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A Brief History of Human Progress* Taken from Gary M. Walton President, Foundation for Teaching Economics "Poverty is but the worst form of violence."

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Presentation on theme: "A Brief History of Human Progress* Taken from Gary M. Walton President, Foundation for Teaching Economics "Poverty is but the worst form of violence.""— Presentation transcript:

1 A Brief History of Human Progress* Taken from Gary M. Walton President, Foundation for Teaching Economics "Poverty is but the worst form of violence." -- Mahatma Gandhi

2 What is poverty? Poverty is hunger. Poverty is hunger. Poverty is lack of shelter. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom. Poverty is powerlessness, lack of representation and freedom. Every 3.6 seconds someone dies of hunger Every 3.6 seconds someone dies of hunger

3 Cyclical Poverty Cyclical poverty refers to poverty that may be widespread throughout a population, but the occurrence itself is of limited duration. Cyclical poverty refers to poverty that may be widespread throughout a population, but the occurrence itself is of limited duration.

4 Absolute Poverty Poverty as defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, health care and shelter. Poverty as defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, health care and shelter. In the Asian, African and Latin American countries, well over 500 million people are living in what the World Bank has called "absolute poverty“ In the Asian, African and Latin American countries, well over 500 million people are living in what the World Bank has called "absolute poverty“ Every year 15 million children die of hunger Every year 15 million children die of hunger For the price of one missile, a school full of hungry children could eat lunch every day for 5 years For the price of one missile, a school full of hungry children could eat lunch every day for 5 years Throughout the 1990's more than 100 million children will die from illness and starvation. Those 100 million deaths could be prevented for the price of ten Stealth bombers, or what the world spends on its military in two days! Throughout the 1990's more than 100 million children will die from illness and starvation. Those 100 million deaths could be prevented for the price of ten Stealth bombers, or what the world spends on its military in two days! The World Health Organization estimates that one-third of the world is well-fed, one-third is under-fed one-third is starving- Since you've started this power point at least 200 people have died of starvation. Over 4 million will die this year. The World Health Organization estimates that one-third of the world is well-fed, one-third is under-fed one-third is starving- Since you've started this power point at least 200 people have died of starvation. Over 4 million will die this year.

5 Relative Poverty (Compared to others in a designated region) In the U.S. hunger and race are related. In % of African-American children were chronically hungry, and 40% of Latino children were chronically hungry compared to 16% of white children. In the U.S. hunger and race are related. In % of African-American children were chronically hungry, and 40% of Latino children were chronically hungry compared to 16% of white children. The infant mortality rate is closely linked to inadequate nutrition among pregnant women. The U.S. ranks 23rd among industrial nations in infant mortality. African- American infants die at nearly twice the rate of white infants. The infant mortality rate is closely linked to inadequate nutrition among pregnant women. The U.S. ranks 23rd among industrial nations in infant mortality. African- American infants die at nearly twice the rate of white infants. One out of every eight children under the age of twelve in the U.S. goes to bed hungry every night. One out of every eight children under the age of twelve in the U.S. goes to bed hungry every night. Half of all children under five years of age in South Asia and one third of those in sub-Saharan Africa are malnourished. Half of all children under five years of age in South Asia and one third of those in sub-Saharan Africa are malnourished.

6 “Absolute” (v. “Relative”) Poverty Absolute poverty is measured with reference to a standard ANNUALINCOMEANNUALINCOME $$$$$$$ Poverty Line $ $ € € £ £ ¥ ¥ $$$

7 Relative Poverty Poverty Line $$$ The middle family is relatively poorer than the famous model and relatively richer than the struggling artist. All 3 are above the poverty line, so none is absolutely poor.

8 Gross Domestic Product It is difficult for those of us in the United States, where per capita GDP in 2002 was about $36,000, to grasp the fact that about 2.8 billion people, or nearly half the world population, live on $2 or less a day. It is difficult for those of us in the United States, where per capita GDP in 2002 was about $36,000, to grasp the fact that about 2.8 billion people, or nearly half the world population, live on $2 or less a day. And about 1.2 billion live on less than $1 a day. And about 1.2 billion live on less than $1 a day. Hunger, squalor, and disease are the norm in many nations of the world Hunger, squalor, and disease are the norm in many nations of the world

9 The Rich and the Poor According to the United Nations, the richest 20 percent of the world’s population receives more than 80 percent of the world’s income; According to the United Nations, the richest 20 percent of the world’s population receives more than 80 percent of the world’s income; The poorest 20 percent receives less than 2 percent. The poorest 20 percent receives less than 2 percent. The poorest 60 percent receives less than 6 percent of the world’s income. The poorest 60 percent receives less than 6 percent of the world’s income.

10 History of the Masses The year 1750 does not usually evoke images of great prosperity or of revolutionary progress, but in fact the mid-eighteenth century was an historical turning point of economic advance. The year 1750 does not usually evoke images of great prosperity or of revolutionary progress, but in fact the mid-eighteenth century was an historical turning point of economic advance. Technological changes in that period allowed growing numbers of people to move from mere subsistence activities to thoughts and actions that furthered economic, political and social progress. Technological changes in that period allowed growing numbers of people to move from mere subsistence activities to thoughts and actions that furthered economic, political and social progress.

11 Almost All of our Ancestors were Utterly Wretched Taking a long, broad view, the lives of almost all of our distant ancestors were utterly wretched. Taking a long, broad view, the lives of almost all of our distant ancestors were utterly wretched. Consider this time capsule summary of humanity from Douglass C. North’s 1993 Nobel address: Consider this time capsule summary of humanity from Douglass C. North’s 1993 Nobel address:

12 Only for the Last 3 or 4 Minutes on History’s Clock Let us represent the human experience to date as a 24-hour clock in which the beginning consists of the time (apparently in Africa between 4 and 5 million years ago) when humans became separate from other primates. Let us represent the human experience to date as a 24-hour clock in which the beginning consists of the time (apparently in Africa between 4 and 5 million years ago) when humans became separate from other primates. Then the beginning of so-called civilization occurs with the development of agriculture and permanent settlement in about 8000 B.C. in the Fertile Crescent – in the last three or four minutes of the clock Then the beginning of so-called civilization occurs with the development of agriculture and permanent settlement in about 8000 B.C. in the Fertile Crescent – in the last three or four minutes of the clock For the other 23 hours and 56 or 57 minutes, humans remained hunters and gatherers, and while population grew, it did so at a very slow pace. For the other 23 hours and 56 or 57 minutes, humans remained hunters and gatherers, and while population grew, it did so at a very slow pace.

13 Just 35 Minutes on our New 24-Hour Clock Now if we make a new 24- hour clock for the time of civilization – the 10,000 years from development of agriculture to the present – the pace of change appears to be very slow for the first 12 hours.… Now if we make a new 24- hour clock for the time of civilization – the 10,000 years from development of agriculture to the present – the pace of change appears to be very slow for the first 12 hours.… The pace of change accelerates in the past 5,000 years with the rise and then decline of economies and civilization. The pace of change accelerates in the past 5,000 years with the rise and then decline of economies and civilization.

14 Last 250 Years Population may have grown from about 300 million at the time of Christ to about 800 million by 1750 – a substantial acceleration as compared to earlier rates of growth. Population may have grown from about 300 million at the time of Christ to about 800 million by 1750 – a substantial acceleration as compared to earlier rates of growth. The last 250 years – just 35 minutes on our new 24-hour clock are the era of modern economic growth, accompanied by a population explosion that now puts world population in excess of 5 billion (1993). The last 250 years – just 35 minutes on our new 24-hour clock are the era of modern economic growth, accompanied by a population explosion that now puts world population in excess of 5 billion (1993).

15 Restricted to Western Europe and Extensions of Britain If we focus on the last 250 years, we see that growth was largely restricted to Western Europe and the overseas extensions of Britain for 200 of those 250 years (North, 1993). If we focus on the last 250 years, we see that growth was largely restricted to Western Europe and the overseas extensions of Britain for 200 of those 250 years (North, 1993).

16 The Decline of Poverty: Where and When Figure 1 shows world population over the past ten thousand years, along with noteworthy inventions, discoveries, and events. Figure 1 shows world population over the past ten thousand years, along with noteworthy inventions, discoveries, and events. Shortly before the United States won its independence from Britain, the geographical line bolts upward like a rocket, recently powering past six billion humans alive on Earth. Shortly before the United States won its independence from Britain, the geographical line bolts upward like a rocket, recently powering past six billion humans alive on Earth.

17 Advances in Food Production Advances in food production from new technologies, commonly labeled the second Agricultural Revolution, coincide with this population explosion. Advances in food production from new technologies, commonly labeled the second Agricultural Revolution, coincide with this population explosion. Improvements and spread of use of the plow, for example, first introduced in the Mesopotamian Valley around 4000 B.C., changed very little over the next 5000 years. Improvements and spread of use of the plow, for example, first introduced in the Mesopotamian Valley around 4000 B.C., changed very little over the next 5000 years.

18 Competition for Needed Resources Contrast this with air travel. The first successful motor-driven flight occurred in 1903 by the Wright Brothers. Contrast this with air travel. The first successful motor-driven flight occurred in 1903 by the Wright Brothers. In 1969, a mere sixty-six years later, Neil Armstrong became the first man to step foot on the moon. In 1969, a mere sixty-six years later, Neil Armstrong became the first man to step foot on the moon.

19 Poor Diet is Not a Matter of Bad Choices! For most people, poor diet was not a matter of bad choices, it was the absence of choices, the fact of scarcity. For most people, poor diet was not a matter of bad choices, it was the absence of choices, the fact of scarcity. Exceedingly poor diets and chronic malnutrition were the norm because food production seldom rose above basic life-sustaining levels. Exceedingly poor diets and chronic malnutrition were the norm because food production seldom rose above basic life-sustaining levels. Most people were caught in a food- energy trap, and low food supplies and inadequate diets were accompanied by high rates of disease and low rates of resistance. Most people were caught in a food- energy trap, and low food supplies and inadequate diets were accompanied by high rates of disease and low rates of resistance.

20 Maladies of Malnourishment Reflected in Historic Height The consequences of malnourishment and widespread disease are revealed in evidence on height and weight. The consequences of malnourishment and widespread disease are revealed in evidence on height and weight. In 1750, the average height of adult males in England, the world’s most economically advanced nation, was 4 feet, seven inches, and even that exceeded averages in France and Norway (Fogel, 1994). In 1750, the average height of adult males in England, the world’s most economically advanced nation, was 4 feet, seven inches, and even that exceeded averages in France and Norway (Fogel, 1994). Today, the average American man stands 15 inches taller. Today, the average American man stands 15 inches taller. A typical Englishman in 1750 weighed around 130 pounds, an average Frenchman about 110, compared to the mid-170s for U.S. males today. A typical Englishman in 1750 weighed around 130 pounds, an average Frenchman about 110, compared to the mid-170s for U.S. males today. It is startling to see the suits of armor in the Tower of London that were worn for ancient wars; they vividly remind us of how small people of long ago really were. It is startling to see the suits of armor in the Tower of London that were worn for ancient wars; they vividly remind us of how small people of long ago really were.

21 Second Agricultural Revolution The second Agricultural Revolution beginning in the mid- eighteenth century, soon followed by the Industrial Revolution, initiated and sustained the population explosion, lifting birth rates and lowering death rates. The second Agricultural Revolution beginning in the mid- eighteenth century, soon followed by the Industrial Revolution, initiated and sustained the population explosion, lifting birth rates and lowering death rates. Evidence (Preston, 1995) reveals that for the world as a whole, it took thousands of years for life expectancy at birth to rise from the low 20s to around 30 years in the mid-18th century. Evidence (Preston, 1995) reveals that for the world as a whole, it took thousands of years for life expectancy at birth to rise from the low 20s to around 30 years in the mid-18th century.

22 Table 1: Years of Life Expectancy at Birth Place Middle Ages Select years France United Kingdom India China Africa World

23 Life Expectancy From Table 1 we see that by 1800, life expectancy in France was just under 30 years, and in Great Britain about 36, levels that China and India had not reached 100 years later. From Table 1 we see that by 1800, life expectancy in France was just under 30 years, and in Great Britain about 36, levels that China and India had not reached 100 years later. By 1950, life expectancy in England and France was in the high 60s, while in India and China it was only about 40. By 1950, life expectancy in England and France was in the high 60s, while in India and China it was only about 40.

24 Europe and England’s Colonies Advanced While the World Slept While the rest of the world slept, and changed little economically, Europe and England’s colonies in America advanced. While the rest of the world slept, and changed little economically, Europe and England’s colonies in America advanced. By the early 1800’s, the United States had pushed ahead of Europe, and by the mid 1900’s, citizens of the U.S. enjoyed incomes well above those of Europeans and many multiples above people living elsewhere. By the early 1800’s, the United States had pushed ahead of Europe, and by the mid 1900’s, citizens of the U.S. enjoyed incomes well above those of Europeans and many multiples above people living elsewhere.

25 Impact of Regional Differences Apparent in Nations Today The real impact of regional differences in economic growth is apparent when we realize that the poor nations of today—Zaire, Ethiopia, Tanzania, Burma, and Bangladesh—have per capita income levels surpassed in Europe 500 to 1000 years ago. The real impact of regional differences in economic growth is apparent when we realize that the poor nations of today—Zaire, Ethiopia, Tanzania, Burma, and Bangladesh—have per capita income levels surpassed in Europe 500 to 1000 years ago. Even now, they have not attained levels of well-being experienced by western peoples at the time of the American Revolution (see Table 3). Even now, they have not attained levels of well-being experienced by western peoples at the time of the American Revolution (see Table 3).

26 Classifications The World Bank classifies countries into high-income, medium-income, and low-income countries on the basis of national income per capita The World Bank classifies countries into high-income, medium-income, and low-income countries on the basis of national income per capita The high-income nations, are known as the industrially advanced countries (IACs); they include the United States, Japan, Canada, Australia, New Zealand, and most of the nations of western Europe. The high-income nations, are known as the industrially advanced countries (IACs); they include the United States, Japan, Canada, Australia, New Zealand, and most of the nations of western Europe.

27 Conditions of IACs In general, these nations have In general, these nations have well-developed market economieswell-developed market economies based on large stocks of capital goods,based on large stocks of capital goods, advanced production technologies,advanced production technologies, and well- educated workers.and well- educated workers. In 2001 these economies had a per capita income of $26,710. In 2001 these economies had a per capita income of $26,710.

28 DVC Developing Countries The remaining nations of the world are called developing countries (DVCs). The remaining nations of the world are called developing countries (DVCs). They have wide variations of income per capita and are mainly located in Africa, Asia, and Latin America. They have wide variations of income per capita and are mainly located in Africa, Asia, and Latin America.

29 Middle Income Nations The DVCs are a diverse group that can be subdivided into two groups: The DVCs are a diverse group that can be subdivided into two groups: The middle- income nations,, include such countries as Brazil, Iran, Poland, Russia, South Africa, and Thailand.The middle- income nations,, include such countries as Brazil, Iran, Poland, Russia, South Africa, and Thailand. Per capita output of these middle- income nations ranged from $745 to $9206 in 2001 and averaged $1850. Per capita output of these middle- income nations ranged from $745 to $9206 in 2001 and averaged $1850.

30 Low Income Nations The low-income nations, had a per capita income of $745 or less in 2001 and average only $430 of income per person. India, Indonesia, and the sub-Saharan nations of Africa dominate this group.The low-income nations, had a per capita income of $745 or less in 2001 and average only $430 of income per person. India, Indonesia, and the sub-Saharan nations of Africa dominate this group.

31 Economies Low (tan) – Medium (green) - high (brown)

32 Table 2 Real Gross Domestic Product Per Capita (1990 $) Area Europe$400$640$870$1,130$4,370$13,950$19,256 USA6001,26010,65023,38027,948 India China Africa World Sources: Maddison (1998, 1999). Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

33 GDP Per Capita Then and Now (1990$) United Kingdom Switzerland USA China Burma Egypt Ghana Ethiopia

34 Comparisons In 2001 U.S. GDP was nearly $10 trillion; In 2001 U.S. GDP was nearly $10 trillion; the combined GDPs of the DVCs in that year came to only $6 trillion. the combined GDPs of the DVCs in that year came to only $6 trillion. The United States, with only 5 percent of the world’s population, produces 31 percent of the world’s output. The United States, with only 5 percent of the world’s population, produces 31 percent of the world’s output. Per capita GDP of the United States is 249 times greater than per capita GDP in Sierra Leone, one of the world’s poorest nations. Per capita GDP of the United States is 249 times greater than per capita GDP in Sierra Leone, one of the world’s poorest nations. The annual sales of the world’s largest corporations exceed the GDPs of many of the DVCs. The annual sales of the world’s largest corporations exceed the GDPs of many of the DVCs. General Motors’ annual world revenues are greater than the GDPs of all but 21 nations. General Motors’ annual world revenues are greater than the GDPs of all but 21 nations.

35 An Institutional Road-Map to Plenty It is clear that the road out of poverty is new. It is clear that the road out of poverty is new. It has been traveled by few societies: Western Europe; the United States, Canada, Australia; and New Zealand (Britain’s offshoots); Japan, Hong Kong, Singapore; and few others. It has been traveled by few societies: Western Europe; the United States, Canada, Australia; and New Zealand (Britain’s offshoots); Japan, Hong Kong, Singapore; and few others. What steps did Western Europe and its “offshoots” take to lead humanity along the road to plenty? What steps did Western Europe and its “offshoots” take to lead humanity along the road to plenty?

36 Characteristics In general In general literacy rates are low, literacy rates are low, Unemployment is high,Unemployment is high, population growth is rapid, andpopulation growth is rapid, and exports consist largely of agricultural produce (such as cocoa, bananas, sugar, raw cotton)exports consist largely of agricultural produce (such as cocoa, bananas, sugar, raw cotton) and raw materials (such as copper, iron ore, natural rubber). and raw materials (such as copper, iron ore, natural rubber). Capital equipment is minimal, Capital equipment is minimal, production technologies are simple,production technologies are simple, and labor productivity is very low.and labor productivity is very low. About 41 percent of the world’s population lives in these low-income DVCs, all of which suffer widespread poverty. About 41 percent of the world’s population lives in these low-income DVCs, all of which suffer widespread poverty.

37 Roadmap to a Life of Plenty? Why is China, the world’s most populous country (almost 1.3 billion), now far ahead of India (second with 1 billion), when merely fifty years ago both nations were about equal in per capita income and more impoverished than most poor African nations today? Why is China, the world’s most populous country (almost 1.3 billion), now far ahead of India (second with 1 billion), when merely fifty years ago both nations were about equal in per capita income and more impoverished than most poor African nations today? Is there a roadmap leading to a life of plenty, a set of policies and institutional arrangements that developing nations can adopt to replicate the success of advanced modern economies? Is there a roadmap leading to a life of plenty, a set of policies and institutional arrangements that developing nations can adopt to replicate the success of advanced modern economies? The heartening news is that while we cannot map out a clear highway to wealth, there are clearly road signs to point us in the right direction and away from cliffs. The heartening news is that while we cannot map out a clear highway to wealth, there are clearly road signs to point us in the right direction and away from cliffs.

38 Nation’s Output determined by Input of Factors of Production Well known is the fact that a nation’s total output is determined by its total inputs, measured in terms of Well known is the fact that a nation’s total output is determined by its total inputs, measured in terms of natural resources,natural resources, labor force,labor force, stock of capital,stock of capital, and entrepreneurial talentsand entrepreneurial talents Two hundred and fifty years ago, and for many centuries preceding that, most people (80-90 percent of the labor force) everywhere were engaged in agriculture, with much of it being subsistence, self-sufficient, noncommercial farming. Two hundred and fifty years ago, and for many centuries preceding that, most people (80-90 percent of the labor force) everywhere were engaged in agriculture, with much of it being subsistence, self-sufficient, noncommercial farming.

39 Percent of Population Engaged in Subsistence Agriculture Today that proportion is under 5 percent in most advanced economies (3% in the U.S.). Today that proportion is under 5 percent in most advanced economies (3% in the U.S.). During this two-and- one-half century transition, people grew bigger, ate more, and worked fewer hours and days in greater safety and comfort. During this two-and- one-half century transition, people grew bigger, ate more, and worked fewer hours and days in greater safety and comfort.

40 How Nations Apply Their Resources To explain why some nations grow faster than others, we need to look closely at the way nations apply and adapt these sources of productivity change. To explain why some nations grow faster than others, we need to look closely at the way nations apply and adapt these sources of productivity change. To use this perspective, we need to assess the complex relationships of the laws, rules, and customs of a society and its economic performance. To use this perspective, we need to assess the complex relationships of the laws, rules, and customs of a society and its economic performance.

41 An Example For example, in Afghanistan and Iraq, we are continually reminded of both the difficulty and the necessity of gaining popular acceptance of changes designed to promote economic growth. For example, in Afghanistan and Iraq, we are continually reminded of both the difficulty and the necessity of gaining popular acceptance of changes designed to promote economic growth.

42 The Human Realities of Poverty Let us examine a typical “extended” family in rural Asia. Let us examine a typical “extended” family in rural Asia. The Asian household is likely to comprise ten or more people, including parents, five to seven children, two grandparents, The Asian household is likely to comprise ten or more people, including parents, five to seven children, two grandparents, and some aunts and uncles. and some aunts and uncles. They have a combined annual income, both in money and in “kind” (i.e., they consume a share of the food they grow), of $250 to $300. They have a combined annual income, both in money and in “kind” (i.e., they consume a share of the food they grow), of $250 to $300. Together they live in a poorly constructed one-room house as tenant farmers on a large agricultural estate owned by an absentee landlord who lives in the nearby city. Together they live in a poorly constructed one-room house as tenant farmers on a large agricultural estate owned by an absentee landlord who lives in the nearby city. The father, mother, uncle, and the older children must work all day on the land. None of the adults can read or write; of the five school-age children, only one attends school regularly; and he cannot expect to proceed beyond three or four years of primary education. The father, mother, uncle, and the older children must work all day on the land. None of the adults can read or write; of the five school-age children, only one attends school regularly; and he cannot expect to proceed beyond three or four years of primary education.

43 Relief from the Daily Struggle There is only one meal a day; it rarely changes and it is rarely sufficient to alleviate the childrens’ constant hunger pains. There is only one meal a day; it rarely changes and it is rarely sufficient to alleviate the childrens’ constant hunger pains. The house has no electricity, sanitation, or fresh water supply. The house has no electricity, sanitation, or fresh water supply. There is much sickness, but qualified doctors and medical practitioners are far away in the cities attending to the needs of wealthier families. There is much sickness, but qualified doctors and medical practitioners are far away in the cities attending to the needs of wealthier families. The work is hard, the sun is hot and aspirations for a better life are constantly being snuffed out. In this part of the world the only relief from the daily struggle for physical survival lies in the spiritual traditions of the people. The work is hard, the sun is hot and aspirations for a better life are constantly being snuffed out. In this part of the world the only relief from the daily struggle for physical survival lies in the spiritual traditions of the people.

44 Sources of Productivity Consider just one of the sources of productivity change – technological change—and how it is intimately tied to the institutions, the laws, rules, and customs of a society. Consider just one of the sources of productivity change – technological change—and how it is intimately tied to the institutions, the laws, rules, and customs of a society. A new technology can introduce a whole new product and service, such as the airplane and faster travel, or it can upgrade and improve an existing one; A new technology can introduce a whole new product and service, such as the airplane and faster travel, or it can upgrade and improve an existing one; we have come a long way from the 1930’s Model A Fords to today’s luxury BMWs and state-of-the- art hybrid fuel technologies. we have come a long way from the 1930’s Model A Fords to today’s luxury BMWs and state-of-the- art hybrid fuel technologies.

45 New Technology A new technology can also affect the cost of production; the introduction of relatively light but strong aluminum changed the cost of producing a whole range of goods and services, from soft- drink cans to skyscrapers A new technology can also affect the cost of production; the introduction of relatively light but strong aluminum changed the cost of producing a whole range of goods and services, from soft- drink cans to skyscrapers

46 Advances of Knowledge In short, technological changes can be thought of as advances of knowledge that raise or improve output or lower costs. In short, technological changes can be thought of as advances of knowledge that raise or improve output or lower costs. They often encompass both invention and/or modifications of new discoveries, called innovation. They often encompass both invention and/or modifications of new discoveries, called innovation. Both require basic scientific research, then further trial and error and study to adapt and modify the initial discoveries and put them to practical use. Both require basic scientific research, then further trial and error and study to adapt and modify the initial discoveries and put them to practical use.

47 Risk and Cost The inventor or company pursuing research bears substantial risk and cost---including the possibility of failure and no commercial gain. The inventor or company pursuing research bears substantial risk and cost---including the possibility of failure and no commercial gain. How are scientists, inventors, entrepreneurs, and others encouraged to pursue high-cost, high- risk research ventures? How are scientists, inventors, entrepreneurs, and others encouraged to pursue high-cost, high- risk research ventures?

48 Rule of Law This is where laws and rules, or institutions as they are called, help us better understand the causes of technological change. This is where laws and rules, or institutions as they are called, help us better understand the causes of technological change. Patent laws, first introduced in 1789 in the U.S. Constitution, provided property rights and exclusive ownership to inventors for their patented inventions. Patent laws, first introduced in 1789 in the U.S. Constitution, provided property rights and exclusive ownership to inventors for their patented inventions. These patents and copyrights extended exclusive ownership rights to ideas including the right to sell, a market for new, patented ideas emerged, with inventors often selling their patents to people specialized in finding commercial uses of new inventions. These patents and copyrights extended exclusive ownership rights to ideas including the right to sell, a market for new, patented ideas emerged, with inventors often selling their patents to people specialized in finding commercial uses of new inventions.

49 Importance of Institutions The keys here are the laws and rules – the institutions The keys here are the laws and rules – the institutions In advanced economies, laws provide positive incentives to spur enterprise and help forge markets using commercial legal and property right systems which allow new scientific breakthroughs (technologies) to realize their full commercial-social potential. In advanced economies, laws provide positive incentives to spur enterprise and help forge markets using commercial legal and property right systems which allow new scientific breakthroughs (technologies) to realize their full commercial-social potential.

50 What is an Institution? Established behavior practices and patterns that form the foundation for community life. Established behavior practices and patterns that form the foundation for community life. Institutions evolve in market economies to help individuals and groups accomplish their goals Institutions evolve in market economies to help individuals and groups accomplish their goals A different kind of institution, clearly defined and well-enforced property rights, is essential to a market economy. A different kind of institution, clearly defined and well-enforced property rights, is essential to a market economy.

51 Generate Productivity Advances Properly constructed institutions generate productivity advances through Properly constructed institutions generate productivity advances through specialization and division of labor,specialization and division of labor, allowing universities, other scientific research institutions, corporations, to cooperate through interrelated markets (production and exchange)allowing universities, other scientific research institutions, corporations, to cooperate through interrelated markets (production and exchange) hastening the growth and spread of technological advanceshastening the growth and spread of technological advances

52 Create Incentives to Work Getting the institutions right and sustaining institutional changes that realize gains for society as a whole are fundamental to the story of growth. Getting the institutions right and sustaining institutional changes that realize gains for society as a whole are fundamental to the story of growth. The rule of law: The rule of law: protects and set limits on the use of property, and influences people’s incentives in work, creativity, and exchange.

53 Population Growth in Developing Countries

54 What do Successful Economies have? Examining the successful economies suggests a partial list of the institutional determinants that allow modern economies to flourish: Examining the successful economies suggests a partial list of the institutional determinants that allow modern economies to flourish: the rule of law, coupled with limited government, and open political participation; the rule of law, coupled with limited government, and open political participation; rights to private property that are clearly defined and consistently enforced; rights to private property that are clearly defined and consistently enforced; open, competitive markets with freedom of entry and exit, widespread access to capital and to information, low transaction costs, mobile resource inputs, and reliable contract enforcement; open, competitive markets with freedom of entry and exit, widespread access to capital and to information, low transaction costs, mobile resource inputs, and reliable contract enforcement; *an atmosphere of individual freedom in which education and health are accessible and valued *an atmosphere of individual freedom in which education and health are accessible and valued

55 Poverty Level In US The 2003 poverty income level in the United States (about $8,500), while poor relative to the U.S. average ($34,000), is far higher than average per capita incomes in most of the rest of the world The 2003 poverty income level in the United States (about $8,500), while poor relative to the U.S. average ($34,000), is far higher than average per capita incomes in most of the rest of the world Yet another way to show how widespread the gains have been from economic growth is to show the availability of things we take for granted today but that were special in Yet another way to show how widespread the gains have been from economic growth is to show the availability of things we take for granted today but that were special in 1950.

56 Sources: U.S. Bureau of the Census, American Housing Survey Figure 2 lists items owned or used by average households in the United States in 1950 compared to those used by Americans below the poverty threshold today. Figure 2 lists items owned or used by average households in the United States in 1950 compared to those used by Americans below the poverty threshold today. Indeed, American households listed below the poverty level today are more likely to own a color television set than an average household in Italy, France or Germany. Indeed, American households listed below the poverty level today are more likely to own a color television set than an average household in Italy, France or Germany. Air-conditioned homes with electricity, a refrigerator, a flush toilet, television and telephones are common even among poor Americans (as shown in Figure 2). Air-conditioned homes with electricity, a refrigerator, a flush toilet, television and telephones are common even among poor Americans (as shown in Figure 2).

57 Conclusions: Recent declines in the number of the world’s poor are primarily a result of institutional improvements in Asia, especially in China and India. Recent declines in the number of the world’s poor are primarily a result of institutional improvements in Asia, especially in China and India. Since 1980, more than 200 million people have moved above the poverty threshold measure. Since 1980, more than 200 million people have moved above the poverty threshold measure.

58 Will poorer nations “catch up”? The faster growth rates of the those successfully integrating into the world market system is positive news, holding out the very real possibility of poorer nations “catching up” to the material comforts enjoyed by the advanced/rich nations, even as the less globalized fall farther behind. The faster growth rates of the those successfully integrating into the world market system is positive news, holding out the very real possibility of poorer nations “catching up” to the material comforts enjoyed by the advanced/rich nations, even as the less globalized fall farther behind.

59 Political Systems Must ???? Devising political systems that divide power, either by Devising political systems that divide power, either by (1) checks and balances among branches or components of one level of government; or(1) checks and balances among branches or components of one level of government; or (2) by federalism creating competition among layers of government, holds promise for the needed economic institutional support of enterprise and markets.(2) by federalism creating competition among layers of government, holds promise for the needed economic institutional support of enterprise and markets.

60 The Corruption Index

61 Presence of Corruption Sanctions Criminality in the Economic System Such criminality undermines the growth of output by diverting scarce resources toward activities that “transfer” income away from activities that produce goods and services. SUCH AS: Such criminality undermines the growth of output by diverting scarce resources toward activities that “transfer” income away from activities that produce goods and services. SUCH AS: Opening economies to international trade Opening economies to international trade Controlling population growth Controlling population growth Encouraging foreign direct investment Encouraging foreign direct investment Building human capital Building human capital Making peace with neighbors Making peace with neighbors Establishing independent central banks Establishing independent central banks

62 Establish Realistic Exchange Rates Exchange rates that are fixed at unrealistic levels forces a nation into an abrupt reevaluation of its currency, sending shock waves throughout its economy. Exchange rates that are fixed at unrealistic levels forces a nation into an abrupt reevaluation of its currency, sending shock waves throughout its economy.

63 Privatize State Industries Many DVCs would benefit by converting state enterprises into private firms. COMPETITION! Many DVCs would benefit by converting state enterprises into private firms. COMPETITION! State enterprises often are inefficient, more concerned with appeasing labor unions than with introducing modern technology and delivering goods and services at minimum per-unit cost. State enterprises often are inefficient, more concerned with appeasing labor unions than with introducing modern technology and delivering goods and services at minimum per-unit cost.

64 Challenge to Poor Nations The daunting challenge for poor nations is to craft better political institutions, to promote the rule of law, rather than the more arbitrary rule of men. The daunting challenge for poor nations is to craft better political institutions, to promote the rule of law, rather than the more arbitrary rule of men. This challenging transition is vital because “history offers us no case of a well-developed market system that was not embedded in a well-developed political system This challenging transition is vital because “history offers us no case of a well-developed market system that was not embedded in a well-developed political system

65 Optimism about the future of mankind Greater and greater numbers of humans are living longer, in greater ease and comfort, and with more dignity. Greater and greater numbers of humans are living longer, in greater ease and comfort, and with more dignity. Although war, revolutions, and natural and man-made catastrophes can imperil regions, the economic evidence and historical record provide ample reason to expect that the global progress launched by open markets and individual freedoms secured by rule of law around 1750 will continue indefinitely. Although war, revolutions, and natural and man-made catastrophes can imperil regions, the economic evidence and historical record provide ample reason to expect that the global progress launched by open markets and individual freedoms secured by rule of law around 1750 will continue indefinitely.


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