If the capital-labor ratio were the only determinant of growth, then economic performance would be easy to manipulate. Communism and other forms of dictatorship would not necessarily fail, because an economy controlled by the government is at least as capable of setting aside output for investment as is an economy that permits a large private sector. The solution to underdevelopment would be simple, because transfers of capital to underdeveloped countries would be sufficient to raise their standards of living.
The fact that social systems matter for economic growth makes the problem of underdevelopment far more complex. It also means that non-economic variables impinge on economic performance.Social Systems that Fail
Communism is not the only social system that fails. Ralph Peters, a retired Lieutenant Colonel formerly with U.S. Army Intelligence, identified seven "failure factors" that he says characterize poorly-performing states.
- Restrictions on the free flow of information.
- The subjugation of women.
- Inability to accept responsibility for individual or collective failure.
- The extended family or clan as the basic unit of social organization.
- Domination by a restrictive religion.
- A low valuation of education.
- Low prestige assigned to work.
Some of the poorest African nations suffer from nearly all of these characteristics. Many Arab countries have these problems, and apart from oil wealth their economies are primitive as a result.
China does not have many of the characteristics of failed states, but it does have strong restrictions on the flow of information. Peters believes that this will create challenges for China, either leading to reduced economic growth or to a revolution that changes the government's policies restricting information flows.
Bruce Bueno de Mesquita and Hilton L. Root argue that autocracy plays a critical role in underdevelopment. They differentiate between a government that has a broad power base (an inclusive government) and a government with a narrow power base (an autocracy). They show that the leader of an autocracy stays in power longer if there is less economic development. Autocrats channel foreign aid to their constituents and supporters, which stabilizes the regime but hurts the country.
Richard Roll and John Talbott compared economic performance in countries before and after major political changes. They found that
When countries undertake a democratic change such as deposing a dictator, they enjoy a dramatic spurt in economic growth, which persists for at least two decades. In contrast, an anti-democratic event is followed by a reduction in growth.
Many social scientists have noticed that democracy and economic growth tend to be linked. However, in theory this might all be due to relationship in which economic growth causes democracy. However, the Roll-Talbott approach shows that there is a causal relationship running from the political system to economic growth.Social Systems that Succeed
Another perspective on social systems is provided by looking at systems that succeed. Physicist David Brin argues that successful systems are characterized by rules that allow new ideas to emerge and compete with old ideas, with the better ideas winning.
Consider four marvels of our age -- science, democracy, the justice system and fair markets...for years, rules have been fine-tuned in each of these fields of endeavor, to reduce cheating and let quality or truth win much of the time. By harnessing human competitiveness, instead of suppressing it, these "accountability arenas" nourished much of our unprecedented wealth and freedom.
Brin notes that each of these arenas permits vigorous opposition and debate. In each case, there is a well-accepted process for settling conflicts and arriving at resolution. The result is that new ideas and methods are generated, sifted, and evaluated. With the best ideas surviving, improvement is continual.
Progress requires failure as well as success. If an inefficient company is not allowed to fail, then there will be fewer resources available to successful companies.
There is a political impulse to "protect jobs." As industries become more efficient, this is difficult. For example, farm productivity keeps increasing, so that the number of people that can be fed per farmer rises. The economy needs fewer farmers, and people can be employed more productively in other occupations. However, this creates political pressure to "save the family farm." As a result, the United States and most European countries spend enormous amounts on subsidies to farmers. Most tariffs and other trade restrictions are motivated by political pressure to keep people working in industries where they are no longer are needed.The Role of Government
Economists hold strong opinions about the proper role of government. They do not all agree, but in most cases economists want government to play a role that promotes growth. Some of the major issues include:
Owners of private property will tend to take actions to enhance its long-term value. They will save and invest for the future. They will adopt useful innovations. Private property can be threatened either by excessive government regulation or inadequate law enforcement. Government must be strong enough at defining and protecting property rights, without going overboard with complex and unnecessary regulations.
Research and development.
Pure scientific research tends to benefit a broad set of people. If the social benefits exceed the benefits to any one company, then research may be under-funded if it is left to the private sector. Moreover, if we rely on the private sector to undertake research, firms may want to keep the results out of the public domain. For these reasons, most economists favor government support for scientific research. However, they view market competition as better at sorting out the application of research to solving human problems. Thus, economists would propose that pure research be supported by the government, but applied research and development would best be done by the private sector. This raises the question of where to set the boundary. Economist Paul Romer says
In the next century we’re going to be moving back and forth, experimenting with where to draw the line between institutions of science and institutions of the market.
Economists are convinced that education helps to promote growth. However, this does not mean that all economists support public schools. Many economists believe that the government should provide vouchers and let parents choose schools. This would make it easier for weaker schools to fail and encourage innovative improvements in education.
A monopoly will tend to resist innovation. However, economists disagree about whether particular firms are harmful monopolists. There were prominent economists on both sides of the Microsoft anti-trust case, in which one of the key questions is whether or not Microsoft's actions will discourage innovation in the future.
Some economists believe that it is impossible for a private company to maintain a monopoly by itself. From their point of view, monopolies are sustainable only to the extent that they are granted or protected by the government. If that is the case, then anti-trust policy does not have to be very aggressive.
Some political, economic, and social systems are more conducive to growth than others. To succeed, a system must reward education, work, and successful innovation. It must not insulate people and companies from their own mistakes and failures. In order to fail, a society must repress the natural desires of people to learn and to improve themselves.