Response to Paul Collier: Chapter 2

Post by Nathan Smith

(This post is part of a series in response to Paul Collier’s Exodus. See my response to Chapter 1.)

Chapter 2 of the migration-skeptical economist Paul Collier’s Exodus is entitled “Why Migration Accelerates,” but he starts by explaining the wealth and poverty of nations. The way he does so sets the stage for serious doubts about the beneficence of migration. He summarizes the state of development economics as follows:

When development economics was in its infancy, the standard explanation for the astounding gap in income was the difference in the endowment of capital. Workers in high-income countries were more productive because they had so much more capital with which to work… [But] capital… can no longer be seen as the primary cause of… poverty; something else must jointly account for their lack of capital and their poverty. Poor choices in economic policy, dysfunctional ideologies, bad geography, negative attitudes about work, the legacy of colonialism, and a lack of education have all been proposed and investigated as explanations…

Increasingly, economists and political scientists have coalesced around explanations that focus on how the polity is organized: how political interest groups shape long-lasting institutions that thereafter affect choices. One influential line of argument is that the key initial conditions for prosperity are those in which it is in the interest of political elites to build a tax system: historically in Europe they needed revenues to finance military spending. In turn, a tax system gives a government an interest in enlarging the economy, and so induces it to build the rule of law…

A related line of argument is that the key institutional change is the shift in political power from predatory elites bent on extracting revenues from the productive population to more inclusive institutions that protect the interests of the productive. In an important new study, Daron Acemoglu and James Robinson argue that the English Glorious Revolution of 1688, in which power shifted from king to Parliament, was the first such decisive event in world economic history, unleashing the Industrial Revolution and opening the path to global prosperity.

Alas, this may be an accurate summary of the state of development economics, but it makes me want to cry. The study to which Collier refers, Why Nations Fail, is one of the most over-rated books I’ve ever read. It’s fatally unrigorous, equally destitute of formal theory and econometrics. A naïve view of the beneficence of democracy has long since been ripped apart by public choice economics, yet Acemoglu and Robinson revive it in the crudest form. People good, elites bad. The book is somewhat persuasive via selective anecdotes if you’re willing to swallow its bizarre terminology, e.g., “inclusive economic institutions” means protection of property rights, even though property rights consist precisely in the right to exclude others. All in all, I tend to think development economics peaked with the empirical work of Jeffery Sachs in the 1990s, and it’s been downhill from there. Daron Acemoglu, in particular, has been a disaster for the field. Honest empirical work on the democracy => growth causal link suggests that the effect is basically nil. But Acemoglu and Robinson’s tendentiously fact-packed and conceptually confusing tome has given development economists a pretext for taking a more politically correct view.

In spite of my dismay at his embrace of Acemoglu, I wouldn’t wholly deny Collier’s claim that national wealth depends on institutions and on a country’s social model, and he is certainly right that “democratic political institutions only function well if ordinary citizens are sufficiently well informed to discipline politicians.” In fact, it’s a bit of a mystery why democracy works even in the mediocre fashion that it does work, in view of rational voter ignorance, Arrow’s impossibility theorem, and other public choice insights, and I think the explanation of the mystery has a lot to do with overlapping webs of altruism among fellow nationals. That’s why ethnic fragmentation in a democracy can lead to disaster: each side cares only about its own, and elections become a contest to grab the spoils of office. But never forget this: open borders does not mean open citizenship. It’s fine to let people come and not let them vote.

Collier writes that “many of the rules that govern economic behavior are informal, so the analysis [of the determinants of wealth] can be extended beyond institutions and narratives to social norms.” Yes, social norms can facilitate economic cooperation. Yes, immigrants may not share the social norms that enable natives to cooperate. But it does not follow that immigrants will undermine economic cooperation among natives. After all, if immigrants don’t share certain social norms that make certain kinds of economic cooperation among natives possible, natives can simply go on cooperating among themselves in the ways that require those norms, and not with natives. Does that sound like reprehensible discrimination? If so, I’m OK with that, but I don’t really think discrimination is involved here.

Here is the key question: How frequent, and how important, are trust-based transactions with total strangers randomly selected from the resident population? If the answers are “frequently” and “very important,” then Collier has good reason to worry about immigration. If much of our prosperity depends on our being able to bump into random people on the street and do big deals with them that aren’t adequately covered by contracts but involve major reliance on shared social norms, cultural understanding, and character-based trust, then letting the native population be greatly diluted by a large influx of foreigners from countries with dysfunctional social models really might impoverish us.

But I think the answers are “pretty infrequent” and “not very important at all.”

On three recent occasions, I found myself suddenly in a racial minority. One was the Fresno Fair, an annual event that seems to draw in a substantial cross-section of the local population. Another was the DMV. The third was this morning at Bank of America. All these situations are atypically non-selective. Everyone needs a driver’s license. Everyone needs to go to the bank. Most people can enjoy a fair. Since Fresno’s population is heavily Hispanic, with some other minorities mixed in, whenever I get mixed up in a more or less representative cross-section of the population, I’m suddenly outnumbered. That feels a little odd. But only a little, and it really doesn’t matter. I feel as if I might not relate very well to the people around me, as if there might be a cultural gulf. I feel less at home than I would among the people at my university (which is racially mixed but a bit more homogeneous culturally– it’s a Christian school, and everyone is here to learn), or my church. Maybe if I felt less at home all the time, that would lower my quality of life, though only a little bit, at most. (It might, on the other hand, make life seem more adventurous.) Anyway, the occasions when I get thrown together with a representative cross-section of the population are quite rare. I spend far more of my time in environments where, in some manner or another, the people present have been self-selected to resemble me. The faculty lounge and the church are obvious enough, but neighborhoods, restaurants, even stores tend to be the same way. People who eat at the same restaurants resemble me more than people who don’t. People who shop at the same stores resemble me more than people who don’t. People who live in the same neighborhoods resemble me more than people who don’t. The people I actually have conversations with are, by and large, far more selected than those I merely shop alongside of. And I don’t need to trust the clerk at the checkout counter: I get my groceries and pay my bill, the transaction is finished, no trust is needed. When it comes to transactions involving trust– if I want to rent a room to someone, or hire them– I’ll be far more selective. Trust-based transactions with people randomly selected from the population are hardly ever needed. (See our page on social capital decline and my post “Robert Putnam, social capital, and immigration.”)

So when Collier writes that…

The capacity to cooperate is fundamental to prosperity: many goods and services are “public goods” that are most efficiently supplied collectively…

The foundations of cooperation have been extensively studied through game-based experiments and are now quite well understood. Sustained cooperation depends upon trust. The extent to which people are willing to trust each other varies enormously between societies. High-trust societies are better able to cooperate and also face lower costs of transactions because they are less dependent upon processes of formal enforcement. So social norms matter, as well as formal institutions…

Institutions, narratives, and norms facilitate the emergence of effective organizations that enable their workforce to be productive. Typically, high productivity depends upon reconciling large size with worker motivation. Economists have long recognized that big is productive: large organizations are able to reap economies of scale. But only recently have they developed a convincing analysis of motivation. Incentives are evidently part of the story, but… an effective firm persuades its workers to adopt identities that are conducive to productivity. [I would say an effective firm depends on virtue.]…

One reason poor countries are poor is that they are short of effective organizations: many are too small to reap scale economies, and many, especially among the public organizations, fail to motivate their workers… I will refer to the combination of institutions, rules, norms, and organizations of a country as its social model… If the prosperity of the high-income world rests on this platform, it has crucial implications for migration. Migrants are essentially escaping from countries with dysfunctional social models… [That] might make you a little more wary of the well-intentioned mantra of the need to have “respect for other cultures.” The cultures– or norms and narratives– of poor societies, along with their institutions and organizations, stand suspected of being the primary cause of their poverty…

… I read all this wearing a kind of armor of disbelief with respect to Collier’s major point, although we have plenty of common ground. I agree with what he writes about organizations. They are important to prosperity, and they depend on more than just getting incentives right, which is impossible; they depend on trust, morality, and perhaps on personal identities inculcated by the organization. It may even be true that immigrants are less likely than natives to absorb an organizational ethos and become really productive contributors to it. But organizations have plenty of filtering mechanisms already. They don’t hire, still less retain, any random person who walks in the door. They need education, references, experience. They conduct interviews. If immigrants aren’t suited to organizations’ cultures, they won’t get those jobs.

As for “public goods,” well, there can’t be an argument against immigration from public goods in the strictest sense because public goods, by definition, are nonrival. That means that immigrants can enjoy them without reducing natives’ enjoyment of them. There’s no downside, even if immigrants are pure free-riders. If immigrants contribute to public goods even a little bit, natives are made better off.If nonexcludable but rival goods are important to the economy, immigrants could harm natives through crowding if they don’t contribute. I can’t think of many convincing examples of such goods. Let me add that the most typical and obvious examples of public goods are supplied by the government using tax dollars. There’s no need for spontaneous cooperation here.

Collier may well be right that open borders and the resulting mass immigration would make spontaneous cooperation with random strangers more difficult to sustain, though I’m not sure. Native/immigrant complementarities might even induce more of it. Where Collier fails to convince, is in his assumption that trust among all residents is needed to sustain prosperity, when almost any example of economically important trust-based relationships you can think of is not between random strangers but between people vetted and selected by some sort of institutional process. I see little reason to doubt that world-class organizations and clean, classy suburbs could sustain high productivity amidst a sea of immigrant shantytowns. Under open borders, immigrants could come, but inclusion in the society and economy would come more gradually, and would be earned by learning, achievement, and conformity to prevailing norms.

In the remainder of the chapter, Collier presents an economic model of migration which stresses the role of diasporas. Migration is a function of cultural distance, the income gap, and the size of the diaspora. Even when income gaps are huge, few will migrate to a country where there is no diaspora of fellow nationals who can ease the transition. Diasporas are gradually absorbed into the population of their adopted country, while at the same time they are replenished by new migrants from their countries of origin. This leads to some intriguing dynamic possibilities. If the migration rate is low enough, and the absorption rate is high enough, there will be some equilibrium size of the diaspora, where it is neither growing nor shrinking, but new migrants are just sufficient to replace those who exit the diaspora to be absorbed into mainstream culture. But it is also possible that diaspora growth will accelerate migration, which will accelerate diaspora growth, causing migration to accelerate without limit. Collier regards this prospect with alarm, but why? People would still be moving from poor to rich countries, and seeing their living standards rise. Diasporas would make the transition easier. Indeed, it is just this kind of story that underlies the double world GDP literature. Of the latter, Collier writes:

The simple economic models used to predict huge income gains from global migration have just this property. Migrants are the equilibrators: in the absence of impediments to movement, migration continues until incomes are equalized. At this point, migrants themselves may feel a bit like suckers: they have moved for nothing. Those who have remained in the countries of origin end up gaining just as much. The indigenous population of host countries loses, but it can comfort itself with the thought that others have gained more than it has lost. As a description of the effects of nineteenth-century migration from Europe to North America, or for that matter from Ernsbach (Germany) to Bradford (UK), this is not a bad first approximation. As the Midwest was opened up, smallholders who migrated could get larger plots of land than they had farmed back in Europe. As the Midwest filled up and Europe became less crowded, plot sizes gradually equalized. Eventually, farmer Schmidt in Germany was as well off as farmer Schmidt in Iowa. But as an analysis of migration from a country that has missed out on prosperity and an advanced modern economy, this simple model is worthless. Modern migration is not a quest for land; it is a quest for efficiency… Migration from poor countries to rich ones is not likely to have much impact on closing the gap.

And with that, Collier dismisses the careful economic modeling of Michael Clemens, John Kennan, etc. Is he justified in doing so? Not even close. Since he has not scrupled to call the work of other economists “simply worthless,” I feel the less scruples about saying the same thing of Collier’s. Collier’s claim that “migration will not significantly narrow [income] gaps because the feedback mechanisms are too weak” is likely true, but that is only because such a tiny fraction of aspiring migrants are allowed to do so. A casual reader might get the impression that Collier actually has some grounds for thinking that “predict[ions of] huge income gains from global migration… are simply worthless.” In fact, he has none, other than that he seems tacitly to assume that rich countries will never tolerate that much immigration. Doubtless he could argue, if he liked, that mass immigration would break the social model of rich countries, and falsify “double world GDP” predictions. But he doesn’t. The dismissal of the best economic modeling of the effects of open borders is never defended with any argument that could pretend to the slightest adequacy: not here; not anywhere in the book.

UPDATE: This EconLog post about “Trust, Diversity, Credit Cards, and E-Commerce” is sort of relevant. Caplan points out that e-commerce solves a giant trust problem via credit cards. That is, a market innovation has achieved what culture would be hard put to do even in the best of cases. That’s a pretty good illustration of what I’m talking about. It’s just not clear that we need much spontaneous trust between strangers, beyond trusting them not to kill you. And while that could be jeopardized by open borders at some point– and at that point I would start to consider supporting migration restrictions, though I’d still want to achieve security with the minimum of regulation of mobility– immigration doesn’t seem to be raising risks of violence today, nor is there any reason to think it would if it were considerably expanded.