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VINE VOICEon December 7, 2009
In an era that pays homage to globalization and the supposedly "flat" world, it's an astonishing thing: Crossing the border from Latin America into the United States "appears to make the productivity of a low-skilled worker ten to twenty times higher, based on the wage differential."

So say Arnold King and Nick Schulz in their new book, which may make a lot of readers think differently about the importance of national borders.

The authors quote the director emeritus of the McKinsey Global Institute, William Lewis: "We compared the construction industry in the U.S. with construction in Brazil and found that in Houston, the U.S. industry was using Mexican agricultural workers who were illiterate and didn't speak English. They were not any different than the agricultural workers who were building similar high rises in Sao Paolo, say. And yet they were working at four times the productivity."

More differences as a result of borders: The book reproduces a chart of per capita GDP in 1997 that places North Korea at $700, South Korea at $13,590. Communist China's GDP was $3,130 per capita, while Taiwan's was $14,170.

What accounts for the differences between countries with similar populations or geographies? The authors chalk it up to a kind of "software" that encourages entrepreneurship and growth: property rights, the rule of law, a government that isn't too intrusive. A strength of this book, though, is that rather than offering exclusively their own ideas, the authors get out and do some reporting, interviewing professors who have thought about these issues, including four Nobel laureate economists: Robert Fogel, Robert Solow, Douglass North, and Edmund Phelps.

Sometimes the people the authors interview say interesting things. A fellow at Stanford University, Paul Romer points out that technological advances needn't be all advanced electronics, but can be as simple as "somebody figuring out how to design the coffee cup so that different-size coffee cups could all use the same size lid."

Other times, the people the authors interview say things that aren't particularly convincing, and that one wishes the interviewers would challenge a bit more.

Tribalism is described by the authors as a "bug" in the same category as "corruption" and "insecure property rights," overlooking the way that tribes can actually contribute to growth. In the same section on the evils of tribalism, the authors warn that "when an ethnic minority achieves economic success, the majority may choose discrimination, or even genocide, to redress the imbalance." This veers uncomfortably close to blaming the victim; even members of majority groups who are economically successful can be resented, after all.

In other areas, the authors bring a welcome appreciation of the dynamism and power of capitalism and of the threat that big government can pose. It's hard to argue with the example the authors give to support their assertion about government not fixing its problems: the mohair subsidy, established in 1955 to assure wool for uniforms, lives on, restored after being eliminated: "The mohair subsidy's beneficiaries are in a position to lobby effectively, while the taxpayers who would benefit from ending the subsidy are diffuse and unorganized." If more taxpayers read this book they'd be better prepared to vote for policies that keep America a place where workers become more, not less, productive, when they arrive here from their countries of origin.
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on December 27, 2009
In the 20th century, whenever markets failed, the temptation was to impose a big-government intervention to address the situation. In "From Poverty to Prosperity", Arnold Kling and Nick Schulz argue for an approach that they describe as "Economics 2.0", an approach in which free markets and even more innovation should be used whenever markets fail.

The authors believe that, in the future, the greatest improvements in living standards will come from ideas and inventions. They emphasize the role of innovation and describe some of the societal conditions that encourage it, such as strong property rights and the rule of law, and also describe other "rent-seeking" activities that stifle innovation, such as lobbying and the propping up of obsolete functions, activities that introduce distortions into the economy.

Trends in modern economics are examined, such as the move away from hard mathematical models toward a more sociological-based approach.

Because advances in the future will be innovation-driven, the question of intellectual property rights and how strongly they should be protected will come to the fore, and Kling and Schulz look at that important debate.

A great part of the book consists of interviews that the authors conduct with leading economists discussing these developments and issues, and there are numerous charts concerning GDP per capita, health, leisure, and life expectancy that show how well-off we are compared to the past. The book is a good study of where economics is going and is an important reminder of the importance of free markets, private property, and innovation.
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on December 20, 2009
It is the best book I've read all year, and the best book of interviews with economists ever written. Quick version: It's the book that Hayek should have written to convince critics and fence-sitters of the dynamic virtues of capitalism. Kling and Schulz elegantly weave together their original observations with truly awesome interviews. If you're going to read one nonfiction book of 2009 from cover to cover, it should be FP2P.
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on December 28, 2009
This is a wonderful book, profound, eloquent, and easy to read. Everyone should read it.

The tables in Chapter 2 show how dramatically human wealth and welfare have improved over the past several centuries. The rest of the book explains some of the reasons for the improvement. In between the chapters are interviews with various economists, all of which are fresh and stimulating.

Ultimately the book makes a powerful case for viewing the economy as far more dynamic and creative than most of us appreciate. Wider understanding of the ideas in this book would go a long way toward improving the quality of our political discourse and our future prosperity.
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on January 5, 2010
I read this book after reading David Brooks column in the NYTimes recommending it in December 2009. I didn't regret reading it. I am not an economist and found the book easy to understand yet highly insightful. It was my first exposure to the pwerful concept of intangible wealth and its importance in raising general welfare and alleviating poverty. I've always been aware of the importance of social capital and strong and benevolent institutions but not packaged together the way intangible wealth is. I've spend most of my career overseas working in lesser development countries and after reading the book I have a new analytical way of looking at things and why things the way they are. The chapter on financial intermediation provides a new insight on the financial collapse of September 2008. You will also be surprised at what the authors consider to be the primary challenges for continued economic growth and wealth creation in the future.
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on June 29, 2010
Let's say there's an apple. I want to eat the apple and you want to eat the apple. Both of us can't eat the same apple. We can divide it. We can determine who is more hungry. We can figure out who is willing to pay a greater price for it. We can find out who wants the core and who wants the seeds. But no matter how much we deliberate, we cannot share the apple in its entirety.

Economics used to be about how to distribute the apple most efficiently, but the world is changing. Although physical resources remain scarce, human innovation has flourished to the point where we can do much more with much less, and few have bothered to explain how or why.

Arnold Kling and Nick Schulz try to tackle this phenomenon in their new book, From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph over Scarcity. In the book, the authors try to grasp this new way of thinking by terming it Economics 2.0. Where Economics 1.0 saw the market as a means for allocating scarce resources (e.g. apples), Economics 2.0 sees the market as a mechanism for channeling innovation and triumphing over scarcity.

In the beginning of the book, the authors use laundry (of all things) to illustrate the difference. Economics 1.0 would try to explain how it might be more efficient for you to outsource your ironing to someone else. Economics 2.0, on the other hand, doesn't look at the tangible items in the equation (the number of shirts, the cost of an iron, the cost of dry cleaning, etc.). Instead, Economics 2.0 is primarily concerned with the potential for innovation. For example, what about permanent press? What about wrinkle-free shirts?

As the authors explain:

"Thanks to technical progress, many shirts today do not need to be ironed at all. Perhaps in another decade or two they will not need to be washed. Given the likely progress of nanotechnology, there is a good chance that shirts manufactured in 2020 will be `permanent clean.' That's Economics 2.0."

Another way to look at this is through what Kling and Schulz call the "software layer" of an economy. While Economics 1.0 is concerned with tangible inputs like labor and capital, Economics 2.0 is concerned with the intangible factors, such as collective intelligence, the existence of property rights, and levels of corruption. You can have all of the right hardware for a productive economy, but as the authors note, "a clumsy or buggy institutional framework will hinder economic performance."

Of course none of this is entirely new. Several lesser known economists have been studying these areas for some time (e.g. Douglass North, Robert Fogel, Edmund Phelps). Indeed, such research makes up the backbone of this book. But Kling and Schulz aren't trying to offer an end-all solution to how we should maximize human ingenuity. They are simply trying to promote and elevate Economics 2.0 to the forefront of our thinking.

The book also doesn't follow a very conventional format. From beginning to end it goes back and forth between broad economic concepts and various Q&A interviews with leading economists. It flows well, and although Kling and Schulz ask many of the same questions, each economist provides such unique answers that the book easily retains its momentum. It is also clear that Kling and Schulz did not pick economists based on some sort of ideological litmus test. In fact, this lack of dogmatism is one of the most refreshing elements of the book.

In addition to their overarching attempt to define and apply Economics 2.0, the authors delve into a wide variety discussions, jumping from property rights to patent laws to foreign aid to human capital to job satisfaction, all the while maintaining a focus on how we can maximize creativity, ingenuity, and technological innovation. There is also a chapter on financial intermediation that contains some of the best insight I've read on the recent financial crisis.

Kling and Schulz end the book by pondering challenges for the future. If we are really serious about maximizing our intangible assets and minimizing our hidden liabilities, what stands in our way?

This question is approached on practical terms, and the authors try to narrow their response down to a few key areas. Their proposed measures include redefining the way we approach intellectual property, reforming and liberalizing our patent laws, and drawing appropriate ethical lines in the realm of technological progress (e.g. with things like bio-engineering).

Overall, the authors bring Economics 2.0 to the forefront of our thinking and help crystalize the happenings of the last few centuries while beckoning us to anticipate and pursue the next few.
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VINE VOICEon March 21, 2010
An absolutely fascinating read. I highly recommend this book for those interested in economics, community development, economic development and human behavior.

Kling, Arnold and Schulz, Nick From Poverty To Prosperity - Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity, Encounter Books, New York, NY Copyright © 2009 by Arnold Kling and Nick Schulz.

This book is about "Economics 2.0' - an emerging field of economics whose impetus for evolving has been the blatant miscues, misunderstandings, assumptions, math, models and people that have contributed to the ongoing global financial crisis. I will let the following excerpts speak for themselves:

"This book presents the main ideas of what we call Economics 2.0. Economists have developed these ideas in order to explain the enormous differences in quality of life over history across countries." P. 2

"Economics 2.0 says that these differences reflect intangible assets and invisible liabilities. The intangible assets are knowledge bases." P. 2

"Invisible liabilities, on the other hand, are institutional and cultural impediments to innovation and productivity. These range from the structure and conduct of government to the attitudes and customs of ordinary citizens." P. 2.

"Economics 2.0 says that overcoming market failure requires innovation. Innovation is best delivered by markets." P. 3

Economics 2.0 is about abundance, which arises from technological progress." P.4.

"We use "recipes" to refer to innovation, ideas, know-how, science, and technology. We use "the operating system" to refer to customs, rules, norms, laws, regulations, and methods of intermediation." P. 10-11.

"The past decade also saw gains in jobs that involve imagination and creativity - designers, architects, photographers, actors and directors. The hairstylists and cosmetologists category rose by 146,000 jobs. Many occupations that use analytic reasoning have continued to grow, too, but computer operators and others are beginning to see their numbers fall. The occupations in eclipse are generally those that involve muscle power, manual dexterity and formulaic intelligence."pp.46-47

"The software layer creates the possibility that growth will accelerate. As more and more of the value in goods and services come from ideas, our standard of living will tend to increase at a faster pace." P. 75

"By far the largest contributor to growth of our price adjusted GDP, or value added, has been ideas - insights that leveraged physical reality." P.76

PAUL ROMER is a senior fellow at the Stanford Center For International Development (SCID) and the Stanford Institute for Economic Policy Research (SIEPR). His contributions to field of economics include being the primary developer of new growth theory, which deemphasizes the traditional idea of the scarcity of objects and directs attention to the power of new ideas.

"Newton said that he could see further because he stood on the shoulders of giants." P.80.

"The set of possible ideas, the set of things there are out there to discover, is just so incomprehensibly large that we've only begun to explore the tiniest subset of possible ideas or discoveries." P.81

"As long as we keep freeing up labor from bending metal and stamping out pills and put more and more of it into discovery, we can keep pushing up that rate of growth, by directing more and more resources in that direction." P. 98

"You want people to be aware of what others are doing so that you don't end up with a whole lot of replication of effort. Part of what A communications technologies are doing is coordinating these discovery efforts worldwide: as soon as somebody discovers something, it gets broadcast very quickly to others throughout the world, and people can change the directions they explore based on what they know others are doing." P.99

Question to Paul Romer: "Are there one or two key things that our politic class, broadly speaking, doesn't sufficiently appreciate or understand about economic growth?" Pp.104

1. Well, one thing that's important to persuade everyone of is that everyone wants growth but nobody wants change, and you've got to have both or you've got to have neither - it's what I was talking about before, that it's all about rearrangement and finding better ways to rearrange things. The only way you can create new value with new rearrangements is essentially by doing things differently; and any time you do things differently, there will be change, so people have to buy into the idea that change accompanies growth. It's not going to be just more of the same for everyone." P.104
2. We have to agree that, one, there will be change, and two, there are some winners and losers and there are no guarantees: everybody who is engaged in economic activity takes a certain amount of risk. There are always winners and losers when there are risks. We all commit to that, and on average we're all going to be better off, but we don't let the losers have veto power over progress. This is clearly a very acute question right now in Europe, where the existing elite, the existing well-off, do have a very strong position of veto power, a choke- hold on change and innovation." P.105

JOEL MOKYR is the Robert H. Strotz Professor of Arts and Sciences at Northwestern University. He holds a joint appointment in economics as well as a Sackler Professorial Fellowship at the Eitan Berglas School of Economics at the University of Tel Aviv.

"The degree to which we hold fast to the wisdom of earlier generations is an incredibly important element in how innovative a society is, because if you think about it, every act of invention is an act of rebellion." P. 130

Kling & Schulz -- "Tribalism tends to cause resistance to innovation. People in isolated villages view new productive techniques as threats. In part, this is because innovations are associated with outsiders. Moreover, innovations threaten to disrupt local traditions that have sustained community cohesion for many generations." P. 139

DOUGLASS NORTH is the Spencer T. Olin Professor in Arts and Science at Washington University in St. Louis. He was awarded the Nobel Prize in economics in 1993. His major interest is the evolution of economic and political institutions and the effects of institutions on the development of economies over time. He is the author of Structure and Change in Economic History (1981), Institutions, Institutional Change and Economic Performance (1990 ), and many other books. P.148

"We're trying to broaden how we think about problems, and. The frame is not economics; it's all of the social sciences. You cannot separate economics from political science and sociology at all. All of the interesting issues are on the borders between them." P.149

Question to Douglas North -- "What other obstacles prevent economists and policymakers from seeing what really matters?" Until they understand that our understanding of the world is very fragmentary, is not complete, is - I believe - partially incorrect, no matter how intelligent we are, we're not going to make sense of the world." p. 151

"Behavioral economics, which has gotten a couple of Nobel prizes in the last couple of years, is the beginning of a recognition that traditional economics is too narrow, and cognitive science is now becoming a flourishing area of interest to social scientists." P.152

"We still don't understand how beliefs get formed, how they change, why they change, when they do, and how that underlies the choices people make." P.153.

"It factors in in that I keep on saying it's a non-ergodic world, which means the world is changing. And therefore, we're always behind. And if we're way behind, of course, our theories are completely wrong. And indeed, all of economic theory is predicated on models that are derived from the past. Now the models, if the world isn't changing very rapidly, may be perfectly fine. But if the world is changing very rapidly, the models are out of date." P.154.

Question to Douglass North: "What do you make of the emphasis on math in economics?" It was vastly overdone. Math should be a tool, and what's happened is that it's become an end in itself. We build elegant models, using very elegant mathematics, but they are so abstracted, so divorced from the problems we're trying to confront that they don't deal with them at all. We borrowed again from the physical sciences, and in the physical sciences, elegant mathematics is essential. That's not so clear for most of the social sciences." Pp.160-161

"We should be very tentative about how we understand the world. That doesn't mean you don't do things. You've got to do things, but you've got to recognize you may be wrong. We don't know enough. And so it's terribly important to recognize that you can be wrong. And, to be, therefore, very susceptible to modifying the theories you hold in the light of new evidence. Now as I said, that doesn't mean you don't do anything; you've got to do things. It does mean that you're willing to be adaptively efficient [in the face on change and to rethink the problems as you evolve." P.163

"What particularly bothers me is that the world is evolving more rapidly now than it ever did before. The degree to which we can catch up with it and deal with it, I think, is more and more strained now that we've devised ways to blow each other off the face of the earth. The time horizon we have to solve problems is much more abbreviated than it used to be; whereas before we could make mistakes and kill a few hundred thousand people, now we can blow everybody up. And we don't seem to have gotten very far in solving social disorder. I hope I'm wrong." P.164

Kling & Schulz: "The entrepreneur's task is to overcome resistance to adoption of new ideas and the discarding of unsuccessful or obsolete practices. This in turn requires that people accept change." P.183.

"Economic development is best served by searchers." P.195

"Economics 2.0 says that the abundance that arises from innovation and economic growth depends on the work of entrepreneurs and searchers. We see economic activity as an ongoing battle between upstarts and incumbents. Incumbents try to consolidate and defend the existing modes of operation. Upstarts try to apply new knowledge and techniques. When the upstarts succeed, incumbents are reluctantly forced to follow." p. 197.

"In Economics 2.0, we emphasize the importance of what is unseen and unknown. In the case of financial intermediation, it is the problem of unseen risks that merits attention." P. 229.

"As with any bureaucracy, the internal dynamics tend to favor those who question innovation and put roadblocks in the way of those with new ideas." P.245

"Economics 2.0 looks at the economy primarily in terms of its adaptive efficiency - how effective it is at incorporating new recipes and discarding outmoded ones." P.239

"Incumbent organizations - resist adopting the best practices that challenge the status quo. The gradual diffusion of innovation is a process that has long fascinated economists." P.249.

"The material portion of our GDP is declining, and the intellectual portion is increasing." P.274.

"The most successful economies have been those in which people have been most willing to accept and promote change. Poverty tends to be concentrated in countries where people and cultures tend to resist change. This means that those countries will either remain backward economically or confront difficult social tension." P.278

The excerpts above are simply a few tidbits. A wonderful contribution. Devour it.
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on January 26, 2010
The product description and the other reviewers give an accurate description of what the book says. I just comment to highlight two ideas covered by the book, one explicitly and one implicitly.

First, while the book and blurbs do spend time discussing the importance of regulation and other government action, the book also makes the point that culture can be just as important for explaining economic results. A culture that values and rewards hard work and new ideas is more likely to lead economic growth than a culture that demeans effort, especially if that effort disturbs the status quo. I think that point can get lost in the discussion.

Second, the humility of both the authors and their interview subjects was striking. All of them had severe criticism for "Economics 1.0" -- but none claimed to have all the answers and many explicitly said that they didn't know all the factors that went into growth. That kind of humility is refreshing in a world of talk radio and blog postings.

It has been twenty years since my formal undergraduate and graduate economics education. Both then and through my practice of antitrust law, it seemed to me that economic theory might be missing something through its focus on static models. I've seen glimpses of similar concerns by others much smarter than me in my cursory review of the work of folks like Romer, Baumol and North. This book summarizes nicely the latest work on explaining how a dynamic economy really operates.
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on February 27, 2010
Kevin Kauzlaric says:

This book presents the world as consisting of a hardware layer (physical assets: i.e. land, and natural resources) and a software layer (intangible assets: i.e. norms, rules, protocols) and explains how the various assets within these two layers create value. It discusses the proportion of the hardware layer to the software layer found in many prominent countries, and it also discusses the value of these two layers in monetary terms. The data is quite interesting as I did not previously understand the relative values. The book focuses on explaining the components of the software layer and how it has transformed the age of scarcity into an age of abundance.

Economics 2.0 presents a dynamic view of the world that dispels the myths propagated by the static models created by status quo economists of yesteryear and presents insights into the economic research that must be and will be conducted now and in the future for a true understanding of the possibility for continued widespread human progress.
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on January 31, 2010
I am a frequent reader of EconLog, the blog that Arnold Kling regularly contributes to, so I found this book to be self-recommending.

What I thought was best about this book is mostly what other reviewers have alluded to....the rich interviews with economists the typical layperson would never have heard of and how they each contributed a lot of important ideas that you don't see talked about by the media's most visual pundits. These interviews, combined with the commentary by Kling and Schulz paint a useful and textured way of looking at the world and the way it's changing. In particular I thought the interviews with Ed Lewis, Amir Bhide, and Paul Romer to be the most interesting.

I also thought the formula of writing a book consisting mostly of interviews to be a smart one and one I hope to see repeated by others.

If potential readers are looking for downsides, I would say people who picked up the book because they read Econlog might be disappointed since they've been exposed to the books' high praise and are already familiar with Arnold Kling's writing style and some of his viewpoints which are replicated here somewhat. Also this book seems like it's more oriented towards the curious layperson than it is to someone who is already familiar with economics. Although the themes running through the book are novel, the books' treatment of them could be seen as lacking depth to the more technically proficient.

All in all, a very worthwhile book that I would recommend to someone looking for something to enrich their vision of how the world works.
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