more than the average amount of economic sense; rich people whose income is falling—like the Kennedy family—have less.

Caplan goes on to argue that this means that countries that stagnate will tend to become "trapped," because economic knowledge will decline in those countries, leading to bad policies.

My view is that one of the most important ideas in economics is learning from failure. That is, by rejecting failed business models, the economy learns. Caplan is saying that people who live in stagnant economies do not learn from failure. From my perspective, if a stagnant economy is one which does not learn from failure, then Caplan is saying that people who live in an economy that does not learn from failure do not learn from failure.

For Discussion. According to Caplan's theory, I would think that growth in Argentina or Japan have created a "virtuous cycle" of better economic policies and better growth. What accounts for the actual result?

For Discussion.


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COMMENTS (8 to date)
Zoran Lazarevic writes:

As I wrote before, there is no direct link between education and prosperity. Here is a repost:

Although it seems counter-intuitive, education has no direct relation to prosperity of a nation. I ran across Pelle and his article EconoTrix: The pitfalls of Philanthropy through the discussion about Cuban Education. This tied nicely into what Philip Greenspun said: "[in spite of] an excellent public education system ... Cubans are dirt poor."

Leftists raise the argument about the excellent Cuban education vs. poor U.S. education because, here in the U.S, education = prosperity. Schools here are very expensive, so mostly wealthy can afford good colleges, and mostly those who graduate from good colleges become rich and successful.

However, if the whole population is well educated, such as in former Soviet Union, ex-Yugoslavia, and Cuba, the country as a whole need not be prosperous. Educated or not, the elite of a state will try to keep the rest of the population (educated or not) in submission. It all comes down to Pelle's 1st law:


"The survival of anyone regardless of education and idealism, comes ahead of the greater good."

Lawrance George Lux writes:

I agree with Zoran, though I think from different rationale. The dynamic is lost from an Economy with the establishment of entrenched Wealth. The Wealthy have gained control of economic formations themselves, or from Forebears, and insist on an economic return which will keep them ahead of the Pack, so to speak. This demands a rate of Return on economic endeavors too great to foster economic expansion. lgl

Tom Kaminski writes:

Caplan himself explains why this theory doesn't always work in another post that he has on the "Library of Economics and Liberty" site; it's called "Mises and Bastiat on how Democracy Goes Wrong" (he links to it at the bottom of the post being discussed here). In short, people tend to believe that protectionism and other forms of government intervention can preserve or improve their current conditions, and so they elect politicians who promise government "remedies." After reading both pieces, I think his suggestion that "good growth causes good ideas" is somewhat overstated, and his statement that "luck" is a factor is understated. "Good growth" offers an evidentiary basis for pursuing certain policies, but it does not guarantee that a society will follow them; for that you also need a fortunate occurrence of strong leadership that bases its policies on sound economic thinking. If a society has that, it's very, very lucky.

I don't know enough about Argentina to comment, but from what I read about Japan, the government is loath to institute a series of banking reforms that would put the economy on a sounder financial basis; and the people generally approve of the status quo. That is, they believe that it was the particular mix of government and free enterprise (i.e., industrial policy) that built their previous prosperity, and they refuse to see it as a major part of the problem. So in that case, good growth fostered belief in the policies that initially led to growth; unfortunately those policies are now part of the problem. The voters, who mostly want a return to the old days, are liable to punish politicians who repudiate the old policies and advocate the "risky" policies of decreased regulation. tk

Steve Duncan writes:

I believe that the reason that Argentinians are poor while Japanese are not was answered by Herman de Soto (?) in the 1980's.

In Argentina (and also the rest of Latin America), most people (including businessmen, if I remember correctly) do not have a legal title to the land they work or to their businesses.
Not having a legal title to what they own, none of these people have a legal property right that can be defended in any court.

As a result, all of these entrepreneurs put into their businesses little more than sweat capital and what they can carry in their hands.

The result is, of course, a poorly performing economy.

shamus writes:

Ineffective and corrupt institutions are at the root of problems in Japan and Argentina. The problems are essentially political in nature.

cb writes:

Regarding Japan, it is understandble to see why the poplulace to be loathe to change. They went from utter defeat to a mighty economic power in a generation, that is extraordinary. They, and everybody else, knows that it was a combination of capitalism and planning. I wouldn't say it's a refusal to believe that is now part of the problem, it's more a question of what is going to replace it. Maybe it is refusal, but who can blame them. What are they suppossed to believe, who has offered an alternative? They're an island country with little natural resources that achieved relatively enormous wealth through mercantilism (oops, I meant exports). They're competition is now China, who has much lower labor costs. They have nothing to offer, and their economic wealth was a product of special status w/ the US and no competition. Relatively speaking, their status as an economic power will go down, regardless of what they do.

I have no idea if Cubans are educated, but even if they are, a statist system w/ little economic ties to the rest of the world seems doomed to me. There are many factors that go into the economic success of a nation/culture, including, but not limited to : political freedom, property rights (mentioned earlier regarding Argentina), monetary system, natural resources, trade policies, etc. etc.

I agree w/ Caplan, those that create wealth have more economic sense. It sounds obvious, those that create wealth understand it more than those that inherited it. Inheritees are more interested in preserving than they are in creating. That is why some people view mobility of class as the singlemost important factor in a fair and sustainable culture. It is imperative that the cream (whether that be defined as talent or intiative, or both) be allowed the opportunity to rise to the top. That's why I have no problem w/ immigration, bring it on, I say. If you want to work, you have a home in the most commercial and fair society the world has ever seen.

Steven J. Owens writes:
From my perspective, if a stagnant economy is one which does not learn from failure, then Caplan is saying that people who live in an economy that does not learn from failure do not learn from failure.

Not that I pretend any great understanding of the history and topics under discussion, but your reading looks like you're misconstruing Caplan's comment.

He seems to be saying that countries - not people - who fail seem to not learn from failure, and the result is stagnation. He's proposing that perhaps there's something in the process itself that causes the stagnation, something in the nature of humans such that a society that is failing creates a social or political environment which discourages good ideas, which perpetuates failure.

As I said, I don't know enough about the history of the countries in question to really judge this. I'd love to see some knowledgable discussion of specific examples of this syndrome. What little I do know about south america suggests that culture and context play at least a little role, but again, I claim no authority on these topics and would love to read some knowledgable discussion.

Edmund Gomes writes:

Countries which are doing badly economically are not necessarily doing poorly beacuse of bad policies - they are doing badly as a result of a very high level of corruption and self-serving policies being put in place by the powers-that-be.

While I have not checked; the linkage between a countries ranking on a scale which measures corruption and its economic prosperity would be inversely correlated indicating that the more corrupt countries perform substantially poorer economically. This, however, does not mean that the powers-that-be are not enriching themselves at the expense of the country; and in fact they are.

If there is low (no) corruption then you have everyone thinking for the betterment of the country and while some policies may be inappropriate they will be (over a period) discarded and fresh policies adopted. This iterative process would continue till the best option is considered and put into effect.

In a corrupt economy there is every incentive to keep activities unclear and murky and enrich the powers that be at every other persons expense.

The poor / bad policies enacted are only an excuse to carry on with this beggar-thy-neighbour way of managing the economy.

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