Basic Economics

by Sowell, Thomas

  Sometimes economic progress depends on whether people in a particular culture are seeking progress, rather than being contented with doing things the way things have always been done. The proportions of the population who seek progress and the proportions who are satisfied with doing things in familiar ways can differ between societies and within societies, thereby affecting economic differences among regions and nations. In the United States, for example, the antebellum South tended not to advance as fast as other parts of the country:

  Techniques of Southern agriculture changed slowly, or not at all. So elementary a machine as the plow was adopted only gradually and only in scattered places; as late as 1856, many small farmers in South Carolina were still using the crude colonial hoe. There was little change in the cotton gin, gin house, or baling screw between 1820 and the Civil War.{898}

  The cotton gin, a crucial economic factor in the antebellum South, was invented by a Northerner. When it came to inventions, only 8 percent of the U.S. patents issued in 1851 went to residents of the Southern states, whose white population was approximately one-third of the white population of the country. Even in agriculture, the main economic activity of the region, only 9 out of 62 patents for agricultural implements went to Southerners.{899} Differences in habits and attitudes are differences in human capital, which can mean differences in economic outcomes. As of the Civil War era, the North produced 14 times as much textiles as the South, despite the South’s virtual monopoly of growing cotton, and the North also produced 15 times as much iron as the South, 25 times the merchant ship tonnage and 32 times as many firearms.{900}

  The advantages of a larger cultural universe do not end with the particular products, technologies or ideas that come from other cultures. Repeatedly seeing how things are done differently in other societies, with better results in particular cases, not only brings those particular foreign products, technologies and ideas, but also counters the normal human tendency toward inertia that keeps individuals and societies doing things in the same old familiar ways. In other words, a particular culture may develop its own original new ways of doing things, as a result of seeing repeatedly how others have done other things differently. Conversely, a society isolated from the outside world has fewer spurs toward rethinking their own traditional ways.

  Human Capital

  Physical wealth may be highly visible, but human capital, invisible inside people’s heads, is often more crucial to the long-run prosperity of a nation or a people. John Stuart Mill used this fact to explain why nations often recover, with surprising speed, from the physical devastations of war: “What the enemy have destroyed, would have been destroyed in a little time by the inhabitants themselves” in the normal course of their consumption, and would require replenishing. Given the wear and tear on capital equipment, constant reproduction of new equipment would likewise be required.{901} What the war does not destroy is the human capital that created the physical capital in the first place.

  Even the massive physical devastations of World War II, from bombings and widely destructive ground battles, were followed by a rapid economic recovery in postwar Western Europe. Aid from the United States under the Marshall Plan has often been credited with this recovery, but the later sending of foreign aid to many Third World countries produced no such dramatic economic growth.

  The difference is that industrialized Western Europe had already developed the human capital which had produced modern industrial societies there before the war began, but Third World countries had yet to develop that human capital, without which the physical capital was often of little or no use when it was donated as foreign aid. The Marshall Plan eased the transition to peacetime economic recovery in Western Europe, but foreign aid could not create the necessary scale of human capital where that human capital did not already exist.

  Confiscations of physical capital have likewise seldom produced any major or lasting enrichment of those who do the confiscating—whether these are Third World governments confiscating (“nationalizing”) foreign investments or urban rioters looting stores in their neighborhoods. What they cannot confiscate is the human capital that created the physical things that are taken. However serious the losses suffered by those who have been robbed, whether by governments or by mobs, the physical things have a limited duration. Without the human capital required to create their replacements, the robbers are unlikely to prosper in future years as well as those who were robbed.

  Human capital may also play a role in the fact that has often been pointed out, that many of the poorest societies have been located in the tropics, and many of the most prosperous have been located in temperate zones. Yet many peoples from temperate zones who have gone to live in the tropics have often prospered there, as the Chinese have in Malaysia and the Lebanese have in West Africa, far more so than people indigenous to those regions. Here, as elsewhere, the effects of a particular geographic setting can be both direct and indirect—presenting objective opportunities and either extending or restricting the development of the human capital necessary to make the most of those opportunities.

  Sometimes the very advantages of a given geographic setting can make it unnecessary for the people indigenous in that setting to have to develop their human capital to the fullest. For example, a tropical land capable of producing crops the year round can make it unnecessary for the people there to develop the same sense of urgency about time, and the resulting habits of economic self-discipline, that are necessary for sheer physical survival in a climate where people must begin plowing the land soon after it thaws in the spring, if they are to raise a crop during the limited growing season in the temperate zone that will enable them to feed themselves throughout the long winter months. This was especially so during the millennia before modern transportation made it economically feasible to draw vast amounts of food from other lands around the world.

  The unavoidable necessity of storing food to live on during the winter means that, for centuries, ingrained habits of saving were also essential for survival among peoples in the temperate zones. But, in the tropics, the development of such habits is by no means always so urgent. Moreover, the ability to store grain or potatoes to eat during the winter is much greater in temperate climates than the ability to store bananas, pineapples or other tropical foods in hot climates. {xxxi} Human capital includes not only information but habits, and the habits necessary for survival in some geographic settings are by no means the same as in other geographic settings.

  Like many other things, natural abundance can have both positive and negative effects. The saying among the Thais, “Rice on the land and fish in the water”{902} expressed a confidence in the abundance of nature that was foreign to people struggling to survive in the very different geographic setting of southern China, where hunger and starvation were perils for centuries, forcing the people there to become frugal, hard-working and resourceful, under threat of extinction. When people from southern China migrated into more promising geographic environments in Thailand, Malaysia or the United States, these qualities—these habits, this human capital—enabled them to thrive, even when they began as destitute immigrants and later became more prosperous than the people who were living in the same environment before them.

  Much the same story could be told of the Lebanese, the Jews and others who arrived in many places around the world as immigrants with very little money, but with much human capital that they had developed in other, more challenging settings. Many other groups have had similar patterns as migrants within their own countries:

  Conspicuous among advanced groups are some whose home region is infertile and overpopulated. The Tamils of Sri Lanka, the Bamiléké of Cameroon, the Kabyle Berbers of Algeria, the Kikuyu of Kenya, the Toba Batak of Indonesia, the Ilocano of the Philippines, the Malayalees of Kerala in India, and the Ibo of Nigeria all come from regions too poor to support their populations, and all have unusually high rates of migration to areas outside their home regions, where they have taken up a va
riety of opportunities in the modern sector.{903}

  The era of European colonialism put Western education and Western industrial, commercial and administrative skills within reach for groups previously among the poorer indigenous people such as the Ibos in Nigeria and the Tamils in Sri Lanka, who then rose to become more prosperous than others who had been more prosperous before. The resentments of their rise, and the politicized polarizations that followed, led to bloody civil wars in both countries.

  Cultural Isolation

  One of the aspects of a culture that can be very important in its economic consequences is a willingness, or unwillingness, to learn from other cultures. This can vary greatly from one culture to another. Both Britain and Japan, for example, rose from being island nations lagging economically for centuries behind their respective continental neighbors, before eventually catching up and then surging ahead of them, largely as a result of absorbing the cultural and economic advances of other nations and then carrying these advances further themselves. The otherwise very different cultures of Britain and Japan were alike in their receptivity to incorporating features of other cultures into their own. This receptivity to advances made elsewhere is at least part of the answer to a question about Britain posed by an Italian scholar: “How, in the first place, did a peripheral island rise from primitive squalor to world domination?”{904}

  By way of contrast, the Arab Middle East—once a culture more advanced than that in Europe—became resistant to learning from others, lost its lead, and then fell behind other nations that were advancing faster. In today’s Arab world—about 300 million people in 22 countries{905}—the number of books translated from other languages has been just one-fifth of the number translated by Greece alone, for a population of 11 million. A United Nations study showed that the number of books translated in the Arab world during a five-year period was less than one book for every million Arabs, while in Hungary there were 519 books translated for every million people, and in Spain 920 books per million people.{906}

  Put differently, Spain translates as many books into Spanish annually as the Arabs have translated into Arabic in a thousand years.{907} Cultural isolation can be a factor in wealth differences among nations, just as geographic isolation can be.{xxxii} While highly educated people in the Arab world may not require translations to be able to understand what is written in other languages, the same is not true for the less fortunate masses of people.

  Sometimes cultural isolation has been the result of a government decision, as in fifteenth-century China, when that country was far more advanced than many other nations. China’s rulers deliberately chose to isolate China from what they saw as foreign barbarians. In the seventeenth century, the rulers of Japan likewise chose to isolate their country from the rest of the world. In later centuries, both countries were shocked to discover that some other nations had far surpassed them technologically, economically and militarily during their self-imposed isolation.

  Among the other ways in which cultures handicap themselves is in limiting which segments of their populations are allowed to play which roles in the economy or society. If only people from certain pre-selected groups—whether defined by class, caste, tribe, race, religion or sex—are allowed to have particular careers, this cultural distribution of economic roles can differ greatly from the individual distribution of inborn talents. The net result can be that, by forfeiting the potentialities of many of its own people, such a society ends up with a less productive economy than in other societies without such self-imposed restrictions on the development and use of their people’s talents and potentialities.

  History is full of examples of societies whose cultural norms confined particular segments of their population to particular roles, or even drove some of their most productive groups out of the country, because the prosperity of those groups made them targets of resentments that resulted in persecution, mob violence or outright expulsions. Other societies whose cultures were less restrictive or repressive often benefitted economically from the arrival of refugees with valuable skills and talents, even if these refugees had little money with them when they arrived.

  Seventeenth century England, for example, benefitted from the arrival of tens of thousands of Huguenots fleeing persecution in France. Huguenots created the watch industry in London, as other refugees created other enterprises and industries in Britain. Similarly, Spain’s mass expulsions of Jews in 1492—forcing them to leave most of their wealth behind—led many to settle in Holland, where the human capital that they retained helped make themselves prosperous again, and helped make Amsterdam one of the world’s great commercial ports.{908}

  Over the centuries, tens of millions of people fled from various parts of Europe to the United States, whether to escape persecution or just to seek wider economic opportunities than were available to ordinary people in Europe. Many American industries were created, or greatly advanced, by immigrants who had been people of no real wealth or distinction in Europe, but who became economic titans in America, while transforming the United States from a predominantly agricultural country into the leading industrial nation of the world.

  Cultural isolation takes many forms, creating economic and other handicaps that differ from group to group and from one society, nation or civilization to another. Differing levels of cultural isolation within and between societies add to geographic and other factors making economic equality unlikely among groups, societies, nations or civilizations.

  Cultural Development

  Because not all cultures developed written versions of their languages at the same time, there has been vastly larger and more varied written knowledge available in one language than in another language, at a particular period of history. Thus, in the nineteenth century, Czechs, Estonians or Latvians who wanted to become doctors or scientists, or to work in other professions that required advanced education, could more readily find the appropriate books and courses available in the German language than in their own languages.

  Although there was a written version of the indigenous language in Estonia before the nineteenth century, most of the publications in the Estonian language “remained religiously oriented” before 1850, and “the working language of all educated persons was German.”{909} Educated people in adjoining Latvia, and in the Habsburg Empire’s province of Bohemia —among other places in Eastern Europe and the Baltic—were likewise educated in German.

  German was the language of the educated classes in Prague, whether those educated individuals were ethnically German, Czech or Jewish.{910} Similarly in the Baltic port city of Riga in the Russian Empire, most of the education in that city in the nineteenth century was conducted in German, even though Germans were no more than one-fourth of the city’s population.{911} When the czarist government opened a university in Estonia in 1802, most of its faculty and students were German, and this remained so for most of the nineteenth century.{912} It was not just in formal education, but also in many different craft skills, that Germans were more advanced than many of the peoples of Eastern Europe. German farm settlements along the Volga and in the Black Sea region of the Russian Empire were more productive and more prosperous than the farms of the indigenous population.{913}

  There was a history behind such patterns. As already noted, Western European languages developed written versions centuries before Eastern European languages, as a result of Western Europe’s having been conquered by the Romans and having acquired Latin letters. During the Middle Ages, it was not uncommon for Western Europeans to be a majority of the population in various Eastern European cities. These urban Western Europeans were often Germans, though there were some Jews and other Western Europeans as well. Even when the Germans were not a majority of the urban inhabitants, they were often a majority of the economic elites, as in Prague in the Habsburg Empire or in Riga, Tallinn and other Baltic cities in the Russian Empire.{914}

  While Slavs were usually an overwhelming majority of the people in the Eastern European countrys
ides, there were also enclaves of German farming communities in Eastern Europe, often deliberately recruited by Eastern European rulers, who were anxious to bring people with more advanced skills into their domains, so as to increase the wealth and power of the lands they ruled. Not only did this transplant more advanced knowledge, technology and experience into Eastern Europe, it also opened the possibility of indigenous individuals in Eastern Europe acquiring some of the cultural advances from Western Europe.

  From a purely economic standpoint, these infusions of human capital into Eastern Europe contributed to greater opportunities for members of the indigenous population to advance economically by rising, as many did, through the acquisition of the German language and culture. However, from a social and political standpoint, a situation in which the German minority dominated the business and professional elites—when German families in Prague often had Czech servants but few, if any, Germans were servants{915}—was a situation provoking ethnic resentments and eventually ethnic identity movements expressing those resentments politically. Similar tensions and polarizations have been common in other countries, where an immigrant group brought more human capital than that of the indigenous population, and was conspicuously more prosperous as a result—the Chinese in Southeast Asia, Lebanese in West Africa, Japanese in Peru and Indians in Fiji, among many others.

  Within nations, as well, particular groups have migrated from one part of their country to another, bringing economic benefits while provoking social and political backlashes because of others’ resentments of their higher economic achievements. However these conflicts turned out—and some have turned out tragically—from a purely economic standpoint these are among the many complicating factors which prevent regions, races and nations from having either equal outcomes or even the same pattern of inequalities over time.