From September 26 – 29, AIER hosted a Harwood Graduate Colloquium on economic freedom and trade. We were thrilled to host Professors Deirdre N. McCloskey, Russel Sobel, and Antony Davies along with fourteen students for a weekend of enlightening discussion. We thank all our guests, along with GIllian Foster Wilkinson, for teaming with AIER to host a fantastic event. This article draws from many of the participants and readings along with a lecture I was fortunate to give.
Around the world, poor people are getting richer and increasing economic freedom in many countries is doing most of the work. But underneath this process that must be included among the greatest developments in human history is a frustrating paradox–as our world continues to develop economically, people’s desire and ability to interfere with the process seem to grow.
Economists have offered compelling explanations for why the urge to “do something,” usually expressed through governments and large charities, fails at an alarming high rate and often does more harm than good. This has led some to advocate getting out of the way–encouraging poor countries to adopt the right institutions and letting the process unfold may help the most people the fastest.
Unfortunately, “the fastest” may not be fast enough. 600 million people still live in extreme poverty and anyone who has seen pictures of Britain’s industrial revolution in the 19th century or China’s urbanization today know that the enrichment process still entails years or decades of living conditions we wish nobody had to endure.
Our efforts to help the world’s poorest are constrained on both sides–in a complex society we can’t just fix the problem, but it’s almost as unlikely that the rich world will simply stand by and let the same process unfold that made us rich in the first place. Is there a better way forward?
A Process Underway
CIting over a dozen studies, Professor Russell Sobel of the Citadel sums up the thinking of many economists:
Evidence that higher levels of economic freedom lead to a number of improved societal outcomes is now abundant. For example, higher levels of economic freedom have been shown to lead to higher levels of income, economic growth, entrepreneurship, investment productivity, happiness and longevity. At the other end of the spectrum, those countries with the worst institutions not only stagnate, but also are often better off stateless or with private governance mechanisms.
A look at per capita GDP provides compelling evidence consistent with Sobel’s claim:
One need only imagine the light blue and green lines representing mostly developing countries moved to the left back through time to see the similarities with Europe and the U.S. around the turn of the twentieth century. Economic liberalization by two countries, China and India in the second half of the twentieth century, have lifted an unprecedented number of people out of poverty in a relatively short time. Professor Deirdre N. McCloskey captures just how important the consequences will be for humanity if these trends continue:
In fifty years, if things go as they have since 1800, the terribly poor will have become adequately nourished. Slaves and women will be largely free. The environment will be improving. And the ordinary person worldwide will have become bourgeois. In 1800 there were good reasons to be pessimistic–though many people in that bright dawn were in face optimists. Nowadays, although an age of widely circulating tales of impending catastrophe, there are many more reasons to be optimistic about our future.
With 600 million people around the world still living in extreme poverty (currently defined as two dollars per day) and many more among the working poor who fuel the type of urban industrialization on which countries grow, there is more than enough scope to ask if we can make this process better or faster. Many economists, in fact, are consumed with this goal.
Nobel laureate macroeconomist Robert Lucas captured the responsibility many in the profession can and do feel after looking at a similar graph 20 years ago:
I do not see how one can look at figures like these without seeing them representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what exactly? If not, what is it about the “nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else.
Prominent economists, perhaps most notably Jeffrey Sachs, have written books insisting that with a modest increase in state aid the end of global poverty would be in sight. More recently, economists have relied extensively on randomized field experiments that almost take for granted the positive impact of direct outside interventions.
Constraints to “Doing Something”
In his 2013 book Doing Bad by Doing Good, economist Christopher J. Coyne pulls together data, anecdotes from the field, and economic theory to tell the profession what it doesn’t want to hear. He invokes Adam Smith when he describes the mentality of Sachs and the new empiricists as “the man of the humanitarian system,” assuming that governments are the best and only means through which to deliver aid.
Coyne concludes that humanitarian aid is at best an imperfectly effective response to short-term crises, and does nothing to promote and may at times harm lasting economic development. His conclusions are backed up by a large body of economic thinking, most notably the contributions of Austrian economists like F.A. Hayek on the knowledge problems faced by governments and large charities, and problems of politics raised by the public choice school of political economy.
As Hayek most effectively showed, knowledge problems plague the efforts of government planners to allocate the resources of an economy. The ability to process all of the bits of information held across the different individuals and firms in an economy makes markets essential in a complex society. Coyne provides stark evidence that confirms common sense–these knowledge problems are all the worse when dealing with an unfamiliar culture halfway across the globe.
Coyne’s book opens with a story of U.S. efforts beginning with the Truman administration to irrigate the Helmand River Valley in Afghanistan. The story is not of one single failure or moment of incompetence but a sequence of engineering issues, episodes of miscommunication with the local population, and ultimately missed targets. The story is a good reminder that government incompetence is an emergent phenomenon, impossible to address with “better people” and an unavoidable consequence of Hayek’s knowledge problem.
Like the knowledge problem, the problems laid out by public choice economics are only compounded when dealing with governments as well as large NGOs. Coyne points out that even short-run emergency humanitarian aid is often compromised by political competition and bureaucratic reality, and devotes a chapter to each.
When there are billions of dollars at stake, pure corruption happens but is not necessary to yield problematic outcomes. The multiplicative effect of all of the relationships and transactions in large bureaucracies are enough. Coyne relates multiple stories of competition for donor resources leading to medicine and equipment gathering dust when the need for the resources elsewhere in the country is all too pressing.
It’s perhaps not surprising that Hayek and seminal public choice scholar James Buchanan have proven tempting targets to demonize for some in the economics and history professions. While fully centrally planned economies appear largely a thing of the past, most economists still support large planned government interventions at home and abroad. Interestingly, Coyne points out that many economists gravitate even further toward central planning when thinking about development aid, where the problems posed by Hayek and Buchanan have even extra teeth, than at home. But both abroad and at home, these are problems economists must confront when trying to help people, and ignoring them helps no one.
Constraints to “Doing Nothing”
Given these problems, and well-documented evidence for them in the field, would we do best by urging economic and political liberalization and getting out of the way? In theory this may be true, but once again we are living in the real world and its complex network of billions of human beings.
The U.S. and Western Europe went through an industrial revolution over a century ago, and there’s no evidence that those poor countries currently in the process will not complete it, while even-poorer countries will evolve on their own. The difference is developing countries now have the rich world looking over their shoulder. Getting out of the way in the real world may be as intractable a problem as centrally planning a country’s path to growth.
Human empathy and morality were topics that interested Adam Smith so much that he dedicated his career to investigating them before he got to commerce and markets. Writing over 250 years ago in The Theory of Moral Sentiments, his words on the human condition continue to speak to the questions we face today:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it…. As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation.
When 19th-century Britain was undergoing rapid urbanization, there was not a population of any significant size halfway around the world seeing pictures of chaotic, crowded, and soot-stained streets and mobilizing billions of dollars to “help.” But the capacity to care and want to do something is part of what makes our humanity. In talking about the process of economic growth, we sometimes forget we are dealing with decades if not centuries of upheaval in a society. Pictures of urbanizing China today are no less galvanizing than what we remember from centuries past.
Yet, if economic theory and practice yield immense evidence for an approach of extreme caution when handing out aid across the world, why don’t more people, even economists, believe it? The evolutionary hard-wiring of our brains may present hurdles to understanding the highly complex system our global economy has become.
In her new book Why Liberalism Works, McCloskey points out that most of human evolution took place in relatively small hunter-gatherer tribes, which themselves are organized on more of a planned, socialist basis than anything that looks like market interaction. We might take that even one step further–the small groups in which we largely lived were systems lacking the complexity that we observe today.
When thinking intuitively about large populations or organizations, we tend to employ a heuristic reducing them to a single actor or small groups of actors. When we talk about “China” pirating our intellectual property or “billionaires rigging the economy,” we are making it easier to think intuitively about economic phenomena, but we are leaving on the table irreducible complexity without which we lose significant understanding of what’s going on.
Even if only implicitly, both Hayek and Buchanan’s critiques are built on the logic of complexity, with the problems in a development context arising not from bad actors that can be replaced but emergent phenomenon built on countless individual interactions. From this perspective, it is easier to understand why so many people steadfastly doubt that we cannot make poor countries rich with a money transfer from our wealthy population, or that vexing unintended consequences arise even when delivering emergency aid.
Connecting the Poor
Have we found ourselves in a global-development Catch-22? Our toolkit for helping poor countries appears fatally flawed and sometimes does more harm than good, but rich countries have populations that will insist on trying. Graduate students and young economists should see this conundrum as an opportunity for important research.
Coyne understands this doubly-constrained environment when he proposes a new approach that doesn’t mandate simply getting out of the way but putting aid in the context of “what can we do” rather than “what must we do.” My own hope is that if we engage more directly with the ideas of Hayek and Buchanan not as constraints but as facts about how the world works, we can extend the frontier of “what can we do” even if only a little.
Libertarian thinker Richard Cornuelle posed a version of this challenge in a 1991 article when he wrote:
Privatizing the other half of a socialist programme, the social services that remain when the last state enterprise has gone private – the part that is practically indistinguishable from the democratic West’s social service states – is a task of another order altogether, If there are alternatives to the state’s failing efforts to get rid of Skid Row, eliminate involuntary unemployment, eradicate illiteracy, provide reasonable pensions, treat the indigent sick, detoxify the environment, among a thousand other problems that beset and perplex an industrial society, there is only the dimmest awareness of them, and certainly no confidence they would work.
There is important work to be done mapping Cornuelle’s agenda to the context of global development. First, while the body of evidence that market liberalization is the crucial foundation of economic growth has convinced many of us many times over, more efforts are needed to show a skeptical world that struggles with complexity in the ways discussed above.
Second, may of the problems raised by Hayek and Buchanan are particularly severe in the context of distributing aid through large governments and organizations. In a domestic context, economists including Michael Munger and myself have argued for eliminating welfare programs and in the short term transitioning to cash payments for the domestic poor. Such distribution in the poorest countries may be politically or logistically infeasible, but it may be that second-best solutions put the actual allocation of resources closer to the people on the ground.
Finally, we have an implicit tendency to think of poor countries developing in isolation. Can we turn the fact that we are here too from a problem, as discussed above, into part of a better solution? The bedrock of such an approach must be free trade. Professor Antony Davies presented evidence in his Harwood Graduate Colloquium that freer trade in particular pushes a country along its path to growth.
There are more signs that better connectivity with each other and the rest of the world could be a more effective way to help the poorest countries. Economist Hernando de Soto has famously argued that developing countries must implement a nationwide regime of property rights to enable “unofficial” capital such as the real estate in poor communities to enrich its owners through capital markets.
De Soto’s book The Mystery of Capital often hones in on this one prescription for development, but a broader theme emerges:
Formal property’s contribution to mankind is not the protection of ownership; squatters, housing organizations, mafias, and even primitive tribes manage to protect their assets quite efficiently. Property’s real breakthrough is that it radically improved the flow of communications about assets and their potential.
McCloskey has written how free societies foster the development of “ideas for betterment” and innovation. She recognizes the importance of connectivity when quoting Matt Ridley’s book The Rational Optimist in noting that “ideas started having sex.” Can businesses and people find more and better ways to connect with the developing world in a way that encourages the spread and further evolution of those ideas as people become free?
People often assume that the strongest voices for the freeing of markets don’t care about the poor. We make our efforts to promote liberalization precisely because we do care, but a continuing free-market agenda in the developing world must account for the constraints on benign neglect, and look for ways to channel that energy into individuals voluntarily connecting. The enrichment process is underway for most poor countries. The way we think about our role in such processes can have a profound effect on millions worldwide.