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Insights from The Wealth and Poverty of Nations

I recently finished reading The Wealth and Poverty of Nations: Why Some are so Rich and Some so Poor by David S. Landes. It was originally published in 1998, so it is a bit dated, and it is still very much worth the read. The themes that run through the book, as I understand them, are still very relevant today. Plus, it is always good to learn more about our economic history. Some of the main themes/points are:

(1) The ability for one society to take over another society through force has often not only meant the decline of the nation being taken over but also the decline of the imperialist nation. Access to steel and the ability to manipulate it, especially into weapons like quick-loading or more automatic guns, and the introduction of foreign germs was often the key to success in battle. (Jared Diamond wrote an entire book on this premise titled Guns, Germs, and Steel, of course. While I found the book to be somewhat redundant, I do think it is worth a read.)

(2) Institutions, including culture and values, are very important factors in determining whether or not a country has or will reach an advanced level of development.

(3) A society’s ability to innovate and its willingness to transfer and accept technologies from other countries also plays a big role in its ability to grow and develop.

(4) Orthodox economics lacks much in trying to explain economic development (see following points).

(5) The market is a powerful force that needs to be harnessed for economic development to occur, but even Adam Smith argued that the market has serious flaws, and there is a role for government to play in the proper functioning of a market economy. He also argues that governments can make as big, or bigger, mistakes than the businesses they are trying to regulate.

(6) There is not one approach to economic development that is appropriate across all countries, and yesterdays “virtues” or “factors” that drove some countries out of poverty may not be relevant (or as relevant) today. “Different strategies in different circumstances” (page 391).

(7) “And what of the poor themselves? History tells us that the most successful cures for poverty come from within. Foreign aid can help, but like windfall wealth, can also hurt. It can discourage effort and plant a crippling sense of incapacity. As the African saying has it, ‘The hand that receives is always under the one that gives.’ No, what counts is work, thrift, honesty, patience, tenacity. To people haunted by misery and hunger, that may add up to selfish indifference. But at bottom, no empowerment is so effective as self-empowerment” (page 523). I would add, and I think Landes would agree given his emphasis on the importance of institutions and culture, that this requires having the institutions that support empowerment, such as access to quality education and healthcare, workforce training programs, small business development support, etc.

(8) He has some very interesting insights on the gains from trade, and in my opinion, this is yet another example of how economic theory (or maybe the misunderstanding or mis-application of economic theory) has misguided the making of economic policy. Furthermore, his understanding of how the pursuit of trade and globalization has played out through history leads to some prescient forecasts of our current economic conditions, as shown in the following quote (keep in mind the book was first published in 1998).

“The present tendency to global industrial diffusion will entail, for the richer countries, a leveling down of wages, increased inequality of incomes, and/or high levels of (transitional?) unemployment. No one has abrogated the law of supply and demand. Many, if not most, economists will disagree. They rely here on the sacred certainty of gains from trade for all. International competition, they tell us, is a positive sum game: everyone benefits.

In the long run. This is not the place to attempt, in a few pages, a survey of the differences of opinion on this issue, which continues to generate a library of material. I would simply argue here, from the historical record, that

  • The gains from trade are unequal. As history has shown, some countries will do much better than others. The primary reason is that comparative advantage is not the same for all, and that some activities are more lucrative and productive and than others. (A dollar is not a dollar is not a dollar.) They require and yield greater gains in knowledge and know-how, within and without.
  • The export and import of jobs is not the same as trade in commodities. The two may be fungible in theory, but the human impact is very different.
  • Comparative advantage is not fixed, and it can move for or against.
  • It always helps to attend and respond to the market. But just because markets give signals does not mean that people will respond timely or well. Some people do this better than others, and culture can make all the difference.
  • Some people find it easier and more agreeable to take than to make. This temptation marks all societies, and only moral training and vigilance can hold it in check” (page 522).

If for no other reason, it is worth reading the book to gain these insights on the notion of free trade and the theory of comparative advantage. International trade brings to the forefront many very complex issues that are ignored or given very little attention if we just grab onto the gains from trade derived from comparative advantage as presented in the mainstream economics textbooks, which typically give very little mention, if any at all, to many of these other issues.

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Brexit’s Potential Impact on the San Antonio Economy

With the United Kingdom voting to leave the European Union, it is worth considering the impact it might have on the San Antonio economy. This basically translates to how it might affect the U.S. and Texas economies because I don’t think it will have any direct effects on the San Antonio economy since there is not a very strong connection between the San Antonio and United Kingdom economies. However, there is a reasonable chance that the uncertainty and chaos caused by Brexit throws the United Kingdom and European Union economies into recession. The best I think we can hope for it that it has no effect. I can’t envision a scenario where Brexit increases economic growth in the U.K or the E.U.

While the United Kingdom’s economy is not big enough to throw the U.S.into recession, according to The Economist, “…Britain is big enough for a recession there to have a meaningful effect on Europe’s economy. As a rule of thumb, whatever the reduction in Britain’s GDP growth, Europe’s economy will suffer a drop of about half as much.”

If a recession in Britain does drag Europe into a recession, the ripples across the pond could drag the U.S. economy into a period of slower growth possibly leading to a recession because the European Union taken together is the largest economy in the world. GDP in the European Union was $18.51 trillion in 2014 compared to GDP in the United States of $17.42 trillion in 2014.

In 2015, U.S. exports to the European Union amounted to $272 billion which equated to 13.36% of all exports (See Trade data). This makes the European Union the second largest export market for the U.S. behind Canada at $281 billion. Mexico is the third largest export market receiving $236 billion in exports from U.S. companies. Exports to the United Kingdom were $56 billion in 2015 (2.76% of all exports). While Texas has the largest volume of exports among all states (See Exports by state 2015), the United Kingdom accounted for 1.8% of total exports from Texas in 2015. This relatively low volume of trade does not mean Texas and the San Antonio economies will be immune from the effects of Brexit. If growth in the U.S. economy slows, it is likely that growth in the Texas and San Antonio economies will follow suit.

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The Importance of Arts Education to Economic Development

Many people, including myself, have argued that it is important to include an enhanced focus (or even a focus at all) on the arts within a curriculum that is focused on science, technology, engineering, and math (STEM). In other words, the focus on STEM should be expanded to be STEAM. Even with these arguments being made, there has been a relatively recent movement to minimize the importance of a liberal arts education across some states. For example, the governors of both Kentucky and North Carolina have made such proposals.

I think this is a grave mistake. To be upfront, I received my bachelor’s degree from a small liberal arts college, and I am currently an associate professor of economics at a liberal arts university. Thus, I admittedly may be biased. But based on my experience, I know that my liberal arts education allowed me to achieve a deeper understanding and view problems from different perspectives. And in my work with artists on various projects and through my teaching of arts students, I know that they see the world from a different perspective that allows them to approach problems from varied angles.

I think J. Bradford Hipps discusses this very eloquently in his New York Times article, “To Write Software, Read Novels,” published in the May 22 paper edition (published May 21 online under the title “To Write Better Code, Read Virginia Woolf“). In the article, he provides examples where liberal arts graduates working within technology companies applied their abilities to “see” things differently to solve problems that the “techies” were finding to be intractable.

This is not arts for arts sake. This is arts for the economy’s sake.

I am confident that if we continue down this path of gutting liberal arts education from Pre-kindergarten through university, our economy is going to suffer because we will severely diminish the productive abilities of our labor force.

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Economic Impact of LiftFund

Along with many other economists, I have long argued that entrepreneurial activity is a key driver of economic development, and recently, I completed an economic impact study of LiftFund that provides a bit more evidence in support of this idea. “For more than 21 years, LiftFund, a 502(c)(3) nonprofit organization, has helped individuals achieve the American Dream by providing small business loans to those who do not have access to capital from typical lending sources, such as traditional banks” (Source: http://www.liftfund.com/about/). The study analyzed the impacts across their markets in Texas and Louisiana from 2010 through 2015.  Along with the direct effects of the LiftFund lending, the analysis also took into account the multiplier effects, but the impacts for a specific business are only counted in the year in which the new jobs were created (i.e., the impacts were cumulative into the future years).

Here is a summary of the results showing the rather substantial impacts that LiftFund and the small businesses they fund are having on their local economies.

In Texas, LiftFund issued $104 million in loans during this time period, and the loans to these businesses supported 10,758 jobs and earned incomes of $500 million. These businesses produced output valued at $1.4 billion. This means that for each dollar loaned by LiftFund, $13.21 in output was created in the local economy.

In Louisiana, loan volume during this period amounted to $10.6 million. This supported employment of 1,495 earning incomes of $70 million. The businesses impacted by this LiftFund support generated $181 million in output resulting in a return of $17.03 in output per dollar loaned in Louisiana.

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Arts Are Important Even For Top Athletes

Alan Shipnuck recently wrote a fascinating article about Bryson DeChambeau, one of the world’s best amateur golfers, who will soon be taking the PGA Tour by storm.  In my opinion, the article is fascinating for several reasons, but one quote in the article from Mr. DeChambeau really stood out to me.

“‘…Playing is not about swing theory. When you’re on the course, you have to be an artist.’ DeChambeau can sign his name left-handed, in cursive, upside down. On his bedroom wall is a stippling drawing of his hero, Ben Hogan, that took him four months to create. In 2015 he finally brought this same artistic flair between the ropes, winning the NCAA Championship and the U.S. Amateur. Only four other players can claim this double-dip in the same year: Jack Nicklaus, Phil Mickelson, Tiger Woods, and Ryan Moore.”

I have long argued that it is very important to have the arts as a core part of the educational curriculum at all levels because even if the person is not going to become an artist, the arts teaches us to “see” things differently. It trains us to approach problems and issues from a different perspective. That is why this part of the article stood out to me. Bryson took a very scientific approach to building his swing and his golf clubs. He majored in physics while at SMU and probably understands the physics and mechanics of the golf swing as well as anyone, but it was not until he realized to be an “artist” on the course did he attain the highest levels of amateur golf.  He is now poised for a very successful pro career. Golf constantly presents you with new challenges on the course that you have to address very quickly, so being able to see different ways to address these challenges through the different shots one can make is very important. In other words, art is great training for even some of the top athletes in the world.

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Creative Industries, Creative Class, and the Effects on Urban Economic Growth

I recently read an article by Erik Stam, Jeroen P.J. de Jong, and Gerard Marlet called “Creative Industries in the Netherlands: Structure, Development, Innovativeness and Effects of Urban Growth.” Part of their research documented in this article looks at the effects of the creative industries and the creative class on innovation and urban economic growth. The difference between the two is that the creative industries is defined by industry sectors (e.g., NAICS codes), and the creative class is defined by occupations. I think the conclusions they draw from their research is quite interesting and very useful for economic development policy.

The analyses show that, with the exception of the metropolitan city of Amsterdam, there is no relation of the presence of creative industries with employment growth. In general, it seems that a concentration of creative industries is a less important determinant for employment growth in cities than a concentration of creative people/creative class. Creative industries do not seem to act as a catalyst for the effect of knowledge (spillovers) on urban economic growth in general. This seems to occur only in the metropolitan city of Amsterdam. This role is ore likely to be taken by the creative class, which was shown to have a much stronger relation with employment growth than the creative industries. If the objective of local economic policy is employment growth, improving living conditions for the creative class…could be more effective than creating conditions for stimulating the creative industries, which is currently widespread policy in the Netherlands…If the objective is not specifically employment growth, but is more focused on the innovativeness of the business population, creating conditions to stimulate the creative industries seems a reasonable policy, as we have shown that firms in the creative industries are more innovative than firms in other industries. However, our study shows that the creative industries are very heterogeneous; businesses in the distinctive domains face different constraints. One policy to stimulate all the creative industries will be less effective than more specific policies tailored to the nature of the specific domains.

Our findings call for a focus on living conditions and labour markets…attracting and retaining individuals in the creative class, instead of business conditions for attracting firms belonging to the creative industries if growth in cities is the objective. Only in very specific urban environments, such as the metropolitan city of Amsterdam, does a policy to attract and stimulate business activities in the creative industries seem to be justified. Perhaps metropolitan environments distinguish themselves from other lower order cities by their intensive social and cultural activity (including creative industries) that provides a source of inspiration for other economic activities…, the local ‘buzz’ of unpredictable, innovative interactions…(pp. 128-129).

I agree with their conclusion that economic development is more about attracting people than attracting companies, but there has to be a place for the creative class to work, so it is also important that the appropriate conditions exist within a metropolitan economy to stimulate the creation, growth, and attraction of creative industry businesses as well. In other words, it is important, as it always has been, that innovation be catalyzed for an urban economy to develop, which brings us back to their point about the importance of creative industries in fostering innovation.

(The article cited in this post was published in the journal Geografiska Annaler: Series B, Human Geography in 2008.)

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