Archive for May, 2014

Why Nations Fail – Not another review

May 19, 2014

Why Nations Fail (Random House, 2012) by D. Acemoglu and J. Robinson

There are enough reviews by eminent persons from different disciplines to make another one unnecessary. Most are very positive. Jeffrey Sachs is one of the exceptions. His review in Foreign Affairs is worth reading for two reasons. He provides an excellent summary of the main thesis and findings of the book, and some of his criticisms are pertinent. His review lead to the normal academic sparring, as the two authors replied with an academic dialogue spiked with sarcasm. Sachs is probably upset as he only gets one mention in the book, but so did Adam Smith who unfortunately cannot defend himself.

Sachs’ succinct summary of Why Nations Fail in the Sept/Oct 2012 issue of Foreign Affairs includes the following:

“According to the economist Daron Acemoglu and the political scientist James Robinson, economic development hinges on a single factor: a country’s political institutions. More specifically… it depends on the existence of “inclusive” political institutions, defined as pluralistic systems that protect individual rights. These, in turn, give rise to inclusive economic institutions, which secure private property and encourage entrepreneurship. The long-term result is higher incomes and improved human welfare.

What Acemoglu and Robinson call “extractive” political institutions, in contrast, place power in the hands of a few and beget extractive economic institutions, which feature unfair regulations and high barriers to entry into markets. Designed to enrich a small elite, these institutions inhibit economic progress for everyone else.” 

Extractive and inclusive political and economic institutions are the four lead actors in this play about national progress, or lack of it. The historical vignettes about these players’ roles in today’s countries reward the reader, stimulate thought and promote further reading about an understanding of today’s world. It is definitely a worthwhile, if lengthy, and sometimes repetitive, read.

What caught my attention was that Adam Smith also gets only one mention in Why Nations Fail. Yet it seemed that, in 1776, Smith had covered similar ground in Wealth of Nations for conditions which prevailed at that time, that is at the start of the first industrial revolution with different national boundaries and much fewer countries.

The global land and sea masses were the same then as now, but boundaries and political institutions differed. Why Nations Fail (WNF) covers some of the same ground as Wealth of Nations (WON) but for a different time period. A review of WNF on the Adam Smith website makes no mention of the failure to reference his earlier work, so I should probably not worry. But it seems to reveal a lack of respect by the present for the past, as well as eagerness to claim originality, when writers today stand on the shoulders of those who came but fail to mention it.

A late former colleague, Eddie West, who was a scholar of Smith, would have been the person to comment on the relationship between the two books, and how Smith’s contribution over almost two and a half centuries earlier supplied the building blocks for WNF. A few extracts will show why it may be reasonable to suggest that Smith had previously given considerable thought to why nations do or do not prosper.

The subtitle of Part 3 of WON is “Of the different Progress of Opulence in different Nations.” This seems to examine issues surrounding the main thesis of WNF.

Part 5 of WON is entitled “On the revenue of the Sovereign or Commonwealth,” with a chapter “Of the Rise and Progress of Cities and Towns, after the Fall of the Roman Empire.” It states:

 “ After the fall of the Roman empire, on the contrary, the proprietors of land seem generally to have lived in fortified castles on their own estates, and in the midst of their own tenants and dependants. The towns were chiefly inhabited by tradesmen and mechanics, who seem in those days to have been of servile, or very nearly of servile condition. The privileges which we find granted by ancient charters to the inhabitants of some of the principal towns in Europe sufficiently show what they were before those grants. The people to whom it is granted as a privilege that they might give away their own daughters in marriage without the consent of their lord, that upon their death their own children, and not their lord, should succeed to their goods, and that they might dispose of their own effects by will, must, before those grants, have been either altogether or very nearly in the same state of villanage with the occupiers of land in the country.”

This seems to illustrate the actions of extractive institutions. Another quote from WON states:

 …”the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life… But in every improved and civilized society this is the state into which the laboring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.”

While Adam Smith did not use the terms “extractive and inclusive political and economic institutions,” he seemed to have something like them in mind. I particularly like the idea of “villanage.” It refers to “a member of a class of partly free persons under the feudal system, who were serfs with respect to their lord but had rights and privileges of freemen with respect to others.” This seems like a fairly extractive arrangement, and one similar today to illegal immigrants who are forced to work for low or no pay in services like the sex trade. But of course we like to focus on more inclusive arrangements.

A graduate student thesis around the general topic of why some and not other nations prosper would be sent back to the drawing boards if her/his bibliography did not include Adam Smith and WON. It seems to me rather naughty for seasoned academics to discuss this topic, on which they have been working for fifteen years, with only one mention of Smith (p. 130), and his exclusion from the bibliography (26 pages of references).

Are things getting cheaper in Canada?

May 16, 2014

One of my tiresome complaints is that the prices of the things I buy are always increasing, and that the Consumer Price Index (CPI) does not reflect my basket of expenditures on goods and services.  Sometimes the CPI is reported while excluding energy and food which seems strange, at least as far as my budget is concerned. Then one day, while staring at my computer screen, I realised that much of what I was watching was actually free, or at least only required owning a computer and paying for internet service.

I read newspapers, magazines, academic periodicals and books for free; listen to music, the radio, watch TV and videos for no charge; have free access to Wikipedia, an online substitute for owning a set of the Encyclopedia Britannica; register and take online courses for no charge; shop, pay bills, trade shares and do banking online; send and receive messages to and from anyone with an internet service both next door and the other side of the world.

The list goes on. In each case, there is often someone trying to get me to pay for a version of what I access or how fast I receive it, but a little willpower on my part resists these temptations where possible. A weakening might be Netflix at C$8 a month for the Canadian service, as opposed to relying on free YouTube postings. US Netflix has 14,000 films as opposed to 1,000 with the Canadian version; a web search (for free) will show how Canadians can access the US service for an additional $50 a year.

Many books are available for free, although less so for recently published books. A first stop is the public library where hard copies are available when not previously loaned out. But now libraries offer e-book and audio editions, which can be downloaded at no cost without leaving home.

Other major home budget items are food, clothing, shelter, travel, healthcare, education and taxes. While each deserves careful analysis,and will be different for a 20 or 30 year old than for an 80 year old, consider the following:

  • Food can be purchased in its original form or with different degrees of processing. Processed food items are more expensive even after the raw food has been cooked at home.
  • Restaurant meals vary in cost depending on a combination of the food, cooking and ambiance of the establishment. Even with coffee shops, food and beverage items vary in price in a Tim Hortons versus a Starbucks.
  • Clothing can be bought online and delivered without the shopper leaving home. Prices tend to be competitive, the choice enlarged and the transaction costs reduced.
  • Home ownership costs depend on mortgage rates which consumers cannot control, but which are currently low. Maintenance costs are often hard to predict, but are typically reasonable for newly built homes and apartments.

Much could be written about the changing costs of the other listed items like travel, healthcare and education where there are more and less expensive ways of consuming and paying for these services. And where the characteristics of the service have changed over time, it becomes difficult to say how much the cost has risen or fallen.

 

My sense is that aside from the price of gas, which is viewed daily in a city (especially over long weekends) and has risen over the past decade, the items which have increased in cost are healthcare and education. But since these are often supplied by government, their cost is paid for out of taxation and understanding the implications requires entering a maze of the ways in which governments raise money at the federal, provincial and locals levels. In a future posting I will discuss how sellers work to raise prices and what, if anything, consumers can do about it; and whether published statistics on GDP and trade reflect changes in the way services are produced and traded.

Real time measure of GDP

May 5, 2014

Technology allows us to monitor things in real time, stock prices, personal health, airline flights for example. National accounting measurement of GDP is a stock measure for each quarter or year. National accounts were developed in the 1930s and dont seem to have been updated much. GDP reports are given wide publicity and may lead to policy changes. Would it be useful to have a real time measure of GDP? If so, why has it not been developed?