Customer Reviews

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor

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I am quite accustomed to having scholars in other fields point out the follies of most economic theories. Seldom have I seen the questioning sword come from an economist. The novelty was quite rewarding.

As Culture and Prosperity suggests, economics has a limited ability to predict and explain human behavior. Many other fields do better. One problem is that much economic analysis assumes what does not exist: everyone considers only economic factors in their decisions; perfect information exists; circumstances are in a stable state; and so forth. Many economists proudly proclaim that it doesn't matter whether or not their work predicts anything accurately or not. All that matters is that the math is correct.

In Culture and Prosperity, the nominal topic is explaining why people in some countries enjoy more prosperity than those in other countries. Actually, that subject takes up less than a quarter of the book. So if that's your main interest, you may find this book to be a little overkill.

To answer the question posed in the topic, you take a brief tour through the history of economic thought from Adam Smith through to the latest theorists and Nobel Prize winners in economics. If you find all of that more than you want to know, just pick up the argument in part five after reading the opening examples.

One of Professor Kay's strengths is that he uses interesting human examples to make his points. He also avoids math for those who find that challenging. Further, he minimizes the use of jargon. It's an unusually clear argument.

Essentially, he concludes that the driving forces in developing prosperity are division of labor (harking back to Adam Smith), more effective organizations (teams can do more than individuals), having individuals and companies make many decisions rather than relying on central planning (pluralism), and creating scarce talents that have value to many others (seeking economic rents). It also helps to have a culture that favors honesty, an interest in being productive, and other social values that are constructive. Many other items play some role.

But his basic points are important for governments: Give up on planning your economies -- seek to facilitate the conditions that lead to prosperity instead; Don't assume that the American way to prosperity can be dropped down into any country without the other characteristics of American society (the reasons why Russia has done poorly).

Professor Kay also has some valuable things to say about the problems for America with the American Business Model (greed is overtaking effectiveness for leaders) and the future of economics (economists need to rejoin the real world).

If you are an economist, you will probably find this book to be very elementary. If you took a single economics course, you will find this book approachable and an entertaining way to catch up on what's happened in the field since you studied it. If you have never taken economics, this book will teach you most of what you need to know about public policy with regard to economics.

Those who believe in efficient financial markets should be sure to read this book. You need to change your thinking!

Although this book will probably not be referred to as long as The Wealth of Nations, I hope that economists will learn from its arguments and style to make their work more helpful to the rest of us.

The subtitle to this book describes the content succinctly - "Why Some Nations are Rich but Most Remain Poor". Author John Kay, a prominent British economist, postulates that one of the reasons is due to cultural factors. These cultural norms may both free and confine the society when it comes to prosperity. If international trade benefits both rich and poor countries then why do poor countries remain poor? In a brilliant exposition of economics he argues that it is not the free markets and constant search for materialistic acquisition that has made America prosperous but it is largely a factor of the various institutions we have in place. That is one reason why many countries have been unsuccessful in trying to emulate the American economic machine. If our success were based entirely on free markets then bringing them to other countries would allow them to prosper, but they often do not. If you were taught the traditional Adam Smith and Keynesian economic models you will be delighted with this additional perspective on the international market and why our models often don't work in other countries. By the same token the models that work in their cultures may not work at all in ours. A fascinating read and a fresh view of international economics, "Culture and Prosperity" is a highly recommended book.

The title and the cover design of this book are extremely attractive. So are the introductory chapters that start with the description of the hypothesis based on the title. This evokes further interest and the soon we find ourselves reading topics that are a rare combination of economics, literature and culture.

There are examples of people in different continents whose income levels in dollar terms vary astronomically. Those who live in poor countries earn less despite good academic qualifications while even a not so educated farm worker in a rich country like Sweden is paid handsomely. The book attempts to solve this mystery.

There are only nineteen countries with a combined population of about 1 billion that are "rich". These countries spring back to prosperity within a short time even when they are flattened by bombs - Germany and Japan for example. It is interesting to note that these nineteen countries have many similarities - statistically atleast - in terms of economic policy, honesty of people, climate, etc. Switzerland tops this list. These "rich" countries are not dependent on their natural resources and have significant trade in value added products and services between them. The rest of the world is just not able to catch up. ( Even the oil kingdoms do not appear in the list of rich in terms of per capita GDP). The book goes on to explain that it is disciplined pluralism with a combination of economic, social and political institutions that is responsible for such success.


Let us then look at the "poor". Pakistan for example has nuclear weapons capability, but a weak public health care system. Can a nation boast of technology when people die from disease ?. This discussion goes on. The next logical step for poor countries would be to exactly replicate the policies of the rich as a quick and sure road to prosperity. Here the author feels that the process needs to evolve over long periods and cannot be transplanted. This is perhaps a very controversial view and can generate a healthy debate.

There are several chapters meant to explain the concepts stated in the hypothesis on prosperity. The bulk of these are devoted to economics while politics and social systems do appear with some icing of art and literature. One might be tempted to visit France and also develop an interest in paintings, Van Gogh, to be specific.

I found every chapter very interesting particularly in the style and simplicity of explaining complex economic issues without the aid of mathematical tools - free markets, perfect competition, economic rent, consumer surplus, central planning, monopolies, and a host of other key topics of economics and wealth generation. Economics is treated as a subject of allocating scarce resources among competing ends. Nobel laureates in economics are quoted liberally adding to the richness of the discussion. The glossary of economic terms provides a good reference.

Having enjoyed the reading on various economic concepts and issues, finally there appears to be a disconnect between from where we started and how the book concludes. Despite this shortcoming the book can be considered a great collection of ideas on a very important global issue.

There have been many arguments put forward as to why some nations seem forever destined to remain poor and others, primarily European in cultural heritage, are prosperous. Those arguments range from the extreme believers in absolutely free markets as the reason for wealth to the relentless and continuous exploitation of the poor as the reason for poverty. As is nearly always the case when there are two extremes, the truth is somewhere in the middle, with each nation having different reasons for their economic performance. However, there are some general reasons, and Kay cites them with examples.
The first requirement for prosperity is a government whose members are not concerned solely with increasing their personal wealth. Although there are many others that he could have used, Kay cites the example of Joseph Mobutu in the Congo (Zaire). In terms of natural resources, the nation is extremely wealthy, but under Mobutu the country, with the exception of his cronies, was completely bankrupted. Kay also places a lot of blame on Western institutions that supported the Mobutu regime, lending billions of dollars that have largely vanished with no physical evidence remaining. Organized mineral production in the country has largely ceased.
In general, the countries of sub-Saharan Africa all suffer from the problem of greed and weak, incompetent government. In an excellent quote, Tom Friedman states, "Come to Africa- it's a freshman Republican's paradise. Yes, sir, nobody in Liberia pays taxes. There's no gun control in Angola. There's no welfare as we know it in Burundi, and no big government to interfere in the market in Rwanda. But a lot of their people sure wish there were." These examples also demonstrate that free markets are not the answer. Some of the freest markets in the world are in these countries, where bandits rule by controlling mining and then sell their ill-gotten gains to the highest bidder. Government leaders also readily sell their decisions to the one willing to pay the most. It is very sad to note that in many of these countries, economic productivity is now lower than it was when they were still under colonial rule.
Stable governments with honest leaders are also not enough. Kay cites the example of Tanzanian President Julius Nyerere, one of the few honest leaders to emerge in sub-Saharan Africa. Nyerere ran a government largely free of corruption and tried to develop factories and a stable economic infrastructure. Under his rule, Tanzania was considered one country that could possibly rise from the muck that is the disaster of Africa. Unfortunately, despite all of the aid and advice from Westerners, the GDP of Tanzania was lower when Nyerere retired than it was when he took office. One giant factory designed to supply the entire country with shoes was a disaster and never operated at more than 5% of capacity before it was closed.
Kay also has a true sense of history, something often lacking in modern commentators on economics. He reminds us that the early industrial revolution in England was very hard on the social structure, people and the environment. Thousands were herded into slums to provide the labor pool, and left to fend for themselves when they were no longer needed. Children were forced to work very long hours at dangerous jobs that required someone of their size and dexterity. Westerners travel to sweatshops in third world countries and are strongly critical of the conditions they find. It is often forgotten that the conditions they find are much better than when Europe industrialized. The reality is that economic conditions eventually dramatically improve, it just takes some time.
In examining the conditions that lead to a country being prosperous, Kay concludes that the following conditions must hold:

* Stable, honest government.
* Laws that clearly define property rights and that are enforced in an even-handed way.
* A sense of community, where people do not blindly follow the path of personal self-interest.
* A spirit of innovation, where new ideas are constantly generated, tried in small experiments and then only executed in the large when they have passed the initial tests.

Kay also spends a great deal of time on the American stock market bubble fueled by the dot-com craze of the nineties. His statements and conclusions regarding the behavior of the American economy will not please those who praise it as the model of efficiency. He considers the descriptions of the American economy to be vastly oversimplified and even whether they accurately describe how it functions.
I enjoyed the book, especially the examples of economic successes and failures. So much so, I wished there had been more of them. A large section is spent on describing the fundamentals of markets, which I largely skimmed. One thing is very clear. In performing a comparison of the economic performance of countries, you realize how complex economic productivity is. Those who argue that all will be well if only free markets and democracy take hold are misguided and/or simple-minded. Societies and cultures are extremely complex and Kay demonstrates that even well intentioned actions can be detrimental.

The cover subtitle is "Why some nations are rich but most remain poor?" is a great question fom a book but this book doesn't get around to ever answering the question. The final conclusion on page 305 is "Sven and Ingrid are well-off for much the same reason that Heidi and Hermann are well-off...The social and economic infrastructures of Switzerland and Sweden have many differences, but both are sophisticated, developed market economies." So did their "sophisticated, developed market economies" just drop out of the sky and by chance land there? If Sven and Ingrid went to Sudan and Heidi and Hermann went to Haiti, would they prosper? There's lots of observation here of dry economic data presented coherently and with style but I kept asking when do we get to the "why" of it all? Why? Why do poor nations remain poor? A more recent book I can recommend as directly answering this question is "Undercover Economist: Exposing Why the Rich Are Rich, Why the Poor Are Poor--And Why You Can Never Buy a Decent Used Car!" by Tim Harford.

This book offers an explanation of why some countries did not experience large economic growth since the end of WWII, with an emphasis on South India, Eastern Europe, sub-Saharan Africa and parts of Latin America. The author provides two reasons. First, some countries such as India and Eastern Europe decidedly went the route of central planning, a system that could never master the coordination and communication aspects that free markets naturally achieve. Others such as sub-Saharan Africa and Latin America tried free markets, but did not have the political and social institutions to make it work.

Specifically, the author argues that disciplined pluralism is the key to a successful economy, and free markets are the best starting point to get there. Pluralism means that individuals and units of individuals have choices for nearly all their economic decisions, such as what food to grow, what job to take, where to live, where to invest in, etc, etc... Disciplined means that these choices are offered and made in a common framework that everyone mostly adheres to without second thoughts or asking questions. Not enough discipline or not enough pluralism and free markets can degenerate into either monopolies or anarchy.

The author supports his arguments by looking at the history of nations, states, cities and companies throughout the past 200 years from various places in Western civilization. In doing so, the author also highlights major achievements in economic thought and how they have reflected, interpreted, or sometimes guided the actions of individuals and nations. So the book is two-fold; it serves as a history of economics and a history of economic theory. All in all, a good book and great reading.

John Kay is one of those writers with the rare knack for making economics understandable, and his skills are in full display in this book. Kay offers a sophisticated critique of the assumption that markets can, on their own, guarantee prosperity, and he shows how culture and institutions play a crucial role in driving economic growth. At the same time, he rejects facile attacks on capitalism, arguing convincingly that markets remain the most powerful engine of prosperity ever invented.

Kay's style is generally quite readable, but at times here -- more so than in his FT work -- he gets bogged down in theory and detail, and there are ponderous passages to wade through. On the whole, though, this is illuminating stuff, and anyone interested in understanding why some parts of the world are rich while others are poor should take a look.

One thing that this book attempts to do is to answer the question: What features enable
companies and economies as a whole to succeed and prosper? Kay's answers center around:

- Division of labor.

- Experimentation and innovation.

- High levels of bureaucratic organization.

- Flexibility.

- Stable, honest government.

- Secure property rights. Laws that protect them. Consistent regulation that makes
business transactions predictable. And, legitimacy: a sense that rewards and wealth are
apportioned fairly.

- A sense of community. There must be motivations in addition to and other than personal,
financial gain. The system must foster cooperation.

- Expensive labor is better than cheap labor. It forces producers to move toward
increased productivity, which results in higher compensation for works, which results in
a higher level of consumption.

- Manufacturing is better than agriculture. Manufacturing produces a higher value product
and uses skilled and valuable labor to do it, thereby increasing wealth.

The institutions and mind-set needed for a modern, successful economic systems take a long
time to produce. It's not likely that anyone can "install" them; these conditions need to
evolve through a self-organizing process.

Assignment -- Allocation of scarce resources to competing ends. Kay considers examples
and problems with both (1) political decisions; (2) market decisions as mechanisms for
assigning and allocating goods to those who need them and to where those goods are needed
(But, what about the Internet stock boom and bust? Were those companies really winners
until they crashed?); (3) allocation decisions made by a single person or by a central
controlling authority (that can be huge mistakes also); and (4) picking good people and
trusting (yes, but which are the good people? Answer: We don't know until after they've
done the right thing.). All of these strategies have problems. We just have to get
lucky, I suppose.

Spontaneous order (and organization), chaos, etc. -- Many of our problems revolve around
the fact that economic systems are large and complex, and, therefore, their formation and
change is chaotic. Complex systems are especially subject to sensitivity to initial
conditions and path dependence. When initial conditions affect (and determine) subsequent
behavior indefinitely and when path dependency is sensitive to small initial conditions,
forecasting (prediction) is impossible.

One interesting point that Kay makes is that we are fooled in believing that contracts,
because we can write them or have them written and signed quickly, are easy. But, the
language and the assumptions behind these contracts, as well as the institutions that we
rely on to interpret and enforce them were not at all easy to produce. In fact, it took a
long time and a huge effort to produce the contract regime that we currently have.

Property rights that are stable and understood in common are important in producing
prosperity, according to Kay. But, those property rights are not simple. Like the
language and assumptions behind contracts, they took years and years to develop and for us
to develop a sense of agreement on them. They vary across different societies. And, now
that we are contesting ownership of things other than physical property, for example music
and movie libraries, the copyrights to books and software, and patents on devices and
inventions, not to mention genomes and DNA sequences, those property rights and
disagreements over them will become even more complex. All of this affects the legitimacy
with which property and its ownership is viewed by a society.

A successful economic system must do the following: (1) Allocation: it must allocate
scarce resources among competing ends; it must determine what is made (production) and who
gets it (assignment). (2) Exchange: the system must enable scarce resources to get to
those we need them where they need them, and to do so in an efficient and cost effective
way.

Centralized control -- Kay provides a number of examples where centralized control of the
allocation and exchange of goods, of the production and assignment of those goods, gets it
disastrously wrong.

Specialization and division of labor are huge magnifiers with respect to prosperity.
Corporations do this well. Combine these with the abilities to organize and to cooperate,
and this is where prosperity comes from.

Some of the later chapters of this book attempt to explain why it is so hard for a poor
country to become rich. These chapters discuss problems faced by countries that are poor
but resource rich, countries that attempt to use central planning and centrally planned
projects, etc.

Kay makes the point that those who do the hard and unpleasant work, are more motivated to
innovate, to mechanize, and to invest in capital improvements. But, some laborers go on
doing unpleasant work for years without innovating. Perhaps Kay means that those who bear
the *costs* of that unpleasant labor are motivated to innovate and to improve labor
productivity. In particular, they want to remove the costs and reduce their reliance on
unreliable labor.

Kay critiques the ABM (American business model). He seems to feel that it is too simple.
Importantly, he claims that the most important difference between rich and poor states is
the quality of their economic institutions. Furthermore, these economic institutions and
the qualities that make them better or worse are not simple; and certainly they are
complex enough so that they cannot be described as merely strong property rights. It
makes a great deal of difference what the exact nature of those property rights are. Also
important is that markets function well (or even function at all) only when they are
embedded in and can depend upon social institutions.

What is wrong with and incorrect about the ABM? (1) The ABM assumes that we have good, or
even perfect information; but we do not. (2) Markets for risk do not work as described by
the ABM; we handle risks in other ways, e.g. in families and communities that cover us and
our risks. In fact the securities markets are more like casinos than like insurance
companies. (3) Most economic activity does not happen in anonymous markets with large
numbers of buyers and sellers, but rather in corporations and other organizations. (4)
Order sometimes does emerge spontaneously, but often it is aided by government, by social
institutions, and by agreements between firms. (5) Knowledge and information are produced,
most often and more importantly by firms and individuals, not by markets of buyers and
sellers.

And, most importantly, the ABM is likely to result in a distribution of income and wealth
that is so skewed that it and the government and economic system that supports it loses
it's legitimacy. We are getting close to that condition here in the U.S.

Kay's book is in some sense a study of a particular kind of complex system, specifically
an economic system embedded within a political and societal system. It's also an attempt
to show just how complex such a system is, and how no simple explanation or simple theory
can explain such a system. Systems like this have a number of characteristics in common:
they are large, complex, chaotic, deterministic, *not* predictable, decentralized, self-
organizing, and adaptive. Given those characteristics, it's easy to see why Kay is
skeptical about the ability of a centralized controlling body (e.g. a national government)
to plan and control the development of such a system. Why? (1) Because the formation and
growth of such systems is chaotic; it's subject to the effect of small changes in initial
conditions; it's path dependent, so that small initial differences result in paths and
conditions that make other conditions/paths unavailable; it's complex, which means that
there are lots of conditions (states); it's subject to outside, unexpected influences; the
effect of making a change to the system is unpredictable. (2) These are usually "one-off"
systems: each one is "one of a kind". You do not have the option of producing several as
practice or as tests and then to make the real one. That means that you have to get it
right the first time, and some of us (I'm a computer programmer) know that's not possible.

If you are interested in the issues discussed in this book, then you are likely to also be
interested in the following: (1) "The origins of political order", by Francis Fukuyama;
(2) "The collapse of complex societies", by Joseph A. Tainter; and (3) "Collapse", by
Jared Diamond. The problem of how societies and political organizations degrade and fall
apart seems as interesting and helpful to me as how they are created and constructed. I
wish that Kay (and Fukuyama) had discussed it a bit.

Every year, around about the time of the G8 summit, we're bombarded by dozens of well-intentioned pleas from celebrities and... well, people who listen to them, for the powerful nations of the world to make things better in the poor nations of the world. The assumption is that given enough dollars of aid, we could make the lives of those in the third world better. It's a noble goal, and possibly attainable in small, temporary measures, but ultimately has proven to be untenable. Why is that?

The root of the issue lies deeper than access to resources, which is the thrust of most aid. Financial aid is a band-aid on a leaking dam. The problem lies in the culture of the society.

Kay tackles the problem with the studied eye of an economist, and illustrates how economics, being an artifact of human behavior, is defined by the culture in question. The concepts of markets, rational actors, prices, and demand are formalized observations of the way in which people interact with each other to produce the means of survival (and beyond).

One of the major determinants of individual economic behavior are the rules and rewards of the system. When economic liberties aren't guaranteed (through corruption, extortion, weak law enforcement, excessive taxation), the resulting disincentive hampers the growth of the economy. Accordingly, in most of the impoverished nations of the world, the government is found to be corrupt on multiple levels.

Fair government alone doesn't guarantee a prosperous economy either. While it is a requirement for a prosperous nation, prosperity still requires the initiative of the populace, a nebulous concept that stems from the values and ideals of the culture involved.

Aside from the weighty consideration of poverty, Kay also drops a lot of little nuggets about more quotidian economic concepts, such as why fair trade coffee is more of a benefit to the retailer than the farmer, why generic foods are given lackluster labels, and numerous other backstories on the rationale behind retailing and pricing.

Overall, a very fun book which, though not entirely capable of answering the claim of its title, does as good a job as possible.

As I read his column in the FT regularly I did have some idea as to the general direction this book would take.

The main point that Mr Kay makes, and one that can be found in all his other writings, is that consumers are not always rational. He believes that a large number of people act adaptively but not rationaly - due to the political issues/corruption of particular countries and firms. (GE is one of his favorite - i.e. the group think, as well as the civil service in mandarin times).

Mr Kay also pokes holes in the efficient market hypothesis rather well - another characteristic that makes him popular in the FT - although not quite a popular as Mr Plender.

While I rate the book as five stars, there are a few issues with this book that detract from the overall experience. The flower market as a perfect example of a competitive market gets tiring but the really annoying feature is the use of fictional individuals (Heidi the Swiss, Sven, etc). I realize this makes things easier to point out differences between countries but it does get tiresome after awhile.

If you are already into micro/macroeconomics this really does not cover anything new - it's just presented in a good format that makes a convincing case to the 'lay man'. Good read.