July 11, 2006

An economist's faith is shaken

Tim Harford, author of The Undercover Economist (which I reviewed in the NY Post), writes in Slate:

The view that incentives are paramount suggests that if you take a person from a poor, corrupt economy and move him to a richer, less corrupt economy, he will live up to the new system that surrounds him. William Lewis of the McKinsey Global Institute has pointed out that illiterate Mexican workers on building sites in Houston are as productive as any construction worker in the world. The Mexicans are perfectly capable of living up to the potential of the American system.

Uh, sure, as hired hands in blue-collar work, but that won't get you all that far in modern America, especially since the white-collar elite is intent upon driving blue-collar wages down to the global market level. A visit to Mexican-American ruled towns in California won't convince you that the Mexican-American political elite is living up to the anti-corruption tradition of California's Progressive-era heritage. Or take a look at New Mexico, six generations after America too control of it.

That is a mainstream economist's view. An alternative view, popular among the common-sense crowd, is that corruption is a problem in Indonesia because Indonesians are crooks by nature. Poor countries are poor not because of their economic system, but because they are full of people who are lazy or stupid or dishonest.

I disagree out of faith, rather than because the evidence is compelling. But then, what evidence could there be? You would need to take people from every culture on earth, put them somewhere where they could ignore the law with impunity, and see who cheated and who was honest. That sounds like a tall order for any research strategy, but economists Ray Fisman and Edward Miguel have realized that diplomats in New York City were, in fact, the perfect guinea pigs. Diplomatic immunity meant that parking tickets issued to diplomats could not be enforced, and so parking legally was essentially a matter of personal ethics.

Fisman and Miguel discovered support for the common-sense view. Countries with corrupt systems, as measured by Transparency International, also sent diplomats who parked illegally. From 1997-2005, the famously incorruptible Scandinavians committed only 12 unpaid parking violations, and most of them were by a single criminal mastermind from Finland. But over the same period of time, Chad and Bangladesh, regularly at the top of the corruption tables, managed to produce more than 2,500 violations between them. Perhaps poor countries are poor because they are full of corrupt people, after all.

It's a very clever piece of work, but I will not be abandoning my faith in economic incentives just yet. In 2002 the Clinton-Schumer Amendment gave New York City much greater power to punish diplomatic parking violations: Cars were towed, permits suspended, and fines collected from the relevant foreign-aid budget. Unpaid violations immediately fell 90 percent. When it comes to parking violations, personal morality matters, but incentives matter more.

Of course, that doesn't explain how Chad is going to get an honest incentive structure on its own. To understand why Chadians don't feel a moral incentive to follow bureaucratic rules, you have to delve down below the level of abstraction at which economists are comfortable.

This subtly points out a fundamental reason economists tend to be babes in the woods when it comes to multiculturalism. The crucial question that Harford never considers is the economic equivalent of the "level of selection" controversy in evolutionary biology: namely, what is the unit upon which morality and incentives work. Harford simply assumes it is "personal" -- i.e., at the individual level.

And yet, even economists realize that American or Swedish individuals frequently behave not as if they are profit-maximizers for themselves as individuals, but as representatives of nuclear families. And surely economists have noticed that in many cultures, the extended family is privileged over the nuclear family as the focus of loyalty.

In the real world, the answer to the question of where morality and incentives operate is relativistic. Anything having to do with your relatives turns out to be all relative.

To people in extended family cultures, morality demands that they cheat strangers and the state to benefit members of their extended family. That is what a proper person does. If you can steal $10,000 per year by never paying to park in Manhattan, you can support five relatives back home in Chad on a munificent $1,000 per year (while keeping the other $5,000 for yourself, but that's only fair).

In contrast, Swedes assume, with some cultural and genetic evidence, that there isn't much difference between members of their own extended family and members of the homogenous Swedish nation, which is more or less coterminous with the Swedish state, so cheating the bureaucracy is almost like cheating your relatives. This early education in fair play tends to carry over even to treating New Yorkers well.

Dr. Theodore Dalrymple explained African corruption in an important passage, based on his experience as a doctor in old Rhodesia:

Unlike in South Africa, where salaries were paid according to a racial hierarchy (whites first, Indians and coloured second, Africans last), salaries in Rhodesia were equal for blacks and whites doing the same job, so that a black junior doctor received the same salary as mine. But there remained a vast gulf in our standards of living, the significance of which at first escaped me; but it was crucial in explaining the disasters that befell the newly independent countries that enjoyed what Byron called, and eagerly anticipated as, the first dance of freedom.

The young black doctors who earned the same salary as we whites could not achieve the same standard of living for a very simple reason: they had an immense number of social obligations to fulfill. They were expected to provide for an ever expanding circle of family members (some of whom may have invested in their education) and people from their village, tribe, and province. An income that allowed a white to live like a lord because of a lack of such obligations scarcely raised a black above the level of his family. Mere equality of salary, therefore, was quite insufficient to procure for them the standard of living that they saw the whites had and that it was only human nature for them to desire—and believe themselves entitled to, on account of the superior talent that had allowed them to raise themselves above their fellows. In fact, a salary a thousand times as great would hardly have been sufficient to procure it: for their social obligations increased pari passu with their incomes.

These obligations also explain the fact, often disdainfully remarked upon by former colonials, that when Africans moved into the beautiful and well-appointed villas of their former colonial masters, the houses swiftly degenerated into a species of superior, more spacious slum. Just as African doctors were perfectly equal to their medical tasks, technically speaking, so the degeneration of colonial villas had nothing to do with the intellectual inability of Africans to maintain them. Rather, the fortunate inheritor of such a villa was soon overwhelmed by relatives and others who had a social claim upon him. They brought even their goats with them; and one goat can undo in an afternoon what it has taken decades to establish.

It is easy to see why a civil service, controlled and manned in its upper reaches by whites, could remain efficient and uncorrupt but could not long do so when manned by Africans who were supposed to follow the same rules and procedures. The same is true, of course, for every other administrative activity, public or private. The thick network of social obligations explains why, while it would have been out of the question to bribe most Rhodesian bureaucrats, yet in only a few years it would have been out of the question not to try to bribe most Zimbabwean ones, whose relatives would have condemned them for failing to obtain on their behalf all the advantages their official opportunities might provide. Thus do the very same tasks in the very same offices carried out by people of different cultural and social backgrounds result in very different outcomes.

Similarly, in his brilliant novel "The Coup" about an African dictator in a country much like Chad, John Updike describes Col. Ellellou's visit to the French colonial villa that his oldest and most traditional wife had seized, and which was now populated by an entire village of the dictator's extended family from the Salu tribe:

"Nephews, daughters-in-law, totem brothers, sisters by second wives of half-uncles greeted Ellellou, and all in that ironical jubilant voice implying what a fine rich joke, he, a Salu, had imposed upon the alien tribes in becoming the chief of this nation imagined by the white men, and thereby potentially appropriating all its spoils to their family use. For there lay no doubt, in the faces of these his relatives, that through all the disguises a shifting world forced on him he remained one of them, that nothing the world could offer Ellellou to drink, no nectar nor elixir, would compare with the love he had siphoned from their pool of common blood."

This doesn't mean that Chadians are condemned forever to live in a society dominated by extended family mafias. But you can see the chicken or egg problem faced by any individual or nuclear family that chooses to be loyal to the state rather than to the extended family. If you give up the support of your mafia, will the state provide you with justice or will it exploit you for the benefit of the mafias that dominate it?

My guess would be that, historically, the main way that societies have overcome the chicken-or-egg problem is through the crucible of foreign war. People come to realize that their mafias aren't big enough to beat a foreign nation on the battlefield, so they have to team up with their neighbors. The War Nerd claims that this is happening right now in Eritrea under the pressure of wars with the much larger Ethiopia, just as Prussians coalesced into an honest, efficient, self-sacrificing nation-state to defeat their larger enemies.

Also see my VDARE article "Undercover Economist Underperforms on Why Poor Countries Are Poor."

My published articles are archived at iSteve.com -- Steve Sailer

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