Sunday, May 11, 2008

No place for glib false modesty, "Why Do Some Countries Remain Poor While Others Grow Rich?" The answer: We know a great deal.

In Harvard Political Economy Professor Dani Rodrick's May 8th post, he writes, "The title of my talk: Why Do Some Countries Remain Poor While Others Grow Rich? The answer: I wish I knew."

I have been following Dani's blog, and I can see that he is a good and caring man, who's very intelligent and competent in economics, but I don't like the false and misleading modesty in this quote. I know, people like it when you sound modest, even if you're saying something that's not true in order to sound that way, and that can be fine, if it's not going to mislead in an important way. But here it is too likely to mislead in an important way. The truth is we do know a tremendous amount about what makes some countries remain poor while others grow rich, even though there's still a lot we don't know.

The research presents very strong or overwhelming evidence on some key things. For example, we know that good governance is crucial. This includes things like low corruption and high transparency, a professional and unbiased judiciary, "the rule of law", and strong government investment in infrastructure, public health, and education. The latter requires substantial taxes, but these things are very high return investments that the unfettered free market will underprovide due to substantial market imperfections which are ubiquitous.

It's very important to note here (and in general, and often) that despite the myth, even in 1776 Adam Smith understood that there were circumstances that would cause the invisible hand to work poorly (see, for example, Cornell Economist Robert Frank's book, "Luxury Fever", pages 171-2.) And, in the last 200 years economics has advanced greatly and overwhelmingly shown that a substantial and smart government role will tremendously increase efficiency and wealth creation over the 100% free market for everything – I'm talking about academic scientific economics, not screaming talk show host, sound bite "economics".

Things like externalities, potential monopoly power, asymmetric information, information costs, large economies of scale, inability to patent, and many more free market problems make it so that a government role can immensely increase wealth, efficiency, and public welfare. These can be found in any college intermediate microeconomics text.

Other things that explain why some countries remain poor while others grow rich: Peace is clearly huge, both internally and externally. Iran and Iraq are very poor despite enormous oil reserves largely because of horrible fighting against other countries and of groups within their own countries. Free trade is almost always a big plus or an enormous plus. But with free trade although the gainers gains outweigh the losers losses, it's important to distribute the gains broadly through high return public investment in things like education, infrastructure, and public health.

So the truth is we know an enormous amount about why some countries remain poor while others grow rich, so there's an enormous amount of good we can do by aiding and encouraging the things we know are highly effective. This is the message we want to get out, that making an effort to help can work, can do great good. When we falsely say glib things like, "The title of my talk: Why Do Some Countries Remain Poor While Others Grow Rich? The answer: I wish I knew.", it encourages people and nations to not try to help because it falsely implies that we don't know enough to have a significant chance to make a difference. So let's be careful. Dani's clearly a very good man, but this is a bad way to display glib false modesty.