Economic Growth – Page 33 – artdiamondblog.com

Bill Gates Misreads Adam Smith’s Theory of Moral Sentiments

Bill Gates speaking at the Davos meetings in Switzerland on January 24, 2008. Source of the photo: http://graphics8.nytimes.com/images/blogs/dealbook/davos2008/gates600.jpg

The German scholars used to call it “Das Adam Smith Problem”: how to reconcile the Adam Smith’s Theory of Moral Sentiments with his later Wealth of Nations. One alleged inconsistency is the advocacy of altruism in the former, and the advocacy of self-interest in the latter.

But a closer reading of The Theory of Moral Sentiments solves the problem. Smith thought a case could be made for altruism, but only toward those we know really well, which primarily meant one’s own family, and maybe also others in one’s community who one knows well. The reason is that altruism works only when we know very well the situation and values of those who we propose to help. Otherwise, we may end up doing more harm than good.

So when Gates embarks on global altruism, he should be careful in citing Smith for support.

The passage quoted below discusses Bill Gates’s interpretation of Adam Smith:

(p. A15) Key to Mr. Gates’s plan will be for businesses to dedicate their top people to poor issues — an approach he feels is more powerful than traditional corporate donations and volunteer work. Governments should set policies and disburse funds to create financial incentives for businesses to improve the lives of the poor, he plans to say today. “If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world,” Mr. Gates plans to say.

In the interview, Mr. Gates was emphatic that he’s not calling for a fundamental change in how capitalism works. He cited Adam Smith, whose treatise, “The Wealth of Nations,” lays out the rationale for the self-interest that drives capitalism and companies like Microsoft. That shouldn’t change, “one iota,” Mr. Gates said.

But there’s more to Adam Smith, he added. “This was written before ‘Wealth of Nations,'” Mr. Gates said, flipping through a copy of Adam Smith’s 1759 book, “The Theory of Moral Sentiments.” It argues that humans gain pleasure from taking an interest in the “fortunes of others.” Mr. Gates will quote from that book in his speech today.

Talk of “moral sentiments” may seem surprising from a man whose competitive drive is so fierce that it drew legal challenges from antitrust authorities. But Mr. Gates said his thinking about capitalism has been evolving for years. He outlined part of his evolution from software titan to philanthropist in a speech last June to Harvard’s graduating class, recounting how when he left Harvard in 1975 he knew little of the inequities in the world. A range of experiences including trips to Africa and India have helped raise that awareness.

In the Harvard speech, Mr. Gates floated the idea of “creative capitalism.” But at the time he had only a “fuzzy” sense of what he meant. To clarify his thinking, he decided to prepare the Davos speech.

For the full story, see:

ROBERT A. GUTH. “Bill Gates Issues Call For Kinder Capitalism; Famously Competitive, Billionaire Now Urges Business to Aid the Poor.” The Wall Street Journal (Thurs., January 24, 2008): A1 & A15.

One good article that discusses some of the issues in my initial commentary is:

Coase, Ronald H. “Adam Smith’s View of Man.” In Essays on Economics and Economists. Chicago: University of Chicago Press, 1995.

Source of the graphic: online version of the WSJ article quoted and cited above.

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

“Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday” (January 22. 2008). Source of caption and photo: online version of the NYT commentary quoted and cited below.

Raghuram Rajan is mentioned in the article quoted below. I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development.

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception. Rajan argued that the main problem was one of misguided incentives. Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks. The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high. The high-flying investors probably had some knowledge of this, but the public did not. In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses. But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses. Instead of handing them out annually, let them become vested only after observing the investment’s track record for several years. If the investment goes south before the bonus is vested, the trader does not get the bonus. This would provide an incentive and reward for those who accurately accessed the risk of their investments.

(p. A1) . . . , Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

For the full commentary, see:

DAVID LEONHARDT. “ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage.” The New York Times (Weds., January 23, 2008): A1 & A23.

(Note: ellipsis added.)

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales. Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity. New York: Crown, 2003.

“Freedom and Prosperity Are Highly Correlated”

Source of graph: http://www.heritage.org/Press/ALAChart/images/ALC_017_index_econ_freedom_3col_c.jpg

(p. A13) . . . the evidence is piling up that neither government nor multilateral spending on education and infrastructure are key to development. To move out of poverty, countries instead need fast growth; and to get that they need to unleash the animal spirits of entrepreneurs.

Empirical support for this view is presented again this year in The Heritage Foundation/The Wall Street Journal Index of Economic Freedom, released today. In its 14th edition, the annual survey grades countries on a combination of factors including property rights protection, tax rates, government intervention in the economy, monetary, fiscal and trade policy, and business freedom.

The nearby table shows the 2008 rankings but doesn’t tell the whole story. The Index also reports that the freest 20% of the world’s economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.

For the full commentary, see:

MARY ANASTASIA O’GRADY. "The Real Key to Development." The Wall Street Journal (Tues., January 15, 2008): A13.

(Note: ellipsis added.)

Source of table: online version of the WSJ article quoted and cited above.

“Not Even an Unchallenged Autocrat Can Repeal the Laws of Supply and Demand”

"Essentials like bread, sugar and cornmeal have all but vanished in Zimbabwe after the government commanded merchants nationwide to counter 10,000-percent-a-year hyperinflation by slashing prices in half and more. The shelves at this grocery store are mostly bare." Source of the caption and the photo: online version of the NYT article cited below.

(p. A1) BULAWAYO, Zimbabwe, July 28 — Robert G. Mugabe has ruled over this battered nation, his every wish endorsed by Parliament and enforced by the police and soldiers, for more than 27 years. It appears, however, that not even an unchallenged autocrat can repeal the laws of supply and demand.

One month after Mr. Mugabe decreed just that, commanding merchants nationwide to counter 10,000-percent-a-year hyperinflation by slashing prices in half and more, Zimbabwe’s economy is at a halt.

Bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs who denuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.

Manufacturing has slowed to a crawl because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.

The chaos, however, seems to have done little to undermine Mr. Mugabe’s authority. To the contrary, the government is moving steadily toward a takeover of major sectors of the economy that have not already been nationalized.

. . .

(p. A8) . . . Most of the goods on store shelves this week were those people did not need or could not afford — dog biscuits; ketchup; toilet paper, which has become a luxury here; gin; cookies.

At various locations of TM, a major supermarket chain, aisles of meat coolers were empty save a few plastic bags of scrap meat for dogs. Flour, sugar, cooking oil, cornmeal and other basics were not to be found. A long line hugged the rear of one store, waiting for a delivery of the few loaves of bread that a baker provided to stay in compliance with the price directive.

The government’s takeover of slaughterhouses seems ineffectual: this week, butchers killed and dressed 32 cows for the entire city. Farmers are unwilling to sell their cows at a loss.

The empty grocery shelves may be the starkest sign of penury, but there are others equally worrisome. Doctors say that at most, there is a six-week supply of insulin and blood-pressure medications. Less vital drugs like aspirin are rarities.

“You can boil willow bark, just as Galen did,” one physician quipped.

For the full story, see:

MICHAEL WINES. "Caps on Prices Only Deepen Zimbabweans’ Misery." The New York Times (Thurs., August 2, 2007): A1 & A8.

(Note: ellipses added.)

"Women in Esigodini, Zimbabwe, cook melons into mash. Meat has been so scrace that melons have been their main source of nutrition." Source of caption: print version of the NYT article cited above. Source of photo: online version of the NYT article cited above.

Measuring Trends in Government Corruption

Source of graph: online version of the NYT article quoted and cited below.

(p. A6) Africa, often stereotyped as a place of epic corruption and misrule, emerges in a World Bank report as a continent of great variety, with some countries — Tanzania, Liberia, Rwanda, Ghana and Niger — making notable progress over the past decade, and others — Zimbabwe, Ivory Coast and Eritrea — moving backward.

The report, released yesterday and based on the most comprehensive data on governance in more than 200 countries, found that not just poor countries struggled with corruption and flawed government.

. . .

The report, “Governance Matters, 2007: Worldwide Governance Indicators 1996-2006,” was written by Mr. Kaufmann and the World Bank researchers Aart Kraay and Massimo Mastruzzi. It was posted on the Internet at www.govindicators.org. Data came from an ideologically diverse array of groups that included Freedom House, Transparency International, the Heritage Foundation, Reporters Without Borders and the State Department.

“This is the best data source on governance now,” said Steven Radelet, a senior fellow at the Center for Global Development, a Washington research group. “It is of huge importance in development. Ten years ago, there was no data. Fifteen years ago, we didn’t talk about this stuff.”

. . .

The report found that the gains and losses balanced out such that the average quality of governance worldwide over the past decade was little improved.

For the full story, see:

CELIA W. DUGGER. "World Bank Report on Governing Finds Level Playing Field." The New York Times (Weds., July 11, 2007): A6.

(Note: ellipses added.)

Effective Foreign Aid

"HOMELAND SECURITY. Many women in Mexico, like Estela Palacio Calzada, with her granddaughter, rely on money sent back from the U.S. " Source of caption and photo: online version of the NYT article quoted and cited below.

Adam Smith argued in The Theory of Moral Sentiments, that altruism is more effective when it is directed toward those we know best–mainly our family, and immediate neighbors.

A policy implication may be that the most effective foreign aid is to have more open immigration policies, that then permit the migrants to send back funds to those in their home country who they know best.

THE money flows in dribs and drabs, crossing borders $200 or $300 at a time. It buys cornmeal and rice and plaid private school skirts and keeps the landlord at bay. Globally, the tally is huge: migrants from poor countries send home about $300 billion a year. That is more than three times the global total in foreign aid, making “remittances” the main source of outside money flowing to the developing world.

Surveys show that 80 percent of the money or more is immediately spent, on food, clothing, housing, education or the occasional beer party or television set. Still, there are tens of billions available for savings or investment, in places where capital is scarce. While remittances have been shown to reduce household poverty, policymakers are looking to increase the effect on economic growth.

Some migrants, for instance, send home money to savings accounts at small bank-like microfinance institutions, which use the resulting capital pool to lend to local entrepreneurs.

For the full story, see:

JASON DePARLE. "Migrant Money Flow: A $300 Billion Current." The New York Times, Week in Review Section (Sun., November 18, 2007): 3.

Source of map graphic: online version of the NYT article quoted and cited above.

Strong Global Support for Free Markets

Source of table: "World Publics Welcome Global Trade — But Not Immigration." Pew Global Attitudes Project, a project of the PewResearchCenter. Released: 10.04.07 dowloaded from: http://pewglobal.org/reports/display.php?ReportID=258

(p. A10) WASHINGTON, Oct. 4 — Buoyed and battered by globalization, people around the world strongly view international trade as a good thing but harbor growing concerns about its side effects: threats to their cultures, damage to the environment and the challenges posed by immigration, a new survey indicates.

In the Pew Global Attitudes Project survey of people in 46 countries and the Palestinian territories, large majorities everywhere said that trade was a good thing. In countries like Argentina, which recently experienced trade-based growth, the attitude toward trade has become more positive.

But support for trade has decreased in recent years in advanced Western countries, including Germany, Britain, France and Italy — and most sharply in the United States. The number of Americans saying trade is good for the country has dropped by 19 percentage points since 2002, to 59 percent.

“G.D.P. growth hasn’t been as dramatic in these places as in Latin America or Eastern Europe,” said Andrew Kohut, president of the Pew Research Center, referring to gross domestic product, the total value of the goods and services produced in a country. “But worldwide, even though some people are rich and some are poor, support for the basic tenet of capitalism is pretty strong.”

For the full story, see:

BRIAN KNOWLTON. "Globalization, According to the World, Is a Good Thing. Sort Of." The New York Times (Fri., October 5, 2007): A10.

United States Cotton Subsidies Hurt Poor African Farmers

Dan Sumner did his dissertation many years ago under T.W. Schultz, a great economist, and a great human being. (Dan was a friend of mine in grad school–we were members of a club that gathered once a month to discuss the works of Bertrand Russell.)

Eliminating billions of dollars in federal subsidies to American cotton growers each year would reduce American cotton production and exports, raise world prices by about 10 percent and modestly improve the incomes of millions of poor cotton farmers in Africa, according to a new study by Oxfam, the aid group.

Agricultural economists at the University of California, Davis, who conducted the study for Oxfam, found that a typical farm family of 10 in Chad, Benin, Burkina Faso or Mali — Africa’s major cotton producers — that now earns $2,000 a year would have an extra $46 to $114 a year to spend if American subsidies were removed.

“Fifty to a hundred bucks is a lot of money to these people,” said Daniel Sumner, chairman of the Department of Agricultural and Resource Economics at the university. “It’s not right to think that changing U.S. subsidies will turn very poor people into middle-class households by our standards. That’s a generational process. But it’s money in their pocket.”

. . .

Dani Rodrik, an economist at Harvard who is skeptical of the importance of reduced agricultural subsidies, said he found Oxfam’s new estimates credible, but said the gains forecast were relatively small. . . .

. . .

But the authors of the report said that removing American subsidies would permanently shift the price of cotton upward, with prices subsequently fluctuating around a higher average.

For the full story, see:

CELIA W. DUGGER. "Oxfam Suggests Benefit in Africa if U.S. Cuts Cotton Subsidies." The New York Times (Thurs., June 21, 2007): A12.

(Note: ellipses added.)

Human Capital and Rule of Law Are “Largest Share of Wealth”

Two years ago the World Bank’s environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, "Where is the Wealth of Nations?: Measuring Capital for the 21st Century," began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world’s wealth! If one simply adds up the current value of a country’s natural resources and produced, or built, capital, there’s no way that can account for that country’s level of income.

The rest is the result of "intangible" factors — such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

Once one takes into account all of the world’s natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

For the full commentary, see:

RONALD BAILEY. "Secrets of Intangible Wealth." The Wall Street Journal (Sat., September 29, 2007): A9.

How the Congo Government ‘Inspires’ Technology Entrepreneurs: More on Why Africa is Poor

"Micheline Kapinga of Kamponde, Congo, uses a cellphone on the only site in the village that is sometimes able to capture a signal." Source of caption and photo: online version of the NYT article cited below.

I AM just back from Tanzania in East Africa.

In the mornings, disregarding the protests of the armed guards at my lodge near Arusha, I jogged along muddy footpaths. After the heavy rains, and under a low, misty sky, the fields looked as ruined as a battlefield. Very poor farmers and their children stared curiously at me as I passed.

In the afternoons, I attended the TEDGlobal 2007 conference, held by the Technology, Entertainment and Design organization in the modern Ngurdoto Mountain Lodge. The contrast between the two experiences troubled me.

TED conferences, mostly held in Monterey, Calif., are invitation-only affairs, are attended by the aristocracy of Silicon Valley and are known for their adventurousness in drawing together wildly disparate trends in technology, business and the arts.

On this occasion, Bono, the Irish rock star and champion of African causes, had persuaded the conference’s organizer, Chris Anderson, to invite the usual crowd, as well as African entrepreneurs, activists, health care professionals and artists to this tropical, leafy region midway between the Serengeti Plain and Mount Kilimanjaro.

. . .

At least one of the African attendees of the conference was representative of the kind of technological entrepreneurialism that the show advocated.

Alieu Conteh, the chairman of Vodacom Congo, was born in Gambia, in West Africa, 55 years ago and moved to Congo in 1981. For years, he was a successful coffee buyer and exporter.

Congo is about the size of Western Europe and has an estimated population of 65 million people. It is one of the least-developed nations in the world, with less than 300 miles of roads, most of them in poor condition.

In 1997, Mr. Conteh recalled in an interview, he heard Laurent D. Kabila, then the country’s president, deliver a speech in which he called upon his countrymen to rebuild Congo’s infrastructure after the 30-year dictatorship of Mobutu Sese Seko. Mr. Conteh, who had no experience in telecommunications, said he was inspired. He decided to build the nation’s first GSM (Global System for Mobile communications) digital network.

At the time, according to Mr. Conteh, fewer than 10,000 people living in Congo — mainly business people, foreigners and government employees — had mobile handsets. They paid $7 to $10 a minute to make a call, using an older technology. Less than 15,000 homes had a telephone landline.

Mr. Conteh said he went, cap in hand, to the minister of communications to ask for the country’s first GSM license. In January 1998 he got it — but he first had to pay the government a license fee of $100,000. Over the years, and with little explanation, he said, the government, which is often terribly short of money, increased the license fee, first to $400,000, then $2 million.

For more of the commentary, see:

JASON PONTIN. "SLIPSTREAM; What Does Africa Need Most: Technology or Aid?" The New York Times, Section 3 (Sun., June 17, 2007): 3.

(Note: ellipsis added.)