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Wishful thinking, and often wrong
on December 25, 2009
This book is well-intentioned. And the author (BF) is candid enough to admit there are some facts his theory doesn't explain. But the thesis is in large part either so vague and full of exceptions as to be unverifiable, or else demonstrably wrong.
The book's affirmative thesis is that (i) "[E]conomic growth brings not only higher private incomes but greater openness, tolerance and democracy" (@15), (ii) "Economic growth matters because it enables the majority of a society's population to feel better off compared to benchmarks that are still recent enough to be meaningful. But once growth stops ... it is only a question of time before habits adapt and the sense of well-being dissipates" (@83), and (iii) "[I]n a stagnant economy, where one person's gain is necessarily someone else's loss, people who get ahead are perceived not only as doing so at other peoples' expense but as directly disadvantaging others. ... Stagnant economies, therefore, do not breed support for economic mobility, or for openness of opportunity more generally" (@86). BF tries to prove this by showing that during periods of "stagnation", countries often see outbreaks of racism, fascism, etc., while during periods of growth, they often enact laws (or undergo changes in social mores) that extend civil liberties and social welfare benefits to wider groups of people (see charts @ 214, 243, 265, 294).
An abbreviated list of issues I had with this line of argument:
1. WHAT IS GROWTH?: You have to wait until p. 47 for BF to offer his definition of economic growth: "a sustained increase in per capita incomes and living standards"(@47). But is this median income? GDP per capita? Something else? The book's lack of definitional clarity or consistency makes many of BF's arguments spongy, and may disguise the fact that some of his arguments are not correct. Here's an example of the latter: Many of the econometric studies BF relies on use GDP (or GDP per capita) as the relevant variable. Problem is, increasing GDP or GDP per capita doesn't necessarily increase the median real income in a society. Since 1980, increases in GDP per capita in the US, other Anglo-Saxon countries and Japan have been accompanied by a *decline* in real median income. In other words, it is not leaving the majority of those societies' populations "better off," in terms of increasing the majority's actual per capita income.
2. NARROW BASE OF EXAMPLES: BF's case studies are all white, European-rooted societies: the US, UK, Germany and France. Yet BF feels this is a sufficient base from which to generalize to the world. Have people learned nothing from post-colonialism? For example, Japan is the world's second-largest economy, with exceedingly rapid growth during much of the 20th Century. Its culture obviously is not European or Anglo-Saxon. The fact that it's not discussed in detail, and barely even mentioned in this book, greatly undermines the credibility of BF's thesis.
3. "EXCEPTIONS," OR A SPECIOUS PATTERN?: BF is admirably forthright that even the historical examples he does cite don't uniformly support his thesis. The cases of Britain and France each include a number of examples where movements towards greater openness, democracy, etc. occurred during moments of stagnation. And he admits that the US provides an even bigger example: the New Deal. I'd add yet another, albeit occurring after publication of this book: the outpouring of popular concern for temporary workers during the recent recession here in Japan, and the related doubts about American-style liberal capitalism. Both were factors leading to the change of political power in Japan in 2009.
BF calls the New Deal an "exception," and quotes A. Gerschenkron: "Historical hypotheses are not ... universal propositions. They cannot be falsified by a single exception. Testing them largely means trying to discover the boundaries of the area in which they seem reasonably valid." (@179; ellipsis is BF's.) But why should we be persuaded by Gerschenkron in this instance? Where do you draw the line between tolerating so many "exceptions" and questioning the validity of the hypothesis? To say there's "a single exception" is no excuse, when BF himself cites several.
4. ENVIRONMENTAL ISSUES: As another reviewer has noted, BF ignores a branch of the literature on economics and the environment. He relies on the "environmental Kuznets curve" (EKC), which purports to show many environmental problems first getting worse and then getting better as per capita GDP goes up (@382-383). He fails to cite to much literature questioning the reality of the EKC, and even some of the sources he cites in support are equivocal (e.g., Bradford & al., cited @533n.35, found evidence of the EKC in regard to only 6 of 14 pollutants). BF also claims that a shift to the service economy will reduce the environmental impact of growth (@381). Empirical evidence undermining this claim appears in a number of papers by U. Minnesota's Sangwaon Suh and collaborators, as well as in work by Fabrice Flipo and Jean Gadrey in Europe. (To be fair, however, some of this empirical work appeared after the book's publication date).
5. MISLEADING PRESENTATION OF RELATIONSHIP BETWEEN GROWTH AND "FREEDOMS": Notwithstanding all these complaints, BF is at his worst when he tries to generalize his argument to the developing world (Chapter 12). At pp. 313 and 316, he presents scatter-plot graphs showing "average rights and liberties rating" versus income per capita as evidence for his hypothesis. Each includes a trend line showing, e.g. that the higher the rate of growth in the period 1978-2003, the higher the "average freedoms" as determined by the criteria of Freedom House (FH), a US think tank that receives most of its funding from the US government. There are several problems with this:
(a) How FH ranks each country seems to be highly subjective and not particularly transparent. Moreover, many FH criteria relate specifically to economic rights, not necessarily political ones. BF mentions in a footnote that he gets similar results using ratings from The Economist magazine (@509); this shows only that one champion of free markets corroborates another. Would the same result have obtained if BF had relied on, say, Oxfam or Amnesty International?
(b) The distribution of the highest FH rankings is very culturally dependent. Of the 42 countries receiving the highest ratings (a total of 2 in the original Freedom House rankings, 1.0 in BF's re-scale), 20 are Anglo-Saxon or former colonies or protectorates of Anglo-Saxon countries, and all but 3 of the rest are in Western Europe (Uruguay, Chile, Cape Verde). So to attribute their high "average freedoms" ranking to their rate of GDP growth may be incorrect.
(c) There's also a more subtle fallacy of treating the nations in scatter plots as fungible entities, rather than as each behaving in accordance with its own specific historical circumstances ("path-dependence"). It's question-begging to believe they all follow some social or historical law, since that is what BF's trying to demonstrate. An analogy: suppose you took a snapshot of people emerging from a train station, or from the arrivals area of an airport. The formation they're walking in at that moment might lead you to think they were traveling together; but in fact, each can come from a different origin, and be heading to a different destination. Their current position relative to each other doesn't convey any significant information about their respective histories or destinies. The same fallacy is involved in the now-faded fad for the inequality-based Kuznets Curve, particularly when used for inter-country comparisons; see, e.g. Timothy Patrick Moran's 2005 article in Sociological Forum, "Kuznets's Inverted U-Curve Hypothesis: The Rise, Demise, and Continued Relevance of a Socioeconomic Law" for a fuller explanation; see also Dani Rodrik, ed., "In Search of Prosperity: Analytic Narratives on Economic Growth" (Princeton UP 2003).
(d) OK. Now suppose we ignore (a)-(c) above, and assume the FH data and BF's interpretation of the statistics are on a sound methodological footing. Nonetheless, BF draws the wrong conclusions from the data.
I downloaded FH's 2009 report, as well as the Conference Board's Total Economy Database, which includes purchasing-power-parity per capita GDP statistics (GK method) for 121 of the 192 countries in the FH. It so happened that the median FH ranking of the total sample was the same as the median of the 121-country sample, so this wouldn't have been affected by their absence. I then calculated two sets of data, using the same 0.0-1.0 scale for the average FH score as used by BF.
First, 1980-2008 per capita GDP growth vs. average FH rankings. This data showed the association suggested by BF - but very weakly. Let's divide the plane into quadrants, according to the median scores for average growth rate and average FH score. BF says we should see concentrations in the SW (low freedoms, low growth) and NE (high freedoms, high growth). What actually we see is 33.5 countries in the SW, 39.5 in the NE, but also 23.5 and 24.5 in the remaining two quadrants. In other words, a very fuzzy plot cloud. Excel can give you a "trend line," but eyeballing this suggests that a linear regression isn't really appropriate. ("Correlation coefficient" is around 0.173 - but I put this in quotes, since it's not clear that either variable is normally distributed.)
My other run focused on growth rates from 1999-2008. Since the FH rankings are recent ones, it stands to reason that they should be most affected by more recent history. Here, the association is *exactly the oppposite* of BF's hypothesis: SW has 26.0 countries, NE 27.0, while NW (high freedoms, low growth) 35.5, and SE (low freedoms, high growth) 32.5. In other words, the China/Singapore model of repressive countries growing faster.
Perhaps the most significant problem comes from comparing the 2001-2002 FH survey (the earliest available on their website) with the 2009 survey. As of 2009, 81% of the 192 countries in the FH survey had MAINTAINED OR IMPROVED their FH rankings -- even though by definition 50% of them had below-median growth. Of the 120 countries in my sample (one country was missing from the 2002 FH rankings), only 7 below-median-growth countries "backslid" in their FH rankings, whereas 10 above-median-growth countries had. Despite sluggish growth during this decade in countries like Germany and Japan, no major economy backslid in its FH rankings, and some advanced slightly (1/2 point in FH rankings, about .09 points in BF's re-scale). 28 above-median-growth countries improved their FH rankings -- as did 22 below-median-growth ones (plus 1 with exactly the median score). I note that BF doesn't attempt any such systematic intertemporal comparison in his book, even though his thesis is an intertemporal one.
I don't claim that any of the data - BF's or mine - really shows causative relationships. It's plausible that China's politico-economic model will become more influential in the coming decades, given that its average growth during the past 10 years has been about 2x that of democratic India's (based on Geary-Khamnis PPP method). In any case, the data I examined doesn't show any connection between FH rankings and growth. Rankings tend to improve or stay the same for the vast majority of countries, period.
(e) Unfortunately, that's not all. Not only does BF make dubious use of trend lines for fuzzy clouds of data, he presents his graphs with all the countries' names **sloping in parallel** with these sham lines. There were many other possible orientations for the data labels that would have preserved legibility, without disguising the weakness of the association of factors. I'd hope that this abuse of graphics could be explained by innocent incompetence, but given that BF is a Harvard economics professor, such an explanation is scarcely more reassuring than the alternatives: intentional deceit or reckless carelessness.
I leave aside other criticisms, such as BF's neglect of the "Easterlin paradox" (happiness does not increase with increasing per capita GDP, beyond a certain threshold; this large body of work is mentioned only briefly in passing, and misleadingly characterized), and the ultimate pessimism of his idea that we need to keep buying more and more stuff in order to preserve our political freedoms. I can only conclude that the widespread praise given to the book is, just like the substance of the book itself, little more than wishful thinking.
POSTSCRIPT, 2010/04: Derek Bok's recent book "The Politics of Happiness" describes a number of other counterexamples to BF's thesis, drawn from recent US history. E.g. support for large social programs began to decline *before* GDP growth stagnated in the 1970s; and racial tolerance continued to improve *despite* that stagnation (Bok @ 68-70).