Columns2024
Does government deliver the goods?
This question crops up now that as governments are getting bigger. This development, in turn, triggers one more question: do governments generate sufficient tax income to fund growing public goods delivery?
Governments in the rich world are now bigger than before. In 1960, state spending across the rich world was the equivalent of 30% of GDP. Now it is, on average, above 40%. Growth of the state’s share of GDP has increased as well. Take the United Kingdom: Since the middle of the 1990s, government’s spending has risen by 6% of GDP. South Korea’s public expenditures rose even faster: 10%.
Adam Smith’s days of the ‘three duties of the Sovereign’, are long over. Spending on entitlements in particular has increased dramatically. They primarily consist of social benefits and transfers, including standard provisions such as pensions and tax credits. Entitlements also encompass transfers in-kind, such as discounts on health insurance and rent subsidies.
On average, OECD countries’ social expenditures rose from 14% of GDP in 1980 to 21% in 2022. In addition, having learned from the ill-effects of deep recessions, quite a number of rich countries’ governments guarantee people’s bank deposits, healthcare-payouts and mortgages; all of them off-balance sheet obligations. Indeed, governments have become more generous in times of trouble – think of their dole-outs during the Covid-19 pandemic. For example, frugal Germany spent 4.4% of GDP shielding households and firms from the pandemic’s economic fallout.
In the early 1950s, America’s spending on public services was equal to 25% of its GDP. Entitlement spending then was a small item, with outlays on pensions and other sorts of welfare equal to 3% of GDP. Now, US spending on entitlements have swelled and spending on public services has decreased. Both now amount to 15% of GDP. This development is not much different in other rich countries.
Some of the growth in entitlement spending was unavoidable. People are growing older, enjoying a longer life as pensioner. This demographic development has not gone hand in hand with an increase in the retirement age. Needless to say politicians shy away from taking tough decisions in this regard. It did cost French President Macron a lot of political goodwill when his government adopted an increase in the retirement age from 62 to 64.
In Europe pension entitlements tend to be universal. Everybody of retirement age receives a pension, including well-off people. This triggered redistributive effects. It is estimated that in OECD countries between a fifth and a third of entitlement spending goes to the richest 20% of households. This also goes for America. Uncle Sam spends roughly $400 billion on transfers on the top income quintile, the equivalent of half the budget of the Department of Defence. To be even more exact, in 2019 an average household in the top 1% received $16,000. But also those who still work receive more by way of transfers, making the system even more redistributive. Again an example. In 1980, the bottom fifth of American earners received transfers equal to a third of their gross earnings. Towards the end of the 2010s, this figure had doubled. All told, transferring government money to people who don’t really need it is not helping to bring about a more equitable income distribution. Those at the bottom of the income scale, also benefit from these transfers, which should be acknowledged as well.
Once entitlements have been established, it is hard to scale them down. For example, in recessions the number of people receiving food stamps rises sky-high; once the recession is over it hardly falls.
Does bigger government deliver the goods? And what about its capacity to do so? State capacity has gone down in the G-7 group of advanced economies. Why is this? Apart from a shrinking wage bill, the public sector’s level of productivity rises more slowly compared with the one of private businesses. Another explanation is diminishing returns: The bigger the government, the larger the influence of them. The rising number of restrictive regulations hinder government’s implementation capacity. For example, US federal regulations have reached 90,000 pages, near an all-time high. The government is usually a monopolistic service provider, free from pressures to innovate or to strive for more efficiency. Unfortunately, attempts to run government institutions as efficient private businesses have not been very successful.
Way back in the 1960s, Milton Friedman already lambasted government for its failures to ‘deliver the goods’. Regarding redistributive welfare policies, he observed that minimum wage, price controls and tariffs had detrimental effects on the poor. His advice was: leave it to charities and the market to help them. He was not all-out against government investments, such as government’s construction of highways and dams, the provision of education (i.e., opening opportunities for youngsters), public health, and maintaining law and order. Yet he concluded that the greater part of government efforts had failed to achieve its objectives.
Government spending increased more than the increase in tax income. While government is expected to spend more, over time tax income has hardly grown – as American commentator Fareed Zakaria quipped: Americans love Republican taxes and Democratic expenditures. Politicians typically hate to increase taxes. What is done instead is borrowing money to balance government’s books. The consequence, of course, is that public debt will increase. Another possibility would be to cut down other outlays, such as the government’s wage bill, the health, education, and social safety budgets.
In 2022, the median rich country spent 24% of GDP on public services, surprisingly the same percentage as in 1992. Given the steep increase in entitlements, the consequence is that, indeed, everything from state-provided health care to education and public safety sufferedThe wage bill has, as noted, gone down in G-7 member countries, undermining the quality of state bureaucracies. Together with the erosion of social service delivery, voters’ perception is that government is not providing what was expected. Across the rich world, their faith in politicians they had voted for is eroding, driving them in the arms of populist parties.
There will come a time when It is unavoidable that more borrowing will reach a point where it simply becomes too expensive or too undermining government’s solvability. Dramatic reform is then called for. This is what President Milei of Argentina is doing. Elon Musk, who is to head a Commission in the new Trump Administration, intends to implement a comparable policy. I look forward to learn what dramatic cuts in the respective governments’ budget, public sector, and regulations will mean for the financial health and public goods delivery of both countries.
Peter de Haan December 2024
Keynes and Holland
Now that the Christmas Season is upon us, it is time to offer you a column with a lighter touch. This column tells you about the great economist John Maynard Keynes’s connection with Holland.
Keynes was mainly involved in British and American politics and economics. As for the ‘Continent’ (when Brits mean Europe), Germany was Keynes’s main interest. His contacts with Holland were very limited indeed, yet worth recounting.
My story starts when the Great War (1914-1918) had ended. Keynes formed a part of the British delegation during the post-war peace negotiations, held in Paris in 1919. He was one of the few attendants who predicted that the Treaty of Versailles would only lead to more trouble.
Even before the treaty was signed by all the parties, Keynes resigned and, in record time, wrote an angry book: The economic consequences of peace. In it, he explained that Germany would never be able to pay the victors the war reparations they demanded. He also provided scathing descriptions of the main characters. For example, he characterized US President Wilson as a presbyterian pastor oblivious to the fact that he was manipulated by British prime minister Lloyd George and French president Clemenceau. The latter quipped about Wilson’s Fourteen Points Plan, that God only had Ten. A member of the German delegation impressed Keynes: the decent Hamburg banker Carl Melchior. Keynes recognized in Melchior a soul mate. After the war, Germany was very short of food; the country was on the brink of famine. The French did not want to help the Germans, much to Keynes’s dismay. In secret, he arranged a meeting with Melchior to broker a diplomatic solution to the urgent problem, and it worked.
Now, what has this story to do with Holland? In October 1919, Keynes was invited to attend a conference in Amsterdam. He then got the idea to invite Melchior to visit him there, which the German accepted. Keynes felt that it would be better not to meet Melchior in his hotel, as Amsterdam was full of spies, he thought. He requested his friend, Dr. Vissering, then president of the Dutch central bank, whether he could receive Melchior in Vissering’s 17th century house, located at one of Amsterdam’s famous canals.
Before Melchior entered Vissering’s library, Keynes suddenly realized that they had never before met in an informal manner, which made him a bit nervous. Melchior must have felt the same. As a consequence, when Keynes welcomed Melchior, the two greeted each other rather clumsily. After a while both men were at ease, so much so that Keynes invited Melchior to lunch in his hotel. On the way, Melchior, who knew Amsterdam well, showed Keynes various ‘hofjes’ (courtyards). After lunch, Keynes shared his characteristics of the chief peace treaty negotiators with Melchior, which he thoroughly enjoyed.
Keynes’s prickly relationship with Jan Tinbergen (co-inventor of econometrics and first economics Nobel Laureate) is well-known among Dutch economists. Keynes was not enthusiastic about the idea that economic dynamics could accurately be explained by a mix of mathematics, statistics and equations. Indeed, one of Keynes’s bons mots was: It is better to be roughly right than precisely wrong. Their differences of opinion did not prevent Tinbergen from sending Keynes a thorough report on Tinbergen’s business cycle model. Needless to say, Keynes was not impressed and wrote a critical review which he published in The Economic Journal, of which he was the Editor, by the way. He bluntly wrote that it was a nightmare to have to read Tinbergen’s text. Nonetheless, Keynes invited Tinbergen to send a reaction. This Tinbergen did, but not strong enough according to Tinbergen’s close friends.
Why did Tinbergen react in a rather timid way? Perhaps this was caused by Tinbergen’s peace-loving character, or was he perhaps put off by Keynes’s cynical review? I don’t know; perhaps it was a bit of both. Keynes responded, in an eloquent, but rather vitriolic, manner. He wrote: ‘No one could be more frank, more painstaking, more free from subjective bias or parti pris than professor Tinbergen. There is no one …so far as human qualities go, whom it would be safer to trust with black magic. That there is anyone I would trust with it at the present stage or that this brand of statistical alchemy is ripe to become a branch of science, I am not yet persuaded. But Newton, Boyle and Locke all played with alchemy, so let him continue.’
Old biographies about Keynes eschew his early homosexuality, before marrying Lydia Lopokova, prima ballerina of Djagilevs Ballets Russes. Recent biographies are less prudish. In one of them, one reads that Keynes enjoyed making lists of all kinds of activities, ranging from his golf achievements, which champagne was offered after a play at the Cambridge Arts Theatre (which he established) to his homosexual encounters. This latter list includes the number of contacts he had with each partner, and a brief description of them. On the list, one find an encounter with ‘The shoemaker of The Hague’. That was all; I was not able to trace the shoemaker’s family. So much the better, I‘d say, as it is none of my business.
Peter de Haan December 2024.
BRICS+ are flexing their muscles
Since the end of the Second World War, we became used to the liberal order, led by the United States – its undisputed leader. This is no longer the case, not so much caused by trade wars and increased protectionism but by the undermining role of BRICS+, a rising political and economic competitor on the world stage.
A stand-off between liberal democracies and BRICS+ is unfolding. The acronym BRICS (Brazil, Russia, India, China, a bit later South Africa) was invented way back in 2001 by Jim O’Neill, chief economist at Goldman Sachs, a bank. He reckoned that rapidly growing large emerging economies would offer attractive investment opportunities. Politically speaking, BRICS was a mixed bag: Democracies Brazil, India and South Africa , were grouped together with autocracies China and Russia. In addition, China and India had an ongoing border conflict. Also economically, the BRICS partners had little in common: Some, like Russia, were primarily raw materials exporters, while China exported technologically advanced goods.
Until fairly recently, BRICS did not make much impression on the political and economic world stage. But not any longer – BRICS is transforming into a formidable alternative international body. The original BRICS partners invited other countries to join: Iran, Egypt, Ethiopia, the United Arab Emirates (UAE ), and Saudi Arabia (Argentina declined the invitation, by the way). Again, expanded BRICS is a mixed bag. For example, religious adversaries (but prominent oil and gas producers) UAE, Iran and Saudi Arabia form part of BRICS+. Meanwhile, thirteen additional countries expressed interest to join, among them NATO-member Turkey, and four important ASEAN members. Poor countries belonging to the Global South find BRICS+ an attractive alternative to their traditional, often former colonizing, partners.
BRICS+ is developing a unified stance in international fora, including its plea to adjust the governance structure of the IMF, World Bank, WTO, and the UN’s Security Council, reflective of BRICS+ growing economic, political, and demographic clout.
BRICS+ represent close to 50% of the world’s population. The group produces 45.2% of global GDP (on PPP basis), while the G-7 countries produce 29.08%. To a large extent, BRICS+ members control oil and gas production and export. Recently, outgoing President Biden’s national security adviser, Jake Sullivan, observed that the United State produces only 4 percent of the lithium, 13 percent of the cobalt and 0 percent of the nickel, and 0 percent of the graphite required to meet current demand for electric vehicles. More than 80 percent of critical minerals are processed by one country: China. Sullivan concluded that the democratic world is too dependent on China, Russia and other autocracies for minerals, semiconductors, and energy supplies.
Through its Road and Belt Initiative, China had already established economic and political relations with many countries around the world. Its objective was to establish physical communication lines and economic ties with countries supplying China with raw materials and food. The network also facilitates China’s export to these countries. In 2001, China launched the Shanghai Cooperation Organization – a body working largely to counter American interests in central Asia. In 2015, BRICS+ established the New Development Bank (the intended alternative to the World Bank), and the Contingent Reserve Arrangement (alternative to the IMF). During the recently held BRICS+ Summit in Kazan, Russia, the creation of the Interbank Cooperation Mechanism, was announced, which is to promote innovative financial practices, including financing in local currencies, to undermine the position of the US dollar as the leading international currency.
Way back in 2010, Ian Morris, Professor of History at Stanford University, published Why The West Rules – For Now. The book’s intriguing title suggested what is now unfolding in front of our eyes. Not too long ago, it was still thought that emerging prosperity in the East would Westernize that part of the world. In 1999, George W. Bush remarked: ‘Trade freely with China, and time is on our side.’ Also, European leaders, such as former German Chancellor Angela Merkel, believed that trading with Russia and China would benefit both Europe and Russia and China. Unfortunately, Bush and Merkel’s win-win assumption proved to be wrong. They forgot that rapid economic growth breeds political power. In his book, Morris refers to China, as America’s adversary in world domination. Since then, it is not just China but rather BRICS+ gradually overtaking the liberal order.
Under the twin leadership of China and Russia, BRICS+ challenge the American-led liberal order. Equally worrying is that BRICS+ are more and more becoming an autocratic Moscow-Beijing oriented international political and economic institution. As Anne Applebaum argues in Autocracy, Inc., BRICS+ may want to use the institutions they create to help spread the same kind of autocracies, they enjoy at home, around the world. Apart from Russian and Chinese undermining cyber-attacks, she adds that the rules that guide economies and governance will be rewritten, inspired by a shared hatred of the American-led order. Should Applebaum be right in her projection, the liberal order we had been used to may become something of the past.
Peter de Haan November, 2024
Theo Jansen creates new forms of life: strandbeests
The other day I was taking a coffee in a strandtent, a temporary wooden structure at Scheveningen’s beach. From a distance I saw something peculiar: A rack from which cheese-coloured PVC tubes were hanging in funny shapes. What was more: a man wearing a cotton cowboy hat was putting zip-ties connecting these tubes. This spectacle intrigued me, so I paid for my coffee and went down the beach to take a closer look. It turned out that the man with the cowboy hat was in fact preparing one of his new strandbeests (beach animals). I now recognized the man, as I had seen various TV documentaries about strandbeests and their creator: Theo Jansen.
I introduced myself to Mr Jansen and told him how impressed and moved I was with his creations, and asked him whether he was prepared to grant me an interview. Mr Jansen must have thought: Who is this individual (he may have hesitated to use a cruder term) requesting an interview? He grudgingly agreed, adding: ‘Keep it brief’. I said I would and cycled home, already thinking about a few smart questions.
In preparation, I consulted Jansen’s website (www.starndbeest.com) and any other information I could get hold of about his strandbeests. Having thought that Theo Jansen was an established artist in Holland only, I learned - to my embarrassment - that he is an appreciated artist around the globe. He and one of his strandbeests featured in one episode of The Simpsons: ‘The Nightmare after Krustmas’. Jansen’s strandbeests have been exhibited in America, Japan, Germany, England, you name it. I also learned from his website that he has a lot of technical knowledge, way beyond my comprehension. I realized that I should have studied more about the artist and his work before even requesting an interview. So, the week after I first met Mr Jansen I cycled back to the strandtent where, luckily, I ran into him. I told him that I realized that my interview request was quite inappropriate. I said that, instead, I would write a column about him and his art. He understood my change of mind and wished me luck.
Theo Jansen (1948) studied physics at Delft University of Technology, which he did not complete, as he was more interested in creating objects in which art and engineering come together. Regarding Jansen’s move from physics to art, he said that he was inspired by Richard Dawkins’s The Blind Watchmaker. In contrasting the differences between human design and its potential for planning with the workings of natural selection, Dawkins dubbed evolutionary processes as analogous to a blind watchmaker.
One of Jansen’s first creations was a flying saucer which he launched over the city of Delft to great excitement of the population ( and the police, I suspect). Since 1990, Mr Jansen started creating strandbeests, applying the knowledge he had gained during his physics study. For example, a strandbeest best walks in the sand having very flat feet, as one can see in the videos of walking strandbeests. This allows the strandbeest to travel much better than on wheels (the first strandbeests were equipped with little wheels), as wheels get easily stuck in the beach’s sand. He designed an Atari computer-driven model to find the right dimensions of the legs made of PVC pipes, to make sure that the feet would indeed touch the sand in a horizontal position. The design of flat feet was one thing, but the mechanism to have the legs rotate was quite another challenge, let alone to make the strandbeest walk powered by the wind only. Refined art critics, typically not having a clue about technical matters, characterized Theo Jansen as a creative technician, but not an artist.
Remembering what Dawkins proposed, Jansen’s strandbeests evolved since their beginnings, as can be watched in the amazing videos about them. Their evolution has gone through quite a few phases, each having a name in Latin. Starting with the Pregluton: the initial period in the absence of matter, in which artificial animals were created in the computer. Then via the Suicideem, all the way to Volantum, in which the strandbeests learned to fly. I took a special interest in the Suicideem stage, which was the phase of self-destruction. An example of a strandbeest being destroyed, not by itself but by the wind, is on video.
Taking a look at the variety of Jansen’s kinetic sculptures (a sophisticated name for strandbeests), he first constructed a miniature airplane. Soon thereafter, the majority of his creations are strandbeests, of which the latest creations can fly. Others have caterpillars trailing behind them. Still others resemble huge beetles on their way to attack an enemy – at least so it seems to me. Needless to say, all of them can walk; the wind providing their propulsion. Sails on top of the sculptures, or on both sides, catch the wind and provide the forward-moving drive. Some of the sculptures are relatively simple structures, but others are majestically large; one, for example, measures 14 meters in width and 4 meters in height. Indeed, some of Jansen’s creations are immense; one resembles the contours of Bilbao’s Guggenheim Museum, as far as I am concerned.
Large strandbeests have understandably many legs. On the video, one of them turned sideways and this made me think of the charming dancers of the Moulin Rouge: all legs moved simultaneously. What a pity, I thought, that strandbeests have no flesh on their PVC-bones. Jansen says that his strandbeests are not imitations of other animals; they are his own creations, pure and simple. Again, have a look at the videos and be impressed, amazed, and -above all - moved.
There is something deeper involved in Theo Jansen’s creations. His beests suggest as if they are living creatures, and this is precisely what the art critics I mentioned in the beginning have been overlooking. In one of the video’s we see how the artist prepares his newly-conceived strandbeest to walk on the beach for the first time. Once in the correct position, Jansen sets his latest creation free, and there it goes! But it threatened to walk straight into the North Sea. We then see Jansen, as a truly alarmed father, rushing to his creation, and putting it into the right direction again. I then realized that Theo Jansen is not simply a kinetic sculptor; he is, indeed, without wanting to sound blasphemous, a Creator, not of moving objects but of evolving creatures having a life of their own.
Over time, his strandbeests have evolved; they became ever better in dealing with the elements storms and water. Eventually he wants to put his ‘animals’ out in herds on the beaches so that they will live their own lives. This would then be, I concluded , the final stage of their evolution process. The strandbeests, like the dinosaurs before them, would become extinct.
This is what I thought. I was wrong, as Jansen argues that his creations will be further improved by students all over the world who take inspiration from his videos and TED talk. They will help Jansen’s creations evolve into ever more sophisticated forms of life. Theo Jansen will then have achieved his aim of not just having created beautiful strandbeests, but he will have created new forms of life.
Peter de Haan September, 2024
African countries’ performance at Summer Olympics
During the recently held Olympic Games in France, Letsile Tebogo from Botswana won the gold medal on the 200 meters sprint. Young Letsile looks like a born runner, athletic, well-built, and – indeed - very young. In short, a wonderful athlete and what an achievement! Letsile now is, I’m sure, the pride of Botswana, a sparsely populated southern African country.
Botswana is relatively prosperous compared with many poor sub-Saharan African (SSA) countries. So, I wondered how these poorer countries had been doing at Olympic Games; after all, they don’t have the money nor the facilities rich countries avail of. And if rich countries would not have poached talented athletes from African countries, like my home country Holland did with Ethiopian-born Sifan Hasan, who won the women’s Marathon in Paris, they would have done even better during the Games.
I undertook a ‘study’ to find out. Starting point is the 1960 Olympics in Italy, up to the recent Olympics in France, so the period 1960-2024. Why start at 1960? you may wonder. As of 1960, most former African colonies gained their independence; this is one reason why I chose 1960. The second reason is that, as a young boy, the 1960 Olympics were the first ones I watched on TV.
I still remember West-German Armin Hary winning the 100-meter sprint, beating all other African American competitors. And there was the incredible Arican-American Wilma Rudolph! She won the women’s 100 and 200-meter gold medal, plus gold on the 4×100-meter relay. As a young girl Wilma had had polio, but she overcame it and became the world’s fastest sprinter. Cassius Clay (better known as Muhammad Ali) won the gold medal in the light heavyweight division. But the greatest sensation was Abebe Bikila, the Ethiopian marathon runner. He won gold, and he did so running barefoot – unheard of at the time.
The United States usually win most Olympic medals. In the old days, the Soviet Union was America’s fiercest competitor. However, since the Soviet Union’s demise, China is trying to win more medals than the Americans. Indeed, the Olympics are all about winning, rather than participating, contrary to what Piere de Coubertin argued when he initiated the Games way back in 1896. Poor countries don’t stand a chance to beat America, China, or any other rich country to win gold, silver or bronze. This is what I thought; hence my little study, which is rather unscientific (for example not all Olympic Ganes since 1960 have been included).The point is that I was interested in trends, not in every possible detail.
Ethiopia participated in the 1960 Olympics and, thanks to Abebe Bikila, won a gold medal. Ghana, who had gained independence in 1957, won a silver medal in the men’s light welter weight category. Total SSA score: 2 medals. In 1960, nine SSA countries participated. Three of them were then still colonies. Two had gained independence in the 19th century: Liberia(1847) and Sudan (1848). Two other countries South Africa and Southern Rhodesia were still Apartheid countries; for this reason I left them out of my medal counting until 1994 when the ANC formed South Africa’s first Apartheid-free government.
As mentioned, I was interested in trends; therefore I felt the liberty to not include all Summer Olympics since 1960. I analysed how many medals SSA countries won during the Games of 1960, 1968, 1976, 1984, 1992, 2000, 2008, 2016, 2020, and the most recent one: 2024. The first trend concerns the number of medals won by SSA countries.
The number of medals
Conclusion: The trend is upwards: from 2 medals in 1960 to 28 in 2024. By the way, SSA countries did better in 2008 and 2016, when in both Games they won 36 medals! What explains the poor result in 1976: 0 medals? The simple reason is that SSA countries boycotted those Games as they protested against the participation of South Africa’s Apartheids regime.
I am sure you also want to know, what the distribution of gold, silver and bronze medals of each SSA country was. In the Annexe, I present the results. Altogether, SSA countries won 189 medals, of which 54 gold, 74 silver and 61 bronze medals.
The countries winning most medals were:
Kenya: 77 medals,
Ethiopia: 37 medals,
Nigeria: 17 medals.
The number of participating countries
There is also a positive trend in the number of participating SSA countries, including the countries not winning any medals. In 1960 only 9 SSA countries participated, while during the recently held games in France, an impressive number 43 SSA countries participated. The table below shows the number of SSA participating countries over the entire period of my study 1960-2024.
Conclusion
The reassuring overall conclusion is that since 1960, ever more SAA countries participated in the Summer Olympics, winning ever more medals. For participating SSA countries who never won any medal, Pierre de Coubertin’s bons mots are valid: it is more important to participate than to win.
Annexe
Peter de Haan August, 2024
At Your Service
Singapore’s first prime minister Lee Kuan Yew once observed that since the Industrial Revolution, no country had become a major economy without becoming an industrial power. He repeated what development economists also proposed at the time: industrialisation would not just help developing countries’ economies grow, the manufacturing sector would also be able to absorb workers leaving the agricultural sector. In record time, prime minister Lee was able to transform Third World Singapore into a rich country.
Nowadays, manufacturing is no longer the engine of growth for developing countries, offering an abundance of jobs. The service sector may gradually overtake manufacturing. Let us have a look at some trends. Over the past decade, developing countries’ services exports have jumped by 60%, reaching $7.9 trillion (7.5% of global GDP) True, the market for physical merchandise is much bigger: $24 trillion. The problem, however, is that the export of physical merchandise has grown more slowly than service exports. So services exports may eclipse those of the manufacturing sector in the future.
Even if countries want to get rich (which country doesn’t), and would want to invest in manufacturing, they have to realise that manufacturing has become more capital-intensive. For most developing countries investing in manufacturing would be a prohibitive proposition. As China invested heavily in manufacturing much earlier, the country now has a near-unassailable position as the world’s factory. There is yet another hindering phenomenon, recently created by Europe and the US: industrial policy. Other terms that cover this policy are e.g., reshoring, protectionism, bringing the production of essential products (armaments, health care related products) back home, etc. Given these developments, the service sector may offer growth possibilities for developing countries.
To date, rich countries still export most services, typically consisting of white-collar professionals working overseas. Comparing America and China, tells us that the US still exports two-and-a-half times more services than China does. Although Great Britain is no longer the manufacturing country it used to be, Britain is the second-largest global services exporter.
The good news for aspiring developing countries is that exports of more advanced types of services are growing. Which services are we talking about? One can think of audiovisual, computer and telecommunication services. A remarkable example recently went viral: New York fried-chicken restaurant Sansan Chicken East Village contracted Happy Cashiers to do the cashier’s services, provided by an English-speaking Filipino who is running the till via video link! And not just the till, the Filipino assistant also answers phone calls and monitors security camera footage. Happy Cashiers provides these services at a fraction of the cost of local staff.
Returning to the advanced types of services, India is the best performing Asian country in them, contributing close to 3% of India’s GDP. This doesn’t seem like a lot, but India is a very large country, and 3% of its GDP translates into a sizeable industry. In global terms, India’s service exports now stand at 5% of the world’s, up from 3% ten years ago. In this vein, countries like Estonia, Latvia, Moldova, Romania and Ukraine each export more than 3% of their respective GDPs.
There is another promising combination of services: Business and trade-related services. Estonia and the Philippines are doing well in this realm; their exports contribute 5% of their GDP. Like the example of the New York fried-chicken restaurant, low labour costs, and an English-speaking population, do help greatly. In addition, freelancers in many countries work on and off for English-speaking platforms. Not just IT provides opportunities, also tourism and health-related services come to mind. As for the latter, relatively cheap but high-quality dentistry, hair implants, hip replacements are a few examples. Who doesn’t have a friend, whose teeth suddenly look perfect, or now have a full crop of hair on his head?
The question remains whether the service sector will have the potential to raise living standards in exporting countries, as manufacturing did for rich countries in the past. The service sector may not be able to create as many jobs as manufacturing did. This needs a bit of explanation. Developing countries’ manufacturing sector absorbed unskilled workers in the past. Once technology improved, productivity of the unskilled worker increased. It was thought this would also happen with the production of tradable services. But it so happened that unskilled workers could not be absorbed by the more sophisticated sector precisely because unskilled workers lacked the necessary skills. Luckily, this did not happen in all countries. The World Bank found that since 1990, service jobs have risen from 40% to 50% of global employment. The Bank also found that labour productivity growth in emerging economies, outside of East Asia, has risen roughly at the same rate in services as manufacturing. Beter even: services productivity has grown faster in emerging economies than rich ones.
The standard opinion was that services, contrary to manufactured products, were largely untradable. This opinion needs updating. Since 2010, international goods trade has stagnated, while trade in services is booming. This sounds inspiring, but one must consider their respective values. At the services growth rate of the past decade, the value of services will take 15 years to reach half the present value of trade in manufactured goods.
Job creation is important, given the fact that the typical developing country is confronted with swelling numbers of youngsters entering the labour market and insufficient jobs to offer them. New jobs in manufacturing are few and far between. By and large, since 1991,the total number of jobs in manufacturing has not grown, accounting for roughly 14% of total employment. In addition, manufacturing is now more and more concentrated in East Asia. Unlike in the past, when manufacturing moved from America and Europe to Asia and Latin America, East Asian factories are now not moving to allegedly cheaper production locations. Labour market data from 51 mostly emerging countries shows that only five - China, Sri Lanka, Taiwan, Turkey and Vietnam - have approximately 18% of their population employed in manufacturing, compared with 16% in 1990. There are various reasons to explain this phenomenon. One is that modern factories require more capital and skill to construct. And as I already mentioned, European and American industrial policies also play a part. China is keen to keep its manufacturing sector not just intact, the country also wants to move the sector to the forefront of technological prowess.
The good news is that service jobs have risen from 40% to 50% of global employment, as workers leave agriculture. The darker side of the coin is that only 5-10% of emerging market service jobs are in tradable, technologically-oriented industries, compared with 15-20% in rich countries. AI may negatively influence the creation of service jobs; it is too early to draw inferences in this realm.
Concluding, despite the growth of jobs in the service sector, developing countries cannot count too much on the service sector creating sufficient jobs. The best these countries can do is to strategically invest in technical and academic education to equip their youngsters with the skills the changing labour market needs, while making better use of the comparative advantages each country has.
Peter de Haan July, 2024
Utopia
Ever since Adam and Eve were evicted from Paradise, authors and philosophers have been writing about Utopia. Also economists have been toying with the prospect of utopia after sustained economic growth and productivity increases made the material circumstances a lot better for most people in advanced economies
Almost a century ago, renowned British economist John Maynard Keynes wrote an essay which is still often quoted. In Economic Possibilities for our Grandchildren, Keynes argued that labour productivity would continue to increase. Around 2030, people would need to work only 15 hours per week to produce the same amount of goods and services as in 1930. Labour productivity would have increased 4 to 8 times to explain this remarkable projection. He was not far off the mark in his productivity projection, but not in the number of hours worked. Instead of 15 hours, the working week in advanced economies is still around 36 hours per week.
Another aspect that concerned Keynes was the question what people would do with much more leisure time? He was not optimistic in this sense, as people, said Keynes, were not accustomed to spend their free time in a pleasant, entertaining manner. Keynes wrote that ‘there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy…. To judge from the behaviour and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing.’ Keynes’s ideal was to live ‘the good life’, that is enjoying friendship, beauty, the arts, what have you. And activities like these, were not particularly the ones the wealthy enjoyed.
Once affluence ensued in America, another economist, namely Tibor Scitovsky, studied how the American people reacted to this affluence. In 1971, he published a bestseller about it, entitled: The Joyless Economy. Scitovsky concluded that by and large, affluence had not made Americans happier. In fact, they appeared to have become less happy. Also, as Keynes had feared, the American people did not get more pleasure out of their lives: yes, they got more comfort, but not more pleasure. Scitovsky proposed that Americans should be taught to learn to appreciate the good life.
Last year, economist Bradford DeLong published Slouching Towards Utopia. Not surprisingly, Delong approached utopia from an economic perspective. Imagine, he writes, that we could go back in time to 1870 and tell people then how rich, relative to them, humanity would become by 2010. They would be amazed and almost surely think that the world of 2010 would be a paradise, a utopia! In 1870 globalization took off; institutions for organization and research and the modern corporation came about. These were the ingredients, argues DeLong, unlocking the gate that had previously kept humanity in dire poverty. On the other side of the gate, the trail of utopia came into view. The closest we got to this utopia was during the post-World War II Noth Atlantic developmental social democracy. But it failed its own sustainability test. And so, concludes the author, we are still on the path slouching toward utopia.
Oxford University philosophy professor, Nick Bostrom, published Deep Utopia; Life and Meaning in a Solved World, which came out just recently. It is an intriguing and witty book. He updates the perspective Keynes gave us way back in 1930. Bostrom presents various scenarios of which I present the one in which AI, including robots, leads us to a ‘post-scarcity’ utopia. In this scenario, technology would have progressed to the point at which it can do all economically valuable work at near-zero cost. Indeed, a post-scarcity utopia in which one would be experiencing a paradox of progress: if technology becomes too advanced, most people will lose purpose in life. But would we still not attempt to enjoy Keynes’s good life? This will not happen, says Bostrom, as we work because we want to consume more and we do not invest more time in leisure. More than a century ago, Max Weber had this to say: The people filled with the spirit of capitalism tend to be indifferent, if not hostile, to the Church. The thought of the pious boredom of paradise has little attraction for their active natures.
In 2012, Robert Skidelsky, Keynes’s biographer, and his philosopher son Edward, published How Much Is Enough. They propose to put a limit to our material desires through limiting economic growth. Keynes’s good life would then be attainable, they believe. People would be working less and devoting more time, for example, to sculpture or to learn to play a piece of music well. Some critics would find this perspective outlandish, such as the eminent American jurist Richard Posner. He said that most of these people are ambitious achievers who seek recognition. And it is ridiculous to think that if people worked just 15 or 20 hours a week, they would use their leisure to cut marble or struggle with a musical score. If they lacked consumer products and services to fill up their time they would brawl, steal, overeat, drink and sleep late. Needless to say that Posner’s opinion about human nature is a lot more pessimistic than that of the Skidelskys. So, Posner would say: Goodbye utopia, goodbye Keynes’s good life!
The economist Richard Easterlin would be taking Posner’s side, I’m afraid. In Growth Triumphant, Easterlin observes that the history of the ends human beings pursue demonstrates that they are ill-suited for utopia. He depicts humanity on a hedonic treadmill: Generation after generation thinks it needs only another ten or twenty percent more income to be perfectly happy. Easterlin published his book in 1996. I’m afraid that the conclusion he drew in 1996 is still valid today: The triumph of economic growth is not a triumph of humanity over material wants; rather it is the triumph of material wants over humanity.
Perhaps there will come a time in which environmental degradation will be so devastating that the Skidelskys perspective will turn out to be not so unrealistic.
Peter de Haan May 2024
Column 4 2024
How has state formation taken place from an economic perspective? This question doesn’t have one answer, but two. Just recently, the American. Economic Review published an article entitled The Economic Origins of Government.[1] The authors studied the formation of the first states in history in southern Iraq. They define states as consisting of several succeeding governments of a city or territory. One is inclined to argue that governments are formed by elites: landed gentry, clerics, you name it, and by roving bandits, in order to protect their property or usurp the property of others. This explanation of state formation is the extractive type. But there is another explanation, proposed by the demand-side school of thought. The rationale is that the demand for public services that citizens cannot themselves provide triggers government intervention.
The Economic Origins of Government starts with the question what the main rationale for government intervention in the economy would be? The answer is the demand for public service delivery beyond the capacity of private service delivery. So, what happened in Iraq when this situation arose? The authors go all the way back to the period 3900BCE and 2700BCE in southern Iraq. In particular, they studied the consequences of the first river shift which occurred around 2850 BCE.[2] This shift was caused by heavy rainfall in Syria and Turkey. The authors undertook an impressive archaeological investigation, benefitting from remains of ancient cities, defensive walls, public buildings, and cuneiform tablets. Their principal research question was whether river shifts led to the formation of new states.
They found that the first river shift resulted in the creation of extended kin groups, called lineages: farmers needing newly constructed longer irrigation canals beyond the capacity of what the farmers themselves could provide. This triggered a demand for public service delivery by a collective body, i.e., government, that had a comparative advantage in delivering these services. In return, lineages paid tribute to the government. In this vein, social contract theories as developed by Hobbes, Locke, and Rousseau, come to mind, in which individuals are willing to give up resources and their autonomy to a government as part of a ‘social contract’.
The authors’ main finding is that states indeed formed where rivers shifted away, consistent with the authors’ demand-side hypothesis. In the authors’ words: States formed where the returns to solving coordination failure seemed ubiquitous. They also found that states were more likely to form where the productivity gains from irrigation were higher.
These main findings contrast with the popular understanding that throughout history many states have been extractive. The authors broadened the investigation period, including the full 7,000 year range of the data they assembled, from 5000CBE to 1950CE. They found that throughout Iraq’s history, public goods were more likely to be provided where rivers shifted away, which indicates that reciprocity between state and society took place throughout Iraq’s history up to 1950.
Subsequently, a study was undertaken on governments’ service delivery. The authors found that the states’ primary tasks were coordination and dispute resolution. Before the formation of the first state, lineages would adjudicate disputes, coordinate through assemblies, and provide public goods locally. After the formation of states these functions continued to be performed within individual lineages, but the newly formed governments extended these functions between lineages.
In sum, the authors found evidence for a demand-driven origin of government. Faced with a coordination problem, lineages formed governments. Lineages’ willingness to partially relinquish authority and on top of that to pay tribute, originated in the inability of lineages to coordinate for the private provision of public goods. The authors conclude that their findings are in line with standard economic arguments about the rationale of government intervention in the economy.
This article reminded me of Elinor Ostrom’s celebrated Governing the Commons[3], as I noticed similarities between how Iraqi lineages functioned and how huerta’s (irrigated fields) in Spain function. Unfortunately, Ostrom’s work is not mentioned in The Economic Origins of Government.
True, the article’s subject matter is state formation, while Ostrom’s book’s focus is on the governance of natural resources to prevent a ‘tragedy of the commons’ from happening. In preventing tragedies, some scholars recommend that the state take control of the natural resources to prevent their destruction, while others recommend that privatizing these resources will prevent tragedies. Ostrom, however, concludes that neither government nor the market is successful in enabling sustained productive use of natural resource systems. Instead, communities have relied on institutions, resembling neither the state nor the market, to successfully govern resource systems over long periods of time. One such community is a Valencia-based huerta, composed of vegetable and potato farmers tilling irrigated land. Huerta’s around Valencia go back centuries.
As already pointed out, Iraqi lineages adjudicated disputes, coordinated through assemblies. As regards disputes, the Valencian huerta also adjudicates disputes. The huerta’s members own land and the water right inheres in the land itself. Flooding and droughts happen regularly. The Spanish government constructed the Generalisimo Dam (completed in 1951) to mitigate extreme flooding and droughts around Valencia. Nonetheless, the distribution of water for irrigation continued requiring regulation, as the distribution of this scarce resource triggers disputes.
Now, how are disputes adjudicated? A huerta’s syndic is the elected chief executive of the individual irrigation unit. The syndic participates in weekly tribunals. Valencia’s Tribunal de las Aguas is a water court that has met on Thursdays for centuries (and still does, as I witnessed) outside the Apostle’s Door of the Cathedral of Valencia. Then Ostrom makes an interesting observation. She says that these water tribunals’ traditions have Islamic origins. The Tribunal’s meetings are carried out without lawyers, but with many onlookers. A presiding officer questions those who are involved in a dispute. The members of the court, excluding the syndic whose irrigation canal is involved, make an immediate decision regarding the facts of the case. Fines and damages are assessed. The decisions of the court are recorded, and they are final.
What Ostrom observes about the Islamic origin of the Tribunals’ traditions, can also be observed about Spanish huerta’s; as they - like Iraqi lineages at the time – also adjudicate disputes. This observation is, I believe, justified as way back in 1244 Don Peregrin, one of the knights of James I, ordered Muslims who had been irrigation officials before the Reconquest to take an oath, to tell the truth about the waters in what way they used to apportion them in the time of the Moors.
Peter de Haan April 2024
[1] American Economic Review, 2023, 113 (10): 2507-2545. The article is written by Robert Allen, Mattia Bertazzini., and Leander Heldring. Nobel Laureate Esther Duflo acted as co-editor.
[2] The Euphrates and Tigris shifted six times between 5000BCE and today.
[3] Ostrom, E. (1990) Governing the Commons; The Evolution of Institutions for Collective Action. Cambridge: Cambridge University Press.
Governments don’t drop from the sky
Column 3 2024
The Phillips Curve had lost its relevance when, during the 1970s, the inverse relationship between increasing inflation and decreasing unemployment, as the curve suggested, no longer existed. Instead, inflation increased rapidly, but so did unemployment. Stagflation was the result. However, the Phillips Curve made a comeback, as explained in this column.
In The General Theory (1936), John Maynard Keynes had suggested that a bit of inflation helped to bring unemployment down. An economic depression could thus be avoided and the economy would enjoy a ‘quasi boom’, Keynes argued. William Phillips undertook a statistical analysis of the relation between inflation and unemployment. In 1958, he presented his curve in which the inverse relationship between the two phenomena was confirmed. Keynesians were elated. However, once stagflation emerged, their joy was over. Indeed, during the 1970s, both inflation and unemployment registered double digit percentages. Keynesians were at a loss to explain this toxic development.
But two economists did explain what happened. In 1967, Edmund Phelps had developed a theoretical model in which inflation is influenced – and this was Phelps new insight – by the natural rate of unemployment. Phelps predicted that a generous fiscal policy would push the actual rate of unemployment below its natural rate. This would in turn push inflation up. Expectations about the future increase of inflation would funnel the flames of inflation even more. The other economist was Milton Friedman. In 1963, he had published, together with Anna Schwartz, the results of a study of America’s monetary policies over the past century. Friedman concluded that inflation was in essence a monetary phenomenon. In short, Keynesians could have known what was wrong with the Phillips Curve, even before stagflation had broken out.
Now fast forward to the present century. As of 2010, it seemed as if the implications of Phillips Curve were still wrong. What happened was that unemployment dropped gradually but, at the same time, inflation did not rise. However, after the end of the Covid-pandemic, more precisely as of the beginning of 2021, inflation shot up, while there were more vacancies than the labour market could provide. In 2022, former Secretary of the Treasury, Lawrence Summers feared that in order to bring inflation down, unemployment would have to rise above 10%. Summers must have had the Phillips Curve in mind, and surely also the way in which Fed Chairman Paul Volcker had brought inflation down in the 1970s. He applied his ‘Volcker Shock’, well knowing that unemployment would increase and the American economy would enter into a (brief) recession, but after a year or two the economy, and employment, started growing again. Volcker also managed to bring the inflation expectations down. These expectation had initially been very high, because people had believed that the Fed would not intervene.
Gauti Eggertsson and Paolo Benigno developed a model in which the development of inflation and unemployment is portrayed. They took as a starting point the Phillips Curve, but with a kink. For the period 2008-2022, their curve moves more or less horizontally; i.e., there is hardly any inverse movement between inflation and unemployment. But in 2021, their curve shows a kink after which the curve shoots up. Eggertsson and Benigno explain the kink as follows. Once the last available worker is being employed, Phillips’s inverse relationship will be resumed. After all, after 2021, when the unemployment rate remained very low, way below Phelps’s natural rate of unemployment, inflation was pushed up. However, for quite some time now, inflation is coming down again.
During a recently held conference, Eggertsson explained why inflation is coming down, while unemployment does not rise. The interaction between the tight labour market and the changing availability of raw materials and components help explain what is happening. After the end of the Covid pandemic, there was a shortage of these raw materials and components. This resulted in more pressure on the already tight labour market. If extra labour would have been available, this could have compensated the shortage of input factors. Once more of these input factors became available, the pressure on the labour market subsided. The result: inflation started to come down, while unemployment did not go up. Simultaneously, inflation expectations went down.
Should Eggertsson and Benigno’s model with a kink prove to be a credible correction of the Phillips Curve, then this is good news for central banks! The authors calculated that one percent drop in unemployment, resulted in a rise in inflation of just 0.34 percent.
In sum, their model shows that the costs of countering inflation, in a situation of very tight labour market and in which inflation expectations are stable, would be much lower than during Volcker’s time when he brought stagflation under control. It thus seems as if the Fed and he European Central Bank so far applied a successful anti-inflation policy.
Peter de Haan March 2024
The return of the Pillips Curve
Column 2 2024
On 21 December last, Robert Solow died at the impressive age of 99. This news did not just bring into memory what had made Solow famous - his economic growth theory – but also the idea if you want to grow old, become an economist! Solow did get his Nobel Prize in in 1987 for his ground-breaking work on economic growth. In the nineteen fifties, he developed a growth model - in professional jargon: a neoclassical exogenous growth model. As Trevor Swan had developed, independent of Solow, a comparable model. The model became known as the Solow-Swan model.
Solow was not impressed with economic growth theories that had been developed in the 1930s and 1940s. In them, investment would add to national spending which would contribute to the economy’s productive capacity. Solow sensed that these models could not guarantee that demand and supply would stay in line with each other. For instance, excessive spending, through enhanced demand, would trigger even more investments, while inadequate investment would induce firms to invest less. In short, the economy would be permanently moving between upward and downward shocks.
This was not what Solow observed in the real economy, since the American economy was making stable progress. How come? Steady growth was achievable- and this was Solow’s discovery - if capital intensity of production could be varied. In that case, strong investment would not be destabilising; it would only result in higher capital per worker. But what about growth? This would peter out in the long run, because more and more capital per worker would result in diminishing returns. Further growth would then be dependent on other factors. He analysed what determined America’s income growth from 1909 to 1949. He found, perhaps to his own surprise, that less than 13% of income growth per person could be attributed to capital accumulation. So there must have been other factors at play. He came to the conclusion that this ‘residual factor’ (the ‘Solow residual’) was something beyond the production factors labour and capital; it was the exogenous factor technological change that explained growth to a large extent. The economist Moses Abramovitz famously called the Solow residual ‘a measure of our ignorance’.
Nonetheless, Solow became ‘the father of growth’. And as noted, in 1987 he was awarded the Economics Nobel Prize for his work on economic growth. Solow had not intended to imply that technological progress would fall entirely outside economics. Some of it, he witnessed with his own eyes at General Motors, came from the factory floor. Scores of economists kept wrecking their brains on the question where economic growth came from? There are many explanations, varying from Paul Romer’s endogenous growth theory, promising increasing returns; ‘dumb luck’ (as Solow himself remarked); profit-driven research; the quality of institutions, what have you. To date, there is no universally accepted answer. After all, innovation is often peculiar and particular. Solow suggested that growth model builders could learn from case studies and business histories. The trouble, however, is that growth theories strive for generality and abstraction. Like Abramovitz, Robert Solow was born in Brooklyn, New York. He did well at high school; so well that, in 1940 he was admitted at Harvard University. During the war, he joined the US Army where he served as an interpreter, as he was fluent in German. When the war was over, and after a brief stint at Harvard, Solow was offered a position at the Massachusetts Institute of Technology (MIT), where Paul Samuelson also worked. They worked together on many projects, such as on Von Neumann’s growth theory, linear programming, the Phillips Curve, and their involvement in, what came to be known as ‘the two Cambridges Debate’. Samuelson and Solow represented Cambridge, Mass., while Joan Robinson and Piero Sraffa represented Cambridge, England. The debate was about the question of capital accumulation and a possible dynamic equilibrium. The Americans maintained that growth would be balanced, while the British emphasized, not surprisingly, on the Keynesian importance of short-term fluctuations. The difference between them boiled down to the perspective chosen. While having the long-term in mind, Samelson and Solow did understand that short-term growth was unstable, and that, consequently, the economy needed Keynesian policies; an aspect which Robinson and Sraffa had difficulty believing.
Perhaps the most interesting part of an obituary is what kind of personality the deceased actually was. Well, Solow was a witty, modest and down-to-earth man. A few examples: when he was woken up in the middle of the night by a telephone call from Sweden, telling him that he had won the Nobel Prize, he did not get excited but went back to sleep. When he was offered the job at MIT, he asked what the lowest paid professor earned, saying that he wanted the same remuneration, reflective of his egalitarian disposition. What he particularly liked about academia was that ideas, no matter how prestigious their source, could be scrutinized by anyone. What he also liked was teaching. He said that teaching was an important activity and itself part of the advance of knowledge. Solow taught many famous economists, among them George Akerlof, Peter Diamond, Mario Draghi, William Nordhaus and Joseph Stiglitz. Solow was asked to write about his life’s philosophy, which would be included in a book together with the philosophies of 21 colleagues.
At first Solow tried to resist the invitation, because he believed that the cult of personality in economics was of no great importance. But in the end, he gave in. From the outset, he said that he thought he did not have a life philosophy. What he did have, however, were a few guidelines for coping. The first one is: don’t take yourself too seriously. In life, the worst consequences could be avoided by a little more attention to the humour of it all. Guideline number two is a real down-to-earth one: if you see something that needs doing, do it! This recognizable guideline came from his belief that much more good is done by tinkering than by starting over from scratch. However, his wife reminded him that once , when he discovered that the automatic wake-up mechanism in their hotel room was not working, he spent an hour and a half trying to fix it. Don’t let the team down; this is Solow’s third guideline.
His experience was that most useful accomplishments are made, not by individuals, but by groups. He added, however, that too much attention to this maxim would have ruined Beethoven or Proust. He concluded tough, that no recipe for coping was perfect.
Peter de Haan February 2024
Robert Solow died
Column1 2024
Is altruism a scarce phenomenon
Anybody with a bit of common sense would not consider altruism as something scarce. However, this does not apply to economists. Scarcity is a central notion of economics; after all, the scarcer a good the higher its value. But would altruism fall into the same category as a scarce good? The first economist I am aware of who voiced his opinion about this question was Sir Dennis Robertson, one of Keynes’s pupils who, by the way, rejected the Keynesian Revolution later in life. On the invitation of Columbia University, Sir Dennis lectured in New York on the subject What does the Economist Economize? Economics, argued Robertson, does not deal with the noblest of human motives, such as love, altruism, generosity, solidarity or civic sense. These noble human motives are best served by preachers.
This, however, triggers the question: what can economists do to help lessen the burden of preachers? The answer Sir Dennis gave was by developing policies that promote self-interest. This would lessen the need to use up the limited quantity of altruism each of us has. Roberston concluded that if economists would do a good job in this realm, they would greatly contribute to limiting the consumption of this scarce source. For Sir Dennis, love – or altruism – was indeed a source that could very well dry up.
We may be tempted to think that Roberston may have been a slightly weird economist. However, he was not the only economist arguing that altruism is a scarce phenomenon. Economics Nobel Laureate Kenneth Arrow shared Robertson’s opinion. In 1972, Arrow wrote that altruism should only be applied in situations in which the market does not work. And Arrow was not alone in thinking like Robertson. The formidable economist Lawrence Summers, former US Secretary of the Treasury and past Harvard President, shared Arrow’s opinion, who happened to be his uncle. In 2003, Lawrence delivered a sermon at Harvard’s Memorial Church in which he told the student congregation that altruism is a precious but also scarce ‘commodity’. The market, he explained, facilitates the satisfaction of our egoistic needs, At the same time this helps to reserve our limited quantity of altruism for family and friends and for solving social problems the market is incapable of solving.
In principle I am quite prepared to accept the opinion of distinguished economists such as Robertson, Arrow and Summers. But in this case I had my doubts. So I discussed the matter with my wife and other family members. I had already discussed my doubts with my wife before she left for a short visit to her home country Spain. The first thing she said upon return was that she was in full agreement with Roberston, Arrow and Summers! I asked her: how come? Her altruism towards her Spanish family was finished, she said. The quantity of altruism she had received at birth was now depleted! I took the courage to ask her what she thought of my stock of altruism. It would have been better not to have asked this sensitive question, as she responded that my stock of altruism was, in her own words, ‘negligeable’. I then asked her why she had married me in the first place. As she is a wise person, she did not respond.
I read about Robertson, Arrow and Summer’s opinions in What Money Can’t Buy, written by Michael Sandel, another Harvard professor. He argues that altruism is not limited in quantity; no, said he, it can be replenished! Ah, I thought, this is more to my liking. I consulted my daughter, a seasoned psychologist specialised in mindfulness, about Sandel’s opposite insight. She said that this replenishment can indeed be done through a so-called compassion therapy. Needless to say that I immediately registered myself for this course.
Peter de Haan January, 2024