Back from some days off in Sicily. Very interesting island which is these days considered as one of EU's priority region. When you think of it this is odd. Walking in the streets of Palermo, Trapani, Agrigento tells you a lot about how rich and prosperous this island once was. Things change and prosperity seems to have left the island. This is the mystery of economic growth. As Robert E. Lucas once said when you start thinking about what drives economic growth, it becomes an obsession. Why are we rich, why are they poor, why were they rich and now poor etc...? are indeed questions that can keep you awake at night. They deal with mankind, its past, present and future.
Well if you are interested in these issues (and more) you should visit Research at Chicago (University of Chicago). In the Business/Economics section you'll find three presentations worth listening to. The first one explores the limits to globalization. The second one involves a review of India's economy by Professor Raghuram Rajan. The last one tells the tale of two giants: China and India. Discussion is led by Professor Gary S. Becker and Professor Raghuram Rajan.
The second one is particularly interesting as it discusses why India's past growth has been so slow and what the future may have in its bag for India. Professor Rajan argues there that it's neither politicians nor bureaucrats who have hindered growth but the business houses (although they kept complaining about being too regulated). He uses the framework of "hacienda economies" (economies dominated by large plantation owners that relied on slave labor) and compares it to what he calls "Costa Rica" type economies.
He provides for instance evidence that Northern India and Eastern India have been growth-hindered because of the "zamindari" system (hacienda type) where landlords (who had the right to raise taxes on behalf of the government) had no interest in an educated workforce. They simply wanted to control a cheap labor force. In the rest of India, cultivators paid directly taxes to the government and were in some sense more "free".
Rajan shows that this legacy of the past explains why Northern/Eastern India exhibit growth patterns very different from the rest of India. I don't know whether this explains the whole thing. What it tells me is that explaining economic growth is indeed a thorny task: The devil lies in the details (miss one detail and you get the wrong picture) which usually are difficult to accomodate by standard theories. Indeed, theories, whatever schools of thought they represent, start with (simplifying) assumptions whose purpose is precisely to avoid capturing too many details.
Talking about details, this is where "standard" economists and behavioral economists seem to disagree: Again Research at Chicago has a good piece on the topic. One quote drawn from this piece puzzles me though:
"At Becker’s Rational Choice Workshop last spring, Harvard’s Edward Glaeser, PhD’92, took up the question of group psychology in his paper “Psychology and the Market.” “The great achievement of economics is understanding aggregation,” he writes. “Our discipline has always been about the wealth of nations, not individuals.”
I think it says it all. How can one be satisfied with such an ill-defined research agenda? This may be why they call economics the dismal science.