An elite educated bureaucracy makes places poorer...

Or so some research seems to show....

I use a natural experiment to show that the regions of China with over a thousand years of sustained exposure to state-building are significantly poorer today. The mechanism of persistence, I argue, was the introduction of a civil service exam based on knowledge of Confucian classics, which strengthened the social prestige of the civil service and weakened the prestige of commerce. A thousand years later, the regions of China where the Confucian bureaucracy was first introduced have a more educated population and more Confucian temples, but lower levels of wealth.

The crucial point here is about prestige - in a world where the high prestige professions are non-commercial, the endeavour of the brightest to secure that prestige undermines economic development.

Much might be said about the situation in Europe where, increasingly, high prestige jobs are to be found in non-commercial environments, what Deirdre McCloskey calls the "clerisy" - academia, medicine, think tanks, central bureaucracies and a host of grand jobs in what might be called the international third sector. Even within the world of commerce, the prestige lies either with performers or with the administrators of large business systems - we are encouraged to see the creators as the parasites not as the means to provide the goodies society wants.

Thus the debate around the rich and successful isn't, "wow, how can we get more people like that creating value for society" but rather, "why aren't they paying more tax so more of us in prestige jobs can have more power and money". We're more bother by the relatively unimportant question of whether entrepreneurial businesses are paying enough money to the state rather than how we can support them (and others) to deliver more social value through that enterprise, innovation and creativity.

The lesson from history - the Dutch republic, Britain in the 18th century, the USA after the civil war, and places like Hong Kong or Singapore today - is that when doing business is valued by society and those leading is have the highest prestige then economic benefit to everyone is greatest. Sadly, we're in a time where entrepreneurship is disparaged, doing business is characterised as exploitative and non-productive, non-commercial roles are seen as the most important, most privileged.

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A curious finding on entrepreneurship and high-growth start-ups...

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From an article by Richard Florida drawing on MIT research into US entrepreneurship and growth:

New startups are four times more likely than the average startup to grow if they are a corporation, two and a half times more likely if they have a short name, and five times more likely if they have trademarks. Furthermore, firms that apply for patents are 35 times more likely to grow. And, curiously, eponymously named firms are a whopping 70 percent less likely to grow.

I don't want to over-analyse this information - it could be reflective of the choices made by the better entrepreneurs (defined as those who succeed in scaling their business). Certainly the findings suggest that businesses approaching the task with a professional attitude - incorporation, trademarks, patents and so forth - are those more likely to succeed, which you think about it makes a lot of sense.

The rest of the article is an interesting one about the distribution of entrepreneurship - essentially the good stuff is concentrated in a few areas:

No surprise, entrepreneurial activity is highly clustered in the San Francisco Bay Area, Southern California, the Pacific Northwest, between New York and Boston, and in parts of Texas.

Interesting stuff for my fellow economic geography buffs.

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Sorry envious lefty folks but entrepreneurs did build that infrastructure

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You'll all be familiar with the "you didn't build that" line directed at wealthy and successful entrepreneurs who have the audacity to use public roads, educated employees and safe communities in managing their business. The most commonly used example - usually in the form of this little Internet poster - is from US Senator Elizabeth Warren.

There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.

You can hear as the socially aware cheer to the rafters at Liz sticking it to the man - telling those rich, successful business people that they owe all that success to the government and should be jolly grateful that it plans to take most of it away in taxes. And it's true that all those things were done with public money (although it's entirely possible - certainly with roads - that private investment could have delivered just as well). But that's not the point, the point is that the rich and successful entrepreneur added some value that wasn't there before - here's Don Boudreaux:

The government-built road that Smith uses to earn handsome profits by serving consumers might well be absolutely essential to Smith’s success, but this fact doesn’t mean that the road’s contribution at the margin to Smith’s success is significant.  Smith’s profits depend upon what he adds to the road’s services – how Smith himself uses the road to create value for consumers.  If Smith uses the road to ship truckloads of ordinary toothpicks to market, he might earn just enough to continue in that line of work, but he’ll not earn magnificent profits.  If instead Smith uses the road to ship truckloads full of new’n'improved toothpicks – toothpicks that sell at prices only slightly above that of ordinary toothpicks but, in addition to doing what ordinary toothpicks do, also are guaranteed to prevent gum disease, cavities, bad breath, insomnia, and erectile dysfunction – then Smith profits magnificently.  Smith’s “above normal” profits (as economists call them) have nothing to do with the road (or with, say, the private efforts of entrepreneurs who are responsible for the delivery truck Smith uses) and everything to do with Smith’s own innovative efforts.

This is the entire point - the entrepreneur is successful because he gets a small part of the value he has added to society (about 3%), most of that value is enjoyed by the consumers who use the goods or services that entrepreneur creates. Having schools, hospitals, roads and policemen paid for from taxes is not a guarantee that we will get that extra bit of margin - it is entirely down the the entrepreneur, which is why such folk are so rich.

So we have benefited (collectively) from 97% of the value added by the creation of whatever wonderful innovation our entrepreneur has developed. And, since this is how the world works, a pretty juicy chunk of that 97% has gone to the government is taxes, duties, fees, levies and rents - the Elizabeth Warren argument is simply wrong. For sure, the entrepreneur didn't build those roads but the extra tax income the added value from his innovation provides made a big contribution to providing schools and hospitals as well as contributing to the next generation of infrastructure investment.

No-one denies the essentially collective nature of free markets - the idea that they are selfish, individualistic or greedy is utter nonsense - yet the cheerleaders for what we might call the 'envious left' continue to peddle the lie that somehow that billionaire entrepreneur isn't successful from his own intelligence and efforts. Worse still that our entrepreneur should face punitive taxes on income and on the return from investment for the sole reason that he has such a lot of the stuff and we don't like him for that reason.

In the end, the marginal improvements those entrepreneurs got rich from also were what made us all richer and made it possible for government to built that infrastructure so the next generation of creative business people can make the next set of marginal improvements (as well as the rest of us enjoying better roads, schools, hospitals and sundry other infrastructure).

The entrepreneurs did build that...

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A glimpse of another Africa

Nairobi

You're all familiar with the Oxfam picture of Africa. The starving children, the smiling farmers kept from death's door by the good work of one or other 'aid programme', the wells dug and the women with bundles on their heads.

This is the Africa of development charity marketing and of the politicians' justification for the international aid budget. It's a rural, poor Africa where food crises are only a dry month away and where fair trade evangelists bring the good news - you can stay on your smallholding barely scraping a living for another year!

And the image is something of an insult - dare I say it, a rather neo-colonial insult. The implication is that, without the expertise of us rich, clever Europeans those Africans are condemned to a life of malnutrition, disease and desolation. It is wrong.

Think back to the terrible events in Kenya back in October - not the terrorism but the target of the terrorists. It was a Westfield shopping mall. Hardly the Oxfam image of Africa. This is another Africa, an urban Africa that isn't filled with subsistence farmers and big-eyed hungry children but with trade, with making, buying and selling things and with entrepreneurs:

I present to you Africa’s brightest young entrepreneurs. These are the ones who are making the most dramatic impact in Africa today in manufacturing, technology, real estate, media & entertainment, financial services, agriculture, fashion and the service industry. They are impatient to explore new possibilities and slowly but surely, they are building empires. 

OK, it's a bit gushing but this is a positive, exciting, growing Africa not the supposed basket case that the likes of Oxfam would have us believe. An Africa with people like Christian Ngan:

After working in financial services in France, first as an analyst at French investment bank Quilvest Group and as an associate at Findercord in Paris, Christian Ngan returned home to Cameroon to start his own business in 2012. With $3,000 of his savings, he founded Madlyn Cazalis, an African hand-made bio cosmetic company that produces body oils, natural lotions, creams, scrubs, masks and soaps. Madlyn Cazalis products are sold and distributed across more than 30 chemist stores, beauty institutes and retail outlets in Cameroon and neighboring countries in Central Africa. 

And with Seth Akumani:

Akumani, 30 is a co-founder of ClaimSync, an end-to-end claims processing software that enables hospitals, clinics and other healthcare facilities all over the world to automate patients’ medical records and to process records electronically. Claimsync’s solution allows these healthcare providers to easily prepare medical claims and send electronically to health insurance companies. In 2013 ClaimSync was the sole African company to participate in the high-profile, IBM, Novartis, GlaxoSmithKline backed Accelerator program HealthXL in Dublin. ClaimSync was recently acquired by GenKey, a Dutch-based biometrics company.

These men and women - more than all the international aid, fair trade campaigns and guilt-tripping charity appeals - are the future hope for Africa. But we never talk about them preferring instead our cosy little colonial myth. Believing it when we're told - again and again - that Africa is filled with poor farmers whose only protection and hope is the caring, kind and white face of Oxfam. That somehow the sort of society we enjoy - of urban wealth rather than rural poverty - is not something Africa can attain.

Africa has a long way to go - it's still too rural and too poor. But the answer isn't propping up poverty with subsidy but rather promoting business, entrepreneurship and trade. Backing the continent's entrepreneurs to do what entrepreneurs did for Europe, Japan and the USA - make us all, compared to today's Africans - rich.

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So it isn't all inherited privilege then?

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In a really rather snide article describing various technology "moguls" as 'robber barons, a Guardian hack called Naughton has reminded us that the left's myth-making about wealth and success - that it remains trapped within a self-sustaining elite - is utter nonsense. Naughton (without intending so, I'm sure) destroys this fiction in just one paragraph:

What's striking about this is not just the staggering wealth that these people have managed to squeeze out of what are, after all, just binary digits (ones and zeros), but how recent are the origins of their good fortunes. Mark Zuckerberg, for example, went from zero to $17.5bn in less than eight years. Microsoft – the company that has propelled Gates, Ballmer and Allen into the Forbes pantheon – dates only from 1975. Oracle was founded in 1977. Bloomberg turned a $10m redundancy cheque from Salomon Brothers into his personal money-pump in 1982. Dell started making computers in his university dorm in 1984. Bezos launched Amazon with his own savings in 1995. Brin and Page turned their PhD research into a company called Google in 1998. And Zuckerberg launched Facebook in 2004.

All of those riches. All that success. All the jobs and taxes and investment and philanthropy (plus sadly Mike Bloomberg's ghastly nannying fussbucketry as Mayor of new York) was made possible by these men having ideas, taking risks and winning.

And right now a new generation of Gates', Dells and Zuckerbergs - a new bunch of entrepreneurs - are doing the same. In twenty years from now we'll be talking in the same terms about a load more men and women who have made billions having started with nothing.

The point about free enterprise is that this opportunity - the chance to be a billionaire - is open to everyone. For sure only a few make those millions but the opportunity to do so is there for us all. So next time you hear some left-wing, equality-monger gibbering on about gini co-efficients and whining about how it isn't fair that some folk inherit money while others don't, point them at the paragraph above.

It isn't all inherited privilege is it!
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