How do you create lasting prosperity? [updated]

How do you bring real prosperity to somewhere like Africa?

Development Economist Jeffrey Sachs has just spent six years there, testing the hypothesis that charity is the answer.  The result, as author Nina Munk tells Russ Roberts, was failure.

Sachs’s story, told in Munk’s book The Idealist: Jeffrey Sachs and the Quest to End Poverty, “is one of the great lessons in unintended consequences and the complexity of the development process,” say Roberts.

Sachs’s idea was to spend a large amount of money to jumpstart the economies of a bunch of African villages and put them on a trajectory of growth … he thought that a full-scale attack on every front would do the job–improve health and agricultural productivity and education and eventually growth would begin.

But how do you sustain that trajectory? He couldn’t says Munk.

I think what we can all agree … that what’s essential is that there is some possibility of employment, of livelihood, sustained livelihood for the people who are living there. How can they earn a living? How can they keep themselves alive? Beyond the basic charity that was given to them right from the beginning. And in both of the villages that I spent the time in, there was really nothing at all, by the time I finished my reporting in 2012, to demonstrate that there was anything sustained here…

That certainly looks like failure. Roberts makes the reason clear in a great post at the Cafe Hayek blog:

What she is saying is that before Jeff Sachs arrived, the African villages had a primitive economy. Nothing changed after the money was spent and all the effort was made to help the people that lived there. But why not?
    And I think the right way to say it is that prosperity requires that people are able to specialise in something that helps their neighbours. Prosperity is about finding ways to help people other than yourself through exchange, what economists call a market. If you don’t have that, you have nothing. Or close to nothing–-you have a subsistence standard of living.
    But as I like to say, self-sufficiency is the road to poverty. Bettering yourself by bettering others is the road to prosperity. Without opportunities to help others and thereby help yourself, you’re stuck with subsistence.

The mistake Sachs was making, suggests Roberts, was confusing cause and effect.

Economies with markets have thriving health and education and are productive. But creating those effects with money doesn’t create anything real if there aren’t markets where people can exchange and better themselves by bettering others. Whatever you do will be ephemeral. You can help people for a while. But you can’t help them help themselves.

What is missing in the parts of Africa that Sachs was trying to help, says Roberts, is “exchange and specialization and the division of labour [that enables people to] get wealthy by figuring out ways to create products and services that have value to other people.  That is what is missing,” he concludes.

He’s certainly right that you can’t start from the top down, or by reversing cause and effect. And any prosperity at all is difficult when you have governments continually plundering both their people and each other, which describes so much of the African continent.

But it’s not true to say that people getting wealthy by creating products and services that have value to other people are totally absent. One inspiring story is Africa’s Export Trading Group, the winner of the 2013 African Agribusiness of the Year, and a company strongly focussed on growth from the bottom up. Tagline: “Linking Africa’s smallholder farmers to global consumers”:

UPDATE: A great short on-topic read here is Ludwig Von Mises’s essay ‘'Capital Supply and American Prosperity' from his seminal book Planning for Freedom (head here for a summary and free PDF download of the book). Don’t be put off by the essay’s title: it’s import is to explain as imply as one human being can how capital accumulation is the key to raising prosperity… and why what happens in places like Africa and 1950s India (on which Mises spends some time) have important lessons for us too.

One of the amazing phenomena of the present election campaign is the way in which speakers and writers refer to the state of business and to the economic condition of the nation. They praise the administration for the prosperity and for the high standard of living of the average citizen. “You never had it so good,” they say, and, “Don’t let them take it away.” It is implied that the increase in the quantity and the improvement in the quality of products available for consumption are achievements of a paternal government. The incomes of the individual citizens are viewed as handouts graciously bestowed upon them by a benevolent bureaucracy. The American government is considered as better than that of Italy or of India because it passes into the hands of the citizens more and better products than they do.
    Capital Investment Increases Production
    It is hardly possible to misrepresent in a more thorough way the fundamental facts of economics. The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries, whether England or India, because the American plants are equipped with more efficient tools and machines. Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.
    It is not true that the economic backwardness of foreign countries is to be imputed to technological ignorance on the part of their peoples. Modern technology is by and large no esoteric doctrine. It is taught at many technological universities in this country as well as abroad. It is described in many excellent textbooks and articles of scientific magazines. Hundreds of aliens are every year graduated from American technological institutes. There are in every part of the earth many experts perfectly conversant with the most recent developments of industrial technique. It is not a lack of the “know-how” that prevents foreign countries from fully adopting American methods of manufacturing, but the insufficiency of capital available…

But this process doesn’t happen on its own:

What begot modern industrialization and the unprecedented improvement in material conditions that it brought about was neither capital previously accumulated nor previously assembled technological knowledge. In England, as well as in the other Western countries that followed it on the path of capitalism, the early pioneers of capitalism started with scanty capital and scanty technological experience. At the outset of industrialization was the philosophy of private enterprise and initiative, and the practical application of this ideology made the capital swell and the technological know-how advance and ripen.
    One must stress this point because its neglect misleads the statesmen of all backward nations in their plans for economic improvement. They think that industrialization means machines and textbooks of technology. In fact, it means economic freedom that creates both capital and technological knowledge.

The simple lesson for us, in this election year?

To Raise Wages, Increase Capital Investment
    But it is exactly the perplexity of this situation that offers a favourable opportunity for the substitution of sound economic principles for the pernicious errors that prevailed in the last decades. Now is the time to explain to the voters the causes of American prosperity on the one hand, and of the plight of the backward nations on the other hand. They must learn that what makes American wage rates much higher than those in other countries is the size of capital invested and that any further improvement of their standard of living depends on a sufficient accumulation of additional capital. Today only the businessmen worry about the provision of new capital for the expansion and improvement of their plants. The rest of the people are indifferent with regard to this issue, not knowing that their well-being and that of their children is at stake. What is needed is to make the importance of these problems understood by everybody. No party platform is to be considered as satisfactory that does not contain the following point: As the prosperity of the nation and the height of wage rates depend on a continual increase in the capital invested in its plants, mines and farms, it is one of the foremost tasks of good government to remove all obstacles that hinder the accumulation and investment of new capital.