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

impoverished cultures, and impoverished cultures have usually meant economically impoverished people.

The massive transplantations of people from one part of the world to another, made possible by the transportation revolutions of the past few centuries, have meant that people with a given culture often settle in a very different environment from that in which their culture evolved and among other peoples with very different cultures. The most dramatic examples may be the Europeans who settled the Western Hemisphere but there have at one time or other been more people from India living in Fiji than there were indigenous Fijians and in medieval times there were often more Germans than Slavs living in the cities of Slavic Eastern Europe, even though Slavs predominated in the surrounding countrysides.

Even cultures fortunate enough to be exposed to other cultures may be exposed to different cross-currents of cultures, depending on where a particular culture is located and what their own geographic setting and historic influences have created— as well as how receptive or resistant they are to outside cultures. Spain and the Western Hemisphere nations formed by the culture brought by Spanish conquerors have been different from Britain and the Western Hemisphere nations formed by the culture brought by British conquerors. Both political and military events have added their influence as history unfolded. In short, peoples and their cultures have differed greatly at a given time and these differences sometimes change over time.

As already noted, Argentina went from one of the richest nations on earth at the beginning of the twentieth century to a nation in dire economic crisis at the end. Yet, just a few years later, Argentina and much of the rest of Latin America had, through changed economic and political policies, begun to have a robust rate of economic growth, lifting millions of the poorest people out of poverty. One study found that, for Latin America as a whole, about 15 million households rose out of poverty between 2002 and 2006. Yet other nations, in Latin America and elsewhere, continued to stagnate or even to deteriorate economically. With nations, as with

individuals, not all have had the same opportunities and not all have taken equal advantages of what opportunities they did have.

All the numerous and interacting factors behind economic development make it virtually impossible that different parts of the world would all have equal development, and therefore equal standards of living, at any given time. Yet the puzzlement, unease and dissatisfaction caused by seeing large economic disparities between societies have created demands for explanations— usually without creating an equal demand for years of study of the historical, geographic, and economic factors behind these disparities. Instead, there has been a demand for simple and emotionally satisfying explanations, especially melodramatic explanations with ideological overtones, such as “exploitation” theories. “Overpopulation” is also a simple explanation that lends itself to melodrama and to solutions favored by those inclined toward controlling other people’s lives.

Exploitation theories explain the wealth of some by the poverty of others, whether comparing nations or classes within a given nation. Sadly, however, many of those who are said to be exploited have had very little to exploit and many of those described as “dispossessed” have never possessed very much in the first place. Moreover, the actual behavior of those described as exploiters often shows them shunning those that they are said to exploit, in favor of dealing with more prosperous people, from whom they expect to earn more money. Thus, most American international trade and investment goes to high-income nations like those in Western Europe or the more prosperous regions of Asia, such as Japan or Singapore, with only a minute fraction of that trade or investment going to Africa or to the more poverty stricken regions of Asia or the Middle East. Conversely, the United States is itself the largest recipient of investments by foreigners. Similarly, within the United States, capitalists are far more anxious to establish businesses in middle class or wealthy communities, rather than businesses in blighted ghettos or on poverty-stricken Indian reservations.

At particular times and places in history, conquerors have indeed extracted wealth from the conquered peoples, but the real question is: How much of today’s economic differences between nations and peoples does that explain? Spain, for example, extracted vast amounts of gold and silver from

its conquered lands and peoples in the Western Hemisphere, at great economic and human costs to those who were subjugated. But much of this wealth was quickly spent, buying imported goods from other countries, rather than developing Spain itself, which has remained one of the poorer nations in Western Europe. Meanwhile, Germany— lacking colonies of any serious economic consequence for the German economy, for most of its history— became one of the most prosperous nations in Europe. Switzerland and Sweden have had no colonies at all and yet have been among the most prosperous countries in Europe and the world.

In Asia, Japan embarked on an ambitious campaign of conquest in the twentieth century and its behavior toward its conquered fellow Asians was as brutal and ruthless as that of Spain toward those whom it had subjugated in the Western Hemisphere. Moreover, Japan used its own lack of natural resources as a justification for its actions. Yet, after Japan’s defeat in World War II led to the loss of all its colonies and conquered lands, the Japanese economy not only recovered from the devastations of war, it rose to new heights. The natural resources that it lacked could be bought in international markets for less than the cost of conquering other countries and maintaining armies there to keep them subjugated.

Exploitation theories are sometimes based on assumptions of ignorance and naivete on the part of some groups, such as Third World peoples, as well as wily and unscrupulous outsiders who are able to make high profits from paying the indigenous people less than their goods are really worth in the world market. Obviously, everyone is ignorant of things they have not encountered before and those living in isolated parts of the world place whatever value they do on new products, based in part on their novelty. But the question is: How long can such a situation last? More specifically, can it last long enough to explain international differences in income and wealth that go on for centuries? An observer writing about West Africa, early in the twentieth century, reported that the ability of foreign traders to obtain much gold and ivory in that region for a little inexpensive colored cloth and cheap knives had already been ended by the growth of competition, and that consequently “the margin of profit was diminished.” This is what anyone should have expected on the basis of elementary economic principles. Dated

anecdotes from the earlier period might continue to be repeated for many years afterward, but the only current exploitation they demonstrate is exploitation of the gullibility of those who are led to believe that this represents a serious explanation of international economic differences.

Exploitation theories are part of a larger and more general category of external explanations of differences in income and wealth among peoples and nations. Strictly geographical explanations which explain such differences simply in terms of the presence or absence of valuable natural resources or of favorable climate or fertile soil are likewise external explanations. Internal explanations would include the cultures of the people themselves, even if these cultures have historically been influenced by geographical factors. However these cultures have come about and whatever the influence of geography, history, religion, or politics, these cultures are at any given place and time a fact of life, as each group trails the long shadow of its cultural heritage. As a noted historian once said: “We do not live in the past, but the past in us.”

As each social, ethnic or other group, and each nation, has had a different past they almost inevitably have a different present and face different prospects for the future. Cultures in which females are seldom educated to the same level as males have forfeited much of the potential of half their populations. Cultures in which books and computers are far more widespread, and attract far more interest, than in other cultures have far more options and outlets for the development of their people’s native talents. Demographic differences among groups and nations are among the other internal factors which can have major influences on their economic fate. A nation where the average age is under twenty, as in Yemen or Afghanistan, cannot have accumulated as much human capital— skills, experience, education— per person as a nation where the average age is around forty, as in Germany or Italy.

The difference between internal and external explanations of economic disparities is more than academic. These different kinds of explanations point in radically different directions when it comes to choices of what to do about these disparities. Exploitation theories, for example, point toward liberation from the exploiters, or at least withdrawal from transactions with

them, as the way to prosper more in the future than in the past. Cultural explanations, however, would suggest more contact with more successful cultures and perhaps emulation of them in some respects. External explanations in general tend to be more psychologically acceptable and more politically attractive than internal explanations which can sound like “blaming the victim.” But which kinds of explanations actually apply to given peoples at a given time is another question entirely.

No single factor can account for the large disparities in economic development among the countries of the world. Nor is the relative influence of any particular factor likely to remain the same over time. Although various geographic factors have played a major role in the economic opportunities available to various peoples, economic development also affects the influence of geography. The invention of railroads and trucks has made available low-cost transport for the first time in regions lacking in navigable waterways and draft animals, such as much of West Africa. Production and sales of cocoa, cotton, and tin began to flourish on a large scale in that part of the world after railroads replaced the costly use of human porters, who were very limited in the size of the loads they could carry. Even mountains became less formidable barriers after techniques of tunneling and blasting through them developed, while airplanes have flown over these mountains and shrunk the role of distance in general. Portable radios and cellular telephones made long-distance communications possible for the first time in many poor and isolated areas, and the Internet has put the peoples of the whole world in instant communication with one another. In short, economic development has reduced the role of geographic factors, which had played such a major role in both advancing and retarding economic development.

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S O U R C E S

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1987. Karl Marx’s comment is from a letter to Friedrich Engels dated February 3, 1851 and reprinted on page 275 of Volume 38 of their Collected Works in the edition published in Moscow in 1982. William E. Simon’s remarks about testifying before Congress are quoted from page 61 of A Gift of Freedom by John J. Miller. The comment by Professor N. Gregory Mankiw is from an op-ed column of his titled “How to Avoid Recession? Let the Fed Work” on page 4 of the business section of the New York Times of December 23, 2007. Job and profit losses in steel-using industries in the wake of policies to protect the steel-producing industry are discussed in an article titled “Sparks Fly over Steel” on pages 57–58 of the November 15, 2003 issue of The Economist. Results of the effect of the Americans with Disabilities Act on the employment of the disabled are cited on page 18 of the New York Times Magazine of January 20, 2008, in an article titled “Unintended Consequences: Why Do Well-Meaning Laws Backfire?” Data on spending and taxing in New York City are from pages 27–35 of the Winter 2003 issue of City Journal, in an article titled “Bloomberg to City: Drop Dead.” The fact that 17 million Americans lost their jobs in the years 1990–1995 was reported on page 7 of an article titled “The Upside of Downsizing” from the November/December 1996 issue of The Southwest Economy, published by the Federal Reserve Bank of Dallas. Adam Smith’s comments on the neglect of infrastructure in 18th century France are on pages 687 and 688 of his The Wealth of Nations, 1937 Modern Library edition.

CHAPTER 2: FREE AND UNFREE LABOR

Information on debt peonage in India is from pages 80–88 of the April 2002 issue of Scientific American, in an article titled “The Social Psychology of Modern Slavery.” The fact that some slaves in ancient Greece lived and worked apart from their owners is mentioned on page 12 of The Slave Systems of Greek and Roman Antiquity by William L. Westermann. Data on the number of hours worked by the top and bottom 20 percent of American families is from page 27 of Income and Wealth by Alan Reynolds. The