Bill Gates reviews Acemoglu and Robinson

by on March 5, 2013 at 1:22 pm in Books, Economics, History, Political Science | Permalink

He doesn’t like the book so much. Here is his bottom line:

This points to the most obvious theory about growth, which is that it is strongly correlated with embracing capitalistic economics—independent of the political system. When a country focuses on getting infrastructure built and education improved, and it uses market pricing to determine how resources should be allocated, then it moves towards growth. This test has a lot more clarity than the one proposed by the authors, and seems to me fits the facts of what has happened over time far better.

He also objects to the critique of foreign and, and the review closes with this:

As an endnote, I should mention that the book refers to me in a positive light, comparing how I made money to how Carlos Slim made his fortune in Mexico. Although I appreciate the nice thoughts, I think the book is quite unfair to Slim. Almost certainly, the competition laws in Mexico need strengthening, but I am sure that Mexico is much better off with Slim’s contribution in running businesses well than it would be without him.

The pointer is from Jeffrey Sachs.

JohnGalt47 March 5, 2013 at 1:33 pm

“… but I am sure that Mexico is much better off with Slim’s contribution in running businesses well than it would be without him.”

Don’t forget: Mussolini made the trains run on time.

Cliff March 5, 2013 at 8:57 pm

That’s a myth, though, isn’t it?

Rahul March 5, 2013 at 1:39 pm

Wonder if the Gates Foundation uses any variant of market pricing to allocate its resources. After all, their funds rival the development budgets of many nations.

Sam March 5, 2013 at 2:41 pm

Careful comparing a stock vs a flow

Vivian Darkbloom March 5, 2013 at 1:52 pm

And, I’m sure the New York Times is much better off with Slim’s contribution to running its business than it would be without him.

Romain Wacziarg March 5, 2013 at 2:02 pm

Bill Gates calling for the strengthening of competition laws anywhere is deliciously ironic.

john personna March 5, 2013 at 2:50 pm

Bill Gates, personally, seems a fine guy … but he took robber-baron-hood too much to heart. I’ll never forget/forgive that MS faked a video (IE removal) before the Supreme Court, and walked.

Slocum March 5, 2013 at 3:41 pm

Gates is a ‘Robber Baron’ in the same sense as Rockefeller — which is to say, that by relentlessly driving down prices, he provided great benefit to the consumer and, at the same time, earned the hatred of competitors who he put out of business. If you were trying to sell a competing graphical interface, web browser, disk compression utility, etc, it was tough — but the consumer was the beneficiary of having all those included at no additional charge. The idea now of a browser (or any of the above) NOT being integrated into the operating system is preposterous (indeed, with Chrome OS, Google is selling an OS whose whole purpose is to run a web browser).

F. Lynx Pardinus March 5, 2013 at 4:01 pm

” The idea now of a browser (or any of the above) NOT being integrated into the operating system is preposterous ”

I don’t think that’s correct, as least not for any reasonable definition of “integrated.” Modern browsers (Firefox, Chrome, or Opera) are installed and uninstalled without modifying the underlying OS.

Slocum March 5, 2013 at 4:09 pm

But there are no modern operating systems that don’t include a browser. And, as I said, Google’s Chrome OS is nothing BUT a browser (at least from the user’s perspective):

http://en.wikipedia.org/wiki/Google_Chrome_OS

Emil March 5, 2013 at 5:04 pm

But chrome OS has hardly made any impact on the market (atleast not yet) whereas chrome browser on its own has had a significant impact. you example is therefore not very relevant to the discussion. Also because what google appears to be doing works the other way around; they are trying to leverage on their browser to get into OS

john personna March 5, 2013 at 5:07 pm

We dodged a bullet when Apache prevented lock-in on MS standards. Your “Gates success” at the Rockefeller (etc.) model was actually a failure in that sense.

We run open standards browsers because the linkage on the server side could not be sealed by the Robber Baron.

Dan Weber March 5, 2013 at 6:08 pm

Well, a browser isn’t “part of the OS” at all, and MS’s arguments trying to say so were obviously silly.

But the concept that you would buy a computer these days without a browser included is completely nuts.

Hey, at one point the TCP/IP stack wasn’t included with Windows, either, and there were competitors in that area. (And you can make a much better argument that the network stack is part of the OS.)

Millian March 5, 2013 at 3:22 pm

Why? Microsoft is not exactly a power player any more. They had a great product around 1995 that people overwhelmingly preferred to competitors. Then Apple brought Steve Jobs back and IE became stagnant.

Rahul March 5, 2013 at 3:38 pm

How does IE stagnation have anything to do with Apple? IE’s competition over the last 15 years have been Netscape, Firefox and later Chrome. Where’s the Apple connection? Safari doesn’t even have 10% of the non-mobile market share.

Millian March 5, 2013 at 4:12 pm

You have forgotten that Microsoft faced not one, but two big competition cases…

Owen March 5, 2013 at 5:47 pm

Well, for starters, Apple developed WebKit, which powers both Safari, Chrome, and the Android default browser (and will soon power Opera). It’s the most commonly used layout engine out there.

linux March 6, 2013 at 12:07 pm

WebKit came from an open source KDE project.

https://en.wikipedia.org/wiki/WebKit#Origins

“The code that would become WebKit began in 1998 as the KDE’s HTML layout engine KHTML and KDE’s JavaScript engine (KJS). The WebKit project was started within Apple by Don Melton on 25 June 2001[10] as a fork of KHTML and KJS. Melton explained in an e-mail to KDE developers[2] that KHTML and KJS allowed easier development than other available technologies by virtue of being small (fewer than 140,000 lines of code), cleanly designed and standards-compliant. KHTML and KJS were ported to OS X with the help of an adapter library and renamed WebCore and JavaScriptCore.[2]“

The Original D March 6, 2013 at 1:38 am

The most important result of the Gates-investment-in-Jobs dynamic was the iPod, which begat the iPhone.

Joe Bureaucrat March 5, 2013 at 8:44 pm

When Gates got started, the Federal Government dictated to its agencies and contractors that they use IBM/Windows for their PCs.

This made a huge difference in how the “network effects” game played out.

Michael Foody March 5, 2013 at 2:23 pm

Both Gates and Slim exploited network effects to make their fortunes. Gates also depended on an implicit state subsidy in the form of copyright and IP enforcement mechanisms afforded by our legal system.

DocMerlin March 5, 2013 at 3:38 pm

Not implicit, it was quite explicit. Before him, software copyrights were not enforced. In fact, most computer scientists thought they didn’t apply.

Cliff March 5, 2013 at 8:59 pm

They don’t really apply. They don’t protect functionality, only copying actual code.

john personna March 6, 2013 at 12:01 pm

You are asserting what you (and I) think they should be. Numerous “look and feel” lawsuits were settled differently. (Actually I’d be OK with strict, exact, look and feel copyright, but not “genre” or “similarity of elements” bs.)

TallDave March 6, 2013 at 10:49 pm

And yet music copyrights last forever. Odd priorities.

Gates also infringed on other people’s IP, much more so than the other way around. Excel is Lotus123, Word is WordPerfect, Internet Explorer is Netscape Navigator, Windows is the Apple interface.

All Gates ever had was DOS. Microsoft couldn’t make a tablet, an MP3 player, a smartphone…

Max March 6, 2013 at 1:18 pm

Well but isn’t the same true for Apple? Steve Jobs also got a lot of ip protection on his projects.

Mike Hess March 5, 2013 at 2:25 pm

What do building public infrastructure and improving public education have to do with embracing a capitalist economy? Those are inclusive institutions.

ben fenster March 5, 2013 at 4:55 pm

Exactly. It seems as if Gates’ criticism is misplaced. He too is stressing the importance of inclusive institutions.

Rahul March 5, 2013 at 11:55 pm

Will you circularly define “inclusive institutions” to include anything that supports Acemoglu’s thesis?

How is a bridge, a road or a power plant “inclusive”? And if they are indeed then what massive man-made object isn’t “inclusive”?

daguix March 6, 2013 at 4:19 am

Building a bridge that everyone can use for free is inclusive. Building another palace is exclusive.

Rahul March 6, 2013 at 8:42 am

An expensive toll bridge? :)

TallDave March 6, 2013 at 10:52 pm

Not exactly. Public goods can be the fruits of inclusive instutitions, but they can also be supplied by dictators. North Korea has lots of roads.

A&R seem to mean, simply, an institution that shares political power. A free press is an example — it allows anyone to have their opinion heard.

Allen March 5, 2013 at 2:30 pm

How is Mexico better off with Slim?

Slim didn’t invent nor has he improved the telecom services he sells in Mexico. Mexicans pay more for the same or worse telecom service, not just relative to wealthy, developed countries, but relative to other Latin American countries, despite being one of Latin America’s richest countries.

He is a rent-seeker who captures enormous rents via the network effect, rents which of course should be returned to the Mexican population, since they actually comprise the network, and which would put more money in the hands of ordinary Mexicans so that they could better sustain a domestic economy. But hey, that would mean fewer desperate Mexicans migrating north to wrap cheap chalupas, so I guess that would be a bad thing.

Brian March 5, 2013 at 3:35 pm

I have lived in Mexico before the privatization was complete and Mexico under Slim’s Telmex. Mexico is better off with Slim.

Before the semi-privatization of Telmex, the national telephone company was a backwards socialist program of high paying jobs for incompetent relatives and cronies of powerful men. Service was unreliable, monstrously expensive, difficult to get at all in rural areas, and often unavailable in homes for years at a time.

Today, service is available in minutes, pervasive, universal, and costs only three times as much as in Europe. Service is mostly reliable, too. The only way Slim wants to cheat us is to overcharge. The national telephone company was denying us needed service entirely. The improvement in the quotidian experience of communicating is hard to describe to anyone who hasn’t lived under socialism.

There is even some competition though abusive anti-competitive practices are visible everywhere. Telmex will force you to reserve minutes and credit exclusively for communicating with other Telmex customers and then drain your general credit first when you call off-network. Telmex gets exclusive contracts to wire transit lines and stations. But you can, if you want to, pay less with Movistar or others.

arpanov March 5, 2013 at 3:59 pm

That has nothing to do with Slim though. He didn’t develop or improve the telecom tech. He doesn’t bring anything to the table. He just wormed his way into the tollbooth and collects tolls.

And shitty public monopoly vs shitty private monopoly is a false dichotomy.

Emil March 5, 2013 at 5:09 pm

And me who thought that he owned and managed telmex… But managing companies is I guess just a walk in the park…

koala March 5, 2013 at 7:26 pm

Yes, it is a “walk in the park” relative to the rents that he captures. The rents he captures are the products of:

1) Telecom technology he neither developed nor improved upon
2) The Network Effect

His “management” has not contributed to either of these factors.

The rents should go to people who develop, work with, improve the tech, and the people that comprise the network, since they are responsible for producing the rents. Depriving these people of the rents and giving them to politically savvy “managers” like Slim is no different than taxing intelligent, responsible people and transferring their money to unintelligent, irresponsible welfare queens who churn out babies.

Max March 6, 2013 at 1:46 pm

@koala:

Well, but rents don’t go to those guys. Modern days management is all about not being too technical. The main reason is that they should be apart from the details as not to indulge themselves in micromanagement. At least that is what I have been seeing in different companies. Perhaps there are exceptions, but it seems to be a general rule. I don’t know if this is entirely good or bad or if it has already passed into an unhealthy extreme, but it is the status quo.
Perhaps it is also a way to let women participate in the market and the innovation space, because they shy away from most technical jobs. If you look at actual tech companies (IT businesses aside, because these are not my speciality), you will see that most workers are MEN, only in the higher ranks do we see a few women.competing. The rate of interest in technical subjects and engineering is lower in women than in men. They like to use technology, but they are rarely geeks (just look at the internet and compare the amount of gals writing blogs or for news outlets to the amount of boys).

Of course, all this more an observation than really a critic, but if you wish to have the rents paid to those doing the actually hard stuff (not the risky stuff), then you would probably make the world a great deal more unequal.

TallDave March 6, 2013 at 11:05 pm

Fair point, Mexico may be better of with privatized Slim than socialist Telmex, but that’s a bit like noting that Europe was better off with the Kaiser than Hitler — better things are possible!

Rahul March 5, 2013 at 3:44 pm

@Allen Mexicans pay more for the same or worse telecom service, not just relative to wealthy, developed countries, but relative to other Latin American countries, despite being one of Latin America’s richest countries.

Why is a service in the richest country costing more than the poorer ones a surprise?

Careless March 5, 2013 at 6:39 pm

It costs more than in richer countries, too.

Steve Sailer March 5, 2013 at 9:54 pm

How about if Slim competently managed his businesses but only made $5 billion instead of $50 billion, and left the other $45 billion in the pockets of average Mexicans, who need it more than he does?

Allen March 5, 2013 at 2:34 pm

It’s no surprise that Bill Gates defends Slim, since Gates’ fortune is also built on rent-seeking via the network effect. Gates had a network effect monopoly bootstrapped when IBM distributed MS-DOS on its PCs and made everyone dependent on paying Gates money or else they wouldn’t be able to run most of the software on the market — and software developers had to write software for MS-DOS because that was where the market was.

MJ March 5, 2013 at 2:34 pm

In “Why is Africa Poor?” Acemoglu/Robinson point to the Kingdom of Aksum as an example of how institutions got more extractive as a response to to external circumstances (that is, the Arab expansion). The Maya example is no different – a change in institutions as a response to external circumstances (climate, in this case). Is Gates sure to have understood the argument – or why exactly does he think this is a counterargument rather than something the authors say themselves?

And does he really bring up the current crisis as a counterexample against the approach via institutions because it somehow shows a decline in growth? I mean, sure, there are sophisticated arguments that there is an underlying decline in long-time growth – but this seems weirdly ridiculous as an argument against what A/R are referring to… Gates is usually presented as sort of a genius, so I doubt that he really made so silly an argument. Am I confused?

PPP March 5, 2013 at 2:36 pm

First, the examples of HK, Korea, and Taiwan support Acemoglu’s thesis. How Gates fails to recognize the distinction between say North Korea’s government and that of South Korea or HK/Taiwan relative to Maoist China is hard to understand. Never, not once, does Acemoglu claim that live in say Taiwan was as free as inclusive as that of Switzerland, but it is infinitely more inclusive than life during the cultural revolution.

Gates’ support for Slim is nothing more than an assertion with no evidence.

Millian March 5, 2013 at 3:24 pm

The primary distinction between North Korea and South Korea was capitalism, during the Park dictatorship which initiated its growth to developed-economy status. Yet pro-capitalist people seem uneasy about taking the credit for their ideology’s central role and the irrelevance of political organisation, much like Chile’s economic success since the 1980s.

Finch March 5, 2013 at 5:03 pm

Economic freedom seems far more important for well-being than political freedom, and that’s an uncomfortable thought. Since the pro-capitalist people are usually also the pro-freedom people, it kind of undermines them.

Mike Hess March 5, 2013 at 6:54 pm

Pro-capitalist people are resistant to embracing the decisions of south Korea in the latter 20th century because South Korea practiced state capitalism.

(Not That) Bill O'Reilly March 5, 2013 at 2:38 pm

Wasn’t Acemoglu and Robinson’s whole point that “embracing capitalistic economics” only really works under the auspices of strong, independent institutions?

MJ March 5, 2013 at 3:05 pm

(Not That) Bill O’Reilly,

I don’t understand that either. It is as if he said “Well, that assumption that you need proper soil to grow apples on seems contrived to me – why not just say that you need apple trees?”

Could you check if he really confuses the business cycle with an argument pertaining to long-term growth?

This seems to be not a critique but a bunch of truisms everyone who has read a wikipedia article on the respective topics could come up with and that are not checked against the frame A/R provided. Gates’ counterexamples seem to fit in their institutional approach rather smoothly.

JCE March 5, 2013 at 3:00 pm

tyler and what do you make of gates’s points?

Manoel Galdino March 7, 2013 at 4:04 pm

+1 I’d ask the same…

Phil P March 5, 2013 at 3:25 pm

I think Gates overall critique is sound. The problem with the book is that it’s a polemic disguised as a theory of history. The polemical point, which may be correct, is that today growth should be possible everywhere; geography, “culture”, economic ignorance don’t wash as excuses. If that’s all they had to say it wouldn’t be enough for a big book aimed at a popular audience. So they come up with a grandiose theory that’s Marx stood on his head – instead of economics determining politics, politics determines economics, going back to the Neolithic! That geography, for one thing, was not important historically, is ludicrous. The real problem though is that they fail to provide a theory of politics, their distinction between inclusive and extractive institutions being ill defined and simplistic.They also cherry pick their examples. In the 19th century the Austrian monarchy hindered pursued policies that hindered development. Interesting, but why did the Prussian monarchy do the opposite? They fail to even to mention India, a rather important country. It’s been a democracy for 65 years, yet growth was very slow until economic reforms in the 1990s, which happened without any change of regime. I could give other examples, but that should suffice.

MJ March 5, 2013 at 4:33 pm

Phil P,

The Austrian-Hungarian empire in the 19th century was a multinationlistic relict of an epoc of cabinet empires that transpired in an epoc of nationalistic awakening throughout Europe. Roughly speaking, the European map according to national states as we know it today has developed in that century – just look up a map from directly after the Vienna Congress and then again after WWII, which spans about 100 years, and then again compare with today (yes, I know WWI added a lot to that, but that doesnt change the underlying forces that where apparent before – and even the relatively recent scattering of the balkan can be traced back to that time – see, e.g. how it was composed in and outside the Austrian-Hungarian empire). The Austrian emperor/Hungarian king (Franz Joseph I. most of the time) was old-fashioned in his understanding of the power structure in a monarchy that he wanted to reign in absolutistic fashion – which is THE driving force for extractive institutions. Only reluctantly did he accept a parliament, and by then the empire was permanently engaged in avoiding its rapid dissolution – which culminated in the “Ausgleich” with Hungary, thusly implementing the double monarchy, but with all the more oppression of national “minorities” and favoring the powerful nationalities in the two halves. This is exactly the kind of environment where you would expect extractive institutions to result.

Prussia/Germany was on the bandwagon of nationalism at the time and surely didn’t have to oppress the population just to hold the empire together. While the monarchy was restrictive, Prussia’s/Germany’s politics of the time is usually identified with prime minister/chancelor Bismarck (who, for example, seemed to have been the only one to recognize the uselessness of colonies). Now, after Prussia integrated with the rest of the Deutsche Bund (minus Austria) it was quite successfull. I guess, A/D would have argued that this was not sustainable, but sometimes you just don’t get your data to prove or disprove anything, because of a world war, or something. But the case of absolutistic state forms combined with strong economic performance is nowhere excluded by A/R. (Obvious cases as the France of Luois XIV. come to mind) – that’s why they spend considerable time talking about just that. But you might want to check what they have to offer as evidence for the lack of sustainable growth in such cases – look, e.g. beginning with their example of the Bushong. That this evidence must be historic is a no-brainer.

But I am most astonished that Gates mentions all this cases (he assumes to be counterevidence) with DIFFERENT reasons for decline and doesn’t stop to think a second about what it means that A/D deliver a frame for ALL of them. Let me make up a really contrived comparison: being (born) under a waterfall, you can come up with two competing theories about what drives things down: a) the obvious, falling water, or b) an exotic theory about “gravity”. Now there is no reason to assume that the waterfall is not a driving force here, or cannot be a principle (and in fact, A/D do not do that: nowhere do they say, that geography was not important). But the general frame to explain why things fall towards the center of the earth is still gravity. (Please read this favaorably, I know it’s pretty easy to drive this kind of comparison ad absurdum.)

I understand the criticism that the book is too vague and doesn’t present enough evidence. But in this case, rather than assuming that there simply IS NOT enough evidence for what they say, I’d do a google search, just to find that one of the coauthors is in the top 10 of repec. This doesn’t prove anything, but it’d be enough reason to actually check with their academic output if it’s their theoretic frame that is weak, or just the book (if, when reading the papers, I’d still feel fit to judge the theory). This would avoid that I trash what is based on the results of more than a decade of highly successful academic research by invoking some cursory thoughts about what I think is the truth – and all that without even checking if there is actually any conflict between what I say and what A/D say.

MJ March 5, 2013 at 4:46 pm

A/D is Acemoglu and Dobsinson, of course. Sorry for all the typos, too…

Urso March 5, 2013 at 4:51 pm

“Please read this favaorably”
I’m going to start appending this to all my posts. There is a definite tendency on the Net for everyone to read everything as critically as possibly. This is quite bizarre considering that much of what’s written on the web is just some tossed off comment; it’s not a series of carefully researched position papers. This tendency, I think, explains much of the “negativity” associated with twitter users two posts down is.

nickik March 5, 2013 at 6:26 pm

One should also add that this book is there popular work. In there papers they go into much, much more detail and look at much more data, a lot more statistics.

T. March 5, 2013 at 6:50 pm

“But I am most astonished that Gates mentions all this cases (he assumes to be counterevidence) with DIFFERENT reasons for decline and doesn’t stop to think a second about what it means that A/D deliver a frame for ALL of them.”

When you have a theory which explains everything, then you have theory which explains nothing. The problem as I saw it when reading A/R, was that extractive/inclusive institutions were defined based on the outcome. Similarly, whether or not a territory had a sufficiently strong and centralized state was also defined based on the outcome.

If you leave sufficient wiggle-room, as they did, you can always argue that institutions were not “inclusive enough” or that institutions were “too extractive”, or that the state was not “strong enough”.

To give you a parallel example: I could write a book on “Why Bodies Fail”. My story would then include that people whose bodies failed did not exercise enough, or that they did not eat healthy enough. I could illustrate this book with various stories and then state every time that in case A there was not enough exercise and/or healthy food, whilst in case B there was and this was the reason for success. Nowhere however would I need to define what “healthy” food was nor what “enough” exercise was. The analogy can be carried further, for example, in my book I could dismiss “radiation” (read: geography) as a cause of failing bodies, for have I not just shown that all you need is to eat healthy and exercise enough?

Now I agree that we should eat our vegetables and move around a bit as much as I agree with A/R that we should have inclusive institutions and strong centralized centers of governance. However what I would like to know is how do I know what is “healthy” and “enough exercise” ex ante, this seems to be absent from the book.

MJ March 5, 2013 at 8:13 pm

“When you have a theory which explains everything, then you have theory which explains nothing.”

What does that mean? I know you meet that sentence every other second under “irrefutable truth”. But really, if you have a set of assumptions and get a huge number of seemingly different observations right, you have a pretty awesome theory, period. With the same sentence I could “disprove” the theories of relativity because they get much (in fact, MUCH) more observations right than what you can derive from “Newtonian” assumptions alone. What you mean to say is, I guess, that they can only explain as much as they do because the theory is so hollow, e.g. because A/R use terms like “extractive” as a purely rhethorical ploy with no real meaning. OK, if you have that feeling, check the source!

If you didn’t make it further than 1/3 of there book, read, for example, their “The Colonial Origins of Comparative Development: An Empirical Investigation” (this is much more complicated, but shorter) before making such claims. You can find there the assertion that “The validity of our approach-i.e., our exclusion restriction-is threatened if other factors correlated with the estimates of settler mortality affect income per capita. We adopt two strategies to substantiate that our results are not driven by omitted factors. First, we investigate whether institutions have a comparable effect on income once we control for a number of variables potentially correlated with settler mortality and economic outcomes. We find that none of these overturn our results; the estimates change remarkably little when we include controls for the identity of the main colonizer, legal origin, climate, religion, geography, natural resources, soil quality, and measures of ethnolinguistic fragmentation. Furthermore, the results are also robust to the inclusion of controls for the current disease environment [...]”

Of course, the claim int his paper is not as general as those in the book (that is, what they explain in the paper is a high correlation between log(settler mortality) in former colonies, which is a proxy for the setup of extractive institutions, and log(1995 GDP) in those places). The definition of “extractive” here links to an index of “expropriation risk”. (That Gates says that it is about capitalism seems more and more odd: it’s a critique without critique, conflating the outcome with the variable that controls it. I still cannot imagine that he got it wrong on a such baisc level; and that stuff with the crisis, boy…) And as I said, I understand the complaint that the book is too vague. But if you want to assert that they are wrong because they cherry-pick their observations and/or ignore alternative explanations, you should really check if that is true by going to the source. This isn’t Jonah Lehrer writing – these are two guys with an actual track record on the topic!

My hunch is that “geography” sounds intuitively right as an explanation, and that the institutional approach overly abstract (though I’d like to see, in precise terms, what people have in mind when talking about geography in this context). But this is not about “feeling” that something ist right or wrong. Failing to grasp what it means – or the authors failing to convey what it means to a general audience – is not a valid reason to jump to conclusions about the correctness of the approach (if everything could be understood on an intuitive level we’d need no science). The econometrics is all out there – if one has the feeling that A/R have written a boring, vague book, OK. If one has a feeling that they are all wrong in principle, one should go to the source and disprove them.

T. March 6, 2013 at 3:25 am

MJ, I’ll number it out of convenience as I have only two points to make in reply.

1. My criticism applies to the book and the book only.

2. The comparison with the theory of relativity is not the right one to make. The theory of relativity gets a lot of things quantitatively exactly right, whilst it could also be wrong ex ante. A/R’s theory however defines whether or not something is extractive or inclusive, and whether there was enough centralization based on the outcome.

To illustrate the second point: imagine that we re-label extractive and inclusive in the book as “A” and “B”, and we re-label not enough centralization as “C”. If you can tell me ex ante whether an institution is “A” or “B” or whether there is enough “C”, then you have a good theory. If you cannot, then A,B, and C are ill-defined.

MJ March 6, 2013 at 7:59 am

I don’t compare A/R’s contrubution to the theory of relativity, it just shows that you can’t refute anything by invoking alleged words of wisdom.

Then, they do not judge that on the outcome, there is a clear measure, and I referenced an example. If you feel the book doesn’t inform you enough, so there. Pointless to engage in fancy reasoning on seemingly abstract level if all you have done is reading 1/3 of a popular outlet. Nothing is “ill-defined” in their work, you just don’t know the definition.

T. March 6, 2013 at 1:02 pm

MJ,

The point of comparison is the ‘refutation’ by the ‘alleged words of wisdom’. You can’t refute relativity with those alleged words of wisdom, simply because the theory tells you ex ante what it does explain, what it does not explain, and what the implications are for observations. You can however ‘refute’ A/R’s theory in the book with those alleged words of wisdom, as the definitions employed are needlessly vague: you can explain everything with those definitions (ex post), yet predict nothing (ex ante).

MJ March 6, 2013 at 3:59 pm

Yeah, whatever.

There are papers, if you are interested, read them. If not, don’t.

T. March 5, 2013 at 3:28 pm

I pretty much agree with Gates’ points: I had a similar feeling when reading “Why Nations Fail”. Exclusive, inclusive, strong centralized state over a territory, etc, were all very much undefined. I stopped at 1/3, but I am not sure whether I want to finish it if the book stays so vague. There is nothing in the book that reads as new or useful.

Emil March 5, 2013 at 4:15 pm

I think Gates has a point in that you can’t blame Slim if the Mexican government is weak or corrupt. You need to blame the Mexican government.

On the other hand I don’t know if this refutes Acemoglou and Robinson (as T. I got bored somewhere around a 1/3 into the book)

Dave March 5, 2013 at 5:13 pm

I’d love to learn more about Gates’ opinions on competition laws. Anyone know if he’s on record anywhere talking about them?

Alex' March 5, 2013 at 5:20 pm

“…800AD, the economy everywhere was based on sustenance farming.”

Did something happen in the late first millennium that I’m missing, or did he mean 1800AD?

Seth March 5, 2013 at 5:53 pm

After reading Gates’s review, I get the impression that he may not be aware of what he doesn’t know.

Nick March 5, 2013 at 5:59 pm

Bill Gate’s criticism makes absolutely no sense. It has been documented time and time again that capitalism has led to a concentration of wealth at the top. Yet he claims capitalism (combined with the right political system blah blah) provides the best allocation of resources.

Yeah, maybe for the rich kids who’s parents can afford the tuition at the schools Gates likes to lecture at.

I bet if he took a trip around the community colleges in this country (not to mention our inner-city secondary schools), he’d be singing a different tune.

Emil March 5, 2013 at 6:06 pm

Please provide examples

maguro March 5, 2013 at 7:02 pm

So what non-capitalistic system provides the best allocation of resources? Don’t leave us hanging.

Rahul March 5, 2013 at 11:49 pm

OTOH, socialism was particularly effective at concentrating poverty at the bottom. e.g. pre-1990 India.

Brandon Berg March 6, 2013 at 12:02 am

On the contrary, socialism has proven remarkably effective at spreading poverty well into the middle class.

HM March 6, 2013 at 3:12 am

You mean pre-1980 India. India grew almost as fast in the 80′s before the reforms as in the 90′s after the reforms. 3.8% vs 4.4%.

Nick March 6, 2013 at 4:35 pm

My point is it isn’t black and white like the arguments often appear to be between folks like Bill Gates and Acemoglu/Robinson. Bill Gates is brilliant beyond my comprehension, no doubt. And he’s been around many more intelligent people than I have in my much shorter, less aristocratic life. And so he looks at the puzzle and says “the folks at the top are doing amazing things…let’s give them all of the resources.” Or at least that’s how I interpret it.

Then I see something like MRUniversity get put together, also by a pair of folks at the top, yet it reaches the folks at the bottom in ways that could seriously make an impact on economic development, if executed properly. How, when, where etc. that’s going to happen, I couldn’t tell you. But coming from a background of teaching at community colleges, where we have lots of really smart people who want to learn but have motivation problems for various reasons, tied with really smart people who want to teach but have motivation problems mostly because they’re paid ridiculously little, online education is definitely a voice that needs to be heard.

That’s all I’m saying.

TallDave March 6, 2013 at 11:01 pm

Well, it’s true capitalism concentrates wealth, but it can happen in a relatively meritocratic fashion — most free market billionaires weren’t born that way, they made some contributiuon to human welfare, they have to in a free system because you don’t get rich ina system of voluntary exchange by offering people a worse deal than they can get somewhere else. Under extractive instutitions, you typically get someone like Moammar Gaddafi, Hugo Chavez, Fidel Castro, Kim Jong Il, Yasser Arafat, or Karimov becoming a billionaire by coercing the wealth of others, incidentally making everyone poorer by ruining the incentives for innovation and growth.

Tom March 5, 2013 at 6:47 pm

typo (need “aid” not first and): He also objects to the critique of foreign and, and the review closes with this

Gates wants aid to be more effective than it really is. Even his own, fine and noble Gates Foundation, would probably help more if it was profit oriented investment.

“Capitalism” is basically private property, as defined and protected by gov’t, plus peaceful, honest, voluntary contracts, enforced by the gov’t. The peace part means all deals are win-win. This is how wealth is created without making others poorer. Slim’s wealth increase, depending on the gov’t, often made others poorer — as did gov’t protection of Gates “intellectual monopoly”.

The moral argument for private property protection is that when somebody steals, the victim loses. But nobody “owns” a “market” — a market is just people making peaceful choices. Mom & Pop shops don’t own a market, and lose that market when Wal-mart (almost no patents, not technological innovation) moves in. Microsoft’s monopoly, not “property”, was protected by gov’t force.

It should never be illegal to share what one has, including making digital copies, even tho that might reduce the market value of info being copied. Creators should make different business plans.

Mike Hess March 5, 2013 at 6:57 pm

Economic policy shouldn’t be made with moral arguments — leave that for the Marxists and Austrians.

mike hess March 5, 2013 at 7:17 pm

I don’t think Gates actually read this book.

He claims “The book also overlooks the incredible period of growth and innovation in China between 800 and 1400. During this 600-year period, China had the most dynamic economy in the world and drove a huge amount of innovation, such as advanced iron smelting and ship building. ”

Page 230 – 231 of Why Nations Fail “Absolutism…prevented industrialization during the critical juncture created by the Industrial Revolution. The Ming and Qing dynasties of China.. illustrate this pattern…between 960 and 1279, China led the world in many technological innovations. The Chinese invented clocks, the compass…and blast furnaces to make cast iron before Europe did…Yet China was absolutist, and the growth under the Song dynasty was under extractive institutions… and the great inventions of the Song were not spurred by market incentives but were brought into existence under the auspices, or even the orders of the government. Little of this was commercialized. The grip of the state tightened during the Ming and Qing dynasties that followed the Song… the absolutist emperors of China opposed change, sought stability, and in essence feared creative destruction.”

And continued on 232 “When the Ming dynasty came to power in 1368, it was Emperor Hongwu who first ruled, for thirty years. Hongwu was concerned that overseas trade would be politically and socially destabilizing and he allowed international trade to take place only if it were organized by the government… He banned private individuals from trading with foreigners and would not allow Chinese to sail overseas.”

The Zhang He trade missions are discussed for an additional two pages, concluding with “These events, though only the tip of the extractive iceberg that prevented many economic activities deemed to be potentially destabilizing, were to have a fundamental impact on Chinese economic development. Just at the time when international trade and the discovery of the Americas were fundamentally transforming the institutions of England, China was cutting itself off from this critical juncture and turning inward.”

For those of you who stopped reading 1/3 of the way through, this was in the latter 2/3.

Steve Sailer March 5, 2013 at 9:59 pm

Shorter Acemoglu: Anything good that ever happened in history was due to following our advice, anything bad due to not following our advice.

Rahul March 5, 2013 at 11:47 pm

Did Acemoglu happen on his own advice?

Sasquatch wrecked my life March 5, 2013 at 10:57 pm

Gate’s “bottom line” seems dead on. Of course it is related to A&R’s argument in that it is probably one component of their larger thesis. But in trying to work everything into their inclusive & extractive framework, A&R conclude that SUSTAINABLE growth can only occur under inclusive institutions. Fair enough, but that introduces another vague concept we need to define (sustainable) and confuses things. Gates’ idea is more simple, direct, and just as true if not more true.

To me, the most interesting part of the review is Gates’ consideration of global competition between economies, nation-states, and empires. That seems to be an important part of how he looks at and analyzes world history.

TallDave March 6, 2013 at 10:45 pm

It’s really not that vague — A&R argue under extractive institutions the incentives for growth are (sooner or later) overwhelmed by the interests of the elite in maintaining the status quo. That generally happens about the time that creative destruction would be required for further growth.

Elites do not like creative destruction because it’s their goose getting cooked, and so they tend to resist it. How successful they are depends on the political institutions.

philipp March 6, 2013 at 12:11 am

Not sure if he even read the whole book.
He is in his critique so fixated on political inclusiveness, and doesn’t seem to realize that markets and private property allready are a step towards inklusiveness if you come from a planned economy with everything owned by the state.
It’s the economy too, stupid!

Jakej March 6, 2013 at 4:07 am

Pull the troops out of Iraq and Afghanistan and invade Mexico to overthrow Slim and the rest of the land barons there and let the people own subsistence land so they don’t need to cross the border but also enforce the border to make sure they commit to the fight there rather than coming to fight us here for our land. We’ve got our own land baron problem to deal with.

TallDave March 6, 2013 at 10:42 pm

I think this response sums it up nicely:

“Rather, they would say that Mr Gates is skipping the hardest questions: why some countries go down the infrastructure, education, and market-pricing path while others don’t.”

I’m just finishing their book, it is very persuasive, perhaps because it leans so heavily on the notion that elites respond to incentives rationally. I used to be a “culture dominates” guy but the book makes a powerful case that institutions shape culture, much more so than the other way around. There were a lot of details about places like Uzbekistan, Botswana and Argentina that I had never seen before.

Highly recommended.

TGGP March 7, 2013 at 12:30 pm

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