Don’t believe “crank the handle” or “legoland” (assemble the blocks) theories of economic growth

There is way more to economic growth than assembling factors of production.

The seminal theory of economic growth is the Solow Growth Model (technically, the Solow-Swan model). The model can be easily expressed mathematically.

I have never liked the model, nor its later variations.¹ The intuition behind my dislike was that societies—and indeed different ethnic groups within societies—obviously varied enormously in their capacity to use, to “put together”, the factors of production. They also vary enormously in their capacity to generate factors of production: specifically capital, the produced means of production. The model implies that there will be a general convergence between economies that has not happened.

Grand Bazaar, Istanbul, Linus Mimietz, Unsplash.

Updating the model by including human capital was a gesture in that direction but did not fix the problem with the model, which is much more basic. The update attempted to grapple with the failure of investment to flow to poorer countries and, by implication, the long-term, systematic failures of foreign aid. The failures of foreign aid also supported my intuition.

The most recent (2024) Nobel memorial was for work that also directly supports my intuition—how much institutions matter for economic growth. The long-term economic growth literature—identifying culture as very much mattering for economic growth—also supports my intuition.

Skills and knowledge (human capital) are basic

To explain why the entire approach—basically, fiddling with some version of the Cobb-Douglas production function—is fundamentally mistaken, we need to go back to the origins of human economic growth. I mean, right back—all the way to foragers.

What are the original forms of capital? Well, there are tools, which are the original form of physical capital. But without the skills to make and use the tools, they either do not exist, or they are useless.

So, we start with skills and knowledge, with human capital. It takes almost 20 years to train a young human forager to be a subsistence adult—that is, to forage as much nutrition as they consume. The need to stuff the human brain with skills and knowledge—and the need to grow a brain that can be so stuffed—is why we have the most biologically expensive children in the biosphere. The need to impart skills to biologically expensive children is fundamental to the dynamics of all human societies.

Human capital—skills and knowledge—is not an “add on”. It is basic.

So are social connections (social capital)

Foragers do not live as atomistic individuals. They live in families and (fluid) foraging bands. Families and foraging bands are vehicles for our highly cooperative subsistence and reproduction strategies.

That we are the tool-making and tool-using species lacking tearing teeth and claws with the most biologically expensive offspring is why we have highly cooperative subsistence and reproduction strategies. It is also why we are so much the normative species—enabling robust cooperation based on convergent expectations—and why we have prestige and propriety as forms of status.

Both these forms of status represent currencies of cooperation. Prestige grants people status for doing things which are risky, clever, hard, entertaining. It is status by conspicuous competence. It provides a way to reward people for engaging in activities which generate wider social benefits—what economists call positive externalities. It also encourages people to want to associate with you.²

The other form of status—propriety—grants status to those who uphold the norms of the group. In particular, it wields stigma against those deemed to have violated those norms. It provides a way to punish people for engaging in activities which generate wider social costs—what economists call negative externalities. It helps solve the free-rider problem regarding the effort to enforce norms.

Reversing (i.e. perverting) status patterns so that people get prestige from victimhood—extending to various forms of failures of competence or even wildly anti-social behaviour—while stigmatising people who conspicuously successful (as oppressors or exploiters) is deeply destructive of human flourishing.³ We can see this pattern currently operating in “progressive” US states, and especially cities, but murderous versions of it operated in various Communist states. These things affect economic activity, but cannot be discerned by a Cobb-Douglas production function.

It is not true that scientists have never discovered Homo economicus. Unfortunately, Homo economicus is not a member of genus Homo. It is Pan troglodytes (chimpanzees) playing strategy games in a lab. It is precisely because we Homo sapiens are more normative, allowing us to encapsulate the social conquest of the Earth, that there are billions of us and only a few thousand of them.

We—as a highly social, indeed ultra-social, species—engage in both individual and social calculations. Different cultures notoriously generate different patterns for, and balances between, such calculations.

For the remaining form of capital that foragers have—indeed, is crucial for their subsistence—is connections, or social capital. Foragers can have friendship, hosting and gift-transfer networks extending up to 200 kilometres away. Such long-distance connections enable information to be transferred, act as a buffer against dearth and ill-fortune, and provide potential marital connections. (The one thing common to all marriage systems is that they create kin-connections, they create in-laws.)

Foraging bands share food—particularly hunted food that is erratic in its successful foraging—as a form of insurance against failure, injury or sickness. Such sharing also provides a way for young men to demonstrate they are good mate prospects.

A huge amount of what foragers do is all about managing connections, about managing social capital. The suppression of dominance behaviour by foragers enabled prestige and propriety to arise as social-currency forms of status. Hence us humans—then and now—engage in both individual and social calculations.

If, for example, we are faced with Knightian uncertainty—that is, we do not have enough information to calculate risks—we will be driven to rely on social calculations, as those we can calculate. We will move towards the safety of being like/among others and try to “piggy-back” off anyone who gets crucial information before us.

In other words, we will—quite rationally—engage in herd or flocking behaviour. This is an aspect of Keynes’s “animal spirits” and is why uncertainty (such as new technology) generates crowd-volatility in asset and similar markets—storming upwards when herd expectations are of growth, downwards when they are not.⁴

Everything humans build starts with human and social capital. This includes everything economic. It includes all aspects of economic growth. If your economic growth model does not start with human and social capital, and the local normative map of culture and institutions, it is profoundly misconceived.

It may have some short-term validity, but otherwise, it will be profoundly misleading. The Solow-Swan model, and its variants, only made any sense because they were developed, and originally applied to, countries where particular patterns of human and social capital—and their normative deployment in institutions and culture—could be assumed (away).⁵ The more divergent from those original set of countries, and their broadly similar patterns of culture and institutions, the countries to which the model was applied, the more catastrophically inappropriate it became.

Hence all those foreign aid failures. The very first question that should be asked of all foreign aid is: how will this interact with local human and social capital and their local normative socialscape? Which is to say, the local culture, social connections and institutions. The normative map of a society matters.

If your model of long-term economic growth does not lead you to start with that how do they interact? question, it is worse than useless, junk it.

This is also bad news for a lot of would-be regulators. How will this regulation interact with human and social capital? is also a key question. Much of the time—remembering that the future patterns of discovery cannot be predicted—the answer will be: we don’t know. If so, why are you doing it?

Of course, that there is usually no systematic, reliable, interaction between the costs and benefits of a regulation, and the act of regulating, is an even larger problem.

The centrality of knowledge, skills and social connections, of culture and institutions, also has implications for migration and sensible migration policy. Migration does not just add labour inputs. It does not even just add human capital. There is the whole gamut of social capital, cultural friction and institutional effects to be considered. “Crank the handle”, “just add inputs”, legoland theories of economic growth actively encourage way too narrow consideration of migration.

Conclusion

Everything humans build starts with human and social capital and their normative socialscape. If you do not grasp that, your social analysis and prescriptions will go badly wrong. If your theory actively works against grasping that, it is not merely false, it is toxic.

So, when folk talk about promoting economic growth—over anything other than the very short term—ask yourself: is this implicitly or explicitly based on, or pushing, a “crank the handle”, “just add inputs”, legoland theory of economic growth ? If it is, it is reliably dubious—more likely just bad—policy.

ADDENDA: Thomas Sowell makes the key point succinctly, including about “the nature of power how, subjective it ultimately is”:

You can transfer the institutions. You cannot transfer the centuries of history that make the institutions work.

…

I think there's a tendency, and perhaps Marxism is to be blamed for some of this, to think of “the objective conditions of society” and so forth and I think those objective conditions are greatly overrated. Those objective conditions are the products of subjective things and those kinds of things don't migrate very well.

Unless, I would add, there is a concerted effort to generate the relevant norms and expectations. Also, the norms and practices of commerce are very widespread. It is the political and other social structures in which they are embedded that vary so dramatically.

FURTHER ADDENDA: Glenn Loury is talking about racial disparities inside the US, but his points apply equally to economic disparities between countries:

… all human development is socially situated and mediated. That is, the development of human beings occurs inside of social institutions. It takes place as between people by way of human interactions. It is dialogic. The family, community, school, peer group: these cultural institutions of human association are where development is achieved and therefore resources that are essential to human development—for example, the attention a parent gives to her child—are not alienable.

Most developmental resources are not commodities. The development of human beings largely is not up for sale. Rather, structured connections between individuals create the context within which developmental resources come to be allocated to individual persons.

Opportunity travels along the synapses of these social networks because people are not machines. Their productivities—which is to say the behavioral and cognitive capacities that bear on their social and economic functioning—are not merely the consequence of a mechanical infusion of material resources. Rather, these capacities are also the byproducts of social processes that are mediated by networks of human affiliation and connectivity.

References

Daron Acemoglu, Simon Johnson, James A. Robinson, ‘Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,’ The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov., 2002), 1231-1294. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=290824

Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty, Crown Business, 2012.

Christopher Boehm, ‘Egalitarian Behavior and Reverse Dominance Hierarchy,’ Current Anthropology, Vol. 34, No.3. (Jun., 1993), 227-254 (with Comments by Harold B. Barclay; Robert Knox Dentan; Marie-Claude Dupre; Jonathan D. Hill; Susan Kent; Bruce M. Knauft; Keith F. Otterbein; Steve Rayner and Reply by Christopher Boehm). https://lust-for-life.org/Lust-For-Life/_Textual/ChristopherBoehm_EgalitarianBehaviorAndReverseDominanceHierarchy_1993_29pp/ChristopherBoehm_EgalitarianBehaviorAndReverseDominanceHierarchy_1993_29pp.pdf

Satyajit Chatterjee, ‘A theory of asset price booms and busts and the uncertain return to innovation’, Business Review, Federal Reserve Bank of Philadelphia, 2011, issue Q4, 1-8. https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2011/q4/brq411_theory-of-asset-price-booms-and-busts.pdf

Stephanie Coontz, Marriage, a History: How Love Conquered Marriage, Penguin, 2005.

Herbert Gintis, Carel van Schaik, and Christopher Boehm, ‘Zoon Politikon: The Evolutionary Origins of Human Political Systems’, Current Anthropology, Volume 56, Number 3, June 2015, 327-353. https://pubmed.ncbi.nlm.nih.gov/29581024/

Mark Granovetter, ‘The Strength of Weak Ties: A Network Theory Revisited,’ Sociological Theory, Vol.1, 1983, 201-233. https://www.csc2.ncsu.edu/faculty/mpsingh/local/Social/f15/wrap/readings/Granovetter-revisited.pdf

Garett Jones, The Culture Transplant: How Migrants Make the Economies They Move To a Lot Like the Ones They Left, Stanford University Press, 2023.

Hillard Kaplan, Jane Lancaster & Arthur Robson, ‘Embodied Capital and the Evolutionary Economics of the Human Life Span’, in Carey, James R. and Shripad Tuljapurkar (eds.), Life Span: Evolutionary, Ecological, and Demographic Perspectives, Supplement to Population and Development Review, vol. 29, 2003. New York: Population Council, 152-182. https://www.unm.edu/~jlancas/EmbCapTheoryHumEvo2001.pdf

Frank H. Knight, Risk, Uncertainty and Profit, Cosimo, [1921], 2005.

C.F. Martin, R. Bhui, P. Bossaerts, T. Matsuzawa, & C. Camerer, ‘Chimpanzee choice rates in competitive games match equilibrium game theory predictions,’ Scientific Reports, 2014, 4, 5182. https://www.researchgate.net/publication/262885591_Chimpanzee_choice_rates_in_competitive_games_match_equilibrium_game_theory_predictions

Will Storr, The Status Game: On Social Position And How We Use It, HarperCollins, 2022.

Jordan E. Theriault, Liane Young, Lisa Feldman Barrett, ‘The sense of should: A biologically-based framework for modeling social pressure’, Physics of Life Reviews, Volume 36, March 2021, 100-136. https://www.researchgate.net/publication/323197652_The_Gender-Equality_Paradox_in_Science_Technology_Engineering_and_Mathematics_Education

Polly Wiessner, ‘Hunting, healing, and hxaro exchange: A long-term perspective on !Kung (Ju/’hoansi) large-game hunting,’ Evolution and Human Behavior, 23 (2002) 407–436. https://www.sciencedirect.com/science/article/abs/pii/S109051380200096X

1. The model has some utility for short-term calculations of growth.

2. As with any social benefit, the knock-on dynamics of prestige can be complex, but status from conspicuous competence is at the heart of it.

3. The November 2014 Shirtgate controversy—where a rocket scientist who had led the technically incredibly difficult task of landing a probe on a comet was publicly humiliated over the shirt he wore (a gift from a female friend it turned out)—represented conspicuous achievement (prestige) being trumped by feminist stigmatisation (propriety).

4. New financial instruments are also an example of new technology. If such instruments fall apart, they can generate paralysing (i.e. negative) uncertainty about the financial viability of, not only various financial assets, but the firms holding such assets. A consequent flight to safe assets can then lead to a crash in transactions. Local prudential regulation meant that Australia avoided the 2008 Global Financial Crisis while the monetary policy of the Reserve Bank implicitly anchored expectations of total spending (thus income) in the Australian economy, so Australia also avoided the Great Recession.

5. Also, if your default analysis is of people as complete information, fully rational, utility maximisers, then it is much easier to analyse as if folk are interchangeable widgets.