Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, June 26, 2008

Capitalism, World Trade and Poverty

Hi Guys,

Our recent argument in response to Bell Curve's inspiring post earlier has inspired me to start a new thread.

Leftists, liberals, and progressives are divided about what to do about world poverty and how to react to the steady increase in world trade since the mid 1980s. When we add environmental concerns to the mix we have quite the Gordian knot of problems. What causes poverty in developing countries? What prevents people in developing countries from improving their own situations? What impact will the increasing trade and prosperity in the world have on the environment?

We obviously won't be able to solve these problems here. But it might be interesting to discuss some of this. I'd like to start by suggesting some good readings.

One of the most interesting books I've read about economic development in the developing world is The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando De Soto, a Swiss trained Peruvian Economist. The short version of his answer to this question is "rule of law" - we have it, they don't. Essentially he argues that the poor in the developing world have an enormous amount of resources, far more resources than all the aid from all the rich countries and NGOs combined from all time. But they can't use those resources, like we do, to generate returns on investments (that is turn their resources into capital) because their local legal systems do not sufficiently protect property rights. For example, a peasant who "owns" his own farm in a place like Guatemala or Zambia etc cannot easily prove that he owns that farm. This prevents him from using it as collateral and so he can't borrow against the farm to improve it by say, enlarging his house, buying more livestock or equipment etc.

Another interesting book about trade and globalization is In Defense of Globalization by Jagdish Baghwati an Indian economist trained at Cambridge and MIT. Professor Baghwati discusses globalization and trade from the perspective of someone who grew up in Mumbai. Like De Soto, I think this gives him some credibility that most commentators on this issue don't have. Most of the debate about globalization goes on between left wing and right wing intellectuals who have lived most of their lives in the richest parts of the world. Baghwati has seen how the other 4/5 of the world lives.

Finally, I'd like to recommend the Copenhagen Consensus website to you all. This center gathers together interdisciplinary groups of researchers to determine global problems that can should be solved first. Their criteria isn't moral or ethical but rather, how much benefit would be generated for how much effort/cost. The main idea is that by solving problems that generate a lot of benefit for the least cost first, we put ourselves in a better position to solve the problems on down the list. It isn't an argument against solving some problems. Rather it is a question of walking before we run. In particular, I'd like to recommend the first Copenhagen consensus list from 2004. The top problem is the HIV/AIDS crisis (which is particularly nasty in Africa). They argue that HIV/AIDS is sapping Africa's already strained resources with devastating effects.


The Law Talking Guy said...

I doubt there's much disagreement about the need for the rule of law, but I could be wrong. If there is disagreement, it would be over how important that is. As a lawyer, I am professionally inclined to say it is critical. I think that's correct for other reasons, too.

But let's not kid ourselves. Capitalism triumphed in the West in large part because military superiority allowed us to exploit colonies and gather wealth, and slavery allowed capital to exploit labor in the grossest fashion. That amassing of capital put the West in a long-term advantageous position vis-a-vis the rest of the world.

There's also a difference between asking what causes poverty and how to solve it. Capitalism produces inequalities in society. The rising tide does not lift all boats; it lifts most of them. There are, as a result of capitalism, people who are poor people not because they lack personal virtue, merit, gumption, entreprenurial spirit, etc., but because we need to have janitors and janitors command low wages. Because without a minimum wage, some would be paid even less. Because capitalism, by putting decisions in private hands, permits racism, sexism, ethnic and religious prejudice to be felt in the marketplace. Because children are born to unequal circumstances. Because education and health care are not free, but require money, and these two "inputs" determine a child's future.

Capitalism, without government intervention, denies many (most) children a decent education because their parents can't afford it. That puts them at a serious disadvantage, whatever their own merits. Worse, this costs a capitalist society the full productive potential of all of its members.

So let's all agree about how marvelous free markets are, then recognize that they have flaws too. Fixing those flaws is my concern. This cannot be done by taking the neoconservative approach of pretending they don't exist. I believe that only government action in ameliorating the inequalities and redistributing some wealth through programmatic efforts can succeed. Universal education and health care are just part of what we need. We also need a safety net to take care of the people who are - by design - going to fall to the bottom rungs.

This is now a planetary problem. Right now there are hundreds of millions of human beings on this planet, a great deal of them children, who are being priced out of the food market. They don't have time to wait for the market to "clear" after planting increases over the next few years. They need food today. In other words, even if a free market in agriculture is the best long-term solution, it is not going to feed anyone today. A true free marketeer would say that starvation is just part of the sytem, the business cycle, the ups and downs. Indeed, a true free marketeer would argue that without the risk of starvation, proper incentives will not exist. I have heard Chicago school economists say the same about debtor's prison. But those are not acceptable answers. Perhaps we can agree on that, too. Then we realize that none of us is a pure free trader.

USWest said...

thanks for the book recommendations, RBR.

I think that the systemic analysis of the problems in the third world is a good one. We can argue over Ag subsidities if we want, but that is merely one aspect of a much larger problem.

I am reminded of an episode of the West Wing where the Adminsitration was trying to get Big pharma to sell Aids drugs at deeply reduced prices to a small African Country. At the end of the day, big Pharma was willing to discount the drugs but was refusing on the grounds that it was pointless. The drugs have to be taken a precise times to be affective. People in said African country didn't have wrist watches.

By the end of the episode, the African president had to leave earlier than planned because rebels had taken over the country. He killed upon his return.

If this episode had been ficitonal, it would have been a clever plot line. However, it is based very much on fact. The devil is in the detials and without government stability and some form of rule of law, the details will be left to themselves.

I love hearing the success stories of microlending and the clever use of cell phones in 3rd world countries to build small businesses. But I wonder if these aren't just gimmicks until the larger issues are resolved.

USWest said...

a final thought: rule of law does not have to be "democratic". Think China.

There simply has to be an environment where stability can be established and people can build small businesses.

Then consider the problem of Zimbabwe and the Mugabe land redistribution programs that some believe have led to many of the nation's current troubles.

Raised By Republicans said...

"Capitalism, without government intervention,"

I think this is the point that LTG always misses. Capitalism without government intervention cannot exist. Government must establish rules that protect private property and assure competition in order for capitalism to - as LTG rightly pointed out - raise MOST of the boats with its rising tide.

The alternatives, anarchy (what the Ron Pauls and Dick Cheney's of the world THINK capitalism is all about) and state planning (what the far left fool themselves into thinking is a solution) will lift only tiny minorities of the boats. Anarchic cleptocracies lift a small number of boats a great deal and leave the rest to drown. State planning lifts the poorest third a tiny fraction but forbids any improvements for anyone else.

Both are recipes for persistent poverty and economic stagnation. De Soto's insight is that he see a way to use capitalism to improve the lots of billions of people. It's an approach that deserves attention.

Raised By Republicans said...

"rule of law does not have to be "democratic". Think China."

True. But the rule of law in China is very spotty. De Soto talks about countries like China a lot. In China you have pockets where law is stable enough to encourage economic growth. But in much of the country, things are still run the old fashioned way, by the arbitrary application of power by local potentates.

One of the things that I thought President Clinton did really well was realize the importance of lawyers. He sent hundreds of US lawyers to China to advise their local governments about how to establish local courts, city governments etc etc. The routine boring stuff that makes an economy work.

Now, there is another question about the relationship between functioning capitalist economy and democratization. Perhaps a subject for another thread.

The Law Talking Guy said...

I'm not missing anything, RBR. But you're playing a bit of sleight-of-hand here with the role of government. Sure, capitalism can't exist in anarchy, but that's a straw man. The issue isn't anarchy, it's the idealized liberal noninterventionist government of the 19th century state - the libertarian/neoconservative ideal. Most libertarians find a very big difference between a government protecting private property (which some view as a natural right) and, for example, "ensuring competition" through active enforcement of antitrust laws (which did not exist during capitalism's heroic 19th century phase).

There is a big difference between a government playing the minimalist laissez-faire role that is all too often lionized in conservative economics departments as the ultiamte pro-efficiency stance, and the interventionist role that I believe is necessary.

Moreover, I think you know that's what all the political debate over capitalism is about. What should government do about outcomes (pollution, wages, etc.) after creating the minimum necessary for capitalism to exist - securing private property rights. There's a very big difference between (1)believing that the government's role is to foster capitalism and accept whatever outcome it produces; and (2) believing that the government should intervene in the market in order to effect substantive policy outcomes.

Raised By Republicans said...

But the 19th century state was far from non-interventionist. Governments in the 19th century granted government monopolies (especially in their colonies) and protected their domestic industries against competition from rival powers pretty agressively. They also sent the troops in to break up strikes and protect the aforesaid monopolists.

You seemed to suggest that if you have things like a minimum wage, you don't have capitalism. I disagree.

I think what we have here is a strong disagreement about what Capitalism is. You seem to equate capitalism with robber barons and mopolists from the 19th century. I contend that this is a mistake.

Capitalism is a much more complex situation. You can have an essentiall capitalist economy in conjunction with things like minimum wages and welfare states. You can't have it unless you enforce things like anti-trust laws.

LTG, you have allowed a bunch of semi-educated cleptocrats like Dick Cheney to define "capitalism" for you. But you should realize that what they want isn't capitalism, what they want is a cleptocracy with a powerful and interventionist state protecting a few big companies and industrial interests against competition.

I would suggest that the real hey-day of capitalism in this country would be the days right after Teddy Roosevelt went on his trust busting binge and then again in the 1990s when start up companies like Microsoft were supplanting the old corporate dinosaurs like IBM.

The self described "Libertarians" want a return to the pre-capitalist days of the Robber Baron.

Dr. Strangelove said...

In my understanding, "pure" capitalism refers to an unrealizable idealized (but not ideal!) social structure in which the sole economic function of government is provide the force of arms necessary to uphold the basic instruments or "ground rules" of capitalism, namely contracts and private property.

In the purest form of capitalism, even things like government-printed/backed currency are technically a form of government interference in the marketplace. The free market will, after all, invent things like IOUs and company scrip to fulfill that need. Indeed, the free market's latest invention in this regard--the massive credit system--has largely replaced currency. (The entire credit system is basically one huge set of interlocking contracts, enforced as always by the government.)

Given enough time, the free market will invent a solution to any problem--it will provide a supply for every demand. And these need not be individual solutions--in game theoretic terms, collusion (as in the credit system) often provides a better answer. Even things like public freeways and some level of basic universal education might be produced by "capitalism" because these will, in the long run, provide a better outcome for most.

The catch is that in capitalism "demand" is measured in a biased way. "Demand" is not just a measure of one's desire, but of one's current slice of the pie. The more wealth you have, the more you may demand. And some players--like environment and the generations yet unborn--have little or no representation in the game at all. Hence things like public freeways and universal education may be created, but those will only be implemented insofar as they benefit the future well-being of those who already are well off.

So of course the rich get richer: The basic non-linearity of the "demand" function is built right into the system. Thus (quoting Galbraith) the other role of government in a democracy is to provide countervailing power, to give appropriate leverage (by force of arms) to those whose "demand" is far less than their actual need. Almost by definition, each use of this countervailing power will provide a market-inefficient outcome, in that supply will not equal "demand." (That's the point of the interference, after all: because the market was not giving the people what they desired.) But it often provides a better outcome for more people.

Raised By Republicans said...

De Soto's insight is that the "market" will not always invent things like IOUs and company scrip. Or rather that it might do so but the rules for how these things work will be so informal and localized that it severely constricts growth.

De Soto's point is that good and consistent application of predictable laws is a crucial neccessary condition for a functioning economy.

In a sense he is saying that this so called "pure" capitalism that you are describing is not an urealizable ideal but is instead something far from ideal and completely different from what we all recognize as capitalist.

Of course Galbraith and Keynes before him were talking about government's counterveiling power in terms of mittigating business boom and bust cycles and providing side payments to the minority of people who are hurt by things like international trade etc. But it is important to note that both of them considered themselves advocates of a capitalist system.

Dr. Strangelove said...

I agree with most of what you wrote here, RbR. (I would point out, though, that I was careful not describe this "pure" capitalism as an unrealizable ideal.)

I think, actually, that I might be going a little further than you are. I think the creation of cartels, guilds, unions--even regulatory systems and certain government agencies--are very much a part of the capitalist free market system. I view these as "collusion" solutions to the game as opposed to the naive "competitive" solutions which seem to be the only ones Libertarians understand.

When government acts as the "executive committee of the bourgeoisie" it is engaged in enforcing a "collusion" solution and acts to increase market efficiency. Only when government acts as a countervailing power does it necessarily impose market inefficiencies.

Raised By Republicans said...

The "collusion" solutions you mention (hey, could they have done a School House Rock for that? You "Collusion Solution what're you pushin'?") are part of capitalism. Some of them have better effects than others. Cartels tend to undermine competition and so do unions if allowed to get too powerful. And it's best if the cartels and the unions can be set up simultaneously so that they balance each other out.

But I think the American "Libertarians" tend to like Cartels and hate the unions. To say that's not fair sounds childish but I think it's valid. It's also bad economics. Another book I could have suggested is Partisan Politcs In the Global Economy by Geoffrey Garrett. In it he talks about how economic performance is not always harmed by things like big unions and big welfare states. But it can be harmed when all these collusive factors are out of ballance (to be rather brief).

History Buff said...

I tend to look at things from a family systems theory view. Family systems theory basically says that everything we do is based on our relationships to people and institutions. Our reactions can be ingrained over generations, so you have to look back at the past to understand the present.

Mexico and most of Latin America was colonized under the Spanish, the most centralized government in Europe at the time. Everything was done in the name of the king and if you didn't have his permission you didn't get to do it. There were a few bold ones (Hernan Cortes) who initially went in without permission, but would go to the King later to petition him for land, once they had already made good and could bring him lots of goodies. This type of top down government made it so that the lower classes really had no initiative to do anything because they would never have access to the king.

Also, there was slavery in Latin America,they just didn't import their slaves. There was an ample native population that the Spaniards worked into the ground to mine gold and silver and to do whatever else needed doing. The Spanish justified this because they saved the indians souls first (usually without their knowledge).

Most of the native societies, especially the Mayans, the Inca and the Aztecs also had centralized authority.

By contrast, the original colonists to the US were from societies (England, Scotland, Holland and France) where authority had been questioned many times, and had, in the case of England also been limited to some degree. The native groups in the US were also from more egalitarian societies (the Iroquois claim to be the first democracy in the US) and many early colonists had a fair amount of contact with them.

During the early 1800s when Texas was being colonized. The Mexicans allowed Americans like Steven F Austin to bring in settlers from the US because they realized that Texas-Coahuila was such a vast territory, that they needed help to settle it. There were also Mexican settlements. The irony of this situation is that the US settlers were much more successful than the Mexicans and because of this the Mexicans started to limit imigration and went after illegal aliens. The reason why the americans were more successful (noted by the Mexican General sent to track the progress of the colony) was that the americans had a town but spent most of there time away from it on their land working their farms, while the Mexicans spent most of their time in town, they were not used to working independently.

This leads us to today. The immigrants that scrape their way here from latin america are the entreprenuers of their society, but they don't have the chance there, because there aren't enough jobs for their burgeoning populations. The US, whose population without immigration is a zero, has jobs that we cannot fill. The best solution that I can see is let these people in legally, give them the chance to make some money so they can go back home and do something with it. Many of them want to go home, but with the way the laws are now, many of them live in fear that they will not be able to return, or that they will be separated from their families. If we are so worried about them staying indefinetly then, they need to be part of the tax system and they need to have a path to citizenship. This would be good for them, for Mexico (because it would bring back people who have been exposed to capitalism, democracy etc) and it would be good for us, because then we would have a labor force that would pay social security taxes. If we completely blocked immigration the social security system would completely fail.

Raised By Republicans said...

I don't follow how the family systems theory connects to the history of Spanish colonialization and how that connects to the current economic situations in places like Mexico.

From what I can tell though you seem to be arguing that capitalism is essentially a cultural trait. And that if Mexicans come to the US and are "exposed" to capitalism they will take home with them to Mexico. If that's not what you are arguing then I'm responding to something that no one put forward:

I don't think that this view of how capitalism develops holds any water at all. The United States and Western Europe and Japan were not always capitalist. Just 150 or so years ago, the US economy looked A LOT like the Mexican economy does today. In the 1840s it would be hard to see fundamental differences between the US and Mexico in terms of economic organization - expcept for things like the more prevelent use of slave based cotton agriculture by American settlers in Texas. But something in the US changed in the late 19th and early 20th centuries. That change is only now beginning to happen in Mexico.

Now, I know that the cultural explanation of capitalism is a common folk theory out there. I also think it is dangerous. I don't go into too much detail about that because I've posted on that sort of thing before. But just briefly, if we start with the idea that economic development is culturally driven we have a choice. Either we throw up our hands and declare that certain cultures are just culturally fated to be underdeveloped and poor for ever. Or we insist that any population that wishes to change their economic circumstances must first abandon their culture.

I really think everyone here should read De Soto's book. He discusses a lot of these issues in a systematic and intelligent way.

History Buff said...

I'm sorry, when I started posting this moring, I ran out of time, so I kind of rushed through it. I do think that there are some cultural elements to economics, but I don't think that's all there is.

I do agree in part with the rule of law arguement. Land ownership in Mexico is very fluid. If you own a peice of property and you don't put a big fence around it or live on it either the surrounding land owners will encroach upon it, gradually swallowing it up, or squatters will set up residence. In the US we have squatters rights laws which would allow the squatters after a time to own the land, but in Mexico if you have some lana (or cash) and a little influence you can kick the squatter off the land. Cash and influence are still very much ingrained in the Mexican system. Bribery is built into the salary structure of civil servants. Not that you can't do things with money and influence here, you can, It's just a lot more prevalent in Mexico. I guess what I was trying to say about Mexicans returning to Mexico that have lived without constant bribery may be more motivated to change the system.

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