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Notebook: Discussion of: Partha Dasgupta (2007): Economics: A Very Short Introduction

Introducing Partha Dasgupta: Economics: A Very Short Introduction

http://amzn.to/2gR2jH3 https://delong.typepad.com/dasgupta.pdf

Back in 1800, nearly the entire world lived in dire poverty—what we today see as the dire poverty line of $1.90 a day, a level at which you are spending more than half your income on bare calories and essential nutrients, the minimum of heat and shelter, and the minimum of clothing. Below that line, certainly your health and perhaps your life is impacted: women become too skinny to reliably ovulate, and children become too malnourished to have healthy and effective immune systems. Back in 1800, there were only a few economies where the median household had a standard of living of more than $3 a day: Germany, France, Austria, Denmark, Belgium, Holland, Switzerland, the U.K., the U.S., and that was it.

Today the median household's standard of living in the United States, Switzerland, or Singapore is 55 times that dire poverty line of $1.90 a day. That is all due to advances since 1800: advances in science and technology that give us powers to manipulate nature beyond those attributed to gods in earlier centuries; advances in business, property, and market organization that allow us to organize production and distribution much more efficiently; and advances in government provision of educational, physical, and institutional infrastructure that underpin the advances in science, technology, and organization.

Yet 9% of humanity today lives at a standard of living of less than $1.90 a day. Half the world's population lives at less than $7 a day. 20% of humanity lives at less than $3 a day—including more than half of the people in each of Ethiopia, Uganda, Haiti, Burkina Faso, Gambia, Comoros, Timor Leste, North Korea, Madagascar, Togo, Guinea-Bissau, Sierra Leone, Eritrea, Guinea, Mozambique, Malawi, Niger, Liberia, the DRC, Burundi, the CAR, and—currently the poorest of the poor—Somalia.

At most 8% of the world's population has a standard of living more than half of today's U.S. median.

Rejoice: the world today is so much fabulously richer than it was in 1800. That is a miracle. Recoil: our knowledge—of how to run governments; of how to organize markets, firms, and property; and of how to apply science and technology—is so sketchily and unevenly distributed around the world, leaving only a small part of it as what we would see as rich and huge chunks of it as what we do see as desperately poor, is a scandal, and a crime against humanity.

But what is to be done about this crime against humanity?

One place to start is with economics, which is, as its revered ancestral founder wrote, "an inquiry into the nature and causes of the wealth of nations". One wishes one's own national economy to be wealthy and prosperous—one wants all national economies to be wealthy and prosperous—but how is this to be accomplished.

One road into economics a a discipline begins with Partha Dasgupta: Economics: A Very Short Introduction http://amzn.to/2gR2jH3 https://delong.typepad.com/dasgupta.pdf. This book is a game theorist's short—very short—introduction to economics. It focus on: individual goals, individual opportunities and constraints, individual incentives, strategies, exchange, trust, and equilibrium outcomes. You won't find lots of practice at using quantitative models to figure out how price and quantity change in response to demand shocks, or calculating macroeconomic multipliers to use in macroeconomic stabilization policy exercises.. What you will find is the logic and rationale for why figuring out how price and quantity change in response to demand shocks or calculating multipliers is a worthwhile thing to do.

Most introductory economics books begin with the highly stylized world of rational individuals and profit-seeking firms trading goods and labor in abstract markets. Instead, Dasgupta starts with two families—one in the upper middle class in the American Midwest, the other in a rural village in Ethiopia—describing how the members of each family live their lives and support themselves. The central concern of economics, he writes, is “to uncover the processes that influence how people’s lives come to be what they are.” Economists use models to answer that question, but the models only come later—after understanding the material conditions that people face and the choices they make under those conditions.

There is one single key thread in Dasgupta's Very Short Introduction: trust. Trust in others is essential to inducing people to make the investments—in making capital improvements, in developing skills and knowledges, in developing production and exchange networks—necessary to take advantage of the possibilities of technology, organization, and the division of labor in order to have full wealth and prosperity. Most of prosperity, in Dasgupta's view, rests on creating social institutions to enable large-scale networks of trust:

  • The coffee farmer on the volcanic hillsides of Nicaragua five years ago could plant coffee trusting that the planting would be socially useful because today I or somebody like me would drink a drink made from their plant's beans, and would be, in exchange for the drink, willing and able to reward all those in the value chain back to the coffee farmer.
    • Back in 456 B.C., the archons of Athens, Greece could commission the sculptor Pheidias to assemble a team to make a 30-foot-tall bronze statue of their patron goddess Athena-Fighting-in-Front trusting that 1500 miles away (as the owl flies) there were Keltic miners in Cornwall who would dig out of the earth the 7 tons of tin needed to turn the copper into bronze and send it by ship and wagon to Athens.

Normally, however, one has deep trust in only a few people: one trusts one's close kin, one's immediate neighbors, and one's closest friends to have your back. Outside of your core group, if you do somebody a favor and provide them with something of use and value, they may or may not reciprocate, depending. The size of the group of people you can normally trust to respect your stuff, or to reciprocate the favors you do in gift-exchange relationships, is about 50. That is not enough on which to build even a minimally efficient division of labor and scale of organization.

Economics is thus, according to Dasgupta, the study of the institutions, norms, and patterns that allow for the generalization of deep trust needed to transform bands of 50 or so East African Plains Apes quarreling with their neighbors into our current 7.5 billion-strong global division of productive labor and system of technological development and advance. How does these underpinnings function and how does our global market economy work—and, in may places and for many purposes, fail to work well? These are the questions Dasgupta asks and tries to answer. And he has a lot to say.

For a taste, let me turn the mic over to Partha http://www.voxeu.org/index.php?q=node/4307:

The earliest class of explanations... [in the] 1950s... [were] that a worker in the United States, for example, would be producing a lot more per hour than a worker in Ethiopia... [because] he has many, many instruments to work with.... The last 20 years... [have seen] explanation[s] ... founded on institutions.... I've found that to be unsatisfactory as well, because you could establish the same institution in various parts of the world, and in some places will work, and in others it won't.... It's a rather banal observation... institutions per se don't deliver. What's at the heart of well functioning institutions is the creation of trust among people... buying and selling, borrowing and lending, investing, and so forth.... Economic life involves exchanges, transactions.... And for them to be fruitful requires a strong element of trust....

Exchange takes place everywhere. Economic life is all pervasive, whether it's in the highlands of Ethiopia or whether in Midwestern United States. No matter where you go, people are making deals, exchanging.... If the trust is maintained within small groups only, then you're not going to be able to propel yourself far, because your transactions are going to be limited.... What you need is to be able to trust the mechanisms, the institutions, in such a way that you can indirectly transact with people in the event we'll never meet.... "How do you build trust?"... is a big thing.... Rumors can cause a society to flip from a state of cooperation to a state where everybody is looting every store on site. We've seen that happen, and we've seen that happening within hours in a day.... Getting locked into a non-trust state... you can even say a society is trapped....

[In] every country there's a great deal of trust within small groups. Villages everywhere, they trust one another, they exchange, they swap insurance, they borrow from each other. Without that, they would of course be dead.... [But] the reach of that trust is so limited...

Notes:

Recommended Reading: Why We Read: Partha Dasgupta: Economics: A Very Short Introduction http://amzn.to/2gR2jH3

Partha Dasgupta vs. Nick Stern vs. Me on Global Warming

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