DRI-183 for week of 12-7-14: Immigration and Economic Principles

An Access Advertising EconBrief:

Immigration and Economic Principles

1776 marked the founding of a new nation and a new intellectual discipline. The Declaration of Independence announced the creation of a United States of America and proclaimed the individual’s right to life, liberty and the pursuit of happiness. The Founders – specifically, the Declaration’s author – relied heavily on Adam Smith for the intellectual underpinnings of their document.

Smith’s Wealth of Nations, published in 1776, identified the purpose of all economic activity as consumption. Today, economists view consumption as the source of happiness. But in 1776, that notion was radical indeed. The reigning philosophy of government was mercantilism, which taught that government should accumulate gold (or specie generally) as a store of wealth by promoting the export of goods and discouraging imports. The resulting net inflow of gold would enrich the nation. Of course, even mercantilists knew that food was necessary to human survival – they coexisted with a primitive school of economists known as the physiocrats, who believed that land was the only source of economic value and agriculture the only productive economic activity.

Smith’s work began the tradition of modern economics by overturning both his fallacious predecessors. The mercantilists were wrong on two counts: they were wrong to stress exports at the expense of imports and wrong to imply that a “favorable” export surplus was a stable outcome. Imports are the beneficial part of international trade because they enhance consumption; exports are the cost of international trade because they connote a sacrifice of goods sent abroad to obtain imported goods for consumption. Even if an export surplus were to prevail temporarily, it could not persist. Building on the work of his contemporary David Hume, who developed the famous “price-specie flow model,” Smith pointed out that the net inflow of money (either gold or silver) resulting from the export surplus would raise domestic prices, causing exports to become less desirable to domestic residents and foreign imports to become more desirable.

Smith also pointed out that human labor created goods for consumption not only by working the land but in factories as well. His discussion of a pin factory is still studied today as a pioneering analysis of productivity.

Thus did the modern study of economics and international trade begin life together. International economics has stayed in the spotlight ever since. Currently immigration occupies center stage; President Obama has seized the political initiative from the Republicans by proposing to temporarily suspend enforcement of immigration laws against large numbers of undocumented immigrants.

Unfortunately, the accidental historical precedence given to international economics has contributed to the misapprehension that this field of economics is sui generis. The truth is that international economics is subordinate to general economic theory. The truths of basic economics apply internationally as well as intranationally. In fact, most international issues would be clearer if they were reconfigured in intranational form. This applies just as strongly to immigration as it does to every other aspect of international economic theory.

Migration and Marginal Productivity

When students take their first economics course, the principle of marginal productivity is one of the first lessons they learn. But first things first. In the beginning, there is scarcity – and it is pervasive. The “economic problem” is the outgrowth of scarce resources and infinite wants. There is no end to the number of good things that the human imagination can dream up. Unfortunately, virtually all of those good things are created using “inputs” – human labor, natural resources and produced goods. Inputs are available in limited quantities; they are “scarce.” Consequently, the good things – “output” – are also scarce. The science of economics has devised a pure logic of choice enabling us to make the best use of scarce inputs in producing scarce output to satisfy unlimited human wants.

The principle of marginal productivity deals with input allocation. It says to allocate inputs so that all marginal productivities are equal. That sounds mind-blowingly simple, and it is. In practice, what it boils down to is that business managers – indeed, all of us, if you want to view each individual as their own manufacturer of happiness – are on the lookout for situations in which some inputs are highly productive. For example, we are all looking for jobs in which our own labor specialties are highly valued. If we are teachers, we keep a weather eye peeled for highly paid teaching vacancies. Movie actors flock to auditions for desirable parts. Computer programmers look for programming jobs that offer the highest salaries.

Input prices, such as the wages paid for human labor, reflect the productivity of the input at the margin. The more productive the input, the greater the demand by managers and the higher the price they are willing to pay it. The more people supply the input, the more sellers compete to offer input services and the lower the price will be, all other things equal.

Input supply and demand determine the market prices for all inputs, from human labor to land to capital goods. The principle of marginal productivity governs the productive allocation of inputs – it tells us whether it makes sense to use more or less of each input in producing the various outputs. It also tells us whether it is efficient to shift inputs between different outputs by using more labor to produce one good and less labor to produce another one.

When we talk about changing input amounts and shifting inputs, we are talking not just about one particular place and one particular point in time. We are also talking about different places at the same time and about different points in time as well. That is, it may also make sense to shift labor from one place to a different place. The same is true of natural resources and capital goods. We also shift input use from today into the future and vice-versa. Differences in input prices and productivities are the keys to these shifts, too.

Migration is one of the most fundamental examples of all economic adaptive response. Differences in input price and productivity between geographic regions create an opportunity for gain by input reallocation. Let us assume that low-skilled human labor is more productive in Kansas than in Missouri. This will tend to make wages for unskilled labor in Kansas above those in Missouri. The most practical response to this discrepancy is for unskilled labor to migrate from Missouri to Kansas. This will tend to lower wages of unskilled labor in Kansas and raise them in Missouri, thereby reducing the wage discrepancy in the two states. The migration will also tend to reduce the marginal productivity discrepancy in the two states by lowering marginal productivity for unskilled labor in Kansas and raising it in Missouri.

Migrations of this kind happen throughout the U.S. on a daily basis. Nobody thinks much about them, let alone takes measures to prevent them. But if I were to replace the word “Kansas” with the word “Texas” and the word “Missouri” with the word “Mexico,” the whole passage would suddenly become controversial and subject to debate. While intranational migration has occurred throughout American history without attracting unfavorable comment, international immigration has been heatedly debated since at least the 1920s.

Our discussion is the tipoff to the falsity of most of the debate. There is little economic difference between intranational migration and international immigration. The mere fact that the migratory movement crosses an international boundary does not invalidate it. It does not rob it of its economic value. Of course, it does change its superficial character. But that is all; the change is superficial only. The gain from immigration is the same as that from migration – more efficient use of scarce resources. It is one of the most basic, bedrock principles in economics.

Opportunity Cost and Comparative Advantage

The very first subject undertaken in the very first course in economics taken by college students is the subject of economic cost. What is special about economic cost, as opposed to (say) accounting cost? Economists view cost in a special way. Because all of us live our lives exchanging goods for money and vice versa, we are completely habituated to denominating prices and costs in monetary units. And that’s good, because it gives us a common denominator for valuing thousands of things whose heterogeneity would otherwise make comparative valuation a nightmare. Can you imagine a life in which we had to trade goods and services directly for other goods and services, without a medium of exchange to intermediate each transaction?

The thought sends shivers up and down your spine. But economists conceptually do just that when they explain microeconomic theory or, as it is sometimes called, price theory. That theory treats money prices only in relative or real form. A relative price reveals the implied sacrifice of one good involved in the purchase of one unit of another. For example, if the Px = $10 and the Py = $5, then the relative price of X (its real price) is the ratio of X’s price to Y’s price. That is, the purchase of one unit of good X implies the sacrifice of 2Y. While the money price of X is $10, its real price is 2Y. In a two-good world, this relative price is the opportunity cost of consuming X.

Why do economists go to all the trouble of jolting students out of their comfortable familiarity with monetary valuation and into the retrograde world of direct barter exchange? Not because barter trade has much practical application, certainly, although it does arise occasionally in special contexts. No, the purpose is expressed in an aphorism by the great 19th-century English economist John Stuart Mill, who characterized money as a veil that obscures but does not completely hide the underlying reality. That reality is that indirect monetary exchange substitutes for direct barter exchange, and this accounts for the concept of a relative or “real” price. When we pay money for goods we are really trading alternative consumption – specifically, the highest-valued alternative consumption purchase equal in monetary amount. This is a tipoff to the fact that the real value we derive from goods and services is the happiness they bring; money is merely a placeholder (or unit of account) that facilitates comparison and exchange.

We penetrate the monetary veil because it’s the only way to learn the underlying truths about opportunity cost and comparative advantage. In 1815, an English stockbroker named David Ricardo assumed Adam Smith’s mantel as the world’s leading economist by developing a revolutionary model of international trade. Ricardo’s model stipulated two hypothetical countries. He could just as well have called them “A” and “B,” but with an eye to the headlines of his day he called them “England” and “Portugal.” He specified two produced goods, wine and cloth, both produced using human labor. (He treated all labor hours as equivalent.) No chauvinist, he assumed that Portugal was capable of producing both goods using fewer labor hours than was England. He began by assuming a condition of autarky; that is, no international trade between the two countries. He also stipulated (arbitrary) price and production levels for both goods in each country.

Up to this point, Ricardo had done nothing remarkable by contemporary standards. But now he hit his audience with a thunderbolt. He asserted that opening up the two countries to international trade would benefit both of them by allowing them to consume more than each country could produce and consume in the absence of international trade.

First, Ricardo pointed out that the true economic cost of production for wine and cloth in each country was not the (unspecified) monetary cost of employing labor. It was not even the amount of labor hours used to produce each good. (Up to this point, classical economists such as Adam Smith had favored a ‘labor theory of value”; the value of any good was determined by the amount of labor required to produce it.) No, the true economic cost was the opportunity cost of production – except that Ricardo called it the “comparative cost.” Based on the labor coefficients of each good in each country, Ricardo calculated the opportunity cost of one unit of wine and cloth production in both England and Portugal.

And lo! The results shocked the world. In fact, they still do. Even though Portugal appeared to be the more efficient producer of both goods, it had a lower opportunity-cost of production for one good only – wine. Portugal was the more efficient wine producer because its opportunity-cost of production was lower than England’s.

The implications of this finding were – and are – world-shaking. England should specialize in its most efficient good, cloth, by producing more cloth than it did under autarky. Portugal should produce more wine than it did under autarky. (Actually, Ricardo’s model prescribed complete production specialization by each country, an artifact of the super-simplified assumptions built into his model.) Then the two countries should trade internationally – England should export cloth to Portugal in exchange for wine produced by Portugal, thus allowing both countries to consume both goods. The terms of trade should represent a ratio of prices intermediate to that existing under autarky.

Sure enough – Ricardo’s model generated a result in which both England and Portugal achieved consumption levels for wine and cloth that exceeded the possibilities open to them under autarky. At the time, this seemed to the general public like a magic trick. To some people today, it still does. Some people have never learned it and others refuse to believe what they learned. Then there are those who insist that Ricardo’s conclusions apply only in textbooks and not in reality, for a host of reasons.

There are two key insights behind Ricardo’s theory. The first is his notion of comparative cost. Modern economists have broken this term in two. They have modified the term “comparative cost” to “opportunity cost” in order to stress its alternative element. To bring out the comparative or relative element, they have devised the term “comparative advantage” to encompass situations like England’s in Ricardo’s theory. Despite being less productively efficient in both goods in the absolute sense, England nevertheless had a comparative production advantage in cloth because its opportunity-cost of production was lower.

But merely identifying the locus of comparative advantage is purely academic unless we act on it by specializing in production, which creates the extra output that allows us all to consume more by engaging in international trade. Thus, specialization and trade is the second key element in Ricardo’s theory.

Thus far in this section, we have said nothing whatever about immigration. But immigration is the proverbial elephant in the room. For thousands of years, civilization has been following this principle of specialization and trade according to comparative advantage. That is what we do when we grow up, go to school, get a job, work and earn money – then use the money to support our lifestyles. We did it for millennia without realizing what we were doing or why, like the character in Moliere’s play who had been speaking prose all his life without realizing it.

David Ricardo developed his theory in terms of international trade for the same reason that Adam Smith began the modern study of economics by focusing on international trade: that was where the action was in terms of money, public interest and government activity.

It is only very recently that economic textbooks have tentatively begun to point out that the same insight they have been flogging for centuries while teaching the theory of international trade is valid in intranational trade. In fact, this is exactly the insight that has accounted for human productivity since the days when human beings left their hunter-gatherer bands and formed individual families residing in villages, towns and cities.

And how does immigration fit into this implicit theory of everyday production, you ask? The answer would be too mundane to need mention were it not for the fact that so many people ferociously resist it even now. In order for specialization and trade according to comparative advantage and trade to work, people have to specialize in their comparative-advantage line of production, just as England and Portugal had to specialize in Ricardo’s model for those countries to realize the gains from international trade.

And they can’t very well specialize when they aren’t allowed to work at what they do best, can they? Yet Mexicans who are five times more productive working in Texas than in Mexico are nevertheless barred from working legally in the U.S.! The basic fundamental principles of markets are designed to achieve maximum productivity by assigning all of us to our highest-valued uses, where our marginal productivity is highest. And U.S. immigration laws allow people to move across international borders only according to their national origin, which has as much to do with their marginal productivity as the color of their eyes does.

Is this any way to run a railroad? Is it any wonder that the greatest economists, like Milton Friedman, constantly stress fundamental principles rather than niggling about esoteric mathematics or econometric models?

Cost Minimization

The standard microeconomic theory taught in college courses is divided into three subject areas: the theory of consumer demand, the theory of cost and production and the theory of marginal input productivity. The theory of cost and production is sometimes called “the theory of the firm” because its usual application is to business firms. That theory explains the optimal logic behind the production and sale of output to consumers by businesses.

A key principle of this theory is cost minimization. The theory of the firm assumes that the firm’s goal is profit maximization. (“Profit” might be viewed in instantaneous terms as the residual of total revenue from the sale of output minus all costs of production, including the opportunity cost of capital and/or the owner’s labor time, or it might be viewed intertemporally as the discounted present value of expected future net revenue.) The firm’s manager(s) will choose the rate of output that maximizes profit and will select the combination of inputs that minimizes the cost of producing that rate of output.

It goes without saying that the firm will purchase any quantity of (homogeneous) input at the lowest possible price. Alternatively, the firm will purchase the highest quality of any heterogeneous input at a given price.

Well, it’s supposed to go without saying, anyway. But when it comes to immigration, suddenly it’s a crime even to say it out loud. When employers want to hire foreign workers because they can pay lower wages than they are paying to domestic workers for the same work, that turns out to be illegal, or immoral, or fattening or otherwise verboten. But if this is not only allowable but even downright de rigeur in an intranational context, why should it be unthinkable in an international context?

Of course, the answer is that it shouldn’t. It is just as beneficial to minimize costs by hiring cheap foreign labor as it is to hire cheap domestic labor. It is just as beneficial to hire cheap labor from any source as it is to purchase cheap raw materials or cheap land or cheap machinery.

Did a reader respond by inquiring “beneficial for whom?” Well, the answer is “beneficial in the first instance for business owners, but beneficial in the long run for everybody, because lower costs ultimately are reflected in lower prices and everybody is a consumer – including all the owners of inputs who are paid the lowest prices.” We can’t always guarantee that every single person benefits from every efficient economic activity – such as immigration – more than they suffer from it. But that has to be true for most people – otherwise, how did civilization advance as it has over the millennia? How did the U.S. become the U.S.?

What About “Fiscal Cost” or “Net Job Creation” or …

We now know that the concept of free and open migration – whether inside the boundaries of a nation or across national boundaries – is fundamental to the efficiency of markets. It is inextricably interwoven into the fabric of our everyday lives, so much so that we take it completely for granted. Thus, when we protest against immigration by foreigners into our country we are engaging in the most blatant contradiction.

How many times have readers of this EconBrief previously seen this issue framed in these clear, straightforward terms? Chances are, the answer is: Zero. Instead, we are presented with a variety of alternative arguments against immigration.

For example, a fairly recent anti-immigration tactic is the “fiscal cost” scam. We are urged to restrict immigration – or ban it altogether – because it is unaffordable. Supposedly, immigrants cost the government more in various forms of transfer payments (welfare, Social Security, emergency medical and more) than they generate in receipts (various tax payments). Thus, on net balance they flunk the criterion of “fiscal cost.”

The non-economist might suppose that this is a key test of economic worthiness, perhaps tabulated quarterly or annually on every American by a government bureau and kept on file. What a laugh. Fiscal cost is a term made up by anti-immigrationists in order to discredit immigrants. The easiest way to appreciate this is to recall that half of the American population now pays no income tax. It has recently come to light that most Americans stack up even worse by the fiscal cost standard than do immigrants! This is hardly surprising; immigrants are not eligible for most forms of welfare and tend to be younger than the average American, so get less medical treatment than average as well. They are more entrepreneurial and tend to work harder, so are more productive as well. This follows because, far from being the tired, dispossessed, tempest-tossed, ragged poor of the Emma Lazarus poem, immigrants tend to have more initiative and smarts than the average person. They have to be better than average in order to contemplate traveling to another land, speaking a foreign language, coping with another culture and starting another life. The anti-immigration stereotype of a lazy bum who somehow runs the border gauntlet in order to live off the fat of the U.S. welfare state is a particularly egregious myth.

Calculating fiscal cost is no easy task. Why would a researcher engage in laborious calculations to produce estimates of aggregate effects whose meaning is so obscure? Actually, complexity and obscurity are what make concepts like fiscal cost attractive to anti-immigrationists. The last thing they want to do is join a debate on fundamental economic principles, where the issues are so straightforward and clear-cut. Why start a fight they are destined to lose? Instead, they want to pick a fight they can pretend to win because the public will not know how to judge it. We are so used to hearing economic issues outlined in complicated terms, so accustomed to watching with glazed eyes and hearing without comprehending that we fall back on our emotions rather than our reason.

Now the anti-immigrationists have us where they want us. The immigration debate takes us back to the days of pre-history, when mankind first began to break up the ancient bands and form families. Outsiders were looked upon with suspicion. Trade and specialization were forbidden; economic activity was geared to benefit the band, not the individual household. Today, the nation state has taken the place of the ancient hunter-gatherer band as the extended family. The state dispenses welfare benefits and rules over us with an iron fist. It wants to control economic activity for its benefit and the benefit of its acolytes. It inflames those ancient, instinctive antagonisms toward outsiders that still reside within the citizenry.

We can revert to the savage, instinctive atavism of mankind’s primitive past. Or we can embrace the reasoned productivity of freedom and free markets. The choice should be easy, for the record of history shows that markets have lifted mankind out of the muck and mire to the prosperity of today.

The last thing we should do is judge immigration by perusing the latest pseudo-study by a think-tank dedicating to obfuscating clear thought. The simplest, clearest, most basic of all economic principles tell us that immigration is vital to freedom and prosperity.

DRI-312 for week of 6-15-14: Wealth and Poverty: Blame and Causation

An Access Advertising EconBrief:

Wealth and Poverty: Blame and Causation

Among the very many cogent distinctions made by the great black economist Thomas Sowell is that between blame and causation. Blame is a moral or normative concept. Causation is a rational, cause-and-effect concept. “Sometimes, of course, blame and causation may coincide, just as a historic event may coincide with the Spring equinox,” Sowell declared in Economic Facts and Fallacies. “But they are still two different things, despite such overlap.”

Unfortunately, blame has overtaken causation in the public perception of how the world works. This is bad news for economics, which is a rational discipline rather than a morality play.

Economic Development

There is a specialized branch of economics called economic development. Not surprisingly, its precepts derive from the principles of general economic theory, adapted to apply in the special case of areas, regions and nation states whose productive capabilities rise from a primitive state to advanced status.

The public perception of economic development, though, is that of a historical morality play. Developed Western nations in Europe engaged in a practice called “imperialism” by colonizing nations in South America and Africa. Then they proceeded to exploit the colonial natives economically. This exploitation not only reduced their standard of living contemporaneously, it left them with a legacy of poverty that they have been subsequently unable to escape. Only government aid programs of gifts or loans, acting as analogues to the welfare programs for impoverished individuals in the Western countries, can liberate them and expiate the sins of the West.

The idea that moral opprobrium attaches to acts of national conquest has a considerable appeal. The conventional approach to what is loftily called “international law” – or, more soberly, “foreign policy” – is that military force applied aggressively beyond a country’s own international boundaries is wrong. But the impact of wrongful acts does not necessarily condemn a nation to everlasting poverty.

In fact, world history to date has been overwhelmingly a tale of conquest. For centuries, nations attained economic growth not through production but through plunder. Only since the Industrial Revolution has this changed. It is worthwhile to question the presumption that defeat automatically confers a legacy of economic stasis and inferiority.

That is why we must distinguish between blame and causation. We may assign blame to colonizers for their actions. But those actions and their effects occurred in the colonial era, prior to independence. Cause-and-effect relationships are necessarily limited to relationships in the same temporal frame; the past cannot hold the present prisoner. Even if we were to claim that (say) inadequate past investment under colonization is now responsible for constraining present economic growth, we would still have to explain why current investment cannot grow and eventually stimulate future economic growth.

Great Britain was the world’s leading economic power during the 18th and 19th centuries. She conquered and held a worldwide empire of colonies. She must have commanded great wealth, both military and economic, in order to achieve these feats. Yet Great Britain herself was conquered by the Romans and spent centuries as part of the Roman Empire. The “indigenous peoples” of the British Isles (perhaps excluding the Irish, who may have escaped the Roman yoke) must have recovered from the pain of being subjugated by the Romans. They must have overcome the humiliation of bestowing upon William the title of “Conqueror” after his victory at Hastings in 1066. They must – otherwise, how else could they have rebounded to conquer half the world themselves?

Great Britain’s legacy of military defeat, slavery and shame did not thwart its economic development. It did not stop the British pound sterling from becoming the vehicle currency for world trade, just as the U.S. dollar is today. If anything, Great Britain and Europe prospered under Roman domination and suffered for centuries after the collapse of the empire.

Germany has been an economic powerhouse since the 19th century. It survived utter devastation in two world wars and calumniation in their wake, only to rise from the ashes to new heights of economic prominence. Yet its legacy prior to this record of interrupted success was a history of squabbles and conflict between regional states. They, too, were subjugated by Rome and arose from a long period of primitive savagery. Why didn’t this traumatize the German psyche and leave them forever stunted and crippled?

It is hard to think of any nation that had a tougher road to hoe than China. True, China was the world’s greatest economic power over a millennium ago. But centuries of isolation squandered this bequest and left them a medieval nation in a modern world. As if this weren’t bad enough, they reacted by embracing a virulent Communism that produced the world’s worst totalitarian state, mass famine and many millions of innocent deaths. At the death of Mao Ze-Dong in 1976, China was a feeble giant – the world’s most populous nation but unable to feed itself even a subsistence diet. Yet this legacy of terror, famine, defeat and death failed to prevent the Chinese from achieving economic development. Less than 40 years later, China is a contender for the title of world’s leading economic power.

It is certainly true that some countries in Africa and South America were colonized by European powers and subsequently experienced difficulty in raising their economic productivity. But it is also true that there are “countries mired in poverty that were never conquered.” Perhaps even more significantly, “for thousands of years, the peoples of the Eurasian land mass and the peoples of the Western Hemisphere were unaware of each other’s existence,” which constitutes a legacy of isolation even more profound and enduring than any residue left by the much shorter period of contact between them.

Economists have identified various causal factors that affect economic development much more directly and clearly than military defeat or personal humiliation suffered by previous generations. Most prominent among these are the geographic factors.

Mankind’s recorded history began with settlements in river valleys. A river valley combines two geographic features – a river and a valley. The river is important because it provides a source of water for drinking and other important uses. Rivers also serve as highways for transportation purposes. Finished goods, goods-in-process and primary inputs are all transported by water. In modern times, with the advent of swifter forms of transportation, only commodities with low value relative to bulk travel by water. But throughout most of human history, rivers were the main transportation artery linking human settlements. Oceans were too large and dangerous to risk for ordinary transportation purposes; lakes were not dispersed widely enough to be of much help.

If we contrast the kind and quality of rivers on the major continents, it is not hard to see why North America’s economic development exceeded that of Africa. Not only is North America plentifully supplied with rivers, but its largest rivers, the Mississippi and the Missouri, tend to be highly navigable. Its coastline contains many natural harbors. Africa’s rivers, in contrast, are much more problematic. While the Nile is navigable, its annual floods have made life difficult for nearby settlers. The Congo River’s navigability (including its access from the ocean) is hindered by three large falls. The African coastline contains comparatively few natural harbors and is often difficult or impossible for ships to deal with – a fact that hindered international trade between Africa and the outside world for decades. The Congo is the world’s second largest river in terms of water-volume discharged; the Amazon River in South America is the largest. Yet the tremendous hydropower potential of both rivers has hardly been tapped owing to various logistical and political obstacles.

Valleys contrast favorably with mountainous regions because they are more fertile and easier to traverse. Sowell quotes the great French historian Fernand Braudel’s observation that “mountain life lagged persistently behind the plain.” He cites mountainous regions like the Appalachians in the U.S., the mountains of Greece, the RifMountains in Morocco and the ScottishHighlands to support his generalization. Not only do both Africa and South America contain formidable mountain barriers, their flatlands are much less conducive to economic development than those of (say) North America. Both Africa and South America contain large rainforests and jungles, which not only make travel and transport difficult or impossible but are also hard to clear. As if that weren’t a big enough barrier, both continents face political hurdles to the exploitation of the rainforests.

South America differs from its northern neighbor particularly in topography. The AndesMountains to the west have traditionally divided the continent and represented a formidable geographic barrier to travel and transportation. One of the great stories in the history of economic geography is the tale, told most vividly by legendary flier and author Antoine de Saint-Exupery in his prize-winning novel Night Flight, of the conquest of the Andes by airline mail-delivery companies in the formative days of commercial North America, the flatlands of South America do not consist primarily aviation.

Climate has similar effects on economic development. A priori, temperate climate is more suitable for agriculture and transportation than either the extremes of heat or cold. Both Africa and South America contain countries located within tropical latitudes, where heat and humidity exceed the more temperate readings typical of North America and Europe. Indeed, Africa’s average temperature makes it the hottest of all continents. While North America does contain some desert land, it cannot compare with northern Africa, where the Sahara approaches the contiguous U.S in size. The barrenness of this climate makes it less suitable for human habitation and development than any area on Earth save the polar regions. Speaking of which, subarctic climates can be found on the highest mountain regions on each continent.

The economic toll taken by geographic barriers to trade can be visualized as akin to taxes. Nature is levying a specific tax on the movement of goods, services and people over distance. The impact of this “transport tax” can extend far beyond the obvious. As Sowell points out, the languages of Africa comprise 30% of the world’s languages but are spoken by only 13% of the world’s population. The geographic fragmentation and separation of the continent has caused cultural isolation that has produced continual fear, hatred, conflict and even war between nations. The civil war currently raging between Sunni, Shiite and Kurd is the same kind of strife that T.E. Lawrence sought to suppress during World War I almost a century ago. Thus, an understanding of basic geography is sufficient to convey the severe handicap imposed on most countries in Africa and South America compared to the nations of Europe and North America.

Political Economy

It is certainly true that geography alone placed Africa and South Africa behind the economic-development 8-ball. Still, each continent does contain a share of desirable topographies and climates. History even records some economic-development success stories there. Argentina was one of the world’s leading economic powers in the 19th century. Not only was its national income ranked among world leaders, its rate of growth was high and growing. Its share of world trade also grew. Today, its status is dismal, exactly the reverse of its prior prosperity – its GDP is barely one-tenth of ours. But it was not conquered by a colonial power, nor was it “exploited” by “imperialism.”

Argentina won its independence from Spain well before it rose to economic prominence. Unfortunately, its political system gradually evolved away from free-market economics and toward the dictatorial socialism epitomized by Juan Peron and his wife, Evita. This produced inflation, high taxes, loss of foreign trade and investment and a steady erosion of real income.

Elsewhere in South America, economic evolution followed a similar course, albeit by a different route. Most countries lacked the same experience with free markets and institutions that lifted Argentina to the heights. Even when independence from colonial rule brought republican government, this quickly morphed to one-party rule or military dictatorship. Although the political Left insists that South America has been victimized by capitalism, South America’s history really reeks of the same “crony capitalism” that reigns supreme in the Western nations today. This means authoritarian rule, unlimited government and favoritism exerted in behalf of individuals or constituent groups. Moreover, erosion of property rights has weakened a key bulwark of free-market capitalism in the West today, just as it did throughout the history of South America.

In Africa, the situation was even worse and has remained so until quite recently. After crying out for independence from colonial oppressors, native Africans surrendered their freedom to a succession of dictators who proved more oppressive, brutal and bloodthirsty than the colonizers. Now, with the rise of the Internet and digital technology, Africans at last possess the ability to exist and thrive independently of government. They also can overcome the costs of transacting to protest against dictatorship.

The importance of markets and institutions can be divined from a roll-call of the most successful countries. Great Britain, Japan, Hong Kong, Singapore and Scandinavia are all small countries that lack not only size but also abundance of natural resources. One thing that Africa and South America did possess in quantities rivaling that of Europe and North America was resource wealth. But the ability to turn resources into goods and services requires the other things that Africa and South America lacked: not only favorable geography and climate, but also favorable institutions, laws and mores. Even in North America, the U.S. had all the favorable requisites, while Mexico lacked the legal and institutional environment and Canada lacked the favorable geography and climate.

Viewed in this light, it is not chauvinism to invoke a principle of “American exceptionalism;” it is just clear-eyed analysis. The country that later became the United States of America was blessed with ideal geography and climate. While it faced aboriginal opposition, that was much less fierce than it might have been. Great Britain’s colonial stewardship allowed the colonies to develop economically, albeit in a restricted framework. Moreover, the colonists developed a close acquaintanceship with British laws and institutions. This proved vital to the eventual birth of the American Declaration of Independence and Constitution. The U.S. was indeed the exception when it came to economic development because it faced few of the obstacles that hampered the development of almost all other countries. Coupled with the most favorable constitution ever written for free markets and a century and a half of virtually free immigration, the result was the growth of the world’s greatest economy.

Culture

Through the ages, historians have accorded culture an increasing emphasis in their studies. Oddly, though, it has seldom been linked to economics in general and almost never to economic development in particular. Yet even a cursory glance suggests it as an explanation for some of what otherwise would stand as paradoxes.

India has long ranked as the “phenom” of economic development – perennially expected to bust loose to assume its rightful place among the world’s economic powerhouses, and perennially a disappointment. As a legacy of centuries of colonial rule by Great Britain, it inherited a cadre of well-trained and educated civil servants. The world’s second-largest population provided a ready source of labor. The country did not lack for capital goods despite the abject poverty of most of its citizens, thanks to British investment. What, exactly, was holding India back?

The political left supplied its standard answer by attaching blame for India’s poverty to its “legacy of colonialism.” Movies like Gandhi portrayed British behavior toward Indians as beastly and sanctified Gandhi’s policy of passive resistance within a framework of civil disobedience. These answers were less than complete, however. They did not explain how the U.S., also a British colony and occasional victim of British beastliness for a century and a half, was able to succeed so brilliantly while India failed so dismally. Nor did they explain why India failed while employing the same socialist economic policies that England had incubated throughout the early 1900s before installing them at home just before granting India’s independence.

India’s adoption of socialism was the political complement to its cultural reverence for poverty, created and nurtured by Gandhi. India could hardly have picked a worse symbol for hero worship. Fortunately, India’s independence was delayed until after World War II, in which India refused to embrace Gandhi’s pacifism and participated significantly in her own defense and that of the Eastern theater. Then, after independence, India continued to stoke regional hostilities with neighbors China and Pakistan in subsequent decades, ignoring Gandhi’s views in the one context in which they might have done some good. Meanwhile, the country’s steadfast unwillingness to adopt a commercial ethic, root out public corruption and eradicate traditional taboos against the unhindered opposition of markets foreclosed any possibility of real economic growth.

If there was ever a culture that seemed impervious to economic growth, it was India’s. Even China never seemed such a hopeless case, for Chinese who emigrated became the success story of Southeast Asia; clearly Chinese institutions were holding up economic development, not her culture. Well, India’s cultural head is still buried in the sands of the past, but her institutions have changed sufficiently to midwife noticeable economic growth beginning in the late 1990s.

Foreign Aid and Foreign Investment

Two great myths of economics relate to foreign aid and foreign investment. For decades, intellectuals and governments sang the praises of foreign aid as a recipe for prosperity and cure for poverty. Alas, institutions like the World Bank and International Monetary Fund – both of which were created for completely unrelated purposes – have failed miserably to promote economic development despite decades of trying and billions of dollars in loans, grants and consulting contracts.

The failures have been particularly glaring in Africa, where real incomes were the lowest in the world throughout the 20th century. In retrospect, it is not easy to figure out why international aid should have succeeded in raising real incomes. After all, one of the signature measures employed by newly independent regimes in Africa and South America was to expropriate wealth owned by foreigners through nationalization. This raised the incomes of government officials and their cronies but did not raise real incomes generally. As Sowell observes, “there is no more reason to expect automatic benefits from wealth transfers through international agencies than from wealth transfers through internal confiscations.” And indeed, “the incentives facing those disbursing the aid and those receiving it seldom make economic development the criterion of success.” Aid agencies simply strive to give money away; host governments simply strive to get money. And that is pretty much what happened.

Lenin developed a theory of imperialism to explain why capitalism did not succumb to revolution on schedule. When the declining profit from capital threatened their viability, capitalists would turn to the less-developed nations, where their foreign investment would earn “super profits” at the expense of the host peoples. Unfortunately, his theory was overturned by experience, which showed that capitalists in developed countries invested mostly in other developed countries. (Today’s neo-Marxism has returned full-circle to the exploitation theories of original Marxism with the newly popular theory of French economist Piketty. His theory postulates a return to “capital” that is greater than that from investment in labor, which promotes a greater level of (hypothesized) inequality in income and wealth. Having failed to sell a theory of inequality based on a declining rate of profit, the Left is switching tactics – the return on capital is too high, not declining.)

The real recurring example of successful “foreign investment” has come through immigration. Welsh miners have come to the U.S. and mined successfully. Chinese entrepreneurs have migrated throughout Southeast Asia and dominated entrepreneurship in their adopted countries. Jews have migrated to countries throughout the world and dominated industries such as finance, clothing, motion pictures and education. German workers helped Argentina become a world leader in wheat production and export. Indian immigrants have become leading entrepreneurs in motels and hotels in the U.S. Italian and Lebanese immigrants migrated to Africa and the U.S. and achieved entrepreneurial success in various fields. Yet, ironically, immigration has typically been opposed by natives in spite of the consistent benefits it generates.

Causation, not Blame

History is a record of strife and conflict, of conquest and submission. At one time or other, practically every people have been conquered and subjugated. Colonial status has sometimes been disastrous to natives, as with some countries colonized by Spain in the Age of Exploration. Sometimes it has been relatively beneficial, as it was in the early stages of the American colonies. Often it turned out to be a mixed bag of benefits and drawbacks. But economic development has never been either guaranteed or foreclosed by the mere existence of a colonial past. Economic logic lists too many causal factors affecting development for us to play the blame game.