The purpose of our studying economics is to work out what makes life better for people so that we can recommend, obviously enough, that politicians start doing those things. Possibly even that we can get everyone to be doing those things which demonstrably improve lives.
We could, and should, also pop into this consideration what we know about our own position through our studies of economics. For example, that resources are scarce. We cannot do everything, there’s just not enough -- enough of anything, time, money, labour, whatever -- to do all therefore we’ve got to puzzle out what works best. Then we go do what works that best and we improve peoples’ lives by as much as it is possible to do so within the constraints of the resources we have available. Which is the best we can do.
The lesson of some recent research is that we’re not doing this so clearly we must change our ways so that we are.
The paper is “Alleviating Global Poverty
” by economist Lant Pritchett of Harvard of University, and it considers three entirely different sets of policies, all of which, we agree, make lives better for people.
But we’d like to maximize how much better lives get given what we can devote to making them so thus we want the best method, not just one that works a bit.
As Adam Smith put it: Peace, easy taxes and the tolerable administration of justice are all that are required to produce opulence from barbarism
The end answer of this consideration is that we really should change, near entirely, what it is that we do.
Stop most development aid in the sense of funding specific projects and interventions. Equally, domestic governments should stop doing most of what they do in terms of that development. Instead, go for the gusto with flat out economic growth.
There is one thing that works even better -- mass immigration, but that runs up against political constraints. That immigration works because so much of how rich we are depends upon how productive we are. That, in turn, depends much less on ourselves, even our education of skills, and much more on where we happen to be.
This is obvious when we think about it; a skilled computer programmer wouldn’t have got far in the Bengal of 1700, just before the British arrived. Equally, today, a skilled computer programmer would do very much better by moving to Silicon Valley rather than staying in Chittagong.
It’s not the skill itself, but the time and place which makes the really big difference.
Thus, the easiest way to make a big change to someone’s living standards is to take them out of a poor country and put them into a rich one.
By definition, labour is more productive in a rich country -- that’s what an economy being richer means, that labour is more productive. Take someone from Dhaka and put them in Doncaster and their income will rise substantially.
This poverty reduction method does run into a limiting factor. We can’t move entire populations thus this won’t create better living standards for all.
At the other end is the sort of targeted intervention so beloved of governments and development agencies. Let’s have a project for chili pepper growers in the upstream upazilas. Or train the leather tanners better. Or empower women in the garment factories. These might all be good ideas and they’ll improve lives, yes. But not by very much.
The insight here is that where there are really big gains to be had from such projects then without the aid or the government they’d already be done. We’re not stupid, we humans, and the poor aren’t stupid either.
Something which doubles the investment into it is something which happens. The sorts of things aid or government do or fund have 5% and 10% returns, nice to have but not transformational in terms of lifestyle. And also only marginally worth it in investment returns.
Nestling in between these two is just speedy economic growth in general. This has the advantage that it’s not limited as the migration issue is. It can, often it has, raise the living standards of everyone in the place of country. There are no losers in our usual economic terms.
The impact of this is hugely, vastly, greater than that of any form of foreign aid or detailed program to redistribute incomes or make life better for any one group of people. It’s the only economic program that comes anywhere near close to the impact of migration upon living standards and, as above, it’s not limited as to the number who can enjoy it.
Which brings us to that rather utilitarian calculation which is at the heart of all of this. We’ve a limited number of resources we can devote to making life better for people. The one that works best is economic growth. Therefore, we should be devoting our resources to economic growth, not anything else, if our purpose is indeed to make life better.
Within this structure there’s one particular change that has produced the most benefit: The switch from socialist planning to near free market chaos in China in 1978. That’s produced more economic benefit for more people than perhaps any other single action in human history -- a fact that we should learn from.
Do what works in terms of economic growth, do it full throttle, and we’ll be doing the best we can. As China did, stop trying to plan the economy and just let the people, you and me, get on with it as we wish.
Or, as Adam Smith put it: Peace, easy taxes and the tolerable administration of justice are all that are required to produce opulence from barbarism.
He was right, as this latest paper shows.
We know what produces economic growth, any rough and ready form of free market capitalism. Given that economic growth itself is what produces the greatest rises in human well being, any rough form of free market capitalism is our best policy, isn’t it?
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London. He also writes for the Continental Telegraph