How I think
Over at MoneyIllusion a commenter asked me the following question:
What is your “take” (to borrow a sports term) on the role played by mass quantities of gold and silver pouring into Spain during the first centuries of that period? Resource curse?
I will answer the question, but first I’d thought it might be helpful to explain how I think about this sort of question—then people can figure out my views without
bothering asking me.
Let’s start with a couple unrelated questions:
1. Does Alan Greenspan deserve credit for being a “maestro”, for engineering the Great Moderation?
Some might approach this question by considering the actions of Greenspan, the challenges he faced, etc., etc. I look at the question differently. I immediately think about all the other central banks during the Great Moderation. How did they do? If they mostly achieved the same sort of success as Greenspan (and I think they mostly did) then I would conclude that Greenspan himself probably wasn’t the key factor. Rather some sort of innovation in central banking (inflation targeting, Taylor Principle, etc.) improved monetary policy performance in almost all developed countries after the 1980s.
2. Will China become a developed economy?
Some might approach this question by extrapolating recent Chinese growth rates. Others might focus on policy reform, or lack of reform. Some might worry about malinvestment, about ghost cities. Some might look at China’s history, and worry about political instability. All those might have some merit, but I’d focus on the economies of China’s neighbors, especially those with broadly similar cultures (Japan, North and South Korea, Taiwan, Hong Kong, Singapore and perhaps Vietnam.) Then I’d consider which examples are most relevant to China. Rightly or wrongly I conclude that North Korea is less relevant than the others, as it hasn’t embraced market economics.
My method is far from foolproof, but I believe that huge countries like China are so complex that it’s really difficult to figure out how they’ll do by looking at all the moving parts. One reason why I believe China is more like the so-called “Tiger Economies” is that it has experienced the same sort of high RGDP growth rates that they experienced a few decades earlier. I don’t feel I have a good grasp on all the details of the Chinese reforms, but they seem to have done enough to generate fast growth for almost 40 years. It’s like the New England Patriots. I don’t know how good each of their offensive linemen are, but based on performance my general sense is that the team is pretty good.
Now for the question about Spain. My immediate reaction is not to think about Spanish history (way too complicated) but rather to think about other similar countries. I notice that in Europe, countries tend to get poorer as you move further south. In the cases of Italy, Spain and Portugal that’s even true within countries. So there seems to be some sort of mysterious X-factor that links southern latitudes with lower incomes. As far as I know there was no similar resource curse in Southern Italy or Greece, and yet those regions are even poorer than Spain. Portugal got much less gold and silver than Spain, and is poorer than Spain. I conclude that there’s no reason to suspect that the resource curse impoverished Spain. It certainly might have to some extent, but the evidence simply isn’t there. Spain’s about as developed as I’d expect, given its latitude.
I don’t want this post to leave the wrong impression. I try to be pragmatic and use whatever information I have. In some cases the internal policy differences are so large that they can be seen from outer space:
In that case you don’t ignore them—you use whatever information you can. But for all sorts of problems the complexities are so great that the least bad way of thinking about an issue is to look at the performance of closely related examples.
PS. An alternative way of thinking about China is to consider the analysis in Garett Jones’s outstanding new book, Hive Mind. Garett provides a list of IQ by country. Here are all the countries that have an average IQ of 101 or higher:
Hong Kong (108), Iceland (101), Japan (105), Singapore (108), South Korea (106), Switzerland (101), Taiwan (105).
Not very many! Notice that all those countries are developed. Unfortunately we have relatively little data for China, but Garett indicates that what data we do have suggests that they also might have a relatively high IQ. Of course it’s possible that the same is true of North Korea (I have no knowledge either way). But if it turned out that North Korea had an average IQ close to South Korea, then I’d also expect North Korea to be a developed country within 50 years.
PS. If you want to see a truly first rate thinker, check out this post by Scott Alexander.