Scott Sumner  

How I think

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Over at MoneyIllusion a commenter asked me the following question:

What is your "take" (to borrow a sports term) on the role played by mass quantities of gold and silver pouring into Spain during the first centuries of that period? Resource curse?
I will answer the question, but first I'd thought it might be helpful to explain how I think about this sort of question---then people can figure out my views without bothering asking me.

Let's start with a couple unrelated questions:

1. Does Alan Greenspan deserve credit for being a "maestro", for engineering the Great Moderation?

Some might approach this question by considering the actions of Greenspan, the challenges he faced, etc., etc. I look at the question differently. I immediately think about all the other central banks during the Great Moderation. How did they do? If they mostly achieved the same sort of success as Greenspan (and I think they mostly did) then I would conclude that Greenspan himself probably wasn't the key factor. Rather some sort of innovation in central banking (inflation targeting, Taylor Principle, etc.) improved monetary policy performance in almost all developed countries after the 1980s.

2. Will China become a developed economy?

Some might approach this question by extrapolating recent Chinese growth rates. Others might focus on policy reform, or lack of reform. Some might worry about malinvestment, about ghost cities. Some might look at China's history, and worry about political instability. All those might have some merit, but I'd focus on the economies of China's neighbors, especially those with broadly similar cultures (Japan, North and South Korea, Taiwan, Hong Kong, Singapore and perhaps Vietnam.) Then I'd consider which examples are most relevant to China. Rightly or wrongly I conclude that North Korea is less relevant than the others, as it hasn't embraced market economics.

My method is far from foolproof, but I believe that huge countries like China are so complex that it's really difficult to figure out how they'll do by looking at all the moving parts. One reason why I believe China is more like the so-called "Tiger Economies" is that it has experienced the same sort of high RGDP growth rates that they experienced a few decades earlier. I don't feel I have a good grasp on all the details of the Chinese reforms, but they seem to have done enough to generate fast growth for almost 40 years. It's like the New England Patriots. I don't know how good each of their offensive linemen are, but based on performance my general sense is that the team is pretty good.

Now for the question about Spain. My immediate reaction is not to think about Spanish history (way too complicated) but rather to think about other similar countries. I notice that in Europe, countries tend to get poorer as you move further south. In the cases of Italy, Spain and Portugal that's even true within countries. So there seems to be some sort of mysterious X-factor that links southern latitudes with lower incomes. As far as I know there was no similar resource curse in Southern Italy or Greece, and yet those regions are even poorer than Spain. Portugal got much less gold and silver than Spain, and is poorer than Spain. I conclude that there's no reason to suspect that the resource curse impoverished Spain. It certainly might have to some extent, but the evidence simply isn't there. Spain's about as developed as I'd expect, given its latitude.

I don't want this post to leave the wrong impression. I try to be pragmatic and use whatever information I have. In some cases the internal policy differences are so large that they can be seen from outer space:

Screen Shot 2015-10-22 at 4.18.19 PM.png
In that case you don't ignore them---you use whatever information you can. But for all sorts of problems the complexities are so great that the least bad way of thinking about an issue is to look at the performance of closely related examples.

PS. An alternative way of thinking about China is to consider the analysis in Garett Jones's outstanding new book, Hive Mind. Garett provides a list of IQ by country. Here are all the countries that have an average IQ of 101 or higher:

Hong Kong (108), Iceland (101), Japan (105), Singapore (108), South Korea (106), Switzerland (101), Taiwan (105).

Not very many! Notice that all those countries are developed. Unfortunately we have relatively little data for China, but Garett indicates that what data we do have suggests that they also might have a relatively high IQ. Of course it's possible that the same is true of North Korea (I have no knowledge either way). But if it turned out that North Korea had an average IQ close to South Korea, then I'd also expect North Korea to be a developed country within 50 years.

PS. If you want to see a truly first rate thinker, check out this post by Scott Alexander.


Comments and Sharing






COMMENTS (22 to date)
Sam writes:

I am divided about the "latitude hypothesis". A specific observation: your three additional datapoints (Portugal, Southern Italy, Greece) are really only two, at least in some sense, since the Kingdom of Naples was a vassal under Spain for much of its history. This sort of thing, along with more recent evidence from the developing world, makes me favor poor governance over geographic determinism as an explanation for uneven wealth in the developed world.

That said, the relationship between latitude and wealth is so strong that it's hard to dismiss the theory completely. Perhaps there is a deeper relationship between geography and political economy that links the two hypotheses. Something along the lines of "the need to stockpile resources to get through winter leads to more effective political institutions". Yet more evidence that the next stage of human enlightenment will be due to colonists dealing with the even harsher conditions on Mars.

Federico writes:

Scott, great post. We should be discussing a lot more how a person thinks and much less what a person thinks.

mbka writes:

The IQ reference is misleading, Scott. IQ rises with development of a country. It is in part an effect of development. This has long been known as the Flynn effect.

Flynn himself (who discovered the effect) and other sources point out that East Germany had indeed at times lower IQs than West Germany, and so does North Korea viz. South Korea, by as much as 17 IQ points. In the case of the Germanys, the IQ difference dissolved within decades. Here is an article with lots of data on this
http://www.theamericanconservative.com/articles/race-iq-and-wealth/

Note - author Lynn discussed there is not to be confused with author Flynn, who discovered the world wide trend of rising IQs named after him.

TravisV writes:

Hive Minds!!

Anyone else remember the good old days when Prof. Sumner would tangle with Noah Smith? For example, see the post below:

http://www.themoneyillusion.com/?p=16824

"Hive minds and other insults"

Matt Moore writes:

I think the South-North thing is a red herring. The south of England is way richer than the North, and always has been. That suggests the the more "central" a region is in Europe, the richer it is. North Italy connects, as does Northern Spain. South England obviously.

Access to markets might be the key variable. See the Adam Smith Institute here for the enduring effect of Roman road routes on development:

http://www.adamsmith.org/blog/economics/economic-development-can-have-some-old-old-roots/

E. Harding writes:

I, meanwhile, look at China in the context of other post-Communist countries. The richest of which is Slovenia. And there is no way China has or soon will have as good institutions as Slovenia. Unlikely China has or soon will have as good institutions as even Russia. So I predict medium-term (not necessarily long-term) end of convergence with the West at about Russia's level. Maybe long-term convergence with Slovenia, but who knows?

Scott Sumner writes:

Sam, Thanks for that info, but I doubt whether Spanish rule a few hundred years ago had much impact on the current situation in southern Italy. But I'll keep an open mind on that point.

I would add that the north/south split also tends to occur in Eastern Europe, and North America, and South America (reversed of course) and Asia. It's far from perfect, but there is a strong correlation.

Thanks Federico.

Mbka, Yes, I am well aware of the Flynn effect, and agree that IQ rises sharply with income. Jones's book discusses that effect. But note that Hong Kong and Taiwan scored high on IQ tests even when poor, and today Shanghai scores very high despite being as poor as Portugal. So it's not just income, there are other things going on. The really interesting comparisons would be Shanghai with Mexico City, or Rio, or Buenos Aires---do you know of any data?
I'm not certain the argument applies to China, but I think it's plausible that it does. In a few decades we'll know the answer. Either Chinese IQs will rise to 105 or so, or they won't. My hunch is that they will, or at least to 100. I should add that part of my belief is based on the notion that we already know IQs are high in Shanghai, and I expect other parts of China to be as rich as Shanghai is right now, before too long. Then the question becomes whether there is something distinctive about Shanghai people, compared to the rest of China. Did unusually talented people move there in the past? Lots of unanswered questions.

Travis, That had to be Noah's all time worst post---just horrible.

Matt, Maybe you are right, but of course that has no bearing on my claim that southern Europe tends to do worse, it's just that the reason might be somewhat different than latitude. Perhaps a temperate climate is best---there are lots of possibilities.

Scott Sumner writes:

E. Harding. A China as rich as Slovenia would be the best thing that has happened in all of human history. It would be a mind-boggling improvement in living standards since 1975, when China was desperately poor. And (unlike say S. Korea) doing this for 1.4 billion people. Incredible--and I think it will happen within 30 years.

I'm not at all convinced that China's "institutions" are worse than Russia's. Yes, in some ways they are (Russia has freer speech, etc), but perhaps not in the ways that matter most for economic growth.

Colombo writes:

What about the ease to flee?
This has more to do with politics than geography. If people show no qualms in leaving, politicians should tend to be a little more cautious.

Njnnja writes:

I would generally agree with your assessment of the long term impact of New World gold and silver, but there is an line of study that says that, in effect, bad monetary policy was the proximate cause of the decline of the Spanish Empire that you might be interested in.

IIRC, the argument goes something like this: Spain was on a gold standard when they find all this gold (and especially silver) in the new world and start shipping it back. Spain does all sorts of stupid things with it, like fight wars and (like any good mercantilist) hoard the gold. Even worse, the gold and silver had to make it across an ocean filled with potentially bad weather and greedy pirates. In some years the treasure fleet would have greater success bringing more money back than other years, so the money supply was highly variable too. In the short run, money is not so neutral and the effects on the real economy were disastrous.

In the long run maybe the Dutch and British would have surpassed the Spanish anyways. But the fact that there is a monetary policy angle to the short run effects makes the story particularly fitting.

E. Harding writes:

It's not that the South is inhospitable to rich countries; it's that the North is inhospitable to poor ones. Greece caught up with the U.K. (or got very close to it) in GDP/capita (PPP) in 1978.

"The really interesting comparisons would be Shanghai with Mexico City, or Rio, or Buenos Aires---do you know of any data?"

-Come on; everybody knows Shanghai scores at least a standard deviation better than these Latin American cities. Argentina has especially few smart, motivated people, especially for its educational history.

againstjebelallawz.wordpress.com/2015/07/24/map-of-the-world-mathematical-smart-fraction/

Also, the temperate climate idea seems correct:

againstjebelallawz.wordpress.com/2015/08/29/maps-of-europe/

I'm skeptical on the Roman Empire thing: Scandanavia exists. And Communism likely had a greater impact on East Germany than lack of Roman rule.

Floccina writes:
I notice that in Europe, countries tend to get poorer as you move further south. In the cases of Italy, Spain and Portugal that's even true within countries.

This seems very interesting to me. Some have suggested that it might have to do with trust. I hope that some technological advance will either contribute the people trusting more or make trust less important.

I think that open books management is an idea that help in the low trust areas but those are just the kind of place where people would be most reluctant to use it.

Lorenzo from Oz writes:

On Spain, there are boundary issues. It is a peninsula with both an Atlantic and a Mediterranean coast, why did it turn out more like more like the Mediterraneans and less like the Atlantics?

I would argue that the curse of silver pushed Spain from being "Atlantic" to being "Mediterranean". Medieval Spain pioneered representative Parliamentarianism *before* England (Simon de Montfort may have got the idea of summoning elected representatives from Leon-Castile), it had considerable commercial vitality, developed effective military forces, had significant intellectual life (e.g. Salamanca School).

Compare the conquistadors or the Spanish forces of Ferdinand & Isabella or the Duke of Parma to Wellington's allies in the Peninsula War; the contrast is just sad. The Spanish ability to put effective military forces in the field had seriously declined, Parliamentarianism had atrophied, as had its commercial and intellectual vitality.

The flood of silver meant that the Crown did not have to negotiate with landed and merchant interests for income, it could buy interest groups off, enforce a particularly rigid intellectual obscurantism.

Looking at how similar countries did is deeply sensible, but it gets a bit trickier with a country which is on the boundary between two regions which somewhat different trajectories.

Lorenzo from Oz writes:

That should be "with somewhat different trajectories".

And yes, that is a great post by Scott Alexander.

You would, of course, sympathise concerning the issue of conventional narratives somewhat disconnected from actual evidence ...

E. Harding writes:

@Lorenzo

-That post by Scott the psychiatrist was good, but not great. It would have been great if it had discussed why all the White Nationalists I read support Trump.

"On Spain, there are boundary issues. It is a peninsula with both an Atlantic and a Mediterranean coast, why did it turn out more like more like the Mediterraneans and less like the Atlantics?"

-Because Spain is very sunny. Seriously, that's my answer. France and the UK are far, far less sunny than Spain.

Lorenzo from Oz writes:

E.Harding: Apparently lots of Hispanics and black Nationalists do too. (Given the three second most preferred candidates among Trump supporters according to polling are Carson, Cruz and Rubio.) I don't think there is any mystery as to why, it is just a mystery as to why folk think there is something special about white Nationalist doing so.

On national trajectories, Spain was always sunny, but its trajectory changed dramatically with the advent of that continuing flood of silver.

Scott Sumner writes:

Njnnja, But in those days Europe was a sort of monetary union, and thus any monetary shocks would have been felt both by gold producers and non-producers.

E. Harding, I agree that there are many exceptions, perhaps the most notable is Singapore, which is right on the equator. Yes, many Singaporeans moved from south China, but south China is also in the tropics.

Regarding Greece, I think that's more a comment on the ineptness of UK policy in 1978.

Floccina, Yes, lack of trust may well be one of the factors.

Lorenzo, Well that certainly is a good exercise in another style of thinking. But I still can't shake the idea that Spain is doing about as well as I'd expect, even if I knew nothing about Spanish history, but did know how other countries in the region had done.

E. Harding writes:

Lorenzo, WNs make up a tiny portion of the Trump base, but they almost all support Trump. So they wouldn't be expected to have much of an effect on polls of all Trump supporters.

Scott, I think it's just as much a comment on the ineptness of Greek socialists in the 1980s and 1990s.

Njnnja writes:

That's exactly why the gold hoarding was a problem. In theory an ounce of Spanish gold is the same as an ounce of English gold. But in practice, the Spanish crown didn't allow money to leave the country so as far as the money supply in the rest of Europe was concerned, that gold could still have been in the ground somewhere in Peru as it was in Seville.

Brian writes:

" But if it turned out that North Korea had an average IQ close to South Korea, then I'd also expect North Korea to be a developed country within 50 years."

Not a chance without serious political reform. North Korea is a great example of government policies making its own country poor. The example of South Korea shows that the outcome could have been so much better.

The Koreas also offer a nice challenge a nice challenge to the pacifistic tendencies expressed on this blog, especially Bryan's. Think about it for a moment. South Korea, with essentially no better intrinsic endowments, has a per capita GDP at least a factor of 10 above North Korea. Economically speaking, this means a war to liberate North Korea (rather than just protect South Korea), even if it had killed 50 to 80% of the population, would have been a net gain economically. In effect, North Koreans have been the equivalent of dead for the last 60 years. It also shows how much was gained by fighting the Korean War, or how much could have been gained by successfully fighting the war in Vietnam, whose outcomes have scarcely been better than North Korea's. Bryan's assertion that the positive outcomes of war are very uncertain is clearly wrong in some cases. Fighting against Communism has been a pretty reliable way to improve economic well being for everyone.

Nathan W writes:

The X factor: Mediterranean countries have traditions of coming in late-ish in the morning, 3-hour siestas, followed by a couple hours of work, and then off to spend time with family and friends, perhaps dining slowly over the course of hours, and then very late to bed (works with the late start the next morning).

My understanding is that these traditions are tied to older times, when further to the south, it was simply too hot in the middle of the day to work, and so people always took a few hours off in the middle of the day.

For a consideration of how this might impact the broader economy, even when a lot of people want to start working full days, consider how hard it is to get anything done before 10am or between 1pm-4pm. Almost all of your support services from other small business are closed. This leaves you with just a few hours a day where you can work at maximum tilt, organizing and completing activities at your full potential.

_________________________

Also, re: the list of "high IQ countries". Consider that this is broadly synonymous with countries that have high quality education systems and strong traditional importance for education. It should not be surprising that students who have been putting in an extra 3-4 hours a night in school work will perform well on a test that revolves around language skills, math skills (including tricksy word questions), pattern recognition and spatial thinking. It's about as surprising as finding out that someone who spends two hours a day at the gym is more muscle-bound that people who spend zero hours a day at the gym.

E. Harding writes:

"Also, re: the list of "high IQ countries". Consider that this is broadly synonymous with countries that have high quality education systems and strong traditional importance for education."

-Well, yeah. The question is, though, "where does that come from?". Hispanics in the U.S. perform, on average, better than students in any Latin American country (including Puerto Rico, which isn't even a country and performs worse than most of Latin America). It's also likely Blacks in the U.S. perform, on average, better than students in any Black-majority country (including Barbados).

"It's about as surprising as finding out that someone who spends two hours a day at the gym is more muscle-bound that people who spend zero hours a day at the gym."

-Indeed. But what makes some people spend two hours a day at the gym, and some spend none?

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