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

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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