07 February 2011

Reasons for Economic Growth: Don't Forget Human Capital


MIT economists and computer modelers are attempting to answer the age old question: "Why are some countries rich and some countries poor?" (via Next Big Future) They have framed the question in terms of economic growth, and have surrounded it with sophisticated computer modeling and visual representations, but they seem to have left out a crucial, central variable: human capital.

In the MIT model, the key variables considered are the diversity of economic "inputs" and diversity of economic "outputs" for a country.
Economists think of production in terms of inputs and outputs. The outputs are the goods that a country produces. The inputs are everything that’s required to produce those goods. In 19th-century America, lumber was an example of a product with relatively few inputs. Exporting it required little more than the manpower and tools to chop down trees and haul them to shipping ports. Twentieth-century digital-signal-processing chips, on the other hand, are products that require a lot of inputs: the ability to extract and purify exotic materials like gallium arsenide, computer-aided design software to produce circuit layouts, and the chemicals and vacuum chambers required for the deposition of different layers of material, among other things.

Hidalgo and Hausmann argue that the diversity of a country’s production capacity, and thus the true strength of its economy, depends on the diversity of both its outputs and its inputs. Two countries could export the same number of products — they could have the same diversity of outputs — but if one exports only garments, it’s likely to have many fewer inputs than a country that exports a mix of garments and other light manufacturing, agricultural products, electronics and cultural goods. And the country with more inputs, the researchers claim, will adapt better to a changing world economy. _MIT

Hidalgo and Hausmann have found that GDP correlates pretty well with diversity of outputs, but it correlates much better with diversity of inputs. And the cases where the correlation breaks down could actually be more interesting than the cases where it holds, because they could indicate economies poised for growth. In 1970, for instance, the Korean economy had much greater diversity of inputs, according to Hidalgo’s measure, than the Peruvian economy; but Peru had twice Korea’s GDP per capita. Over the next 30 years, the relative diversity of inputs in the two countries’ economies stayed more or less the same, but by 2003, Korea had four times Peru’s GDP per capita. _NextBigFuture
Human capital can be represented by several different markers. Levels of educational achievement, for example, can be seen as one measure of human capital. Quality of pre-natal care, child-raising, and early education are other very crucial metrics. But one assessment of human capital which absolutely cannot be neglected in the analysis of a nation's long-term economic trajectory, is the average population IQ.
Per capita GDP vs. national average IQ. The regression line is shown in red. The correlation coefficient is 0.73.

There are many ingredients which go into the economic growth and success of a society, region, or nation. But any analysis which dances around the central issue of human capital, can easily be seen as a sophisticated smokescreen or obfuscation, rather than an attempt to get at the heart of the issue.

A nation's exports and imports are certainly important indicators of its economic health. But what is cause and what is effect? Clearly the MIT researchers are wrapped in a complex dynamic computer network of circular causation -- and potential infinite regress -- unless they can clearly identify variables which are more central and causative.

Political correctness has long been associated with the death of honest research and scholarship in many departments of academia. The ascendancy of post-modern multiculturalist ideology in the humanities departments and in administrative policies of universities has trickled down and spilled over into the social sciences -- even into some of the harder sciences. There are simply some topics and phenomena which one cannot even hint at, much less mention outright -- and far less make a topic of serious study.

Imagine all the time, effort, and resources being wasted at all levels of society, devoted to "dancing around the obvious." Entire huge and expensive departments of academia, media, industry, and government are devoted to obfuscating and denying truths which are obvious to any intelligent 6 year old.

But MIT has very big computers, very good tools of visual illustration, and very intelligent professors and researchers. Best to let them show them off, and pull the wool over society's eyes, using very sophisticated tools. Lie back and enjoy it. You'll feel much better about it all that way.

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Blogger kurt9 said...

Not only is cognitive ability important. A reverence for competence, productive accomplishment, and free inquiry as cultural values in their own right are necessary for economic and technological development. Personal character traits like grit, perseverance, and "having one's shit together" are also necessary factors. Raising kids to develop these traits is integral to economic and technological accomplishment. All of these are necessary components of human capital for a dynamic accomplishment-oriented society. IQ alone is not sufficient.

Monday, 07 February, 2011  
Blogger al fin said...

Very true.

Clearly I am not arguing that IQ is sufficient on its own. I am only pointing out that average population IQ is highly correlated with a nation's GDP. In other words, IQ is important. It should not be ignored by serious scholars.

By saying that, I violate political correctness, and will not likely be invited to any more White House parties by the Obama regime.

In other blog posts I have discussed grit, executive function, purpose, motivation, ambition, etc etc etc., as I believe you know.

It never hurts to point out how large the overall picture is however. Thanks.

Monday, 07 February, 2011  
Blogger kurt9 said...

By saying that, I violate political correctness, and will not likely be invited to any more White House parties by the Obama regime.

I know that.

In other blog posts I have discussed grit, executive function, purpose, motivation, ambition, etc etc etc., as I believe you know.

Actually, you're probably the only blogger who has discussed all of these points and have put them all together. Everyone else in the blogging milieu seems to focus exclusively on IQ.

Of course, PC is a delusional ideology. Its like a national-level cult.

Monday, 07 February, 2011  
Blogger Stuart Shaw said...

Great analysis. The comments from kurt9 and your clarification – as I’m a newbie here – have answered a lot of questions I might have raised about IQ on its own.
I’d like to add a few things – again, as i’m new to this blog and haven’t looked past this spot yet forgive me if you know/have covered this – but there are and have been some trying to look at this area with new glasses on – Stiglitz for example http://www.stiglitz-sen-fitoussi.fr/en/index.htm - there are also others who have undermined other simplistic but widespreadly assumed notions – Uwe Reinhardt laid into wealth creation assumptions – the assumption being that wealth creation lies within the firm, when actually the real wealth creation is located/begun in homes (family unit) and schools – firms just finesse what human capital foundations are laid – or not - there. Link to the NYT articles here: http://economix.blogs.nytimes.com/2010/05/21/who-creates-the-wealth-in-society/
I’m glad I found this blog. Will stay tuned.

Tuesday, 08 February, 2011  
Blogger al fin said...

Thanks for the comment and links, Stuart.

Western societies are affliced with "expertitis" and give far too much credence to ideas coming from so-called experts, who derive their "expertise" almost entirely via credentials and affiliations with large or prestigious institutions.

Instead, every person must educate himself (with assistance mainly in learning to learn at as early an age as possible) and understand the key concepts of life intimately without needing to call on experts or academics.

For that to happen, an entirely different sort of child-raising and early to middle childhood education will be necessary.

Wednesday, 09 February, 2011  

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