False economy

Good review from the FT, found via A New Start:

False Economy: A Surprising Economic History of the World
By Alan Beattie
Riverhead $26.95 336 pages
Published in the UK in June

False Economy is a book about how economic triumphs and disasters have shaped the world – and why it’s so hard to change the course of history once decisions have been made. The book’s central idea is that our smart or stupid choices determine whether a country’s economic development is successful – but that success is still often a surprise.

The reader has to work to arrive at this or any other central idea, however. For much of this fascinating but sometimes maddening book, Alan Beattie, the FT’s world trade editor, seems to follow Mark Twain’s famous preface to The Adventures of Huckleberry Finn: “Persons attempting to find a motive in this narrative will be prosecuted; persons attempting to find a moral in it will be banished; persons attempting to find a plot in it will be shot.”

Some themes took shape as I read – but they were often contradictory. We should learn the lessons of economic history, says Beattie, yet those lessons are often unclear.

Beattie is a legendary economic journalist, whose analytical judgment is greater than most of his peers by an amount roughly equal to the income difference he reports between Botswana and Sierra Leone.

Each chapter is themed – cities, religion and so on – and the individual stories are mesmerising. The book’s inability to convey a clear point arises because Beattie is too honest to shoehorn all his material into one comprehensive theory of what makes some countries succeed and others fail, including the twists and turns along the way.

Beattie accurately reflects the collapse in self-confidence among economists on our ability to usefully recommend how “developing” countries can rapidly develop. And he’s right about the reasons for this: both success and failure have often caught us by “surprise”, the key word in the book’s subtitle.

We are given many examples of such surprises. Theological theorists of economic success traditionally celebrated Protestantism – until Catholic Ireland, Portugal and Spain took off. They damned Confucianism, then praised it once East Asia grew. The religious determinists are still confused now about whether Islam hinders growth, when Muslim success stories such as Malaysia consistently outperform Christian comparators such as the Philippines.

As for other factors, corruption is a disaster in Africa, but apparently equal levels of corruption don’t seem to hurt East Asia, Beattie shows.

The book is rife with interesting conundrums: the Nile river valley is one of the most fertile places on earth, yet Egypt imports half of its wheat; Peru rather than California has captured the US asparagus market; West Africa is the perfect location and climate to produce cocaine for Europe, but coke is instead made in distant Colombia – then routed through West Africa.

Beattie’s explanations, the best parts of the book, are on his home turf: international trade. In a wonderful exposition that should make it into all undergraduate economics classes, Beattie argues that, fertile Nile or not, Egypt is not so much importing wheat as importing water. Only the Nile provides water for the mostly desert country. Wheat takes much water to grow, so the water imports are contained in the wheat imports. By importing wheat, Egypt conserves its own water for drinking and uses other countries’ water to grow wheat shipped to Egypt. This is a wonderful illustration of how trade allows countries to import scarce resources, buying in the goods that would use them, and export their abundant resources, by selling the goods that use those.

To Beattie, the surprising and sad thing is that there are so few “water” exchanges and other such beneficial trades. This is partly because special interests distort trade. For example, the US preaches free trade to Africa, but prefers to keep out African cotton and give $4bn in subsidies to 10,000 American cotton farmers instead. Why? Senators in those farming states would block any reform of the cotton subsidy.

Is importing Peruvian asparagus a happy counter-example of US free trade policy? Unfortunately not, Beattie tells us. It was part of a drug war programme to subsidise Peruvians to grow asparagus rather than coca leaves, giving them privileged access to the US market.

And the cocaine still pours out of Colombia, not West Africa, because even an illegal export needs good roads to get the coca leaves to the factory and then to the port. West Africa’s lack of good roads, Beattie points out, costs it much more in lost exports than even trade policies such as those on cotton.

Beattie is resolutely agnostic about how to succeed economically, which is admirable compared to the often pompous pronouncements pouring out of international agencies and think-tanks. Yet his examples suggest this agnosticism is a little overdone.

Beattie actually makes a good case for free trade, but is more comfortable pointing out paradoxes than confirming orthodoxy. He is even more uncomfortable giving any strong guidance on overall development success.

But in being so stubbornly agnostic, I think Beattie makes the same mistake as academics such as Dani Rodrik. Both Beattie and Rodrik are determined to explain all medium-term fluctuations in economic growth rates – they can’t accept that some of the idiosyncratic consequences of decisions resist explanation.

Looking in hindsight, one can emphasise the favourable factors, minimise the unfavourable factors and produce a plausible explanation. Sometimes these explanations will be orthodox economics 101 (free trade worked!); other times they will be heterodox (government industrial policy worked!). But these “explanations” cannot really be proved or disproved; each particular bout of success or failure is special. Ultimately, they give little guidance – to other countries, or even to the same country in a future period.

Economics has a better track record explaining very long run patterns of success or failure – explaining the level of development (per capita income) more than the economic growth rate. This requires economists to swallow our professional pride and admit that many fluctuations around very long run paths are indeed surprising – they will always resist explanation or prediction.

Even the long run patterns don’t explain everything; any prescription has counter- examples. We must give up the search for the grand unified theory of short run and long run growth and development, a bitter pill indeed. But at least this would keep us from chasing the ephemeral “miracles” for their unstable “lessons”, and keep us from trying to squeeze a prescription out of every last counter-example. Instead, we’d stick with ideas that, on average, for most countries, have stood the test of time.

Beattie’s supremely entertaining and informative book is a great reminder that the details of success are often impossible to predict or prescribe: no one can work out how to achieve each component. The best response is not to have increasingly convoluted advice by experts, but to let individuals with local knowledge roam free by trial and error to find their own successes.

So in the end, the economics profession does have more sensible things to say about achieving long-run success than Beattie allows: (relatively) free individuals, free markets, free trade, free thinking, and institutions that support all of the above.

William Easterly is author of ‘The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good’ (Penguin) and writes the blog ‘Aid Watch’

3 Responses to False economy

  1. Very interesting stuff, nicely reviewed.

    The blunt-instrument use of culture in economic theory certainly is problematic; eventually, though, economists might actually get some good out of anthropology and social psychology.

    Until then, I feel fully justified in making my choices among economistic explanations by intuitive historical sense.

  2. Ben says:

    well said

  3. […] first chapter has deservingly been hailed as a great piece of “what-if” history, but the part of the […]

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