Tag: mark koyama

Professors Koyama and Rubin Explain How the World Became Rich

To be honest, you really should read the entire book. But then again, it is freakishly expensive by Indian standards, and the interview we’re about to discuss serves as a very good introduction to thinking and reading more about this subject, so let’s get started.

If you play the animation in that chart (and make sure you have tick-marked the “Relative change” box), you should be struck by two questions. Well, I am, at any rate.

  1. Why the hell did it take so long?
  2. What the hell happened about two hundred years ago?

And the interview is about precisely these questions, but before we get there, a slight digression.

My way of getting students interested in the topic of macroeconomics is by showing them Gapminder, and then asking them a seemingly simple question: why does the world look the way it does?. That is, why did the countries that are rich today (on a per capita basis) get that way?

Some students say it is because those countries have a smaller number of people, and I say that by logic China ought to be poorer than us. Some say it is because those countries were never colonialized, and I say that by that logic Singapore ought to be a very poor country, and so also South Korea. This goes on for a while, but I eventually get the discussion around to two central questions/conclusions.

First, is it likely that we will ever know for certain, and if so how? Or are we doomed to just faffing around for ever?

And second, if we do find out, can we apply some of those lessons in India’s case today? That is, if at all there is a recipe for growth, does it remain applicable across time and space?

And as Robert Lucas put it (in a different but very related context), it is very hard to stop thinking about these questions once you start thinking about them!

The book in question, How The World Became Rich, with its subtitle ‘The Historical Origins of Economic Growth’ aims to answer these very questions. And as anybody who has attempted to study a subject such as this know, this is A Very Hard Thing to do. Here is the description from the Amazon page:

Most humans are significantly richer than their ancestors. Humanity gained nearly all of its wealth in the last two centuries. How did this come to pass? How did the world become rich?
Mark Koyama and Jared Rubin dive into the many theories of why modern economic growth happened when and where it did. They discuss recently advanced theories rooted in geography, politics, culture, demography, and colonialism. Pieces of each of these theories help explain key events on the path to modern riches. Why did the Industrial Revolution begin in 18th-century Britain? Why did some European countries, the US, and Japan catch up in the 19th century? Why did it take until the late 20th and 21st centuries for other countries? Why have some still not caught up?
Koyama and Rubin show that the past can provide a guide for how countries can escape poverty. There are certain prerequisites that all successful economies seem to have. But there is also no panacea. A society’s past and its institutions and culture play a key role in shaping how it may – or may not – develop.

https://www.amazon.in/How-World-Became-Rich-Historical-ebook/dp/B09VNRJZ31

As the excerpt says, there are many, many theories about why some countries got a headstart on the others. And while we can’t ever be sure of what the exact mixture of theories is, and whether this mixture remains the same for all countries across all periods, we can be sure that any recipe must contain at least some of these ingredients. And that’s better than knowing nothing, eh?

But which ingredients? In the next section, my notes from having read the article

  1. The Fate of Rome, by Kyle Harper, is now added to the list.
  2. Life slowly got better across the centuries from the time of the Roman Empire until the Middle Ages, but many of these changes could be explained by major demographic changes (such as, say, the Black Death and the resultant decrease in the population.)
  3. Sustained economic progress necessarily needs sustained technological progress. And sustained technological progress needs to be high enough to be able to beat the inevitable downward pressure imposed by population growth. They also add property rights as an important component, but it is, in essence, enough technological progress to be able to beat the inevitable Malthusian Trap.
    “Ultimately (and this matters for the acceleration in growth we observe from the late 19th to the 20th centuries), it also helps if families limit the number of children they have. This does not necessarily contribute to innovation, but it does mean that innovation will more quickly translate into growth.”
    Of course, the next logical question to ask is why would families limit the number of children they have, and to me, the answer is that they will only do so if they are convinced that their children have a more than reasonable chance of surviving into adulthood. Health comes first, both for individuals, but also for economic growth.
  4. This is an article I will need to read carefully, on the debate between historians and economic historians. The topic? What role did slavery have to play in the economic development of Europe.
  5. Remember the ‘ingredients in the recipe’ analogy that I used in the previous section? Institutions (such as property rights, labor unions), the demographic transition and education are three things that Professors Koyama and Rubin completely agree upon.
  6. “I think one thing the history of technology has taught us is that as long as the incentives are there for innovators to innovate, we will continue to be surprised.”
    I think this to be a key sentence, and I wonder if we think hard and often enough about whether the world is incentivizing innovators enough.
  7. Capitalism without Capital is also added to the list. Sigh.

Links for 13th May, 2019

  1. “There should be limits, too, on the rights investors can sign away. In recent years, some companies — such as Smartsheet and Twilio — have done dual-class issues in which the extra voting rights expire after a certain number of years. These sunset provisions preserve the potential benefits of leaving initial control in the hands of founders, while avoiding the risk of creating a dynastic birthright. That’s a sensible compromise. The Securities and Exchange Commission, or the exchanges it oversees, should make such provisions mandatory.”
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    A very useful article to help understand how to think about IPO’s, Uber, Lyft valuations, mandatory disclosures from firms and how they try to get around the issue – and the excerpt above is yet another example of a favorite adage of mine: the truth always lies in the middle.
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  2. “We find that between 1300 and 1400 a 10 percentage point higher Black Death mortality rate was associated with a 8.7 percentage point fall in city population, but between 100 and 200 years later, the impact of mortality was close to zero. When we examine the spillover and general equilibrium effects of the Black Death on city populations, we similarly find negative effects in the short run, and no effects in the long run. Cities and urban systems, on average, had recovered to their pre-Plague population levels by the 16th century.”
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    A worrying article, especially towards the end, but two major takeaways for me: cities matter, and trade matters. But my major takeaway is there is (yet more) cause for worry.
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  3. “Unfortunately, the world’s most prominent specialists are rarely held accountable for their predictions, so we continue to rely on them even when their track records make clear that we should not. One study compiled a decade of annual dollar-to-euro exchange-rate predictions made by 22 international banks: Barclays, Citigroup, JPMorgan Chase, and others. Each year, every bank predicted the end-of-year exchange rate. The banks missed every single change of direction in the exchange rate. In six of the 10 years, the true exchange rate fell outside the entire range of all 22 bank forecasts.”
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    Forecasts are useless. I cannot be more serious when I say this. Forecasts are useless. But foxes are better at the impossible then the hedgehogs – this article helps you understand these terms, and their usefulness. This blog is about becoming a better fox!
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  4. “Again, one can argue that the amount of redistribution should be larger. But it would be untrue to argue that a significant amount of redistribution–like doubling the after-taxes-and-transfers share of the lowest quintile–doesn’t already happen. ”
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    The always informative Timothy Taylor on taxes, their composition, their effectiveness and the resulting redistribution in the United States of America. Also, read the book that is reviewed in this article – the entire book is worth your time, but the chapter on income tax is what I was reminded of.
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  5. “When Paul Romer expresses an opinion, it is always worthwhile to listen because it is always well-considered. In an opinion piece in the New York Times, he puts forward a proposal to restore what he terms is the “public commons” of the provision of information in support of democracy. He actually puts forward two linked proposals: one for a target on targeted ads by digital platform companies and a proposal that the tax is progressive (which may be a check on dominance). The latter is interesting but I will just focus on the former here.”
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    I do not recollect if I linked to the Paul Romer piece that is linked to in the excerpt above – in case I did not, please go ahead and read it. The rest of the current article speaks about why Romer’s proposal is a good idea, but not necessarily implementable right away.