Conference Report | Inputs To Prosperous Economies

By Natalia Vasilenok

On June 8‒9, 2023, the Hoover Institution hosted the third conference of the Working Group on the Foundations of Long-Run Prosperity. Building upon the first two conferences that focused on the origins of economic growth and factors sustaining growth over the long run, this time the Working Group set out to scrutinize the inputs to a prosperous economy, such as cooperation, education, or entrepreneurship, in both historical and contemporary perspectives.

Envisioned as a forum bringing together disciplines that study growth of human societies employing a variety of theories and methods, this year's conference attracted scholars from across the social sciences, history, archaeology, and evolutionary biology. The talks spanned space and time, ranging from prehistoric Mesopotamia to colonial Nigeria and present-day United States.

Transport Corridors

Inaugurating the first day of the conference, Jordan Horrillo of Stanford University presented “Transport Corridors,” joint work with Roy Ellis and Stephen Haber. The influential hypothesis put forward by Adam Smith relates the geographic extent of markets to economic growth. However, the question remains: Where do markets start and end? While previous studies have often defined markets as grid cells or nation-states, the authors develop a novel data-driven algorithm that constructs geographic shapes around urban centers. These shapes, which the authors call “transport corridors,” show how far from a city goods could be transported given a fixed energy budget. The algorithm relies on eighteenth-century transportation technologies and accounts for geographic and environmental constraints. Measuring economic development at the level of transport corridors, the authors demonstrate that Smith's hypothesis held true until the beginning of the twentieth century.

The discussion of the paper focused on the potential prospects for understanding global development offered by the transport corridor framework. Chad Jones of Stanford University invited the authors to examine in further detail exceptions to Smith’s hypothesis identified by the algorithm, such as Niger or Chad, where cities evolved regardless of moderate reach of markets. Jean-Laurent Rosenthal of Caltech suggested complementing the geographic definition of a market with a practical one. Rosenthal emphasized that whenever we speak about markets, we mean a market for a specific good associated with good-specific patterns of consumption and transaction costs.

The Price of Prisons and the Lasting Effects of Incarceration

There is a general agreement in the literature that stronger institutions capable of law enforcement and protection of property rights lead to higher levels of economic development. In the joint paper with Nonso Obikili, “Prison Labor: The Price of Prisons and the Lasting Effects of Incarceration,” Belinda Archibong of Columbia University–Barnard College suggests that under certain circumstances, these same institutions may have a detrimental effect on the outcomes of local populations. Collecting archival data on incarceration rates from colonial and post-colonial Nigeria between 1920 and 1965, the authors find that the British colonial administration tended to increase short-term incarceration during periods of economic shocks to compensate for labor shortages in state-run railroad construction. While the exploitation of prison labor was economically beneficial for the colonial government, in the long run it hindered trust in police and courts among the local population.

During the discussion, Peter Blair of the Hoover Institution and Harvard University suggested that strong legal apparatuses in colonies might not have been primarily designed to protect property rights but were instead used for coercion. Vicky Fouka of Stanford University recommended that the authors provide more background about a potential counterfactual that would have been observed had the colonial administration not relied on prison labor. Would it necessarily have instead recruited labor on the market?

Economic Origins of Government

In social sciences there are two main clusters of theories explaining the formation of government. The “extraction” theory suggests that government evolves as an instrument of resource extraction, whereas the "cooperation" theory argues that government arises in response to the demand for public goods. The paper “The Economic Origins of Government,” presented by Leander Heldring of Northwestern University and coauthored with Robert C. Allen and Mattia C. Bertazzini, undertakes an ambitious task of adjudicating between these theories by focusing on a historical period when states did not yet exist. Relying on archaeological data and examining the shift of the Tigris and Euphrates rivers in southern Iraq around 2850 BCE, the authors find that the states were more likely to develop in areas that lost access to water. The demand for irrigation played a pivotal role in shaping the earliest state in Mesopotamia that resolved a coordination problem across multiple smaller communities.

Both discussants agreed that the emergence of states involves both cooperation and extraction under varying conditions in different stages of historical development. Deborah Gordon of Stanford University emphasized that while cooperation may have led to the formation of some states, it does not necessarily imply that states always arise solely out of cooperation. Similarly, Andy Hall of Stanford University recommended exploring the mechanisms driving state formation in areas that acquired access to water after the river shift.

Research University, Invention, and Industry

Despite the prominent role that higher education plays in economic development today, historically, universities have not always been the centers of research and innovation. Jeremiah Dittmar of the London School of Economics presented joint work with Ralph R. Meisenzahl titled, “The Research University, Invention and Industry: Evidence from German History.” The paper traces the increasing importance of universities in innovation and production in Germany during the nineteenth century. The French Revolution and the Napoleonic invasion shifted the values of university elites, leading to the emergence of a modern model of a research university that heavily emphasized scientific research and education. The authors demonstrate that invention and manufacturing shifted toward cities with universities after 1800. Proximity to universities also led to higher levels of mechanization in manufacturing and more competitive prizes won at the first world’s fair in 1851.

During the discussion, Dimitris Papanikolaou of Northwestern University outlined two potential mechanisms linking universities and growth: universities can generate innovations that are directly adopted by firms, or they can produce general knowledge that motivates innovation later. Offering a comparative perspective on the economic history of science, Anna Grzymala-Busse of Stanford University discussed the potential effect of political fragmentation on the role that universities came to play in fragmented Germany in contrast to centralized England and France.

Jim Crow and Black Economic Progress After Slavery

Lukas Althoff of Princeton University opened the second day of the conference with the paper “Jim Crow and Black Economic Progress After Slavery,” coauthored with Hugo Reichardt. Motivated by the observation that Black Americans are 40 percent less likely to attend college today, the paper aims to explore the historical impact of institutionalized racial oppression on the economic outcomes of the Black population in the United States. The study examines the interaction between slavery and the Jim Crow laws and draws two main conclusions. First, by identifying Black families in the historical censuses of 1850 and 1860, which only recorded the free population, the authors can uncover persistent underperformance among the descendants of Black families enslaved until the end of the Civil War, compared to formerly free black families. Second, by leveraging the variation in the severity of Jim Crow laws across states, manually compiled and classified by the authors, the paper finds that more oppressive laws contributed to a higher persistence of the economic gap between free and enslaved Black families by 1940, which was most prominent in education.

The discussion of the paper focused on other structural factors that may have contributed to the persistence of the free-enslaved economic gap on top of formal laws. Jonathan Rodden of the Hoover Institution and Stanford University raised the question of whether out-migration, which was more prevalent in the states with less oppressive laws, was mitigating the effects of Jim Crow. Bill Summerhill of UCLA, in contrast, suggested distinguishing the effects of legislation from informal discriminatory practices and prejudice.

On the Nature of Entrepreneurship

The concluding talk by Ellen R. McGrattan of the University of Minnesota, titled “On the Nature of Entrepreneurship” and co-authored with Anmol Bhandari, Tobey Kass, Thomas J. May, and Evan Schulz, delved into one of the fundamental questions of economic growth: Who are entrepreneurs and how are they different from people who pursue other career choices? The study relies on administrative records of around eighty million individuals and compares life-cycle incomes of entrepreneurs and employees in the United States over the period 2000‒2015. The authors find that entrepreneurs exhibit more persistent income growth over their lifetime, with the slowest growth rates observed in the first years of their careers. This can be attributed to the heavy investment they have to make in intangible assets early on, such as brand reputation and networks. In contrast to previous studies that have used smaller samples, the authors also discover that new entrepreneurs have higher past labor income but lower past asset income than individuals with similar characteristics who do not enter self-employment.

Both discussants provided insights from microeconomics and focused on the heterogeneity within the group of individuals who choose self-employment. Ross Levine of UC Berkeley suggested drawing a clearer distinction between entrepreneurs who start unincorporated and incorporated businesses. While unincorporated businesses are more likely to be established in times of economic shock, incorporated entrepreneurs tend to follow the economic cycle. Pete Klenow of Stanford University contrasted the findings regarding the life-cycle earnings of entrepreneurs with the observation that firm growth rates decrease with firm age.