Real prosperity

by Russ Roberts on January 29, 2014

in Complexity & Emergence, Hubris and humility, Podcast, Standard of Living, Uncategorized

This week’s EconTalk is one of my favorite episodes in a long time–Nina Munk talking about her book, The Idealist, the story of Jeffrey Sachs’s attempts to end poverty.

There is much to learn from Munk’s story of the six years she spent shadowing Sachs as he implemented the Millennium Villages Project. Sachs’s idea was to spend a large amount of money to jumpstart the economies of a bunch of African villages and put them on a trajectory of growth. Sachs isn’t a Keynesian. He didn’t think spending alone or “boosting aggregate demand” was the key to prosperity. But he thought that a full-scale attack on every front would do the job–improve health and agricultural productivity and education and eventually growth would begin.

Munk has many insights, but the unforgettable insight for me came when I asked her why she considered Sachs a failure. After all, the money that was spent made a difference and some (most?) of that difference was positive. But Munk points out that it’s easy to help people have more stuff than they otherwise would have. That’s called charity. The much harder challenge–and the one Sachs tackled–is creating growth, the possibility of future improvement. Here is the key part of her answer.

And I think what we can all agree on is that what’s essential is that there is some possibility of employment, of livelihood, sustained livelihood for the people who are living there. How can they earn a living? How can they keep themselves alive? Beyond the basic charity that was given to them right from the beginning. And in both of the villages that I spent the time in, there was really nothing at all, by the time I finished my reporting in 2012, to demonstrate that there was anything sustained here. That there was anything that allowed the people in these villages to continue to live here and support their families and that a generation from now would be there. There is no industry. There is no reason for anyone to develop markets in these places. There are no resources. There’s no water. Agriculture is excruciatingly difficult. The soil is lacking any nourishment. There are terrible problems of violence. What happens in the long term?

What Munk is saying is that all the spending and effort and dreaming didn’t create jobs. And without better-paying jobs than were there before, what have you really accomplished that can last and be self-sustaining?

I want to try to phrase Munk’s answer in a different way. What she is saying is that before Jeff Sachs arrived, the African villages had a primitive economy. Nothing changed after the money was spent and all the effort was made to help the people that lived there. But why not? And I think the right way to say it is that prosperity requires that people are able to specialize in something that helps their neighbors. Prosperity is about finding ways to help people other than yourself through exchange, what economists call a market. If you don’t have that, you have nothing. Or close to nothing–you have a subsistence standard of living. But as I like to say, self-sufficiency is the road to poverty. Bettering yourself by bettering others is the road to prosperity. Without opportunities to help others and thereby help yourself, you’re stuck with subsistence.

I don’t really like the word “market.” Too much shorthand for a rich concept of exchange that allows for the possibility of specialization that allows for more investment in capital (human or physical) that leads to higher productivity that leads to prosperity and growth. Adam Smith understood this a long time ago and his insights have somehow been lost to much of the economics profession. At the heart of Smith’s insights into exchange and specialization and the division of labor is that we get wealthy by figuring out ways to create products and services that have value to other people. ┬áThat is what is missing in the parts of Africa that Sachs was trying to help. If you don’t have ways to help other people though exchange, you can’t have prosperity or even take steps toward prosperity.

The mistake Sachs made is that he confused cause and effect. Economies with markets have thriving health and education and are productive. But creating those effects with money doesn’t create anything real if there aren’t markets where people can exchange and better themselves by bettering others. Whatever you do will be ephemeral. You can help people for a while. But you can’t help them help themselves.

Markets emerge organically. Links between people get created by individuals struggling to find ways to help themselves by helping others. I don’t think we understand the process at all. Until we do, it is very hard to help people with top-down creation of the effects of markets. We should be thinking about the causes of markets and what is keeping those causes from emerging.

 

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