Multiplicative Growth: A Just-So Story that Deserves a Hearing
By Bryan Caplan
Here’s Greg Clark on growth over at Cato Unbound:
I fully agree with McCloskey about the surprisingly poor ability of
incentives alone to account for growth. In order to hold on to the
central idea that the 10,000-year delay in the Industrial Revolution
from the first appearance of settled agriculture was created by a lack
of incentives, economists have to maintain the collective fiction that
all societies before 1800 were run along the lines of Kim Jong-Il’s
North Korea. Yet, in case after case, we find, deep in the 10,000 years
of economic stagnation, fully incentivized market societies.
Clark is basically expanding his position in A Farewell to Alms: Since England had good policies for centuries before the Industrial Revolution arrived, good policies can’t explain modern economic growth. Other economic historians I consulted told me that Clark neglected many important English policy changes between 1500-1800, such as the enclosure movement. But suppose that English policy were utterly stagnant between 1200 and 1800. Would that imply that policy was irrelevant?
No; it would merely show that policy is not enough. But the facts are quite consistent with a multiplicative model. Maybe growth requires policy, population, and science; when Policy*Population*Science hits a critical value, growth takes off. Clark might dismiss the multiplicative model as a just-so story, but he shouldn’t be so hasty. Low scores on any one of these variables really do seem to choke off growth, and high scores on all three really are a near-guarantee of growth.
1. Policy. The natural experiments of North and South Korea, West and East Germany, mainland China and Hong Kong/Taiwan/Singapore, show that policy makes a huge difference. Awful policy is enough to overpower every other advantage combined.
2. Population. As Simon, Diamond, Kremer explain, small isolated populations are extremely backward. Slow discovery of knowledge is a big part of the problem, but inability to take advantage of scale economies is a huge handicap too. This is why people can’t escape the consequences of bad policy by moving to a desert island.
3. Science. Modern production depends heavily on modern scientific knowledge. Indeed, there was never a truly rich society before the rise of modern science. So science looks like science another crucial ingredient for growth. Without it, good policy and large population aren’t enough.
Clark’s right to argue that if policy were the sole key to growth, England would have enjoyed an Industrial Revolution much earlier. But he’s wrong to neglect an equally show-stopping point: The Industrial Revolution began in a country with exceptionally good policies. A multiplicative model can explain both patterns. Growth didn’t start earlier in England because other crucial ingredients – like population and science – weren’t strong enough. But one important reason why England grew first is that its policies were exceptionally good, giving it an edge over other countries with comparable advantages in population and science. (In fact, you could say that England’s openness to trade vastly swelled its effective population).
Now you could ask: If growth is really multiplicative, why is it so important for the Third World to focus on policy? For science, the answer is simple: Most of the critical knowledge is already free for the taking. For population, the answer is only slightly more complex: As long as your economy is open to the international economy, it’s the world’s population that matters, not your country’s.
The upshot: Third World countries face much more favorable circumstances than England did in 1800. England had to line up three ducks. But two of the Third World’s ducks are already lined up. If the world’s poor countries adopt tolerably good policies, they will grow.