Where does the money come from to pay for education in PNG?

I didn’t have any intention of thinking about economics a few weeks ago when I was on a cruise ship, the Sun Princess, visiting Papua New Guinea and the Solomon Islands. It just happened.

 If you spend a lot of your life thinking about anything you find interesting you don’t necessarily stop doing that just because you are enjoying a holiday. That is what I tell myself anyhow.

One of the reasons people go on cruises, like the one I recently enjoyed, is to see something of the culture of the people in the countries they visit. That isn’t important to everyone. Some people are more interested in scenery, bush walking, swimming, diving etc. Others just want to enjoy the amenities offered by a floating hotel.

 A substantial proportion of people on our cruise were interested in local culture and history. That judgement is based largely on attendance at the lectures offered on those topics. There were not many spare seats available in the theatre seating a few hundred people – my guess is about a quarter of passengers attended the lectures. In addition, videos of the lectures were also available for viewing in passenger cabins.

Of course, when cruise ship passengers visit any small community they don’t get to observe people going about their normal daily activities. The arrival of the cruise ship disrupts normal activities. People who usually spend their time gardening, fishing or making handicrafts become merchants, guides and entertainers. Inevitably, the role of tourists as consumers and potential benefactors influences the culture they observe.

I don’t wish to imply that the cultural experiences we were offered were not authentic. The cultural festival staged for our benefit in Alotau provided a sample of traditional singing and dancing. The houses we saw on Kiriwina Island were places where people lived; the gardens provided food that people relied on for subsistence; the canoes we saw were normally used for fishing. I didn’t get the feeling of visiting a theme park that I had at times a few years ago on an Alaskan cruise (that was nevertheless enjoyable).

Some houses on Kiriwina Island

Of the places we visited, on Kiriwina lives of the people have been least affected by western influences. Even there, however, a group of village children, who were dressed traditionally, were raising money from the tourists by singing “Twinkle, Twinkle Little Star”. When I suggested to my guide, a year 10 student at the local school, that this song was part of a universal culture, he expounded eloquently on the importance of preserving local culture. I agree with him and hope tourism will help to preserve local culture. For my guide and most locals, however, the highest priority in obtaining money from tourists was to help fund education.

Wherever we went, people were raising money to fund local schools and pay school fees. From what I have heard when I was working in PNG a few years ago, the funds raised from tourists do not all end up being used for the purpose for which funds were donated. However, there is no doubt that education is widely seen by parents as a way for their children to obtain a better future. The children in some of the groups performing for tourists on Doini Island seemed to be doing a good job of raising money by entertaining tourists whilst also helping to preserve local culture.

Children on Doini Island raising funds to build a new classroom

The main reason why the government does not do more to fund education and health services is because PNG is a low-income country, lacking the tax revenue base that would be required to fully fund schools and basic health services. Politicians have promised to increase funding but have not delivered on those promises. If taxes were raised that would have an adverse impact on incentives - including incentives for village people to become involved in the market economy - and be unlikely to raise much additional revenue. Misuse of public funds is a serious problem, but it is unrealistic to expect that a huge pool of public funds would appear to fund education and health services if corruption could be eliminated.

During our visit to Rabaul I witnessed a discussion of education funding that left me feeling frustrated. The participants were an Australian tourist and a local tour guide. The discussion occurred on a small bus taking a group of tourists to see the area that had been devastated by the eruption of Mount Tavurvur in 1994.

Visiting a volcano at Rabaul

When our guide told us that she felt fortunate to be able to take on casual work as a tourist guide to help pay for the education of her children, the Australian tourist expressed the view that the PNG government should be paying for education. She went on to tell everyone how incredibly lucky we were in Australia to have a government that paid for education, health services and pensions.

Other passengers remained silent, but a man sitting in the front seat next to the driver looked over his shoulder to see who the woman was who was doing all the talking. Unfortunately, I didn’t have the presence of mind to ask the vocal tourist how she thought our government funded education, health services and pensions.

As the cargo cult dies out in PNG, the magic pudding cult has continued to grow in Australia, apparently now even seeking converts in PNG. 

Virgin Coconut Oil Rabaul

The same tourist bus provided us with an opportunity to see a small manufacturing plant making Virgin Coconut Oil. I don’t know whether the product has the health benefits that are claimed for it, but the process by which the oil is extracted from fresh coconut meat looks as though it should produce a better product than the oil manufactured from copra exports.

 Preparing coconuts for oil extraction

Manufacturing plants like this one may have potential to generate more income for local communities than is possible by exporting copra.

Copra awaiting export at Rabaul

If I let my imagination run wild it even seems possible that the manufacture of virgin coconut oil in Rabaul could be an example of the kind of development that could play an important role in enabling more widespread economic opportunities to emerge in PNG in the years ahead. If that can happen it might even be possible for village people to purchase better and more secure access to education, health services and the other things they want. 

Coming back to earth, the manager of Virgin Coconut Oil Rabaul mentioned that the business had obtained assistance from a government agency serving grower interests, the Kokonas Indastri Koporesen (KIK). A question that raises is why such assistance is necessary if the venture has potential to be profitable and provide more attractive remuneration for labour than is otherwise available. I don’t know what services the KIK provided in this instance, but I am sure that in a more normal market economy those services could have been provided by commercial enterprises with relevant technical knowhow, marketing links and other relevant resources. So, what prevents potential commercial partners, including foreign firms, from linking up with local firms to undertake ventures of this kind?

The underlying problem, as I see it, is that the profit motive doesn’t work very well in an economic environment where investors have reason to fear that profits are not safe from potential predators, including some within government. The assistance provided by KIK to processing enterprises is valuable in demonstrating the potential for value adding activities, but does not address the underlying problem.

It is difficult to see how the underlying problem can be solved in the near future. It will take a lot more than just announcement of economic policy reforms. Meanwhile, perhaps greater economic opportunities could be generated if the KIK and other commodity boards were given a more explicit role to facilitate additional investment in agriculture and related processing activities.

Is the cycle of political complacency beginning to turn in the United States?

The villain in Tyler Cowen’s latest book, The Complacent Class: The self-defeating quest for the American Dream, is “us”. Tyler is writing about America, but much of what he has written is relevant to other high-income countries. The problem, as Tyler sees it, “is that peace and high incomes tend to drain the restlessness out of people”. Many people have become complacent – “satisfied with the status quo”. Most people don’t like change much and “they now have the resources and the technology to manage their lives on this basis more and more, to the country’s long run collective detriment”.

Tyler has not persuaded me that complacency is a problem of itself. It would be nice to be able to feel more complacent. (According to Tyler’s questionnaire - international version here - I am a striver: “You embrace newness, but you need to strive harder to break the mold”.) As I see it, complacency only becomes a problem when people are complacent about things that they have good reason to be alarmed about.

Tyler provides a fair amount of evidence that Americans have become more complacent. For example:

• ·         People now switch jobs less frequently.
• ·         Geographical mobility has declined.
• ·         There has been a decline in start-ups relative to total business activity.
• ·         There are fewer unicorns (miracle growth firms).
• ·         Market concentration has risen.
• ·         There is more pairing of like with like e.g. people are choosing marriage partners with similar education levels, and housing is more segregated by income and race.
• ·         Upward mobility in income and education has stopped rising.
• ·         People are now more inclined to stay at home and use delivery services.

That is all very interesting. It changes my perceptions about America. I have to get used to the idea that Americans are no longer as mobile and innovative as they were a couple of decades ago. But that does not necessarily mean that complacency is a problem. If peace and high incomes have made Americans more complacent, isn’t that a good thing? There is not much point in striving for more of anything once you are satisfied with what you have already. How is complacency leading to bad outcomes?

When Tyler looks in detail at some of these changing characteristics, he points to the failure of political decision-making to cope with interest groups seeking to protect themselves from change. How does complacency come into that? The NIMBY advocates who are using their political muscle to protect their interests against higher density building can hardly be described as complacent. The people at Donald Trump’s rallies who are supporting his policies to protect jobs - by reducing immigration and constraining import competition - do not seem complacent. The complacency must lie with the general public, who are not yet sufficiently outraged by the stasists to cast their votes for candidates who will constrain their political influence.

Tyler’s discussion of declining geographical mobility provides a good example of political market failure. He points to research showing potential for a substantial increase in GDP if more people were to move from low-productivity cities to high-productivity cities. Regulatory constraints prevent this from happening:

“Residents in Manhattan, San Francisco, and many other high-productivity locales just don’t want all of those new people moving in, and so they have passed overly strict building and land use regulations or in some cases they have limited infrastructure so that adding more residents just isn’t practical. Without good bus or subway connections, for instance, a lot of neighbourhoods just don’t work for people with jobs downtown”.

Tyler uses the terms ‘stasis’ and ‘dynamism’ quite frequently in this book, but I couldn’t find any reference to Virginia Postrel’s pathbreaking book on this topic, The Future and Its Enemies, published 18 years ago (my discussion here). I would have been satisfied with a footnote to explain how Tyler’s views build on, or differ from Virginia’s views. Similarly, it would have been nice to see a footnote discussing the affinity between Tyler’s views and Mancur Olson’s argument that stable societies tend to accumulate distributional coalitions that slow down their capacity to adopt new technologies and reallocate resources. See: The Rise and Decline of Nations.

Early in the book Tyler suggests that “the growing success of the forces for stasis” are linked to complacency. That argument has most force it the final chapters of the book where he discusses politics.

Tyler makes the point that much of the U.S. federal government budget is locked in to spending programs that are politically untouchable. Political change occurs at the margin and is the result of complex battles among interest groups, political manoeuvring and use of public relations campaigns. The Trump administration is unlikely to change this situation much. The pre-allocation of tax revenues will ultimately become unsustainable:

“At some point this country will face an immediate crisis, and there won’t quite be the resources, or more fundamentally the flexibility to handle it”.

Tyler presents a view about the tendency of governments to take on more responsibilities than they can cope with effectively that is similar to the view I expressed in Chapter 8 of Free to Flourish. I argued that there is a growing gap between the expectations that many people have of what democratic governments can deliver and what they are capable of delivering.

However, Tyler seems to present a more optimistic view of the ability of western democracies to reform themselves rather than to collapse and to be replaced by authoritarian regimes. That is just my impression. I find it hard to point to particular passages that support that view. The scenario that Tyler presents of a possible future that would be more dynamic does not feature less dysfunctional government, although smaller government may be implied.

Although I'm not sure why, after reading the book I was left feeling hopeful that the cycle of political complacency has reached its peak and that, over the next few years, American politics might become less shrill and more focused on problem solving. Perhaps the actions of the Trump administration will further erode political complacency in ways that will lead to a public reaction favouring a more constrained role for government. So, democracy will probably survive in the U.S. I’m also reasonably confident that a fiscal crisis in Australia will eventually result in rule changes needed to make democracy sustainable in this country. I’m less complacent about the future of democracy in some of the countries of southern Europe. 

Postscript
Tyler Cowan has provided some grounds for optimism in a recent Cato article entitled "Between authoritarianism and human capital". An extract:

"So we’re going to see a kind of intellectual war, and possibly war in other, more violent forms too. That war, using that word in the broadest sense possible, will be between today’s amazing accumulated stock of human capital — and the emotional momentum behind authoritarianism, which is encouraged by the political fraying that stems from underlying fears of disruption.

Right now, I’d still put my money on the positive side of talent and human capital. But in recent times, I can’t say I’ve seen the odds moving in my favor."

Should trade policy be about "the art of the deal" or about facilitating economic growth?

"We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs.  Protection will lead to great prosperity and strength" - Donald Trump, Inaugural Address, Jan. 20, 2017 

How should the Australian government respond to the potential for the crazy trade policies of President Trump to take the world into a new era of trade protectionism? Since Trump’s inauguration the depth of his commitment to trade protectionism has become clearer. In my view we should be prepared for the unravelling of much of the international trade liberalisation encouraged by the U.S. in the latter half of the 20^th Century.

If the Australian government continues with the current directions of international trade policy – viewing trade policy from an economic diplomacy perspective – there is a real risk that it will take ill-considered retaliatory action to foreign protectionism. Politicians who put their faith in trade diplomacy – the art of the export deal – think that they are pursuing the national interest when they make access to the Australian market contingent upon foreigners allowing our exporters to gain access to their markets. In terms of that mindset, if foreigners restrict access to their markets, it would appear logical for us to retaliate.

By contrast, political leaders who view trade policy as part of economic growth policy are more likely to keep in mind that the substantial trade liberalisation effort that Australia has made over the last 40 years has occurred unilaterally, rather than as part of any international deal. A growth policy perspective recognises the contribution that unilateral trade liberalisation has made to our prosperity.

The substantial trade liberalisation efforts made in Australia since the beginning of The Tariff Review, established in 1971, have all occurred for domestic reasons. Except for the 25 percent tariff cut of 1973, which was motivated primarily by macro-economic objectives, all of the reductions in industry assistance have occurred primarily to promote the micro-economic reform objective of providing incentives for greater productivity throughout the economy. That applies to reductions in non-tariff barriers, including reform of agricultural marketing arrangements, as well as reductions in reductions in tariff barriers.

As with other microeconomic reform policies, trade liberalisation efforts in Australia have not been pursued with equal enthusiasm by all governments. However, a sustained push toward trade liberalisation was initiated by Bob Hawke (then prime minister) and Paul Keating (treasurer) in May 1988 as part of a major package of microeconomic reform measures. In delivering the statement, Keating commented:

“The way forward for Australia is not to be closeted and sheltered, but to be open and dynamic, trading aggressively in the world. Only this kind of economy can provide the employment and rising living standards that Australians aspire to”.

In the light of the toxic political environment currently prevailing in Canberra it is worth remembering that those reforms were facilitated by support from the Liberal–National Party Opposition.

The trade liberalisation that was being undertaken in pursuit of microeconomic objectives was subsequently ­offered, and accepted, in Uruguay negotiations as our market-opening contribution to global trade reform. As the Tasman Transparency Group has noted, this approach enabled us to secure all the gains available from trade negotiations — the major gains in efficiency from reducing the barriers protecting our less competitive industries, as well as those available from access to external markets. That exercise should have provided the model for all subsequent international trade negotiations.

Unfortunately, the opportunity for further gains from the pursuit of microeconomic reforms has been missed in subsequent trade negotiations. Australia’s agenda in recent negotiations establishing a range of preferential trading agreements (PTAs) was simply a market access wish list. Following the conclusion of PTAs, governments have measured their success solely on the basis of whether the outcomes improved access to external markets.

The academic research that the Department of Foreign Affairs and Trade is now sponsoring on “the effectiveness of economic diplomacy in contributing to Australia’s exports and inflow of foreign investment” does not seem to be directed at answering a comprehensible, policy-relevant question. Research being undertaken by the Productivity Commission on implications for Australia’s trade policy of possible international shifts towards a more protectionist stance seems more likely to provide a basis for sensible policy development.

Previous research on the consequences of PTAs suggests that there are no grounds for complacency that the economic benefits even exceed costs. For example, using an analytical framework developed by the Productivity Commission to assess our much-heralded trade agreement with the United States, Australian National University economist Shiro Armstrong found that the agreement was responsible for reducing — or ­diverting — $53.1 billion of trade with the rest of the world. He has suggested that “the data shows that … Australia and the United States … are worse off than they would have been without the agreement”. 

Recent Australian governments have at times acknowledged that trade policy should be part of a wider productivity promoting agenda. Nevertheless, the government seems to have been at a loss to know how to counter the argument that Australian governments should be seeking to provide a level playing field for domestic industries vis a vis subsidized foreign competitors. This argument has figured prominently in lobbying in some quarters for further government assistance by way of anti-dumping action and government procurement preferences. The government has been slow to point out that if we are to use a playing field analogy – and our interest is in promoting the wellbeing of Australians rather than conducting trade wars – the relevant basis for comparison is the relative assistance levels of different Australian industries. As a rule, if industries need assistance to compete internationally, they can’t be making efficient use of resources. 

If the Australian government is serious about its commitment to lift national productivity it should place trade policy in the Treasury department – the department with central responsibility for facilitating economic growth. This would add some much-needed economic discipline to the conduct of trade policy as we face a more difficult world trading environment. The last thing we need in this environment is a bureaucratic structure for trade policy that is biased toward mindless deal-making and retaliation

Does Henry George have the answer to funding basic income?

The idea of a government-funded basic income or social dividend has been around for at least a couple of centuries. It has been supported by some prominent advocates of individual liberty as well as by collectivists. For example, it was proposed as an alternative to existing welfare systems by Milton Friedman in the 1960s (as a negative income tax) and by Charles Murray (as an unconditional basic income for all adults) in In Our Hands, published in 2006. More recently Elon Musk among others, has suggested a government-provided unconditional and universal basic income (UBI) as a solution to the hypothetical problem of ensuring that people have adequate incomes when their jobs are displaced by automation.

That problem is hypothetical because it seems reasonable to expect - at a national level and over the longer term - that jobs displaced by automation will be replaced by more highly paid jobs. That is what happened with jobs displaced by mechanisation during the 19^th and 20^th centuries. No persuasive evidence has emerged to support the view that the effects of automation will differ in that respect. Nevertheless, UBIs might appear to be an attractive social/political insurance policy, just in case automation does result in widespread loss of income-earning opportunities.

The idea that one day most of the population will depend on UBIs as their main source of income strikes me as inherently unappealing. Historically, individual human flourishing has been closely related to the self-respect that comes from earning a living, which is absent when people are able to live on “sit-down money” – an appropirate term used by some Australian aborigines to describe welfare benefits.  Robert Colvile has provided references to research relating to disincentive impacts of UBIs in a recent FEE article.

I want to focus here on a question of practicability: Is there some easy way for a government raise sufficient additional revenue to fund a UBI to reinforce expectations that the benefits of future economic growth will be widely shared? How could substantial additional revenue be raised without stifling the economic growth process? As I contemplated those questions the thought crossed my mind that if I was back working in the Australian public service (heaven forbid!) and was asked to recommend a way to raise more tax revenue, I might suggest more reliance on taxes on the unimproved value of land, as proposed in Australia's Henry report, and as suggested much earlier by Henry George in Progress and Poverty (first published in 1879). Land taxes get a fair amount of support among economists, including some who write for The Economist.

At some point it occurred to me that I should actually read Progress and Poverty – or at least, the 2006 version, edited and abridged by Bob Drake – rather than rely on second hand reports. As I read about Henry George’s theory of wages and interest it became clearer to me why he was viewed as a crack-pot by some of the people who taught me economics. For example, by rearranging the identity, Production = Rent + Wages + Interest, he concludes: “wages and interest do not depend on what labour and capital produce – they depend on what is left after rent is taken out”. Of course, if you rearrange the terms another way, rent would appear as the residual after payment of wages and interest. Modern economists should not be overly critical, however, because George wrote Progress and Poverty before John Bates Clark had made his contribution to the marginal productivity theory of distribution - and Clark apparently attributed his conception of the marginal productivity of labour to George’s theory of rent.

Henry George provides an interesting discussion of the way site rent rises with economic development. He asks readers to imagine a vast unbounded savanna. Every acre seems as good as any other for the first family to arrive, so they make a home somewhere, anywhere. When other families arrive, one location is clearly better than the others, that is close to the family that has already settled. Having a neighbour provides opportunities for the families to help each other. As more people arrive, a village is established to enable people to obtain advantages from local specialization and trade. As the village grows into a town and then into a city, the productivity of the original land increases. As a consequence: “Rent – which measures the difference between this increased productivity and that of the least productive land in use – has increased accordingly”. The original owners of the land become rich “not from anything they have done, but from the increase in population”.

George recognised that advances in technology, improvements in manners and morals and government policy reforms (e.g. free trade) also increase the productivity of land, and increase rents.

Following David Ricardo and John Stuart Mill, George argued that a tax on rent would fall wholly on land owners. He went further, however, in suggesting that all rent could be taxed away for the benefit of society without ill-effect. He suggested that returns to labour would thereby be enhanced:

“When all rent is taken by taxation for the needs of the community, equality will be attained. No citizen will have an advantage over any other, except through personal industry, skill, and intelligence. People will gain what they fairly earn. Only then, and not until then, will labor get its full reward, and capital its natural return”.

Henry George was correct to argue that, from an economic efficiency perspective, rent taxes are superior to most other taxes because they have a smaller impact on productive effort and investment. However, it is hard to see how a large increase in land taxes could be viewed as providing an equitable sharing of tax burden. Consider two people who have equal wealth, the wealth of A is in entirely in land and the wealth of the B is entirely in shares in companies that do not own land. Would you view it to be equitable for a government to introduce a tax that would take away a large slice of the wealth of A, while leaving the wealth of B unaffected?

Perhaps that inequity could be overcome by announcing that the new land tax will only apply to future increases in land values. However, the deadweight costs of a tax on future increases in land values would not be negligible. For example, consider a firm that is planning to build a very fast train and considering whether a stopping point along the route should be at City X or City Y. The firm is buying land along the route because it needs to capture some of the expected appreciation in land values to make its investment worthwhile. The firm’s investment appraisal suggests that City X would be the best location. However, it subsequently learns that City X is contemplating a substantial tax on future increases in land values, while City Y has no such plans. That information obviously has potential to tip the balance in favour of City Y, resulting in a less efficient allocation of investment.

The potential deadweight costs of land taxes have been explored in more depth by others, including Bryan Caplan and Zachary Gochenour.

My bottom line: Land taxes are better than many existing taxes (much better than taxes on land transfers) but they don’t offer a costless way to fund the substantial additional revenue that would be required to fund an unconditional basic income sufficient to meet reasonable expectations of a widely-shared dividend from future economic growth. If land taxes can’t do it, I doubt whether any tax-transfer proposal can achieve that objective. One way or another, even when robots do most of the work currently done by humans, humans will still need to earn the bulk of the incomes they live on - including by inventing and improving robots, servicing and managing them, and owning them.

How did the culture of growth evolve?

There can be little doubt that a change in attitude toward nature and the ability to harness it to human needs, that occurred among an educated elite in Europe in the period 1500 to 1700, paved the way for the industrial enlightenment in Britain, and the subsequent economic growth that has since benefited much of the world’s population. Joel Mokyr’s recent book, A Culture of Growth: The origins of the modern economy, explains that change of attitude in terms of cultural evolution.

Since cultural evolution involves individuals in making choices that change their beliefs, values and preferences it might be expected to be a gradual process. However, Mokyr uses cultural evolution to explain the large, discontinuous change in attitudes that occurred in Europe by pointing to: factors causing resistance to such change throughout the world; factors specific to Europe leading to a weakening of such resistance; and specific change agents espousing the cultural change that occurred. At the risk of over-simplifying the author’s scholarly efforts I will attempt to outline his thesis below.

Early modern Europe was a deeply religious age. The great Thomist synthesis, in which Christianity was merged with Aristotelian physics and metaphysics became a deeply entrenched dogma. The prevailing culture discouraged potential innovators from openly challenging this dogma. Science had previously flourished during some periods other parts of the world. It flourished in the first centuries of Islam, but was subsequently held back by mystical religious dogmas. It flourished in China during the Tang and Song dynasties (618-907 and 960-1127), but stagnated during the Ming and Quing dynasties (1368-1644 and 1644-1911) when institutions such as the imperial service examination system served to discourage intellectual innovation.

Political fragmentation is the specific factor which led to a weakening of resistance to intellectual innovation. In the context of the ongoing cultural unity of Europe, political fragmentation made it possible for intellectuals whose ideas were suppressed in one jurisdiction to continue their work elsewhere. The ubiquity of the printing press made a mockery of prohibitions on books by rulers of particular states. The rulers of different states sought to enhance their prestige by competing with one another to attract citizens with academic or other skills. 

The third element of the evolutionary story is the work of cultural entrepreneurs, particularly Francis Bacon (1561-1629) and Isaac Newton (1643-1727). Joel Mokyr emphasises that Bacon’s contribution should be assessed in terms of his rhetorical contribution to cultural change rather than his specific contributions to science. Bacon challenged the traditional orthodoxy by emphasizing the potential for the “sacred duty” to improve the material conditions of life to be aided by knowledge gained from experimentation. He argued that knowledge ought to bear fruit in production.

Isaac Newton promoted the view that the universe is mechanistic and understandable and that the role of science is to establish empirical regularities. He also argued that this knowledge should be used for the material benefit of mankind.

The educated elite in Europe – members of the so-called Republic of Letters – looked upon Bacon and Newton as the most influential thinkers of their age. The Republic of Letters set up norms and incentives that supported the market place of ideas. Participants were expected to reply to letters, disclose findings and data truthfully and acknowledge intellectual debts. The main payoff for successful scientific efforts was enhanced reputation. Evidence and logic were needed to back up assertions in order to win acceptance for new ideas. Scepticism provided the basis for advances in codified knowledge.

In Britain, the Puritans were particularly impressed by Francis Bacon’s writings. They were deeply attracted to experimental research. The systematic study of God’s creation was seen to be the closest a Calvinist could get to understanding an inscrutable deity. The study of nature was seen to have potential to instruct interpreters of the scriptures. The Puritans saw a great deal of virtue in “good works”, which they associated with labour that was useful and profitable in a worldly sense. What we call leisure, the Puritans viewed as idleness. They regarded education in physics, science, mathematics and languages as deeply virtuous.

The Puritans showed little concern for improving institutions in ways that would benefit economic growth, but in their stress on empirics and the practical use of knowledge they constitute “an essential link between the early followers of Francis Bacon and the Industrial Enlightenment of the 18^th century” (which Joel Mokyr wrote about in The Enlightened Economy). During the later Enlightenment period, science was, of course, able to “shed religion and advance on its own steam”.

In this brief review I have focused on the bare bones of Joel Mokyr’s model of cultural evolution. Readers interested in a broader perspective, should read Deidre McCloskey’s review. McCloskey’s important trilogy of books in this field also emphasise the importance of rhetorical contributions in promoting a culture of growth, but seem to imply that literature’s role in changing attitudes toward business made a greater contribution than Bacon’s cultural entrepreneurship in the field of science.  I mention this just to acknowledge that history can be complicated.

I find it difficult to read a book like A Culture of Growth without wondering what the implications it might have for the future. My reading of the history of the industrial enlightenment (sometimes still referred to as the industrial revolution) has previously made me think about the links between cultural change and economic policy reform. One might think that if a cultural evolutionary framework can help us to think about the past it should also be able to help us to think about the future. However, such models can only provide a framework. As Joel Mokyr emphasises models of cultural evolution are contingent rather than deterministic:

“In other words, they force us to recognize that things could have turned out differently than they did with fairly minor changes in initial conditions or accidents along the way” (p 232).

Hopefully, the “accidents” that  the world is currently experiencing will not destroy the culture of growth.

Can creative destruction be an inclusive process?

This question is prompted by my reading of Innovation and Its Enemies, Why people resist new technologies, a recently published book by Calestous Juma. The author takes much of his inspiration from Joseph Schumpeter, who famously described the innovation process as one of creative destruction. Juma argues that new controversial technologies are likely to enjoy more local support “where the business models include provisions for inclusive innovation”. I will explain later.

As the title suggests, the book explores resistance to introduction of new technologies. It does this mainly by telling the stories of nine innovations: coffee, printing of the Koran, margarine, farm mechanization, AC electricity, mechanical refrigeration, recorded sound, transgenic crops, and AquaAdvantage salmon.

Anyone who has an interest in innovation is likely to enjoy reading the stories presented in this book. Without reading a book like this one it would be difficult to fully appreciate that goods, like coffee, that are now commonplace, were once highly controversial innovations. The stories told in the book make me wonder whether future generations will look back with bemusement about my concerns about artificial intelligence and neural lace.

Although Calestous Juma delves into history in these case studies, he does not seek to provide much historical perspective on changing societal attitudes toward innovation. I doubt whether he believes that we are living in a time when opposition to innovation is particularly great by historical standards, but his views on such matters are not obvious from this book. Readers need to look elsewhere (e.g. The Enlightened Economy, by Joel Mokyr) for an understanding of the industrial enlightenment that began to occur in western Europe around 300 years ago. The author’s neglect of this big picture of attitudinal change is surprising in view of his acknowledgement that he obtained “early inspiration” from an article by Joel Mokyr on innovation and its enemies.

   

The stories told in Juma’s book are enlightening about the nature of resistance to new technologies. The general message is that resistance should not be lightly dismissed as irrational fear of change:

“Many of these debates over new technology are framed in the context of risks to moral values, human health, and environmental safety. But behind these genuine concerns often lie deeper, but unacknowledged, socioeconomic considerations. This book demonstrates the extent to which those factors shape and influence technological controversies, with specific emphasis on the role of social institutions”.

One of the things the book demonstrates is that resistance to innovation is often fuelled by people who have reason to fear competition from new products and new ways of doing things. Those faced with potential for economic loss have used every trick available in an attempt to protect themselves from the consequences of innovation. It is certainly true that many members of the public have genuine concerns about the potential impact of innovations on public morals, health and the environment, but the losers from change often exploit such concerns mercilessly to persuade governments to protect their interests. Thankfully, since the industrial enlightenment, the efforts of the losers to protect themselves from new competition have not been particularly successful.

Although he has chosen a similar title for his book, the author is clearly not a fan of Virginia Postrel’s The Future and its Enemies (which I discussed here).  He has little faith in the capacity of the spontaneous processes of free markets to manage innovation:

“Managing the interactions between change and continuity remains one of the most critical functions of government”.

Again:

“Political leadership on innovation and the existence of requisite institutions of science and technology advice are an essential aspect of economic governance. Such institutions need to embody democratic practices such as transparency and citizen participation that accommodate diverse sources of expertise”.

The author’s apparent faith in government regulation of the innovation process sits oddly with his acknowledgement of shortcomings in existing regulatory processes which focus largely on the risks of introducing new products. He acknowledges that these processes often fail “to compare the risks and benefits associated with the new product to those of existing production systems, even though it is precisely this difference that should form the basis of a regulatory decision on new technologies”. The author also acknowledges the potential for consumer protection regulation to be used for protectionist purposes:

“What may appear as a legitimate appeal for the right to know may in fact be driven by an effort to brand a product so it can be rejected by consumers for protectionist reasons”.

I agree with the author that sensible political leadership is a fundamental requirement, but sensible political leaders will aim to confine regulatory interventions to those circumstances where there are good reasons to fear that spontaneous processes might lead to outcomes that will be widely regretted. When political leaders set out to manage interactions between change and continuity they open their doors even further to interest groups seeking preferential treatment. It would be nice to think that sensible policies and social harmony will emerge from citizen participation that accommodates diverse sources of expertise, but experience suggests that elected politicians are more representative of broader community interests than are the interest group spokespersons that governments select as citizen representatives. The most likely outcome is for the interests that would be represented in such forums (e.g. consumer, environmental, industry and union groups) to conspire to protect their interests in regulating markets, at the expense of the interests of the broader community in allowing free competition to determine outcomes under most circumstances. The critical requirement for sensible policy development is for the claims of interest groups to be subjected to critical scrutiny within the context of a public inquiry process that is capable of providing trustworthy independent advice to governments. (Australia’s Productivity Commission may provide a useful model for other countries to consider.)

Calestous Juma suggests several ways in which innovation could be made a more inclusive process: greater involvement of public sector institutions in providing training in the emerging fields; creation of joint ventures; equitable management of intellectual property rights; segmentation of markets to enable the technology to be used for non-competitive products, and improvement of the policy environment to support long-term technology partnerships.

Smoke and mirrors may help political magicians to appear to be ‘inclusive’, but they cannot alter the fact that some people are adversely affected by innovations that provide widespread benefits to the broader community. In her book, Bourgeois Equality, discussed on this blog a couple of months ago, Deirdre McCloskey uses the term, ‘bourgeois deal’ to refer to societal acceptance of innovations that compete with and displace old ways of doing things in exchange for widespread improvements in living standards. I doubt whether ‘inclusive’ innovation policies - even if designed by intelligent and well-meaning people - can do much to help sustain public support for the bourgeois deal. Ongoing support for the bourgeois deal depends on expectations that innovation will continue to generate widespread improvements in living standards.

Postscript:
Calestous Juma has responded as follows:

"I appreciate your thoughtful review of my book. You raise important points that need addressing. First, you wondered why I did not address the question of whether public attitudes on new technologies have changed over the centuries. I address this issue by showing that the public responses to new technologies appear to be conserved over the 600 years that the case studies cover. At face value this may appear not to be the case because of the remarkable proliferation of technology into every aspect of human life. I think that the change has been in the availability of technologies due to the exponential growth in science, technology and engineering. Public perception of technological risks has not changed, mostly because as humans we have not changed in any discernible way over the last 600 years. We have not found a way to reprogram the amygdala, to simplify a little.

Now to your more complex question: is inclusive innovation compatible with creative destruction? My answer is yes. In many cases disruptions, to use the term in a more prosaic way, is largely a result of the business model used. There are two examples that illustrate this. The introduction of mobile phones in Africa was by any measure disruptive. But it was also inclusive because from the outset the focus was to ensure that the poor had access to the service. Inclusive innovation was achieved through low-cost handsets and pre-payments for airtime. The early concern that mobile phones would be toys for the rich never came to be. The second example involves the strategies adopted under the Montreal Protocol to develop alternatives to the ozone-depleting substances. In this case those firms such as DuPont that were likely to be disrupted by alternative chemicals were included in new research efforts. The Protocol went further and introduced an amendment that promoting the sharing of the new technologies with developing countries.

Both examples involved private-public partnerships that were committed to promoting inclusive in innovation. In both cases incumbent technologies were displaced. Both case provide lessons of inclusive innovation. We can trace other examples of inclusive innovation in history. We have café au laite, as the name advertises, because of compromise to create a recombinant product. Proposals for co-existence are not new. It was tried, without success, to leave a niche for horses in American agriculture in light of the relentless march of tractors. The proposal came too late and the superiority of tractors over horsepower illustrates that there are many areas of technological transformation where inclusive innovation is not a viable option. In other cases there has been a long period of co-existence between butter and margarine. This wasn't a result of an inclusive innovation strategy but it offers some lessons worth considering."

Why has Australia prospered much more than Argentina?

In the first half of the 19^th Century the Australian and Argentinian economies were similar in many respects. Both countries were being settled by European migrants and their economies were heavily dependent on pastoral activities. Around 1900, per capita GDP levels in Argentina were thought to be not far below those in Australia (see the chart below). Since then, while Australia has prospered to much the same extent as other relatively wealthy countries, Argentina has slipped behind.

Ian McLean’s attempt to explain why Australians have prospered to a much greater extent than Argentinians is to my mind the most interesting feature of his book, Why Australia Prospered (2013).

Part of Ian’s explanation did not come as a surprise to me, but nevertheless deserves to be repeated - often! There have been periods during the last century when inappropriate institutions and policies have threatened to retard the improvement of Australian living standards (e.g. the 1970s) but long-run stagnation was avoided because appropriate economic reforms were made and sustained. As Ian comments: “This contrasts with the historical record of Argentina” (p 252).

A deeper, and more novel, aspect of Ian’s explanation is his speculation that the past willingness of Australians to change institutional arrangements when future prosperity has been threatened is linked to the emergence among 19^th century Australians of a democratic and egalitarian temperament, and its persistence since then. Ian notes that there were strong economic forces opposed to the emergence of such culture in Australia because the initial distribution of ownership of pastoral land - the principal basis of wealth in the economy - was highly unequal. In terms of the analysis of Stanley Engerman and Kenneth Sokolov, the economic power acquired by the wealthy elite could have been expected to have been employed to shape political and social institutions as occurred in Latin American countries, entrenching inequality and resulting in ongoing growth-stunting distributional conflict. According to Ian’s speculations, Australia avoided a long period of squattocracy (oligarchic government by wealthy land owners) only because the British were still in control at the critical point in the 1850s and were able to determine the nature and timing of self-government.

This story challenges some of my preconceptions. I like to think of the squatters as heroes of free enterprise rather than as oligarchic rent-seekers. But I guess few humans are able to resist the temptation to exercise political power in their own interests when the opportunity presents itself. The squatters would have had little difficulty in believing that they were serving the common good by seeking to entrench their dubious property rights and encourage ongoing importation of cheap labour for use on their properties.

The idea that the British government was acting in Australia as an enlightened force promoting democratic ideals might require some explanation.  Ian points out that British attitudes and policies towards the colonies had been shaped by the loss of American colonies and by political instability in Canada. He also notes the existence of domestic pressures for institutional change:

“The attitudes and aspirations of the flood of immigrants arriving after the discovery of gold reflected those of mid-Victorian Britain where reform of the corrupt and class-based political system and concern at social and economic inequalities were much in evidence” (p 252).

Ian McLean’s account of Australian economic history shows that it would be as difficult to sustain the view that Australia has prospered because the heroes of free enterprise have consistently won political battles against the proponents of egalitarianism, as it would be to sustain the view that Australia has prospered because government interventions have consistently been benign in this country. Early establishment of democratic institutions seems to have acted as an important safety valve reducing the potential for distributional conflict, even though it brought with it restrictions on economic freedom, such as trade protectionism, that were later to hinder economic growth. Over the long term, a democratic and egalitarian culture has so far helped Australians to restore and maintain sufficient economic freedom to ensure their ongoing prosperity. 

Should foreigners be allowed to buy agricultural land in Australia?

Cartoon by Nicholson from “The Australian” newspaper: www.nicholsoncartoons.com.au

I am surprised by the frequency with which concerns about foreign ownership of land in Australia are being expressed to me by friends who have fairly sensible views on most other issues. It is almost as though rationality disappears whenever foreign ownership and agricultural land become linked in their minds.

My response has been along the lines that foreign ownership of land in Australia isn’t something we should be worried about because it has been occurring since the beginning of European settlement and, these days, accounts for a small proportion of total agricultural land. (ABS data indicate that about 99% of Australian farm businesses are fully Australian owned and about 90% of farmland is fully Australian owned.) 

That usually provokes the assertion that Chinese ownership is new and worrying. 

When I suggest that the new owners can’t take the land home with them, I am asked to justify why foreigners should be able to buy land in Australia, when Australians are not allowed to buy land in their countries. My reply has been that Australia should adopt economic policies that serve the interests of Australians rather than following the policies that other countries adopt. 

At that point I am asked to explain how foreign ownership of agricultural land in Australia serves Australian interests.

That might seem like a reasonable question to ask, but it is actually a debating trick that puts the onus of proof in the wrong place. The basis of a market economy is that economic transactions are undertaken because they are mutually beneficial to sellers and buyers. If some third party considers that a particular kind of transaction should not take place, the onus should be on that party to make the case. 

If an Australian wants to buy the property at a lower price, that is not a legitimate argument for preventing the property from being sold to a foreigner. If their sole objection to the transaction is that the purchaser is foreign, why is that relevant?

Unfortunately, the views I have presented above tend not to have been particularly persuasive. My friends seem to want me to explain how Australians can benefit from foreign ownership of agricultural land. Well, now I have now calmed down a little, I will try to do that.

The most obvious way Australians benefit from foreign land ownership is from associated investments which create increased employment opportunities, and generate additional wealth, some of which adds to government revenues and enables more services to be provided to Australians. 

So, what about the situation where the foreign owner does not undertake any new investment? In that situation it is quite likely that the former owner will invest the proceeds of the sale in ways that will generate additional income. It is also likely that the new owner will find ways to use the resources more productively, perhaps by using better management practices. The fact that a new owner is prepared to pay more than the former owner’s reserve price usually implies that the new owner can see potential to generate more income from the property than the former owner.

Is there any more reason to question the benefits to Australians of foreign investment in agricultural land than any other foreign investment, or of new investment in agricultural land by Australians? I don’t think so, but various arguments to the contrary are raised. It has been suggested that ownership that is encouraged by foreign governments to improve food security may endanger future food security of Australians. It has also been suggested that enclaves of foreign ownership could have a deleterious cultural impact on rural communities. The people who promote those views seem to overlook the fact that foreign ownership or agricultural land in Australia is a small proportion of the total.

The opponents of foreign ownership of agricultural land also raise such issues as whether foreign firms pay tax, whether they are able to import foreign labour more easily, and whether they can be trusted to comply with Australian labour and environmental regulations. Those arguments seem to me to be scraping the barrel. It is hard to see why Australian tax and regulatory authorities should have any greater difficulty in dealing with foreigners than with Australians.

As far as I can see there is no case for foreign ownership of agricultural land in Australia to be subjected to more stringent regulation than any other foreign investment in this country.

Will future technological advances provide widespread opportunities for human flourishing?

A range of issues related to this question have been discussed in a recent series of posts on this blog. My conclusions are summarised below.

Recent trends in productivity growth do not provide persuasive evidence that the rate of technological advancement is slowing.

On the one hand, we have techno-pessimists such as Robert Gordon who argues that technological progress is slowing down.  On the other hand, we have techno-optimists such as Erik Brynjolfsson and Andrew McAfee who argue that the global economy is on the cusp of a dramatic growth spurt driven by smart machines taking advantage of advances in computer processing, artificial intelligence, networked communication etc.

My post discussing these issues notes that the evidence does not support the view that there was a general slow-down in productivity growth in high-income countries prior to the global financial crisis and great recession. In only about half of the countries covered by the OECD data was the rate of multifactor productivity (MFP) growth during the 2001 to 2007 lower than that in 1995 to 2001.

It seems likely that the slow-down in measured productivity growth in the US and some other countries may be attributable, in part, to difficulty in measuring the outputs of the information and communications technologies (ICT) industries - particularly free content provided on the internet.  As means are found to require users to pay for more internet content it seems likely that will, of itself, make the productivity numbers for ICT industries look better even though underlying productivity will not have improved.

A post discussing recent OECD research on technological diffusion gaps at firm level suggests that there is a technological diffusion problem rather than a slow-down in technological advances. Productivity growth of global frontier firms has remained relatively robust, despite the slowdown in productivity growth in many OECD countries during the 2000s. A widening technological diffusion gap is particularly evident for service sector firms.

Technological innovation is likely to destroy a substantial proportion of current jobs, but it will not necessarily be more disruptive than it has been in the past.

As discussed in my post ‘Is average over?’ there is strong evidence of job polarization in the US. Research by David Autor shows that the occupations experiencing loss in employment are in the middle of the distribution, with the locus of displacement of middle-skill employment moving over time into higher skilled categories.  The pace of employment gains in low wage, manual task-intensive jobs has been increasing since the 1980s. The growth of high-skill, high wage occupations decelerated markedly in the 2000s, with only a modest recovery between 2007 and 2012. Autor suggests that the deceleration of growth of high pay jobs was associated with macroeconomic events which led to a sharp deceleration in computer investment (the bursting of the dot-com bubble, followed by the collapse of the housing market and the ensuing financial crisis).

Australian research, published in a recent report by CEDA (discussed here) shows a similar pattern of job displacement. The jobs that are disappearing involve routine tasks, not just low-skilled tasks. Researchers estimate that over the next 10 to 15 years about 40% of jobs have a high probability of being susceptible to technological change in Australia.

Growth in labour demand will occur in occupations that tend to involve perception and manipulation, creative intelligence and/or social intelligence. Many jobs will be concerned with the creative application of technology to solving problems.

In recent years enough new jobs have been created in Australia at a rate sufficient to replace those that have disappeared.

Some authors have suggested that the world faces a period of extraordinary economic disruption over the next few decades. My reflection on economic events over the last 40 years (in this post) suggest to me that perceptions of extraordinary disruption are a product of the economic stagnation in many high-income countries during the last decade.

During the 1970s I was under the impression that the pace of change was quickening, but that was an illusion. The economic disruption occurring in the wake of the first oil price shock and the emergence of stagflation certainly involved a quickening in the rate of change relative to the abnormal stability of the 1950s and 60s. Looking back now, however, economic change over the last 40 years seems to have been less about quickening than about fits and starts.

I suspect that when people look back in 40 years’ time they are they are not likely to perceive that the first half of the 21^st century was extraordinarily disruptive. They are more likely to perceive this to have been a period of fairly normal disruption, with the pace of change being similar to that occurring on average since the beginning of the industrial revolution.

There is potential for future technological advances to lift average real wage levels in high-income countries.

At an aggregate level, innovations that raise labour productivity tend to increase the demand for labour because they make labour more productive. International comparisons show that real wage levels are more or less proportional to average productivity levels.

Real wage growth has not been quite proportional to labour productivity growth in high-income countries where labour’s share of national income has fallen over recent decades. As discussed in this post, average real wages in high-income countries have typically been growing at a rate around 0.35% per annum less than the median labour productivity growth of 1.64% per annum.

In most countries the most plausible reason for the failure of real wages to keep pace with the growth of labour productivity is that capital deepening (the growth of capital per unit of labour) has not been sufficient to offset the labour augmenting (or labour saving) bias of technological progress. (See my post discussing the elasticity of substitution between capital and labour.) In other words, investment levels have been too low.

A slowdown in the contribution of investment to GDP growth was evident the United States, Europe and Japan in the period 2000-07 and was accentuated after the global financial crisis.  Investment levels in Australia remained strong until recently, mainly reflecting investment in mining to supply inputs to the construction boom in China.

Investment in natural resource development has had a modest direct impact on demand for labour in Australia, but the impetus it has provided to overall economic growth in Australia had a more profound indirect impact. The impacts on labour demand of the growth of urban centres as hubs of highly innovative activity are similar in some respects.  As discussed in my post on the competitiveness of cities, when cities become attractive places for location of technology-intensive activities that tends to increase demand for many categories of labour including teachers, nurses and building workers.

Technological advances offer the potential for ongoing improvements in the quality of life.

It is sometimes suggested that because most people in high income countries are already highly satisfied with their lives, the additional opportunities provided by technological advances are not worth having. However, the benchmarks that people use when asked to evaluate the quality of their lives tend to change with changes in their perceptions of what might be possible. As noted in an earlier post, survey data indicates that a substantial proportion of people who claim to be completely satisfied with their lives (above 40% in some countries) are in complete agreement with the proposition that “because of science and technology there will be more opportunities for the next generation”.

In my last post I considered whether the disruptions associated with technological innovations cause a great deal of anxiety and unhappiness. There is a great deal of evidence many people who lose their jobs or feel that their jobs are threatened do suffer anxiety and unhappiness. However, these feelings are strongly associated with the state of the economy and the prospects of obtaining alternative employment.

Discussions of technological unemployment tend to focus unduly on potential job losses and to overlook the impact of new technology on economic growth and the associated expansion of employment opportunities. Many people will lose jobs as a result of technological change at some point in their lives. Most will readily find alternative employment, but some people are likely to have their lives severely disrupted by the high levels of unemployment that may persist in some regions where declining industries have been major employers.

If governments want to ensure that technological advances provide widespread opportunities they should stop protecting narrow interests.

Recent OECD research on technology diffusion gaps (discussed here) suggests that the ability of firms to learn from the global frontier is stronger in economies where there is less protection of domestic interests through international trade barriers, product market regulation, employment regulation and bankruptcy laws that that leave people with valuable skills employed in zombie firms. The research also suggests that skill mismatches can be exacerbated by high transactions costs in housing markets (e.g. stamp duties on transfers).

The competitiveness of cities as locations for technology-intensive activities is likely to be adversely affected by powerful interest groups opposed to increases in population density and innovations that have potential to reduce the cost of transport, including congestion costs. (See post on competitiveness of cities.)

There is increasing recognition that excessive regulation to protect intellectual property rights is discouraging the diffusion of new technology and limiting the opportunities created by technological progress. As discussed in a post on this topic, the economic benefits of copyright and patent laws derive from the incentive they provide to authors and inventors to engage in creative activity. If granted appropriately such monopoly rights could therefore be expected to result in more technological progress and higher productivity growth than would otherwise occur. However, in recent decades these regulations have been used to provide monopoly rents to holders of rights far beyond those required to provide incentives for creative activity.

* * *

My general conclusion is that if governments were to do no harm we could be much more confident that future technological advances would provide widespread opportunities. That is probably too much to ask, but it might be reasonable to expect governments to do less harm than at present. For example, if governments want to help unemployed people who live in regions of persistently high unemployment, they should consider welfare measures designed specifically to assist those most affected (including relocation and early retirement). This is likely to be a less costly approach than the alternatives of supporting uncompetitive firms and industries through subsidies, tariffs, anti-dumping measures, government procurement policies etc. or funding uneconomic infrastructure projects. 

This series of posts has focused on likely trends over the next few decades and has not addressed longer term issues that may emerge as robots come to play more important roles in our lives. I might have something to say about those issues after reading and thinking more. One day I might even feel able to write sensibly about the implications of the 'singularity' for individual human flourishing.


Postscript:
I think William Nordhaus may be writing sensibly about the timing of the 'singularity' and its implications for real wages in his paper: "Are We Approaching an Economic Singularity?"