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naked economics: UNDRESSING THE DISMAL SCIENCE: “Keeping Score” / “Development Economics”

This essay discusses Mankiw principles seven and eight: governments can sometimes improve market outcomes; a country’s standard of living depends on its ability to produce goods and services.  It illustrates these principles with examples and examines conclusions the author has drawn.  Two are singled out for further thought beyond the author’s scope.

 

KEEPING SCORE: A country’s standard of living depends on its ability to produce.

In Chapter 7, Wheelan’s thesis is that a country’s standard of living depends on its ability to produce goods and services.  This thesis is developed through an explanation and defense of GDP as an indicator of a nation’s prosperity.  He draws several conclusions to support this.

The first is that “any measure of economic progress depends on how you define progress. GDP just adds up the numbers.  All else equal, it is better for a nation to produce more goods and services than less (p. 155).”  He illustrates this with an example of how the real cost of goods decreases with time despite inflation raising the nominal cost.  He does this by measuring the real cost of living in time, the time it takes to earn the money equivalent to the price of the goods.  Thus, in 1900 it cost one hour and forty-one minutes of labor to purchase a pair of stockings. Today, it costs 18 minutes of labor to purchase a pair.

The second conclusion, GDP reflects more than just a number; “When GDP turns negative, the damage is real: jobs lost, businesses closed, productive capacity turned idle (p. 156).”  He illustrates the significance of India’s per capita GDP of $440.  In India there are 500,000 cases of leprosy.  The medication to cure leprosy only costs $3 and is provided for free by the World Health Organization.  However, their health care network is not structured to effectively diagnose and administer the medication.

 

DEVELOPMENT ECONOMICS: Governments can sometimes improve market outcomes.

Why does half the world’s population live on less than $2 a day?  In Chapter 12, Wheelan’s thesis is an answer to this question; “their economies have failed them.”  He goes on to show “that government can sometimes improve market outcomes (Mankiw 7)”, and conversely when economies fail their people so do governments.  Wheelan draws several more conclusions, based on his second thesis.

The first, “Excessive regulation goes hand in glove with corruption (p. 211).”  Harvard economist Robert Barro has found that government consumption, excluding education and defense, is negatively correlated with per capita GDP, (p. 211).  A less benign corollary is that excessive regulation allows for government officers the opportunity to take bribes from those seeking a way around the regulation. Hernando De Soto’s documented study of opening a business in Peru revealed that it was impossible to start a business legally without bribes. The process was exhaustive and posed a significant barrier to entry in the Market. (p. 211)  Governments interference stifles growth in this case.

His second conclusion, informal property rights render real estate property less productive, (p. 210).  This means that real property cannot be collateralized.  This stifles growth.  The Economist tells such a story of a Malawian business that cannot raise capital to grow its business despite their “ownership” of a home that would cover the cost.  De Soto reports that such situations result in $9 trillion in uncollateralized real property. (p. 210)  If government would formalize property rights then citizens would be able to collateralize real property stimulating their economies.  Drawing a parallel between these two conclusions shows that government must balance its role.

 

SUPPORT FOR FORMAL PROPERTY RIGHTS

            De Soto’s argument support reform for formalized property rights.  Wheelan doesn’t directly discuss why this issue persists.  There must be reasons, possibly such as protectionist logic or politics.  At the heart of the issue could be that if property is leveraged to incur debt it would be possible for foreign micro lenders to foreclose on the property in the case of default.  Clearly foreign investors would have an advantage.  Even with formal property rights land still belongs to government.  To illustrate lets assume that an owner of land in the US stops paying taxes on that land.  The property will be seized.  Data that would flesh this out would be valuable to De Soto.  Show the benefits through an analysis comparing the benefit to the risk.  Fundamentally the benefit must outweigh the risk because real property cannot be exported to another country. 

CHALLENGING GDP AS A MEASURE OF OUR COLLECTIVE WELL-BEING

GDP is a good measure of a countries standard of living because it directly measures production.  A country’s standard of living depends on its production, Mankiw 8.  GDP like any statistic has its limits; Wheelan sympathizes with other social scientists, he illustrates GDP’s shortcomings. He explains alternatives to the use of GDP as a measure of our standard of living such as, “Bennett’s index of leading cultural indicators”, the United Nation’s “Human development index” and Miringhoff’s “social health index” (p. 155). He subtly points out that any measure is a statistic and has limitations. He doesn’t however go on to explain that GDP is an actionable statistic as opposed to these other indexes. He could highlight the direct, causal, relationship between production and standard of living. Allso these other measures are direct or causal. They measure symptoms not causes.

In summary, this essay showed that governments can sometimes improve market outcomes and a country’s standard of living depends on its ability to produce goods and services. It illustrated these principles using as examples: the real cost of goods measured in time, India’s per capita GDP, De Soto’s research in real property and his study of corruption in government. It looked at several conclusions that Wheelan drew, specifically: GDP is a good measure of a countries standard of living because it directly measures production, GDP reflects more than just a number, excess government regulation leads to corruption, however, informal property rights hinder development.  It drew parallels between positive and negative government interaction.