In an era that pays homage to globalization and the supposedly "flat" world, it's an astonishing thing: Crossing the border from Latin America into the United States "appears to make the productivity of a low-skilled worker ten to twenty times higher, based on the wage differential."
So say Arnold Kling and Nick Schulz in their new book, From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and The Lasting Triumph over Scarcity, which may make a lot of readers think differently about the importance of national borders.
The authors quote the director emeritus of the McKinsey Global Institute, William Lewis: "We compared the construction industry in the U.S. with construction in Brazil and found that in Houston, the U.S. industry was using Mexican agricultural workers who were illiterate and didn't speak English. They were not any different than the agricultural workers who were building similar high rises in Sao Paolo, say. And yet they were working at four times the productivity."
More differences as a result of borders: The book reproduces a chart of per capita GDP in 1997 that places North Korea at $700, South Korea at $13,590. Communist China's GDP was $3,130 per capita, while Taiwan's was $14,170.
What accounts for the differences between countries with similar populations or geographies? The authors chalk it up to a kind of "software" that encourages entrepreneurship and growth: property rights, the rule of law, a government that isn't too intrusive. A strength of this book, though, is that rather than offering exclusively their own ideas, the authors get out and do some reporting, interviewing professors who have thought about these issues, including four Nobel laureate economists: Robert Fogel, Robert Solow, Douglass North, and Edmund Phelps.
One consensus that emerges among both the Nobel laureates and the others interviewed for this book is that Friedrich Hayek was a giant. And not only because they are concerned, as Richard Ebeling warned the other day, that recent expansion of government means that we are on a "new road to serfdom."
Professor North, who says, "You cannot separate economics from political science and sociology at all. All of the interesting issues are on the borders between them," describes Hayek as "the most important social scientist of modern times."
Professor Phelps names Hayek as one of a "few subtle minds."
Another professor, William Easterly, says, "I'm a fan of Friedrich Hayek; he was amazingly ahead of his time in his understanding of an economy as a kind of spontaneous order."
And another, Amar Bhide, says, "There was a very nice lecture by Friedrich Hayek in 1974, where he talked about this almost ritualistic preference for only studying things that can be measured."
So if there is a message to take away from this book other than that borders matter, it is that it's worth reading Hayek. Good starting points are The Road to Serfdom and The Fatal Conceit. For those seeking something shorter, free of charge, the Institute of Economic Affairs has made available Hayek's 1973 lecture (pdf) "Economic Freedom and Representative Government."
One of the virtues, or drawbacks, of having a book composed of a bunch of interviews is that the interviewees don't always agree with each other, or with the authors. Professor Fogel, for example, remarks that if trends continue, by 2030 or 2040 "China will be bigger than the United States and Europe put together" in terms of the size of its economy. China's lack of political freedom and the large role that government plays in its economy is left largely unexplored.
Professor Solow observes, "It is far from obvious to me that the way to foster competition is to leave the private sector alone."
Sometimes the people the authors interview say interesting things. A fellow at Stanford University, Paul Romer points out that technological advances needn't be all advanced electronics, but can be as simple as "somebody figuring out how to design the coffee cup so that different-size coffee cups could all use the same size lid." Or, even better: "there's a recipe out there that you could use to just assemble carbon, oxygen, and hydrogen atoms, and that if you just use the right recipe to put them together, it will make a factory that will be smaller than a car, that will be mobile, that will seek out some renewable input that will convert into some chemical that humans want, that will be self-healing whenever it gets injured, that will maintain sterile conditions, and that will even make a replica of itself when one generation breaks down." Sound implausible? "It already exists in the form of a dairy cow."
Other times, the people the authors interview say things that aren't particularly convincing, and that one wishes the interviewers would challenge a bit more. A professor at Northwestern University, Joel Mokyr, says, "Every act of invention is an act of rebellion…a highly religious society that believes that all wisdom was revealed to our forefathers isn't going to be very innovative." Yet some of the leading American revolutionaries – an innovation if there ever was one – were quite religious, as I describe in my biography of Samuel Adams.
The authors bring a tone that at times is excessively didactic, along with their own sometimes questionable assertions, such as, "The provision of meat inspections and bank deposit insurance and regulation are examples of practices where the United States has developed effective systems on which all of us rely." It's not entirely clear that the meat inspection system meets the "effective" hurdle, and as for the dangers of deposit insurance, ask Charles Calomiris.
Tribalism is described by the authors as a "bug" in the same category as "corruption" and "insecure property rights," overlooking the way that tribes can actually contribute to growth. The authors might consider Thomas Sowell's book Migrations and Cultures, or even their own interview with William Easterly in which he talks of spontaneous order, or "social pressure to follow the rules." That pressure, and the trust that is its consequence, can be stronger within groups. In the same section on the evils of tribalism, the authors warn that "when an ethnic minority achieves economic success, the majority may choose discrimination, or even genocide, to redress the imbalance." This veers uncomfortably close to blaming the victim; even members of majority groups who are economically successful can be resented, after all.
In other areas, the authors bring a welcome appreciation of the dynamism and power of capitalism and of the threat that big government can pose. Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list through 1997, they write, explaining that "the tendency of government regulation to benefit incumbents and thwart new entrants means that regulation represents a threat to dynamic efficiency."
Government "does not face competitive pressure, and so it does not fix its problems," they write. That's a slight overstatement. After all, state and local governments do face competitive pressure from their neighbors, and even national governments are subject to market forces, as demonstrated by the weakening of the dollar as measured against gold and by the flight of manufacturing jobs from America to overseas. Within politics, there is competitive pressure between political parties that can sometimes result in incumbents being thrown out and new administrations or congressional leaders being installed to fix problems, as President Reagan fixed the problem of high taxes and a weak military.
Still, it's hard to argue with the example the authors give to support their assertion about government not fixing its problems: the mohair subsidy, established in 1955 to assure wool for uniforms, lives on, restored after being eliminated: "The mohair subsidy's beneficiaries are in a position to lobby effectively, while the taxpayers who would benefit from ending the subsidy are diffuse and unorganized." If more taxpayers read this book they'd be better prepared to vote for policies that keep America a place where workers become more, not less, productive, when they arrive here from their countries of origin.
(FTC-mandated disclosures: The publisher sent me a free copy of this book, and if you buy a book from this site with an Amazon.com link, Amazon shares with us a fraction of the revenue.)