Sowell Applied Economics Thinking Beyond Stage One (revised and enlarged ed)

plants and animals existed in the tropics, so that much of the knowledge and many of the techniques from the temperate zones could not be applied in the tropics, and therefore could not be transmitted through the tropics to temperate zones on the other side.

Temperature is, of course, not the only aspect of climate. Rainfall is another. Knowledge and techniques of agriculture that apply in a wet climate may not all be usable in arid regions. Therefore differences in rainfall patterns can produce cultural isolation as regards agricultural techniques, just as natural barriers like mountains or deserts can produce cultural isolation in general. Those isolated climatically have likewise been unable to draw upon the knowledge and experience of peoples in similar climates elsewhere, when there have been hundreds or thousands of miles of very different climate patterns in between.

During the many centuries when ships were moved on the seas by the power of the wind in their sails, knowledge of particular wind patterns and ocean currents in particular regions of the world was crucial to the ability to carry on trade among different societies. Much of this knowledge was as localized as knowledge of the plants and animals peculiar to particular geographic settings. Knowledge of sailing in general was not enough when trying to sail off the west coast of Africa, for example, in places where it was easy for Europeans to use the wind and currents in that region to get in but hard to use them to get back out again. Conversely, sailors familiar with the monsoon winds of Asia could sail westward as far as Africa during the times of the year when those winds were blowing in that direction, and then return home later, after the time came for the winds to shift direction and begin blowing eastward.

Like other special knowledge of local or regional conditions, knowledge of wind patterns and ocean currents, and the techniques developed to deal with these localized patterns, tended to be confined to those living in the area. Put differently, various regions tended to develop different knowledge and techniques. Thus, for example, those countries which became leading seafaring nations and naval powers in the Mediterranean during the Middle Ages were not able to play the same role in the later era of trade and warfare in the Atlantic, where the waters were much rougher, and the wind and

weather conditions more severe. Those nations which had been the leading naval powers in Europe in the earlier era, when the Mediterranean was the principal avenue of waterborne commerce and naval warfare, were unable to match the upstart Atlantic naval powers when the central theater of trade and warfare shifted to the Atlantic after the Europeans discovered the Western Hemisphere.

POPULATION

Some of the worst poverty in the world today can be found in thinlypopulated regions like sub-Saharan Africa. Meanwhile, population density is several times higher in much more prosperous Japan. There are also densely populated poor countries, such as Bangladesh, but Singapore is even more densely populated and has a far higher standard of living. The United States and Tanzania have very similar population densities, but radically different economic levels. Clearly, there are other factors that have much more to do with prosperity than population does. Indeed, a case can be made for many regions of the world that it is precisely the thinly spread population which makes it so expensive to provide electricity, sewage lines, and medical care that many of these people are often without such things.

In some ultimate sense, there must of course be a limit to the earth’s capacity to sustain human life. But there are ultimate limits to many things— perhaps all things— and yet that provides little or no practical guidance as to how close we are to those limits or what the consequences are of various alternatives today. There are ultimate limits to how fast a given automobile will go, and yet we may drive it for years without ever reaching even half of that ultimate speed, because there are much narrower limits to how fast we can drive safely through city streets or even on highways. As a young man, John Stuart Mill brooded over the fact that there was an ultimate limit to the amount of music that could be produced by using the eight notes of the musical scale. But, at that time, Brahms and Tchaikovsky had not yet been born nor jazz yet conceived, and rock music was more than

a century away. Ultimate limits alone tell us virtually nothing useful about whether there is or is not a practical problem.

If we were in fact approaching those ultimate limits, whether in food supply, natural resources, or other necessities of life, their rising prices would not only inform us, but force us to change course, without public exhortations or politically-imposed limitations. Indeed, many political solutions are as inconsistent as they are counterproductive. For example, there are restrictions on the use of water by the general public, imposed by the same political authorities who supply water below cost to farmers. These farmers consequently grow crops requiring huge amounts of water from costly government irrigation projects in the California desert, instead of leaving such crops to be grown in the rainy regions of the world, where ample water is supplied free from the clouds. Although the water is costly to the government— which is to say, the taxpayers— it is cheap to the farmers, and is used as if it were abundant.

Food shortages and famines have sometimes been used as evidence that population has outgrown the food supply. But hunger and starvation in modern times have almost always reflected local problems such as crop failures in a given area, combined with difficulties in getting enough food into the stricken region fast enough to prevent death from either malnutrition or diseases to which the people have been made vulnerable by malnutrition.

In some very poor countries, the roads and other infrastructure are not sufficiently developed to carry vast amounts of food to widely scattered people with the urgency that is needed. All too often, in both poor and more affluent countries, the famines have resulted from human error or malice or military operations that disrupt food distribution systems. During the First World War, for example, the Allied naval blockade prevented food from reaching many in central Europe:

Germans were forced to eat their dogs and cats (the latter came to be known as “roof rabbits”) as well as bread made from potato peels and sawdust. Civilian deaths by starvation climbed to hundreds of thousands per year.

None of this had anything to do with overpopulation. Neither did the man-made famine in the Ukraine in the 1930s, which took millions of lives, and which Josef Stalin used to break the back of resistance to his regime.

“Overpopulation” theories do not stand up well to empirical scrutiny. But they do not have to. They have in fact remained popular for more than two centuries, in the face of large and growing evidence of their falsity. Even within Malthus’ own lifetime, his prediction that growing numbers of people tended to cause their standard of living to be reduced was falsified by empirical evidence of rising population and rising living standards occurring simultaneously. That has continued to be the general pattern ever since. Wars, natural disasters, and other local disruptions of food supplies have caused famines from time to time in various places around the world, though less so than in centuries past, when the world’s population was a fraction of what it is today. Indeed, obesity and a search for export markets for agricultural surpluses are problems for a growing number of countries today.

Even in a poverty-stricken country like India, the number of people has been nowhere close to what the land could support. A twentieth century study found:

Half the population of India lives on less than a quarter of the total available land, and one-third is concentrated on less than 6 percent of the land. At the other extreme, vast areas continue to be almost uninhabited.

In centuries past, similar conditions were found in Eastern Europe, where Western observers often commented on the emptiness of the land and its fertility, even though the people of Eastern Europe were typically much poorer than the people of Western Europe, where population densities were greater. These circumstances led many Eastern European rulers to recruit German farmers to come settle in their domains and even to allow them to live under German law in the places where they settled. Clearly the poverty of Eastern Europe was not due to “overpopulation.”

Photographs of crowded cities in Third World countries may create the impression that there is not enough room for the populations of these countries and that this somehow accounts for their poverty. However,

crowding is what cities are all about, whether in poor countries or in rich countries. Park Avenue has more people per square mile than in many Third World villages or urban slums. Crowding lowers the cost per person of supplying everything from electricity to running water to sewage lines, movie theaters and ambulance services. That is why there have been crowded cities in countries with vast amounts of open space, whether in twentieth century India or nineteenth century America.

FOREIGN INVESTMENT

Thus far we have been considering factors which promote or retard the economic development of a given country or region from within that country or region. Much economic development, however, has been created in particular places and times by foreigners investing their money, technology or skills. This has been done in a variety of ways, through private investors, financial institutions or business enterprises, and the recipient countries have ranged from sovereign states to colonies of imperial powers.

Private Investment

Although Britain led the world into the age of the industrial revolution, in earlier centuries Britain was one of the more technologically backward nations of Western Europe. An influx of immigrants, often refugees from religious or other persecutions but sometimes just immigrants seeking greater freedom or economic opportunity, brought to the British Isles valuable skills in industry, commerce, or finance.

These included Huguenots who created a watch industry that had never existed in Britain before, Germans who built the first pianos in Britain, and Lombards and Jews who at one time were the principal groups running London’s financial institutions. The reliability and impartiality of British law also attracted investments from continental Europe. All of this developed not only the British economy but also the British people, who

eventually became by the nineteenth century the leading industrial, commercial, and financial people in the world. Now Britain was exporting capital, on net balance, instead of importing it. By the end of the nineteenth century and the early years of the twentieth half of all international investments in the world came from London. Britain now exported more than half its capital in the years immediately before the First World War.

The United States was likewise transformed from a predominantly agricultural nation to an industrial power with the aid of skills, talents, and technologies brought to the country by massive inflows of immigrants from Europe, and with vast amounts of foreign investments which helped build such infrastructure as canals and railroads in the nineteenth century. Moreover, the United States continued to be the world’s leading recipient of foreign investment on into the twenty-first century. Nor was the United States unique in being developed with the help of overseas investors. On the eve of the First World War, foreigners owned one-fifth of the Australian economy and one-half of the economy of Argentina.

None of this meant that these nations were passively dependent on foreigners. The internal circumstances of these nations were crucial in determining whether foreign investment poured in. At a minimum, foreign investors had to be able to rely on having their investments remain their private property, rather than being subject to confiscation or “nationalization” as it is phrased politically. The local economy also had to have whatever was needed to complement the investors’ capital, whether that was natural resources, suitable labor, technology or infrastructure. Differences among nations in all these respects have led to highly disparate amounts of foreign investments coming into different countries.

How the native-born population responded to the influx of foreignborn people with skills that they lacked was also a crucial factor. Nineteenth century Japanese, for example, not only welcomed but recruited these foreigners with the skills and experience to industrialize Japan, while they sent many of their own young people to more industrially advanced countries as students to acquire such skills themselves. But twentieth century Malays remained largely spectators as Europeans, Chinese, and people from India created a modern industrial and commercial economy in

colonial Malaya and then in an independent Malaysia. Indeed, Malays resented all three and, after independence, greatly restricted the economic activities and educational opportunities of the Chinese and Indian minorities. Among nations lagging in economic development, what happened in nineteenth century Japan was the exception and what happened with the Malays has been the rule. Accordingly, the dramatic rise of Japan from a poor and backward nation in the nineteenth century to one of the most advanced and prosperous nations in the world during the twentieth century has likewise been the exception rather than the rule.

In short, it has not been simply a lack of financial or human capital which has retarded the economic development of many poorer countries but the active suppression of both. Sometimes this has been simply a political expression of popular resentments of foreigners or domestic minorities visibly more prosperous and more industrially or commercially advanced than the indigenous people. This pattern has been widespread, from the resentments of the Indians and Pakistanis by indigenous populations in East Africa to the resentments of the Lebanese in West Africa, the British in Argentina, the Jews in Eastern Europe, the Armenians in the Ottoman Empire, the Chinese throughout Southeast Asia, and many indigenous minorities such as the Marwaris in India’s state of Assam and the Ibos in northern Nigeria.

Sometimes the resistance to foreign capital has been ideological, based on Marxist-Leninist theories of international exploitation, “dependency” theory in Latin America, or a more amorphous belief that foreigners could prosper only at the expense of the local population. The magnitude of the self-inflicted economic losses from rejection and suppression of foreign financial and human capital can be estimated from the dramatic increases in economic development in both China and India after such restrictive policies were eased in both countries toward the end of the twentieth century. Economic growth rates rose rapidly in China and India after such restrictions were greatly reduced, and tens of millions of people in both countries rose out of poverty.

Foreign Aid

Another source of foreign financial and human capital— transfers of wealth to governments in poorer countries from governments in more prosperous countries or from international agencies— does not have nearly as good a track record. While these kinds of transfers have been called “foreign aid,” it is an open question whether or how much this process has in fact aided poorer countries to rise out of their poverty. Moreover, the amount of private capital going to Third World nations is many times the amount of foreign aid, even though most private capital goes to prosperous nations rather than poor nations. Indeed, the amount of remittances from Third World citizens living abroad exceeds all the foreign aid in the world.

Not only are there countries where massive amounts of foreign aid have failed to increase the output per capita, on which a rising standard of living depends, South Korea is a country whose rise from abysmal poverty to one of the more prosperous nations in the world began right after the United States drastically reduced foreign aid. As of 1960, South Korea’s real per capita income was below that of Haiti, which has long been one of the most poverty-stricken nations on earth. Massive American aid during the 1950s— amounting to 10 percent of South Korea’s total output— failed to change that. The change came after that aid began to disappear:

But aid peaked in 1957, and by the early 1960s Korea could no longer count on it to sustain what was a relatively low rate of investment. Nevertheless, by the mid-1960s, Korea had turned itself around and achieved an unprecedented near-double-digit growth rate. And by the mid-1980s, it had acquired the status of an upper-middle-income country.

All of this was contrary to prevailing opinions among “experts” on development. As of 1951, the “consensus view in the United States was that whereas the East Asian countries, such as the Republic of Korea, were likely to turn into basket cases, India and Africa would quickly grow out of poverty.” This view “was shared by the scholarly community, which flocked to study India as the model of economic development.” The passage of time revealed how painfully, and even tragically, mistaken this view of the prospects of India and Africa was, as India grew very slowly and many sub-

Saharan African nations were poorer, decades after independence, than they had been during the colonial era. Not only were the predictions of development “experts” wrong as regards which countries were more likely to grow out of poverty, more fundamentally they were mistaken as to the causes and cures of Third World poverty.

If subjugation to imperialist and industrialized nations was the cause of Third World poverty, as was widely assumed, then obviously the achievement of independence should have led to rising standards of living and rising economic growth rates in the formerly subjugated nations in Africa and Asia. If economic dependence on foreign investors, as in much of Latin America, was the reason for the countries in that region lagging behind the rest of the Western world economically, then policies to keep out foreign investors and depend on internal development were the obvious remedies— and the remedies adopted both in much of Latin American and initially in South Korea. In both places, there were policies restricting foreign trade and foreign investment, and policies aimed at producing domestically the things that had formerly been imported. It took years in South Korea, and decades in Latin America, for the repeated failures of these policies to eventually bring about a change in policies.

Economic growth rose in both places when they opened their economies to the world market, as well as freeing their economies from many domestic regulations. India and China likewise had large increases in their economic growth rates after their markets were freed from many government restrictions that had previously applied both domestically and internationally.

SUMMARY AND IMPLICATIONS

Many of the most popular explanations of vast differences in economic development among nations are also among the most readily refutable. “Overpopulation” theories can seldom survive the process of definition, much less the test of empirical evidence. Neither do most “exploitation” theories. It might seem that natural resources would be a major factor in a

country’s prosperity or poverty but there are too many high-income countries with meager natural resources— Switzerland and Japan, for example— and too many low-income countries with rich resources, such as Chile and South Africa. Technology can be important but much technology from advanced industrial nations has been transferred to subSaharan Africa and failed to become economically viable without the complementary factors of skills and experience, or even attention to maintenance.

In another sense, however, less economically developed nations have been able to “leap-frog” over some stages of development which more economically advanced nations went through to reach their current levels of technology. For example, most modern industrialized nations went through a stage when they had to invest vast sums of wealth in the creation of telephone networks of wires and conduits— a cost beyond the means of poor, thinly populated countries such as those in sub-Saharan Africa, where the cost per person would be prohibitive. However, the development of cellular telephones in the late twentieth century enabled many Africans to have phone service without such massive investments in infrastructure. In 2008, The Economist magazine reported, “in Africa, people who live in mud huts use mobile phones to pay bills or to check fish prices and find the best market for their catch.”

The ultimate economic factor is the human factor. Even such a major factor as geography exerts much, if not most, of its effects through its expanding or restricting the cultural universe from which given peoples can draw on other peoples, near and far. As already noted, when Europeans first crossed the Atlantic to settle in the Western Hemisphere, they were able to find their way where only water could be seen from horizon to horizon by using astronomy, compasses and a numbering system all first developed outside of Europe. People cut off from such sources of foreign knowledge by geographic barriers would have had a far more daunting task. People kept out of touch with most of the rest of the human race by geographic barriers would likewise find it difficult to match the progress of people able to draw on many cultures. Narrow, inbred cultures have often been