Friday, August 31, 2007

10 Questions for Greg Clark   posted by Herrick @ 8/31/2007 02:04:00 PM

In his new book A Farewell to Alms, Greg Clark, an economic historian at the University of California, Davis, contends that "[t]he New World after the Neolithic Revolution offered economic success to a different kind of agent than had been typical in hunter-gatherer society: Those with patience, who could wait to enjoy greater consumption in the future. Those who liked to work long hours. And those who could perform formal calculations in a world of many types of inputs and outputs...."

Clark also provides archival evidence that in medieval Britain (and to a lesser extent in China and Japan) the wealthy-who presumably had those "middle class" skills in abundance-raised more children than the average person. If you put these pieces together-a system that rewards a new set of abilities, plus greater reproductive success for those who have those abilities-then all you need to get some form of selection is one more link: A transmission mechanism. On the nature of the mechanism, Clark leaves the door wide open. Could be parent-to-child cultural transmission, could be genes, could be both.

While much of the discussion of Clark's book has focused on his "survival of the richest" hypothesis, Clark himself appears to be equally devoted to demolishing the widely-held view that economic institutions are the key to modern economic growth. He notes that the British people had solid property rights, limited government, and sound currency for centuries before they had their Industrial Revolution. Drawing on early work by Nobel Prize-winner Douglass North, he argues that economic institutions are largely endogenous and relatively efficient, at least when we're talking about time horizons lasting a century or more. If institutional change wasn't the driving force behind modern economic growth, then what was? In Clark's view, the driving force was change within human beings themselves.

1. In some early work, you wondered why workers in British cotton mills were so much more productive than workers in Indian cotton mills. You discuss this in the last chapter of A Farewell to Alms. You looked at a lot of the usual explanations-incentives, management, quality of the machines-and none of them really seemed to explain the big gap in productivity. Finally, you seemed to turn to the idea that it's differences between the British and Indian workers themselves-maybe their culture, maybe their genes-that explained the difference. How did you come to that conclusion?

Clark: I came to economics as an undergraduate expecting, as is the central view of economics, that the explanation for wealth and poverty would ultimately be located in social institutions and that people everywhere have basically the same aspirations and abilities.

But unlike most of my colleagues in economics I have always been interested in the mechanisms, and the fine details, of how things actually function. Much of modern economics is entirely theoretical, and even most empirical work in economics involves just looking at very high level correlations between variables such as income per person and education, or democracy, or the openness of trade.

When I set out in my PhD thesis to try and explain differences in income internationally in 1910 I found that asking simple questions like "Why could Indian textile mills not make much profit even though they were in a free trade association with England which had wages five times as high?" led to completely unexpected conclusions. You could show that the standard institutional explanation made no sense when you assembled detailed evidence from trade journals, factory reports, and the accounts of observers. Instead it was the puzzling behavior of the workers inside the factories that was the key.

2. Your book is clearly a call for a new research agenda in the fields of economic growth and economic history, one focusing less on institutions and more on what we might broadly call "labor quality." But your key hypotheses seem to turn on the question of how and why entire workforces change across the centuries, and involve questions of culture, child-rearing methods, and perhaps human genetics-fields quite outside the expertise of most economists. If you could command an army of, say, biologists, anthropologists, and neuroscientists to test your hypotheses about long-term changes in labor quality, what would you have them work on?

Clark: That is a great question. If, as is possible, the pre-industrial era changed people genetically to be better adapted to market economies, then a systematic comparison of the DNA of societies should find correlations between gene frequencies and the histories of these societies. If genetic change was also occurring in historical time, as opposed to the pre-historic era, then we would expect these changes to be incomplete even in societies with a long history of settled agriculture. In that case we would actually predict class differences genetically! The rich in these societies would differ genetically from the poor in certain systematic ways! All this should be testable at some point.

If the change was purely cultural, then we still might be able to discover systematic behavioral differences between poor and rich in modern capitalist society, such as over time preference rates, that correlate with differences between rich and poor societies.

3. What do you think are the weakest links in the now-conventional "Institutions Matter" chain of reasoning?

Clark: The book challenges the modern orthodoxy of economics - that people are essentially the same everywhere, and with the right set of institutions, growth is inevitable - in three ways. First by showing that there were societies like medieval England where the institutional structure provided every incentive for growth, yet there was no growth. Second by pointing out that by objective measures the institutions of many highly successful modern economies, such as in Scandinavia, provide much poorer incentives to individuals than those of very poor economies. And lastly by showing that in the long run economic institutions that would prevent growth tend to get replaced endogenously by ones that are pro-growth.

4. You provide a variety of evidence that interest rates have fallen over the centuries; this is a fascinating set of data that we've discussed before at Gene Expression. Should economic historians still be searching for transaction cost stories to explain this fall in interest rates-e.g., lenders needed a high return in ancient Rome to compensate them for the high cost of searching for safe borrowers-or is that search likely to hit a dead end?

Clark: Interest rates on safe assets like houses and land fell from 25% or more in Ancient Babylon, to 10% in Ancient Greece, Roman Egypt and medieval Western Europe, to 4% in the eighteenth century in the Netherlands and England. Most economic historians assume this just represents transaction costs. But I can show in cases such as medieval England that transaction costs have nothing to do with this - the real return on investments as safe as modern Treasury Bonds was 10% or more. So I am confident that something much more fundamental was changing over these years.

5. You use data on British wills to argue that the British people of today are by and large the descendants not of peasants and not of the violent medieval aristocracy-both groups failed to reproduce themselves. Instead, the British people of today are largely the descendants of the bourgeoisie of the middle ages. Nowadays, that seems to be a testable hypothesis; have you run into genetic evidence bearing on what you call the "survival of the richest?"

Clark: I agree that, in principle, this is a completely testable hypothesis. If there was genetic change in the Malthusian era then we will find systematic differences in genes that influence behavior such as patience and propensity to violence between groups such as the British and those such as Australian Aboriginals that had no experience with settled agriculture.

However, as far as I am aware, the identification of genes that influence such behaviors is at a very early and tentative stage. The only such studies I have seen reported are those of differences across ethnic groups in variants of genes encoding monoamine oxidase enzymes.

6. How are economists reacting to the book? In particular, are there any misunderstandings that you'd like to address?

Clark: I expected a hostile and perhaps even dismissive reaction, given the controversy that the "survival of the richest" argument was bound to create, and given the attack on the modern orthodoxy amongst economists about institutions being the key to wealth and poverty. But economists who have read the book, even when they remain skeptical of the conclusions, have generally found it interesting and challenging. They have been surprised to learn in particular that the history of economies is not anything like the implicit assumptions they have, based on modern economic doctrine.

7. One implication of your model is that human populations that haven't been through the full Neolithic Revolution are going to fail miserably when they try to build a modern market-oriented society. If people turn out to as hard to change as they appear to be-if neither culture nor genes prove to be all that malleable in the medium-run-then how would you recommend improving the lives of these people? Do you think economists can design institutions that can help make these populations productive?

Clark: Anyone who reads history cannot fail to be impressed by the difficulties that hunter-gatherers, or societies with only limited experience of settled agriculture, have in successfully incorporating into the modern capitalist economy. I spent a week in Australia this summer, and the plight of Australian Aboriginals is very sad. The surviving Aboriginal communities have seen tremendous rates of poverty, alcoholism, drug use, violence and sexual assaults.

But an important point in the book is that while some of this cultural variation may be due to the long histories of societies, there is a lot of cultural variation within these constraints that produces dramatic differences in wealth in modern societies. So there is no ground for fatalism on the possibilities for any society. The problem is that measures to reform the cultures of societies seem difficult to devise. Look at the lack of success the Chinese Communist Party had in remaking Chinese Culture. China has emerged from a period of extreme ideological indoctrination seemingly with its pre-communist love of individual wealth and status completely intact.

8. You emphasize that "[t]he argument is not that agrarian life was making people smarter." But you also emphasize that agrarian life placed greater value on verbal and mathematical skills than hunter-gatherer life. Let's set aside for the moment the question of whether these skill changes were cultural, environmental, or genetic. Are you claiming that the rise in math and verbal skills was counterbalanced by an equal loss of some similarly valuable hunter-gatherer mental skills? In other words, were the mental effects of the Malthusian process zero-sum? If so, what process within your model would make that occur?

Clark: I wanted to emphasize in the book that I was not advocating any kind of Social Darwinism. The long Malthusian economy that preceded the Industrial Revolution changed people, but there is no evidence it made them "better" or "smarter." Indeed there is evidence that we did not become any happier as result of economic growth.

Anthropological accounts of forager societies suggest that people in these communities have strikingly developed powers of observation and memory (as well as an amazing ability to endure pain) - they are just not abilities that the modern market economy places much value upon.

9. Bowles, Camerer, and an interdisciplinary research team led a series of ultimatum-game studies in pre-modern societies; the found incredibly diverse outcomes. By contrast, across modern societies, ultimatum game play is much more similar, so it looks like the modern world really is a world of conformity, at least on this topic. How do you think their experimental evidence bears on your question of whether the "long Malthusian night," as you call it, selected for a certain set of behaviors and attitudes?

Clark: I have seen these results reported, but had not thought of relating them to the arguments of the book. I would have expected that pre-modern societies would have had a common response, but potentially a different response than in modern societies. So I do not think I could call this any kind of vindication of the hypothesis in the book.

10. What's the next project?

Clark: I always have several going at the same time. One is a follow up to the "survival of the richest" study for England reported in the book which will look more closely at the intergenerational transmission of economic success with a much larger set of data, and seek to show through examination of the effects of family size that the mechanism is indeed almost entirely the transmission of culture or genes. This study will also look over the whole period 1600-1914 and examine when and why richer men ceased to have more children than average and began to have less. I would love to use this data to try to tease out whether we have just cultural evolution as opposed to genetic - I just cannot think of any way to do that!

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