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Human Capital, Wealth and the State: Reflec6ons on Gary Becker When Popper Met Friedman The Redefini6on of Economics “one of the major benefits that I personally derived from the first mee6ng of the Mont Pelerin Society in 1947 was mee6ng Karl Popper and having an opportunity for some long discussions with him, not on economic policy at all, but on methodology in the social sciences and in the physical sciences. That conversa6on played a not negligible role in a later essay of mine, "The Methodology of Posi6ve Economics," … It just shows how nature and science works in wondrous ways. Milton Friedman interviewed by David Levy 1992 Friedman and Becker •  “Progress in posi6ve economics will require not only the tes6ng and elabora6on of exis6ng hypotheses but also the construc6on of new hypotheses. …The construc6on of hypotheses is a crea6ve act of inspira6on, intui6on, inven6on; its essence is the vision of something new in familiar material. “ M. Friedman “The Methodology of Posi6ve Economics” •  “what most dis6nguishes economics from other disciplines in the social sciences is not its subject ma[er but its approach… maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach.” G. Becker “Introduc6on to the Economics of Human Behavior. The Beckerian Combina6on •  The Human Capital Century –  Brilliant but less obviously revolu6onary –  Incredibly right empirically •  The Economics of Everything –  Field redefining –  Par6cularly sociological •  But what if Frank Knight had accepted “Compe66on and Democracy” •  Becker as Poli6cal Scien6st instead of Sociologist A 42% Return per Year of Schooling? 4
6
8
10
12
Years of Schooling and GDP per Capita, 2010
0.00
5.00
10.00
Avg Yrs of Schooling for Population 25+, 2010
Sources: Barro & Lee and The World Bank Indicators
15.00
-1
0
1
2
Years of Schooling, 1960
and Government Effectiveness, 2011
-2
Government Effectiveness, 2011
Economic Spillovers vs. Poli6cs 0.00
2.00
4.00
6.00
8.00
Avg Yrs of Schooling for Population 25+, 1960
Sources: Barro & Lee and The World Bank Worldwide Governance Indicators
Note: Government effectiveness ranges from -2.5 (weakest) to 2.5 (strongest)
10.00
Becker and Government •  Compe66on and Democracy (1958) –  Perfectly compe66ve democracies will cater to voters but monopoly, ignorance and 6e-­‐ins limit. •  Law Enforcement, Malfeasance and Compensa6on of Enforcers (1974) (S6gler) –  “Trust calls for a salary premium…” –  Pioneering the economics of corrup6on •  A Theory of Compe66on Among Pressure Groups for Poli6cal Influence (1983) –  Deadweight loss reduces subsidy, small effec6ve groups get more, compe66on favors efficiency Ease of Doing Business 0
50
100
150
200
Years of Schooling, 1960
and Ease of Doing Business, 2012
0.00
2.00
4.00
6.00
8.00
Avg Yrs of Schooling for Population 25+, 1960
Sources: Barro & Lee and The World Bank Doing Business Data
Note: Ease of doing business index: 1=easiest to 185=most difficult
10.00
Why would Human Capital Improve Government? • 
• 
• 
• 
Reverse causality, omi[ed variables, etc. Supply of poli6cal leaders/bureaucrats Informa6on of Voters/Protesters Organiza6on of Ci6zens: Human Capital is Social Capital –  Coleman (1988) “Social capital lies in the structure of rela6ons between actors and among actors” •  Human capital and rule of law are complements –  A simpler economy needs less legal completeness –  Educated become a pressure group for be[er or more democra6c government Democracy and Educa6on 0
2
4
6
8
10
Years of Schooling, 1960
and Average Democracy Index, 1960-2000
0.00
2.00
4.00
6.00
8.00
Avg Yrs of Schooling for Population 25+, 1960
Sources: Barro & Lee and The Polity IV Project
Note: Democracy index ranges from 0 (anocracy) to 10 (consolidated democracy)
10.00
Two Stories for Human Capital and Progress •  Story # 1: Sca[ered investment in skills builds a community able to organize itself to defeat monarchs and some6mes maintain democracy. –  Boston 1775, Paris 1789, 1830, 1848, 1871, Tahrir Square, etc. –  The Despot’s Dilemna: inves6ng in educa6on increases wealth today but creates risks of overthrow. •  Story # 2: Human capital shios the nature of the economy from simple agriculture to complexity with many more interac6ons (need law), investments and innova6ons: demand for law. –  Becker and Murphy on the Division of Labor. –  Similarly despots may be more willing to return to democracy when the benefits are higher (assuming they get to live). •  Implica6ons for the Asian Model: if story # 1 is correct, then instability seems likely, if story # 2 is correct, then autocra6c competence can last.