Final Exam

by Russ Roberts on April 28, 2009

in Standard of Living

Here is an interesting exam question that could be the only question on the final exam of a first rate economics class. I don't know if there is such a thing. I think many econ majors around the world when confronted with this question would struggle to put the right answer into words. My idea for the question comes from a post by David Henderson over at EconLog, who quotes a Robert Frank column. Here is the quote from Frank:

For example, as a Peace Corps volunteer in Nepal long ago, I hired a
cook who had no formal education but was spectacularly intelligent and
resourceful. Beyond preparing excellent meals, he could butcher a goat,
thatch a roof, plaster walls, resole shoes and fix broken alarm clocks.
He was also an able tinsmith and a skilled carpenter. Yet his total
lifetime earnings were less than even a very lazy, untalented American
might earn in a single year.

And here is the question I would ask:

Why does a spectacularly intelligent and resourceful person in Nepal earn spectacularly less than a lazy untalented American?

Robert Frank's answer
:

Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

I'm not sure what what Frank means by social investments. The theme of his column is that financial success rarely depends just on hard work and talent. It also depends on luck and even where you are born. And he's critical of those who opppose larger government.

 David Henderson's answer:

There's a more-obvious cause of the wealth that we have been born into:
a great deal of economic freedom compared to that in other parts of the
world.

I think David Henderson's answer is part of the answer. But neither Frank nor Henderson's answers really get at the essence of the paradox implicit in Frank's observation. I'll give my answer in another post. In the meanwhile, the comments are open.

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OneEyedMan April 28, 2009 at 9:48 am

He's good at many things, but why hasn't he become superbly good at one thing while taking advantage of the division of labor?

The diversity of the skills he's come to develop are a sign that there are many markets to goods and services that exist in the rich world that don't effectively exist in Nepal.

Metre April 28, 2009 at 9:56 am

Part of the answer, it would seem, is the high degree of specialization in the American economy versus the Nepalese economy. I like to think I'm a good engineer, but I would be hard pressed to master all of the skills of the Nepalese chef. But then again, I don't have to. The economy in Nepal is much closer to a subsistence economy than ours, placing a premium on having multiple skills. But a subsistence economy cannot produce the wealth of a one where skills are more specialized.

raja_r April 28, 2009 at 10:00 am

I think the answer is obvious. The imperialistic British stole all the natural resources of Nepal and that is why they're poor.

Hugo Chavez told me so.

Dave April 28, 2009 at 10:01 am

I don't think there is one answer, but there are several contributors.

One is an established marketplace for goods and services. Lack of such prevents division of labor and creation of wealth.

Second is trade — both inter-regional and international trade are important. Both exist in the US and not in Nepal. As a corollary to that, there is most likely little movement of labor within Nepal, so there's isolationism in terms of products and services but also of labor.

Not being an expert on Nepal, I don't know how much of the above are cultural and how many are imposed by the government. Either way, they are impediments to the laborer's accumulation of wealth.

Eric B. April 28, 2009 at 10:07 am

Can we fault the Nepalese man for not properly taking advantage of the marketability of his skills by finding proper compensation? Shouldn't the idea of globalization be to pay the worker what he's worth irregardless of where he's from.

Ricardo Cruz April 28, 2009 at 10:20 am

OneEyedMan seems to have gotten to the crux of the issue. I would add that had he been born in a western country, I'm not sure he'd been very well paid either. To seek a rent on his talents, being polyvalent isn't going to help him. What he needs is to specialize which most people wouldn't be willing or able to perform.

I mean, the reason why you can treat land in general as if it's all priced the same, it's because even if some land allows for more crops being planted there, it won't be able to command a higher price as long as enough single crops land exist to satisfy demand. The same principle could be at play here.

Josh April 28, 2009 at 10:22 am

The answer has to revolve around Henderson's observation that if you took this man and plopped him into San Diego, he'd instantly start making hundreds of times what he makes in Nepal.

The ensemble of institutions (both public and private), capital, and cultural mores in the United States multiplies the productivity of every person. Think of how much more productive a single port worker is, controlling a shipping crane, than that same person would be alone on a desert island.

Why can't the felicitous circumstances of the US be easily copied to Nepal? I think it may be mostly because of the nature of capital and trust. Capital is not homogeneous, it's not just money. It's an incredibly layered and complex interlocking system that has to be built up and carefully maintained. This is probably best done by free markets. Building up these free markets requires a great deal of trust between the economic actors, and this is also hard to build, it can't just be air-dropped from cargo planes.

Lisa April 28, 2009 at 10:28 am

I think it is important to acknowledge that this cook's Nepalese economy is the environment in which he makes his choices to develop and utilize his variety of skills. From the information you give in your example, "Beyond preparing excellent meals, he could butcher a goat, thatch a roof, plaster walls, resole shoes and fix broken alarm clocks. He was also an able tinsmith and a skilled carpenter". He sounds very wealthy. His Nepalese earnings (which must include all gains, tangible and intangible, he makes from his self sufficiency as well) are relative to his Nepalese economic environment. The other pitiful bloke seems awfully deficit in the intangibles and at the rate he is traveling, not very wealthy relative to his US economic environment.

Sean April 28, 2009 at 10:30 am

I'm somewhat confused by the question, actually. Part of the reason also has to do with the tariffs that the US puts on US labor. Why should sugar earn so much less money outside of the US compared to HFCS inside the US? Is the question simply one of identifying all of the obstacles that interfere with the 'free trade' price of labor?

Eric H April 28, 2009 at 10:32 am

Does it have something to do with the availability of capital? I have a friend from the Ukraine who has a similarly broad skill-set.

He attended college in the Ukraine, but the economic circumstances of the Soviet Union required him (and most everyone else, if his account is accurate) to specialize in fixing almost everything. Replacements, and replacement parts, were frequently unavailable. He held down a respectable job as a maintenance electrician, where he repeatedly exercised a relatively specialized skill-set. Outside of that job he was a plumber, a carpenter, an auto-mechanic and a gardener.

In my friend's case, and in that of the Nepalese chef, resourcefulness and intelligence were expended to make the most out of scarce capital; their above-average intelligence was spread across a spectrum of activities.

The intelligence of a "lazy American" is not spread across a spectrum of activities but concentrated onto a very few through specialization. Our capital-rich environment thus maximizes the "intelligence input"; we get more dollars because each unit of intelligence is used more efficiently than it would be in Ukraine or Nepal.

I might add that Robert Frank's observation is quaint but can't be taken that seriously. How well his chef did each of those things is related to how many different things he did. There may have been someone in Nepal who specialized in thatching roofs. Maybe the chef didn't do that job as well as the specialist, because he spent several Saturdays skinning goat carcasses. Also: if each of the Chef's skills were equally valuable, why does Frank call the guy a chef?

David April 28, 2009 at 10:33 am

I think the most obvious explanation is division of labor. Even the most skilled person at everything cannot out-produce less skilled people who have a higher degree of specialization and division of labor. A person's intelligence and skills have nothing to do with how much s/he gets paid. Payment for labor is directly related to the value of the end product. Intelligence and skills can help a person produce more valuable products, but that is not a given.

Paul Mansour April 28, 2009 at 10:39 am

The marginal productvity of labor is higher in the US. It it higher because of centuries of massive investment in plant, equipment, and research and development, which in turn happened because individuals were free to acquire property, make use of their own knowledge, and pursue their own ends under the rule of law largely free from government.

How's that?

Stewart Ulm April 28, 2009 at 10:44 am

There are two basic possibilities:

(1) There is less need for this man's skill in Nepal. This would be the case if he was, for instance, a spectacularly talented dog groomer or computer programmer. And, conversely, I assume that a man who is spectacularly talented at herding water buffalo would make *less* money in America than in Nepal.

(2) Other Nepalese citizens are less able to pay for his services than a corresponding American customer could. This seems more likely. And I imagine it's precisely the reason why Nepalese people are less likely to use a diesel-powered back hoe than an American is when either is setting the foundations of a new home. The back hoe is not less functional in Nepal than it is in America, but there is less ability to actually afford it. Consequently I assume (having never been to Nepal) that most houses there do not have expansive basements, if they have basements at all.

Randy April 28, 2009 at 10:45 am

I'll go with cultural traditions of work ethic and specialization.

Ike April 28, 2009 at 10:46 am

Because the value of an item is NOT based solely on intrinsic properties, but factors in location.

The fee a plumber can command is a function of his skill, his accessibility, his free time, the agreements and collusions of trade organizations and government, and his level of competition. All are in flux, which is why prices change.

Posed a different way — which is the more useful discharge of electricity? The 110 volts traveling through a 5-watt nightlight bulb, or the extra 15-millivolts required to trigger a neuron and stimulate a reaction?

I would offer that the nightlight, while more visible and capable of producing more "heat," is not networked as efficiently. Throw a million neurons working in concert together, each doing something relatively simple and small, and the use of that extra energy — while on paper is less than the nightlight — is of greater value.

It's in the nodes.

Can I have my diploma now?

Joe April 28, 2009 at 10:51 am

To me it sounds like a serious lack of the "roundabout" method of creating products/services.

We all know that the United States can make most products more cheaply than many other countries, but Ricardo's law of association tells us that via comparative advantage we will get a much greater net benefit if we specialize and allow others to specialize in their comparative advantage.

This fella in Nepal is trying to be a one-man show. When what he should do is focus on his comparative advantage, and allow other folks actively engaging in commerce in his area to specialize as well.

"The surest way to poverty is self-sufficiency".

Ike April 28, 2009 at 10:52 am

By the way — I deliberated crafted an answer that does NOT require one pay homage or tribute to a "government" that made it possible, or "social investment."

Rather, we have the government we do and the leisure time to pontificate about sociological nonsense because we're in a free and dynamic economy that allows us such privilege. NOT the other way around.

You know, because orders emerge.

Mark April 28, 2009 at 10:54 am

No, I don't think I would credit division of labor for this phenomenon, for, as pointed out previously, if you brought this man to the U.S. his income would instantly multiply. His skills are good and valuable, but less valuable in his country due to unfortunate circumstance.

The answer, in my mind, is the national development of the invisible hand. Consider, for example, that this man may now be approximtely as wealthy as the early pioneers of this nation. However, here in the U.S., the invisible hand has grown powerful, due in large part to its longevity. Methods of production, transportation, sales, and all other pieces of the production pie have been improved and streamlined, many new methods have been tried and the best ideas have lasted. As a result, the gross product has grown, and all have become relatively wealthy.

In Nepal, where wealth is relatively scarce due to less national production, services are less valuable, for fewer people are willing to pay a reasonable price for something we here are accustomed to paying for. Thus his services and abilities are worth much less there than they would be here.

Paul Mansour April 28, 2009 at 10:55 am

When Frank says:

"Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success."

I would say:

All Americans , "well-paid" or not, owe an enormous, if rarely acknowledged, debt to the generations of individuals who came before and worked as members of a civil society in pursuit of their own happiness, thereby increasing the stock of capital, and leaving America a richer place for their children, and who, when duty called, even made the ultimate sacrifice for freedom.

caveat bettor April 28, 2009 at 10:56 am

I think the operative word is "trade", but that encompasses several factors, for instance: efficient and stable price signaling, the enforcement of property rights, the freedom to express personal preferences, a vibrant private sector, a stable investment/credit/debt system, Ricardian specialization, stable health outcomes, a vibrant wealthy class, and even more vibrant middle class, a culture that promotes balanced risk taking …

MnM April 28, 2009 at 10:58 am

The specialization and division of labor is certainly part of it, but not the whole of it. You can be highly specialized in making widgets, but if there's relatively low demand for widgets…

I also think the question is a bit vague. Perhaps too vague to provide a sufficient answer. We would have to compare the Nepalese worker to an American cook-butcher-roof thatcherer-wall plasterer-shoe repairman-clocksmith-carpenter in order to eliminate some necessary variables. I'm afraid I don't know any American workers who meet those qualifications. ;o)

Not so sound like a cliched '80's robot, but, need more input. :D

Matt April 28, 2009 at 10:59 am

Think of the smartest guy in the universe who can also patch walls and fix alarm clocks. How much would he make if he lived on Mars?

Matt April 28, 2009 at 11:04 am

Yikes. The more I think about it the less I can understand why this is such a good question. The answer is IN the question. Guy lives in Nepal. Awaiting next post on different topic.

Michael Foley April 28, 2009 at 11:14 am

The cook is probably compensated pretty well relative to the total wealth traded in the country (which isn't much). The cooks' problem is that he cannot trade in a larger market.

A similar situation might occur in professional sports. A great local athlete gets a small salary because there is only so many people who will buy a ticket at the local arena. But if that same athlete performs on national television, he participates in a larger market and receives a larger salary.

Patrick April 28, 2009 at 11:24 am

Love this post.

Nepal has less capital than the United States, which means that the marginal productivity of labor will be less. Even if our man in Nepal specialized in one thing, he would produce less (and contribute less to the production of others) because there are fewer productive resources.

An example might help. Let's say Nepalese Ned moves to the United States. And he gets a job cutting lawns. Sure, he gets to use a lawn mower, and can cut more lawns per unit of time. But the person who's lawn he cuts is also more productive (specialized, capitalized) with the time that they are not cutting lawns, so they can afford to pay more.

So the return on labor in society is influenced not only by an individuals intelligence and willingness to work hard, but by the entire structure of production. To the extent that we are and have been freer than Nepal, we've been more productive with all the resources at our disposal. Not only do we have more of them, they're organized more productively.

I'm going to guess that Nepal has some significantly different institutions and cultural beliefs that make it more difficult to divide labor. It's not merely a matter of telling the man to specialize, there has to be a method of coordinating highly specialized labor.

I would also suspect also that there are barriers to capital flowing into Nepal either through trade or direct investment.

And lastly, words like intelligent, resourceful, lazy and untalented are pretty normative. I'll accept that a parking attendant is lazier than our man in Nepal. But I don't think the judgment matters. He's more productive because his labor is made more valuable by a large city around his parking structure.

So how'd I do? Where's the extra credit question?

JS April 28, 2009 at 11:35 am

Productivity.

JS April 28, 2009 at 11:36 am

And labor restrictions (unionization, immigration restrictions, minimum wage laws, etc)

But mostly productivity.

Mike@PVL April 28, 2009 at 11:40 am

Because American employers are willing to pay the lazy unskilled American more. Remember Ricardo: prices, even labor prices, are not determined by value. The Nepalese polymath is welcome to attempt to charge higher for his skills, but I would assume in his culture he is not unique. That is to say, many people in Nepal are likely to posses these skills. So, any attempt to charge more might result in being passed over for another equally talented Nepalese man. Supply and demand, the rest is, as they say, just commentary.

kurt April 28, 2009 at 11:48 am

institutions

Ike April 28, 2009 at 11:52 am

Mike@PVL –

Supply and Demand are secondary measures, and not primary causes.

If it were as simple as to say there wasn't enough aggregate demand in Nepal economy, then Keynesian stimulus would play a role.

We could boost overall demand by paying Sherpas to carry sheep up and down the mountains.

Shaune Stoddard April 28, 2009 at 11:55 am

It is speculation to answer the question without further facts. Some questions:

*Is there basic rule of law? Can the cook trust that someone in power (government, church, local bully or otherwise) won't come along and simply take his earnings?

*Does Nepal have a solid/stable currency and banking system? Can the cook put his well earned wages in the bank and trust that they won't be lost, stolen and/or inflated away?

*Does Nepal have private property rights? Can the cook buy a small piece of land and build a small house on it that he owns "clear title". When he dies, can he pass it down to his children?

*Is the cook free to associate/dissociate with anyone he wants? Is everyone in his community (local,state) free to trade with each other?

*Does the basic legal system support contracts? Are they enforceable in some material manner?

*Does the Nepalese (sp?) culture (tribal, traditional, religious or otherwise) embrace freedom and respect for individual man? Can he feel that he is in control of his own life?

*Where is the Nepalese society in their development, understanding and utilization of rational thought? In their society, is the primary explanation for "the way the world works" given by "priests"?

*How did the lazy/untalented American "earn" his wages? Clearly define "earn". Can he quit his job and still somehow afford to buy a color TV, beer and/or a pack of smokes?

*Does the lazy/untalented American wake up every morning and feel like a victim? Does he feel that the world "owes" him something?

*Has the lazy/untalented American ever truly gone hungry?

Summary question: Does the cook live in a society where he feels secure that he can proudly provide an ever increasing standard of living to his family via the fruits of his labor (mental and physical)? Does the American have pride or does he believe he is a victim?

Ken Nelson April 28, 2009 at 11:57 am

The answer, naturally, is that there is less demand for the Nepal chefs services. If a million Peace Corp volunteers parachuted into Nepal, his wages would rise accordingly.

Chris O'Leary April 28, 2009 at 11:58 am

While it's amazing that he can do all of those things, the problem is that…

1. None of those skills can be performed from a distance (or over the Internet) in order to benefit from trade. Instead, he can only rely on local buyers (who are also poor). If he could somehow sell those skills to rich Americans, then he could make some money. He would likely make much more money if he moved somewhere else. There are Bosnians here in St. Louis who make pretty good money (e.g. $20/hour) working as handymen.

2. Those skills don't add up to something amazing. They are just discrete skills and are still only locally valuable.

3. The local economy doesn't place a premium on those skills.

Bronc April 28, 2009 at 12:04 pm

Two words – supply, demand

Matt April 28, 2009 at 12:08 pm

One word: Nepal.

Perry E. Metzger April 28, 2009 at 12:20 pm

So many of these answers strike me as entirely missing the point.

The question is not "why is Nepal poor" or "why is the US rich" or anything like that. It is: "Why does a spectacularly intelligent and resourceful person in Nepal earn spectacularly less than a lazy untalented American?"

This is a much shallower question than "why is Nepal poor" or "why is the US rich" and is much easier to answer.

The wealth you accumulate per unit time has nothing to do with how skilled you are — you could be the best ironmonger on earth, sit on your behind all day and earn nothing.

The wealth you accumulate has nothing to do with how hard you work, either. You could find a patch of land and spend all day digging deep holes and filling them again, expending enormous effort in so doing, and never earn a penny.

The wealth you accumulate has to do with how much other people are willing to give you in exchange for the goods and services that you provide them.

There are therefore four things to examine in answering: are what goods and services the talented Nepalese man has tried to put on the market, what are fellow Nepalese able and willing to trade for those goods and services, what are the goods and services an average American puts on the market, and what are fellow Americans willing and able to trade for them.

First, let us note that we haven't been told what the Nepalese gentleman is typically selling. He might have a vast array of talents, but that doesn't tell us what he generally does with them. However, the fact that he's willing to work as a cook even though he has a wide variety of skills would seem to indicate that he's not working regularly at some single lucrative profession or running some sort of continuing enterprise of note.

Even in third world countries, some people become relatively wealthy, and as in every other country, that has more to do with what you do with your skills day to day than with what skills you may possess. I presume that even in Nepal, some people are wealthier than others, and not necessarily because of their delicate handwork skills. I suspect, for example, that it would be hard to convince someone with a successful import business to work as a cook, and I presume that at least some such people must exist. The man who imports sheet metal or portable radios may not be as smart or as talented as the goat cook, but he's stumbled on something of far more value to far more of his fellow Nepalese, so he can earn more per unit time even if he could never make an intricate structure from tin or cook a goat.

Second, although we might discuss at length why Nepal is poor, all that matters here is the fact that it is indeed poor. If your customers are poor, they will not be willing to pay as much for goods and services as richer people will. I think that, in the effort to be clever and think about why Nepal might be poor many other responders have ignored that the mere fact that it is poor is the critical part. Even a fully free society with no hindrances whatsoever on the market can be poor, at least early on in its history. Capital takes time to accumulate. The question is not at all how free the market in Nepal is, or anything like that — all that matters is that it is poor.

Third and fourth, we might discuss the situation of the typical American worker, who is operating in a culture where people have great demand workers who will put in a steady 40 hours a week at some well defined task that, thanks to the state of economic development, produces value on a steady basis, and where, because the overall society is quite rich, such workers generally have their pay bid up quite high by world standards.

I realize a lot of people would like to read something deeper into this situation, but as is often the case the straightforward answer that looks only at quite obvious details seems to be the right one. He is relatively poor because he is doing the wrong things, he is absolutely poor because there is little wealth in his country. The lazy American benefits from a more structured production system in a wealthy land. The Nepalese man could become wealthier not by becoming more skilled but by doing something more valuable to his fellows, or by leaving for a country where there is more money to pay for his existing sort of work.

MattM April 28, 2009 at 12:24 pm

According to Frank, I owe a huge "debt to the social investments that supported [my] success."

Several issues with that:

1) I also owe a huge debt on the house government policies encouraged me to buy. And because of disastrous monetary policy, I lack the freedom to unload that debt any time soon.

2) I DIDN'T ASK for the social investments of my parents generation, and I'm not asking any for my family now. But I'M ASKED (forced) to foot the bill of these "investments" EX POST FACTO. I only had one year of public education (kindergarten because the Catholic school I was to attend didn't offer it), which my parents property taxes probably paid the teacher's entire salary that year, and for the next 12. But, somehow, my parents and I are still in debt and not paying enough. "Son, now that you're 18, here's the bill for your education…. and diapers… and meals…. and back rent…"

3) The notion that the only investments of value are the ones that the government makes for us is absurd. I suppose we should outlaw the stock market. Paul Mansour makes a great point above about owing our success to the actions of previous generations, before we ever had these "social investments".

4) Federal expenditures have outpaced revenues for much of the last 100 years. If these really are investments, where are the returns, and where is the accountability?

ettubloge April 28, 2009 at 12:26 pm

Most of the answers contain explanations. I would like to list this "lazy" guy's abilities: drive a car, purchase and set up and use a computer, speak and write coherent English, analyze complicated business issues and, more than anything else, reside and market his skills where there is greater return than in Nepal. My guess is this Nepalese superstar can do more than A-Rod except play baseball. But baseball playing is a more marketable skill.

BoscoH April 28, 2009 at 12:29 pm

Why does a spectacularly intelligent and resourceful person in Nepal earn spectacularly less than a lazy untalented American?

Because on whole, our Nepali friend doesn't provide as much value. The fry cooker at the local McDonalds serves hundreds of people per day. The WalMart greeter helps thousands find the shopping cart line. A small roofing company in the USA might do hundreds of reroofs and thousands of roof repairs per year. The thing we do really well here systemically is allow lots of small value to aggregate into large value. Inexpensive and standard payment/credit, rule of law for enforcing contracts, relative peace internally all contribute to this ability to aggregate value. An existing asset base, of course, is responsible for lots of the value that exists to be aggregated.

Rack me.

Michael Fernwood April 28, 2009 at 12:45 pm

A Nepleese or American workers' lifetime earnings are determined by the amount of producer surplus that worker can extract for their skills or services. Earnings will increase only to the extent that a worker's marginal opportunity cost of providing a service is less than the marginal revenue a society, or market will pay the worker.

Tiral and error, luck, will enable the worker to discover a skill or service on which a free and fair market places the highest marginal value. The worker will chose to specailize in that one skill or service only. A talent for that skill or service may have exisited prior to specialization or it may not. Certainly, post-specialization, society will at least perceive a talent. Monopolistic rents may even ensue.

In the case of Mr. Frank's multi-talented cook (roofer, plasterer, metal worker, carpetner, electricain) a likley specialization as a residentail contractor nay have been the occupational lifetime earnings producer surplus maximization.

Unfortunately, for the cook, Mr. Frank's employer, the Peace Corps, was most likley building new huts in the village for a marginal cost of $0. It is hard to extract producer surplus when you are competeing against free.

Such as it was, the cook had no other option but to be hired by Frank who then extracted consumer surplus by having the cook fix things around the house.

The intellignet and resourceful cook lived in a market burdened by the debt of American social investment.

Jon Biggar April 28, 2009 at 12:48 pm

I suspect that Henderson would agree that our culture of economic freedom *is* a "social institution" that we owe a lot of our prosperity too. But I also suspect that Frank would completely disagree with that.

It's really interesting how liberals are so ready to tear down the social institutions that gave us a prosperous society and replace it with an ivory tower thought construct that they believe (without evidence) will work better.

TrUmPiT April 28, 2009 at 12:56 pm

"Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year."

Are you, perhaps, referring to lazy, untalented Cindy McCain who owns more luxury homes than she can remember or count and makes something like $10,000,000 per annum for looking at herself admiringly in the mirror when she wakes up in the morning? Yes, I'm sure you must have been thinking of her when you said that.

Sam Grove April 28, 2009 at 12:58 pm

The Nepalese chef is wealthy in that he is able to provide for his needs and handle many tasks, but is he able to produce much value for those he does not meet?

He can provide valuable services, but he is not able to mass produce those services to trade with others beyond his normal reach.

His multiplier is small.

Otto Maddox April 28, 2009 at 1:06 pm

According to some college professors I am aware of, the Nepalese are being economically exploited and oppressed by the United States.

(Sorry, somebody had to say it.)

S Andrews April 28, 2009 at 1:11 pm

You guys are missing the whole point. Communist Party of Nepal is the single largest party in Nepalese Assembly. Now that they have a party with an ideology of social investments, Peace and Prosperity is a given in the future of Nepal.

S Andrews April 28, 2009 at 1:15 pm

You are also missing this part of Nepalese history:

In the late 1940s, newly emerging pro-democracy movements and political parties in Nepal were critical of the Rana autocracy. Meanwhile, with the assertion of Chinese control in Tibet in the 1950s, India sought to counterbalance the perceived military threat from its northern neighbour by taking pre-emptive steps to assert more influence in Nepal. India sponsored both King Tribhuvan as Nepal's new ruler in 1951 and a new government, mostly comprising the Nepali Congress Party, thus terminating Rana hegemony in the kingdom. After years of power wrangling between the king and the government, the monarch scrapped the democratic experiment in 1959, and a "partyless" panchayat system was made to govern Nepal until 1989, when the "Jan Andolan" (People's Movement) forced the monarchy to accept constitutional reforms and to establish a multiparty parliament that took seat in May 1991.[21] – Wikipedia

In essence, most of 20th century Nepalese Governing institutions were modeled after their Indian Counterpart. Well, we all know that India wasted more than 4 decades experimenting with Fabian Socialism.

Patrick April 28, 2009 at 1:18 pm

Even in a non-capitalistic society individual skills are not rewarded as highly as is the ability to lead groups of people effectively. Sure, highly specialized people in any economy are valued, but it will not and should not be rewarded on the same level as a great leader. Unfortunately, the western economy also tends to create and reward poor leaders as well as the great ones.

Martin Brock April 28, 2009 at 1:38 pm

First, the comparison between the "lifetime earnings" of this Nepalese man and the annual earnings of some no-account American worker is bogus. These comparisons surely ignore wealth not accounted for monetarily, so if this Nepalese man subsists on food he grows himself or barters for food with his roof thatching services, he hasn't "earned" anything. If he can't buy an mp3 player with dollars, he has no "earnings".

The Nepalese man is alive, so he's consumed enough food to stay alive for however long he's lived. An American worker earning the minimum wage can't eat for a lifetime on his monetary earnings, so the comparison is plainly nonsense.

The division of labor accounts for nothing here, since the no-account American worker has no particularly valuable skills, by assumption. Presumably, if this Nepalese man could immigrate to the U.S., he could do anything the American can do better and would earn a higher monetary wage, ignoring any discrimination based on his national origin. I take this fact for granted.

Synergy accounts better for a real difference in wealth. The American worker's labor is more valuable because he performs it in a more productive context characterized by many productivity enhancing innovations that he and everyone around him takes for granted, from paved roads to air conditioning and fast food.

These synergies aren't necessarily a product of "social investments" (or state spending) vs. market dynamics, but an American worker is certainly more productive as consequence of them.

It seems reasonable to call the American worker's greater wealth, insofar as it really exists, an "accident of birth". Who doubts that the Nepalese man would earn more, by the measures we assume here, had he been born in the U.S.? This fact warrants no larger government in my way of thinking. Maybe it warrants a smaller government.

I don't know much about Nepal, so I don't know how much relative freedom has to do with it, but I do know that the Nepalese man would have a hard time immigrating to the U.S. legally, so any scarcity of freedom is not confined to his side of the border.

Finally, maybe people in Nepal just don't want to live like Americans.

mobile April 28, 2009 at 1:42 pm

It's a final for an economics course. So I reckon I have at least a 50% chance of getting the right answer if I say

"Supply and demand".

OregonGuy April 28, 2009 at 1:45 pm

Opportunity.
.

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