From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and The Lasting Triumph over Scarcity
By Arnold Kling and Nick Schulz
(Encounter Books, 317 pages, $27.95)
Prior to about 1800, the Malthusian race between productivity and population growth trapped humans at a subsistence level of material prosperity. After the industrial revolution, technology improvements boosted productivity past population growth, and humans began to climb out of poverty as a group.
In From Poverty to Prosperity, Arnold Kling and Nick Schulz attempt to explain the intangible assets that brought man out of the Malthusian era and into the prosperity of today, and that separate the wealthy societies of today from those that are still mired in subsistence-level poverty. They explain, in methodical but simple terms, why, for instance, North Koreans suffer terrible poverty while South Koreans enjoy every kind of material abundance, when the two countries share similar natural and geographical resources.
The answer, according to Kling and Schulz, comes from what they call Economics 2.0. They explain that while Economics 1.0 addressed scarcity, Economics 2.0 examined the modern phenomenon of abundance: “Sixty years ago, a social studies teacher looking for a movie that would motivate students to sympathize with the plight of the unfortunate in America might have chosen ‘The Grapes of Wrath.’ Today, it would be ‘Supersize Me.'”
Although both Kling and Schulz are to the right on the political spectrum (Kling coauthors the popular libertarian economics blog EconLog, and Schulz is a fellow at the American Enterprise Institute), their critique of modern economics is not so much free-market as anti-establishment. They think that researchers are too busy applying rigorous mathematics to narrow topics, while larger questions about the differences between poverty and prosperity go relatively unexamined.
The real value of FPTP is the synthesis of the ideas of thinkers who wrestle with such big questions. Half of the book comprises interviews with luminaries like Nobelist Edmund Phelps of Columbia and Nobelist Douglass North of Washington University in St. Louis — some of the giants of growth and development economics. Kling and Schulz get these great minds to think about the intangible, human sources of growth, and to delineate sweeping economic concepts that seem too often ignored in Washington, D.C. or in academia.
Kling and Schulz sum up their message as “markets often fail. That is why we need markets.” In other words, in the production, consumption, and distribution of goods and services, often markets will not deliver the best or even desirable outcomes. But a comparison of countries that have wildly different standards of living suggests that there are certain market features beyond the simple production of widgets or distribution of wealth that create those staggering disparities. And those differences are mostly in what the authors called the “software layer.”
The software layer is a way of labeling the processes that characterize successful modernized economies. To take one example from the book, what separates the Bulgarias (GDP per capita: $4,010) from the Greeces ($12,769) of the world is not physical. Instead, the difference lies in processes and protocols that each country follows — if they were computers, the key would be the software, not the CPU or disk space.
The authors highlight some of the commonly recognized key attributes of a healthy economy: democracy, intellectual property rights, stable government, and so on. The book also contains some speculations and open questions, such as Phelps’s contention that an “economic culture” of entrepreneurial attitudes significantly boosts performance. And there is a chapter dedicated to explaining what keeps certain countries poor. William Easterly, an aid-skeptical development economist, discusses the dismal track record of foreign aid in Third World countries, and muses that the problem could be with some of the “software” entailed in the massive, centrally administrated aid programs engineered by first-world economists. Easterly worries, “It’s as if central planning has been totally, mercifully extinguished everywhere else except [in the areas with] the world’s desperate, poorest people, who can least afford such a dysfunctional solution to their problems…”
FPTP is not particularly ideological, but it leaves you with one key idea. The prosperity of countries now depends more on human institutions, innovations, and know-how than on material factors. Politicians and policymakers need to understand that strengthening those intangible assets is more important than short-run economic management.