Arnold Kling  

What I've Been Reading Lately

When the Facts Don't Change, I... What Professors Want...

I'll excerpt quotes from some of these books below.

The Bottom Billion, by Paul Collier. This book has been highly recommended by other bloggers affiliated with George Mason, and I agree. His thesis is that economic development is taking place at a tolerable place in 5/6th of the world, but one billion people live in failed states. He thinks we know enough about what works and does not work to be able to adopt constructive policies toward the bottom billion. I'll put some quotes below the fold.

NOTE: See also Nick Schulz's interview with author Paul Collier.

Let Their People Come, by Lant Pritchett. His thesis is that limitations on international labor mobility do increasing economic damage and are becoming more costly to enforce as cross-country wage differentials grow.

From my point of view, the first-best world is one with (i) open borders and (ii) limited government. One argument against (i) is that it would eventually undermine (ii). Although Pritchett addresses many objections to allowing increased immigration, he does not address this one.

However, I can think of a number of reasons that the correlation between (i) and (ii) could be positive rather than negative. For tyrants, open borders would offer a powerful check on power. Robert Mugabe would have a harder time exploiting his people if they all just got up and left. Our own government would be smaller if we said that its job did not include interfering with peaceful transactions between American employers and non-American-born employees. Also, there is some evidence that support for a welfare state goes down as ethnic homogeneity goes down. I would rather that we channel our xenophobia into lower welfare benefits for "them" than into a larger state to try to keep "them" out of the country.

Our First Revolution, by Michael Barone. Reading the book helped remind me that in the 17th century Parliament was needed to vote the taxes to finance a war, but otherwise the legislature played little role. Nowadays, the legislature plays a role in just about everything but voting for taxes to finance a war. How did we get to this point? We tend to talk about governmental institutions as if they were drawn up on a blank slate. Instead, it is is interesting to look at how they evolved. This sort of history book can help, although for that purpose Barone's book is thinner on institutional evolution and thicker on day-to-day political maneuvering than I would have preferred.

The Warhol Economy, by Elizabeth Currid. Combines some statistical analysis that demonstrates the concentration of artistic activity in New York with name-dropping and journalistic accounts of the New York "scene." For my taste, too much beauty, not enough geek. But I don't think I was the target audience.

Catalyst Code, by David S. Evans and Richard Schmalensee. Their thesis is that some companies are middlemen who need to have many sellers in order to have buyers and also need to have many buyers in order to have sellers. Think of eBay, for example. Or a credit card (until merchants will accept the card, consumers won't want it, and vice-versa). The authors emphasize that catalysts cannot use textbook microeconomics to make their pricing decisions. Instead, such firms need to deal strategically with the balance between the two sides of the market. An interesting phenomenon is the fact that when there are dominant catalysts in a market, a new catalyst can come along and maneuver itself into position by breaking down the walls between the incumbent catalysts. (Imagine a web site that could act as an interface to both eBay and Craigslist.)

From The Bottom Billion, p. 46:

If there are effective checks and balances on power, the society is saved from patronage politics...this is reinforced by the selection of politicians according to their intrinsic motivation to serve the public. Where patronage politics is not feasible, the people attracted to politics are more likely to be interested in issues of public services provision...But where patronage politics is feasible, electoral competition leaves the corrupt as the winners.

p. 66:

In 2004 a survey tracked money released by the Ministry of Finance in Chad intended for rural health clinics...Amazingly, less than 1 percent of it reached the clinics.

p. 81:

the most dramatic transformation of the size and composition of trade has been during the past twenty-five years. For the first time in history, developing countries have broken into global markets for goods and services other than just primary commodities...Now, 80 percent of developing countries' exports are manufactures...The production of primary commodities is basically land-using, and exporting them is most likely to benefit the people who own the land...manufactures and services offer much better prospects of equitable and rapid development.

p. 167:

For the bottom billion to break into [manufacturing] markets they need protection from Asia...Even with high Asian growth, it will take several decades to open up a wage gap that is wide enough to spur firms to relocate.

From Let Their People Come, p. 64:

the ultimate reason that there is not massively more mobility across national borders is that the citizens of the rich industrial world do not want it.

From The Catalyst Code "What is a Catalyst?" (p.3):

An entity that has (a) two or more groups of customers; (b) who need each other in some way; but (c) who can't capture the value from their mutual attraction on their own; and (d) rely on the catalyst to facilitate value-creating reactions between them.

Does that definition help you distinguish a firm that is a catalyst from a firm that is something other than a catalyst? It doesn't help me. From their definition, it is easier to describe Wal-Mart as a catalyst than Facebook. But I know that Facebook is a catalyst, and Wal-Mart not so much.

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COMMENTS (4 to date)
Mark Seecof writes:

Kling writes: "Our own government would be smaller if we said that its job did not include interfering with peaceful transactions between American employers and non-American-born employees. Also, there is some evidence that support for a welfare state goes down as ethnic homogeneity goes down. I would rather that we channel our xenophobia into lower welfare benefits for "them" than into a larger state to try to keep "them" out of the country.

Let's see. Quickly lumping the Federal budget items for Homeland Security (which includes Customs, Immigration, etc), Justice Dept, and Courts together we see that they account for less than 2% of the Federal budget. The portions of those agencies which really deal with immigration issues must be much less. On the other hand, my crude estimate of social-services spending (including Social Security and Medicare-- you could argue that immigrants don't get those, but of course, they will in due course) is ~60% of the Federal budget. The picture is worse for State budgets-- they have zero spending on immigration control, but large amounts of social spending (for which immigrants are largely eligible).

So, Prof. Kling (and I mean this in an intellectually-honest and respectful way): just how much would the government shrink if we cut back on immigration enforcement? Would the costs we save there be greater than the new costs we would incur for social spending on immigrants and their (generally low-performing) offspring?

Also, do you really think Americans (who obviously favor large amounts of social spending) would cut off their noses to spite their faces? By the time immigrants provoked enough "xenophobia" to generate some political support for cuts in social spending, the immigrants themselves would be a powerful voting bloc-- do you seriously think spending on them would be cut very much?

As for ethnic homogeneity, all experience around the world shows that cooperativeness and social peace decrease as ethnic homogeneity does. Why would we desire that effect, even if it applied a brake to social spending?

You have a beautiful, theoretically coherent view of developmental economics which proceeds from the axiom that people (taken generally) are fungible. If you see low economic development somewhere, you assume that bad institutions or bad luck are to blame. But what if your key premise is wrong? What if different groups of people have different abilities to contribute to a modern industrialized society? In that case your whole perspective may be wrong. I put it to you that some people are more capable of functioning in and contributing to a highly-industrialized economy. You have seen the incontrovertible evidence of associations between average group IQ and economic success, both in between- and within-country comparisons.

When you propose to open the borders, you are really proposing to depress the USA's average IQ severely. On all available evidence, that will probably depress industrial advance and economic growth severely as well. So rather than boosting the fortunes of both natives and immigrants, in the short run your program would boost the fortunes of immigrants at the expense of natives, and in the long run would lower the fortunes of both (since the benefits of industrial advances can be exported, but only if such advances occur in the first place. Technical advances occur in places such as the USA, Eastern Asia, the EU-- but not[1] in places such as Mexico or sub-Saharan Africa). The only plausible explanation for the difference is a difference in the propensities of the peoples involved.

(And before you reiterate a "comparative advantage" argument that low-IQ immigrants will free up higher-IQ natives to grow the economy, please find an example of such an effect occurring anywhere in the world in modern history. We have plenty of examples of high-IQ countries growing (economically) without immigration. We have plenty of examples of growth in low-IQ countries created by higher-IQ immigrants (or colonists). But I am genuinely, honestly, unaware of any examples of growth in a high-IQ country powered by an influx of low-IQ immigrants.)

[1] There are of course exceptions, so few that they prove the rule-- or which (once you examine them) turn out to have sprung from colonists or other migrants from more creative regions!

Stuart Armstrong writes:

Robert Mugabe would have a harder time exploiting his people if they all just got up and left.

Actually, it seems that his regime is proped up by the fact that all the energetic despertate have left, leaving only the more apathetic or powerless. And their remitances from abroard are propping up what's left of the Zimbabwean economy.

I'm not sure how I stand on the effect of greater mobility influencing government size. Most of the arguments seem to go your way - suggesting that it decreases government. However the western economies of the last 50 years have seen great increases in both mobility and government, so the effect must be weak if any.

On a personal note, I'd be in favour of the highest rate of immigration that's feasible, whatever the effect on government.

Richard Schmalensee writes:

Thanks for your kind comments about my book with David S. Evans, Catalyst Code. I want to add two small points to the conversation. First, it's not just pricing that a catalyst needs to do differently than an ordinary business. Our book is organized around a framework that guides analysts and entrepreneurs through all the important differences. Second, I agree that the definition we use (which is pretty standard)isn't as clear as it should be. We'd love a better one. WalMart isn't a catalyst because it only has to attract customers; its suppliers are generally eager to sell to anybody who will pay. An aspiring high-end art gallery, in contrast, is a catalyst: it faces the classic catalyst chicken-egg problem of attracting both well-healed consumers and high-quality artists. Facebook is interesting; it seeks to attract end-users, advertisers, and developers -- just like Google.

Patri Friedman writes:

Arnold - See my Dynamic Geography piece for an exploration of how low costs of movement would effect government efficiency.

Also, look at how much lower taxes are on capital than labor, presumably because of differential mobility. So free movement of labor should reduce government spending.

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