Juris Naturalist

Jordan asked me what I thought, so here you go:

My humble opinion on the Hausmann Hidalgo thesis as presented by Plummer’s review in the Washington Post.

Which is to say, I have not read Hausmann or Hidalgo myself, and they may be operating at a plane which is beyond what I have learned.  But here goes…

The Obvious

Institutional analysis has failed to provide the promised explanation of cross country differences in economic growth.  There are economists, some of whom I have been reading a bit of late, such as Douglas North, Daren Acemoglu, and others, whom have tried to work out the influence of institutions on economic systems.  My own professor, John Nye, who studied with North for many years, has pointed out that Great Britain, the case study many try to isolate as the origin of modern economic growth, entered into that growth at the same time they expanded the role of centralized government, reassigned a great many property rights (which is to say they renegged on older sets of rights in favor of their preferred sets of rights), and spent a great deal of money on building a standign military force.  They did everything libertarians claim hurts free markets, all the while growing like crazy, and improving individual liberties!

So, it seems that governance systems cannot play a defining role in the way economies grow, though no one claims they are entirely unimportant.  Bill Easterly, among libertarian development economists, and Dani Rodrik on the other end of the spectrum both claim that there’s no “one size fits all” recipie for growth.  It seems that the primary believers in simplistic answers remain bureaucrats and those employed by state-funded aid agencies, and other true-believer sorts.

No, development is complex, indeed, and perhaps entirely accidental!  It should fit well with a Christian perspective of Providence to believe that the rain may fall on the unjust as well as upon the just according to God’s decrees.  However, we must keep place for natural consequences, and this is the domain of economics.

Further, the insight regarding dispersed knowledge is at least as old as Leonard Read’s “I Pencil,” though that can easily be traced to Smith’s description of a tin factory.  That Plummer does not make the connection is either sloppy or slow, I can’t decide.

The Novel

However, it is perhaps not so surprising that economists have forgotten Read’s monograph, despite Milton Friedman’s recitation of it on the “Free to Choose” video series.  Instead, what Hausmann and Hidalgo may be capturing is a move relatively recent in the trade literature.  That is, countries don’t seem to matter nearly as much as we once thought.  Firms, instead, are the important unit of analysis, and indeed I would not be surprised if investigating even smaller units within firms would be further illuminating.

But this is too difficult.  One cannot draw intersecting supply and demand curves for each sub-managed office in order to make predictions about larger macroeconomic trends.  What is desired is a simplifying theory sufficient to make “close-enough” predictions about short term moves in the economy.  Presumably these are the desires of politicians and market movers who want to preserve security and get rich.  Too bad.  The economy is not some set of smooth infinitely differentiable functions.  It is lumpy.  What good economic theory gets right is first pointing out the tendency of markets to move toward equilibrium, and perhaps more importantly the ability to show how littel we really know about our subject of interest.  I might even say how little we can hope to know.  We are primarily engaged in moving items out of the bin “stuff we don’t know we don’t know” into the bin “stuff we know we don’t know” and only occasionally can we move one of these bits into the bin “stuff we know.”

What I find useful, then, and novel in this tidbit of a review, is the idea that we need to focus on the novelty of goods produced by a country.  Again, I think we ought to look beyond the country as a unit of analysis in general.  A novel good is demonstration of innovation in attempt to capture a share of the market.  That is, it is customer focussed.  A successful novel good, one that survives, usually is successful because it replaces some less preferred good, many of which are *also novel*.  This is Schumpeter’s Creative Destruction.  However, sometimes a less preferred good can win.  This happens when an inferior good enjoys state protection or subsidies of some sort.  In such cases, institutions matter, not because of the good they do, but because of the harm to the global economy induced by their interventions.

Novel, new, unique goods capture rents.  That is, they earn profits above the market average.  Singapore may be richer because the Singaporese produce more novel products.  (Note that Singapore per se does not produce anything.  People make things, and make the decisions about what it is that will be made, and in what quantites.  Falling into the nation as unit of analysis happens again and again.)  Of course formal education plays a limited role in the development of novel products.  Formal education can include precisely that sort of schooling which encourages conformity and discourages creative thinking and entrepreneurial vision.  Schooling is what fish sometimes do, and formal schooling is very good at producing people who can queue properly, but quite poor at developing well-motivated free thinkers.  On the other hand learning technical tools is very important to implementing fresh ideas, or even for identifying fresh vs. already been tried ideas.

I’m currently reading up on the literature which identifies firms which export as being better on many margins than firms which do not export.  This seems to fit well with Hausmann and Hidalgo’s discussion of big vs. small businesses.  Again, the older trade theory, from Smith to Ricardo to Hecksher-Ohlin to Krugman then Krugman and Helpman always does its analysis at the country level.  Bradford and Jensen hit off a literature which has begun to look for firm-level data when analyzing trade patterns.  What I expect to find in the long run is that succesful entrepreneurs are the real unit which endows some firms with global comparative advantages.  In the past it has been easy to imaginge that natural resource endowments were imperitive to development, or that the relative ratios of inputs was crucial.  But as transportation costs have fallen, largely thanks to the invention of the container ship (an underappreciated phenomenon), and as trade barriers have diminished, it is clear that there are few relevant unique elements to nations.  Among the most important elemnts that does impact national comparative advantage is migration policy.  With open borders I have a hard time imagining what comparative advantages beyond climate remain relevant for development trends.

I don’t know if this all boils down to a “relatively limp” future for the United States.  I mostly don’t care.  Of course developing economies are going to experience greater growth than the US in the near future.  They are playing catch-up.  The average Chinese worker now earns only 1/10 of the average US worker.  And that’s a dramatic improvement over a few years ago.  I hope the Chinese do catch up, nevermind China.  I hope the Indians catch up nevermind India.  It is the nationalistic mindset captured in Plummer’s language which poses the real greatest obstacle to development.  The idea that other people’s lives improving in some way harms our own is pure envious thinking, a true zero-some-game, fixed size of the pie perspective which only motivates protectionism and dehumanizes the other.

On the other hand, I think it is silly to claim that the US has few opportunities to move further up, whatever that can mean.  Americans are constantly moving up.  The TV I paid $400 for a year ago now sells for $200 (at least on buy-nothing Friday).  We afford greater comfort with less.  And this fits well with Cowen’s earlier work in “Create Your Own Economy.”  Further, as the rest of the world develops, we will experience the same kind of beneficial spillover effects that the rest of the world has been enjoying from us!  Positive externalities flow both ways.  US growth may appear limp in comparison to other economies, to which I say: finally!

I often wonder how much of the innovation we have benefitted from has occurred too rapidly.  It has been incentivized through artificial means for too long and with too much market intervention.  Perhaps we have got 4G wireless networks for our smartphones at the expense of improvements in fuel economy, or architectural improvements, or who-knows-what.  And who-knows-what is precisely the problem.  No one knows what and no one knows who.  Subsidizing innovation in industry “x” presupposes that the most important new innovation ought to come out of industry “x”.  But that would be impossible to know.  We have had a lot of such subsidization, and in my estimation, a lot of bad investments.

But there have been real innovations! one would be quick to point out.  Ah, the seen and the unseen, as Bastiat and Hazlitt pointed out.  We don’t know, can’t know, at what expense we have got the innovations we have got.

And this is precisely where Hausmann and Hidalgo strike me as problematic.  It would seem their argument will motivate policymakers to further subsidize innovation in industries that their own country seems to have a comparative advantage in.  But those comparative advantages will merely be artifacts of past subsidies.  And we will wind up throwing good money after bad.

Ask yourself, what can it really mean for one country to have a comparative advantage over another in producing a given product.  There are a very small range, primarily of agricultural goods, which it seems to me any geographic region might have a legitimate comparative advantage in.

I may have the chance to read this book sometime later.  Particularly if it becomes relevant to my research.  For now, I’m skeptical, and I’ll wait to see how the profession receives their work.