Saturday, January 07, 2006

Marxist Theory Takes a Hit

Arnold Kling assesses a study done by the World Bank, 'Where is the Wealth of Nations?', and draws some surprising conclusions. a landmark event in this transformation of economic viewpoint. First, it adds to the growing body of evidence that institutional factors, such as property rights, play a significant role in economic development.

Moreover, the study comes from an organization that was founded on the opposite belief. The World Bank was created at the end of World War II in order to promote economic development by providing capital to poor countries. Given its history and raison d’être, the conversion of the World Bank to a belief in intangible factors as determinants of economic development would be equivalent to a fundamentalist religious group's endorsement of gay marriage...

...As social scientists, however, we have noticed that a large share of wealth comes from factors other than basic labor and capital. This phenomenon was first documented by Nobel Laureate Robert Solow, and came to be known as the Solow Residual. The term "residual" suggests something small, mysterious, and unexplained. But the Solow residual is not small -- it is several times larger in importance than the stock of physical capital.

Because the Solow Residual is too large to ignore, much recent research has focused on explaining it. The current consensus is that institutions matter. The rule of law is important. Clear property rights are important. On the negative side, protectionism, corruption, and barriers to entrepreneurship are important...

Why are we fortunate enough to have institutions that are conducive to growth, while other societies are stuck with dysfunctional institutions?...

...Tyler Cowen... He writes, "Imagine economics is no longer built around the dual of preferences and constraints. We would instead have the following starting points: ...beliefs ...peers ...stories..."

Here, I wish to focus on the role that beliefs play in determining economic institutions and performance. I claim that:

1. People behave differently based on what they believe.

2. People support different institutions and policies depending on what they believe.
3. Some patterns of beliefs are self-reinforcing.

4. People's beliefs tend to reflect the beliefs that they are exposed to in their immediate family and peer groups.

5. Because of the importance of peers and family, beliefs among a group can remain stable for a long time, and then rapidly evolve when a critical mass of people experience a change of mind.

Ironically, one of the most difficult beliefs to change is the belief that physical resources are the main causal factors in economics. From Karl Marx's Das Capital to Jared Diamond's Guns, Germs, and Steel, the materialist belief captures people's imaginations. However, as the evidence for the intangible sources of wealth becomes more and more salient, our beliefs will adapt accordingly. When a book produced under the auspices of the World Bank challenges the materialist assumption, a broader change of beliefs may be imminent.

I don't believe that he is talking about the institution of federal government that is the final authority in all affairs, public and private.

This... a from a study by the World Bank. What's next, the United Nations acting responsibly?

1 comment:

Al said...

1. At least Diamond considered three factors, as opposed to Marx's one.

2. God bless Kling and Cowen! Whether they like it or not.

3. The UN will act responsibly when they consider something more substantive than the opinions of political appointees (who are nothing more than the winners of polical popularity contests) as definitive.