In my original response I criticized Lawrence Harrison’s advocacy of the key role of culture in growth on the grounds that “in 50 years the agenda of introducing culture into analysis of growth has not advanced one step from the state of the art of the 1950s.” I now feel that I owe equal criticism to Peter Boettke and James Robinson, who both contend that incentives, and incentives alone, will explain all economic outcomes. This of course is the famous founding position of modern economics in Adam Smith, 1776, as exemplified by the quote Boettke gives:
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.
That doctrine was enunciated 230 years ago. If this is such a foundational truth of economics, why are we still debating whether it holds? The sad answer is that this is so because there has been pitifully little proof of the key role of incentives in economic growth in the subsequent 230 years.
There is, for example, little difference in output per worker in modern Germany and the USA. They are both very affluent modern societies. Yet the OECD reports that the marginal tax rate, taking all burdens into account, on the median wage earner in Germany in 2000 was 65%, compared to 34% in the USA. If incentives are the key to growth, why can the modern European welfare state, whose grabbing hand claims the majority of the output of its citizens, and returns it in social entitlements, continue to function? Adam Smith himself would have denounced the political economy of the modern welfare state as foolish, wasteful, unsustainable, and a sure recipe for the impoverishment of all its inhabitants.
Further, I would bet Peter and Jim that there are plenty of modern African nations subsisting at some of the lowest living standards humanity has ever witnessed, where the marginal effective tax rate on the average earner is well below even the current U.S. rate. In modern Germany the state provides health care, education, subsidized transport, TV channels, the lot. In these impoverished African states if you want decent health care, decent education, travel, information, then you buy it with your hard earned money. Yet these states remain mired in poverty.
Similarly, modern economic growth did not emerge till around 1800 in countries like England. We can go back to the years 1200-1800 where there was very little growth in pre-industrial England. What we find, astonishingly, is governments that were so constrained by English principles of Parliamentary control over taxes, that the average total tax take of all government in England before the Glorious Revolution of 1688-9 was in the order of 1-3% of incomes. England in 1300 was a capitalists’ paradise, with a 1% tax rate on incomes, stable property rights, and strong protections for private property. Yet England then had little or no growth. Something beyond incentives seems to be missing.
The British Empire in the nineteenth century was constructed on the principles of laissez faire. The colonial civil servants of India were, for example, all schooled explicitly in the principles of limited taxation, stable property rights, clear dispute procedures, and limited government. India was not just a nation, but a whole continent, which under the British was open to complete freedom of import of entrepreneurial talent, capital, technology, and goods. Yet India saw almost no economic growth before Independence in 1947, while Canada, Australia and New Zealand flourished under the same formula.
Incentives are clearly not sufficient for economic growth. It turns out, more amazingly, that the modern welfare state suggests that they are not even necessary.
If you want to stay within the incentives framework, clearly there must be other social incentives that are much more powerful than the formal incentives provided by the explicit institutional structure. But those incentives remain largely unmeasurable, and begin to look very much like the invocation of culture that Peter Boettke and James Robinson want to avoid.