Prof. Bryan Caplan

bcaplan@gmu.edu

http://www3.gmu.edu/departments/economics/bcaplan

Econ 311

Fall, 1999

1. Why Are Some Countries Rich and Others Poor?
1. Why then are some countries rich and others poor?
2. Land, labor, and capital explanations are clearly inadequate.
3. World's knowledge available cheaply to all; the "catch-up" effect.
4. Important point: Migration raises world wealth by change in real pay minus migration costs.
5. Related observation: Capital and labor are often trying to migrate out of some countries.
2. Growth: Post-War Trends
1. As emphasized earlier, official GDP growth numbers can be misleading along a number of dimensions.
1. Government production counted at cost
2. Quality adjustments
3. Non-market goods
2. After severe declines during the Great Depression, growth resumed after World War II in the U.S. and Western Europe.
1. 1945-1973
2. 1973-
3. Why did growth slow down in the developed countries after 1973? Oil shocks widely blamed at the time, but growth hasn't returned.
4. Communist countries reported higher growth numbers during this period, but these were mostly unreliable or fake.
5. On average, less-developed countries have also experienced positive economic growth. One should expect this from the "catch-up" effect alone.
6. But these rates varied considerably from country to country.
1. The biggest successes: Japan, South Korea, Hong Kong, Singapore...
2. Big disappointments: Africa and India
3. China: Stagnation and famine under Mao, growth under Deng.
3. Explaining Growth: Economic System Matters
1. For the big differences, linking economic system and growth is hard to avoid.
2. Disasters under Communist regimes.
3. Stagnation in India.
4. Retrogression in Africa.
5. Economic freedom of the world index.
6. If the big differences in economic growth and performance are driven by differences in economic systems, perhaps smaller ones are as well.
1. Ex: European unemployment
7. New wave of safety, health, and environmental regulation closely coincides with post 1973 decline in the rate of economic growth in U.S. and other developed countries. Coincidence?
4. The Decline of Socialism and the Rise of Deregulation and Privatization

1. Most of the economic debates of the 20^th-century were between interventionists and socialists.
2. The third alternative of laissez-faire has been extremely unpopular throughout the world for most of the century, especially since the Great Depression. (N.B. Different responses to Great Depression and e.g. Ukrainian famine).
3. Collapse of Communism (Eastern Europe - 1989; USSR - 1991) largely ends the interventionist-socialist debate.
4. If regulation and government ownership are bad, why simply refrain from expanding them? Why not roll them back?
1. Deregulation
2. Privatization

1. The Choice Between Laissez-Faire and Intervention
1. Today, almost everyone will admit the benefits of free markets in general terms, but laissez-faire remains extremely unpopular.
2. In earlier periods, interventionism often seemed to be driven by poorly considered efforts to solve truly serious problems.
1. Ex: New Deal response to Great Depression
3. Today, in contrast, interventionism seems driven more by pseudo-problems - "shocking anecdotes" magnified by media attention.
1. Environmental threats to human well-being
2. Human threats to environmental well-being
3. Accidents/safety
4. Why call them pseudo-problems? Because they tend to be:
1. Getting smaller, not larger.
2. Small problems to begin with.
3. Largely expressive, not practical problems.
5. A lot of piecemeal solutions to pseudo-problems add up to a heavy regulatory burden.
6. Accidents and safety: bottom line is that life just keeps getting safer. Accidental death rate has fallen roughly in half in the U.S. over this century.
1. Note further: Accident rates were falling long before new safety regulations were imposed.
7. Similarly, many of the largest scares about environmental threats to human well-being have turned out to be scientifically off-base, as Simon volume documents.
8. DDT ban causes life rise in deaths from malaria to save some bird species. (e.g. 2 M/year in Sri Lanka).
9. Key fallacy in media scares: Some fraction of the population would have been sick anyway. You have to compare health of exposed individuals to health of normal individuals. Putting sick people on TV proves nothing.
10. Expressive versus practical problems. There is a big gap between what people say and what they are actually willing to do. However, democracy responds to words/votes, not practical consequences.
1. Illustration: Landsburg's monkey.
2. WTO demonstrations
11. More general point: Landsburg's "Why I Am Not an Environmentalist"
12. Economists have suggested a variety of cost-effective ways to solve real environmental problems with minimal deviation from laissez-faire.
2. The Future: What to Expect for Yourself and the World
1. Progress in the U.S. is very likely to continue. Your living standards are very likely to keep getting better.
2. The rate of progress, however, is sensitive to policy. Bad policies will keep life from getting better as rapidly as it could.
3. Policy tends to drift in the direction of additional intervention, though this drift has been reversed in many cases.
4. LDC's that retain a moderate amount of economic freedom and peace will gradually catch-up to wealthier Western countries. Others will stagnate or get poorer.
5. A glass half full: Progress will probably continue and life will keep getting better, at least in countries that currently have a moderate or higher level of economic freedom.
6. A glass half empty: Progress could be much faster, and many countries far short of the level of economic freedom necessary for growth.