Book Summary: Wealth, Poverty and Politics by Thomas Sowell

My Personal Summary

This book explains the underlying factors that affect the economic fate of human beings.

Broadly speaking, there are geographic, demographic, cultural, and political factors that influence economic outcomes of individuals and nations.

It is often the combination of these variety of factors that lead to different levels of production, which naturally lead to different levels of economic prosperity.

Book Notes

  • The whole purpose of this book is to understand the factors that affect the economic fates of human beings.
  • It’s interesting that this book looks at a variety of factors that affect economic outcomes, while Guns, Germs and Steel makes the case that geography was the main factor that spawned differences in economic outcomes.
  • “The poor are poor not because something is being withheld from them but because, for whatever reason, they are not producing enough.”
  • Geography varies wildly throughout the world. Example: More tornadoes occur in the middle of the U.S. than in all other countries of the world combined. This variation naturally affects the economic fates of countries in different ways.
  • The Zaire River in Africa is not as valuable economically as the Yangtze River or Mississippi River because it has far more waterfalls and cascades so it’s less able to be used for transportation. Freezing weather can also cause rivers to freeze in some regions of the world, which reduces their economic value to zero until they unfreeze.
  • Regions in temperate zones tend to have highly fertile soil, which affected the development of nations when agriculture was just getting started.
  • Isolated regions, especially historically, tended to develop at a much slower pace economically because new technology couldn’t reach these places. Examples include mountain regions and islands, but also places separated from the rest of the world by deserts. The largest desert on Earth, the Sahara desert, is larger than the contiguous U.S. and separates sub-Saharan Africa from the rest of the world. There are also very few good harbors in tropical Africa, which makes it hard for them to connect with other cultures overseas.
  • The combination of geographic factors- rainfall, soil fertility, annual sunlight, types of plants and animals present in different regions, etc. all lead to different economic outcomes between regions.
  • Waterways play many vital roles – as drinking water for humans and animals, as food sources (fish), as sources of irrigation for crops, and as transportation arteries. Waterways vary in their economic usefulness to humans.
  • The most vital role that waterways have played historically have been as sources of transportation. It has always been significantly cheaper to transport goods by water than by land, which is why most major cities are located near bodies of water.
  • Although Africa is twice the size of Europe, the African coastline is shorter than the European coastline because the European coastline has many more twists and turns, which create harbors where ships can dock. The coastal waters near Africa are also more shallow which makes it hard for big ships to dock. This means they must offload supplies to smaller ships to bring in to shore. This is time consuming and costly, which has a negative effect on the African economy.
  • Many African waterways also have waterfalls and cascades, which makes it hard for ships to navigate into the country from the sea and throughout the country. This is in direct contrast to the Yangtze River and its tributaries in China, which are much smoother and flow over flat plains, making water transportation much easier in China.
  • Fascinating: the average depth of a river is not as important as the minimum depth since a river that is too shallow at one point can’t be navigated through. Africa also suffers from being a dry continent so the rivers that it does have usually aren’t deep enough for large boats to navigate through.
  • Uneven rainfall can also cause problems with transporting goods via river. In Africa it’s common to experience periods of no rain at all for months followed by torrential downpours. This makes it hard to plan for the transportation of goods via boats.
  • The places rivers flow also matters. For example, rivers in Western Europe typically flow out into the open seas, providing access to seaports around the world. By contrast, most rivers in Russia flow into the Arctic Ocean, which is not accessible to the rest of the world. This has positive economic effects on Western European countries and negative effects on Russia.
  • The U.S. is blessed with amazing waterways with the Mississippi being highly navigable, the Great Lakes and the St. Lawrence River allowing for the transportation of goods from the Atlantic through the Midwest, and a “well indented coastline” with deep harbors where massive ships can easily dock.
  • Although the Nile is the longest river in the world, the Mississippi has far more volume which makes it much easier for large boats to traverse.
  • Rivers are only useful economically if they flow through areas of commerce, industry, or agriculture. So although the Amazon is the largest river in the world (in terms of volume) it flows through areas with jungles and poor soil quality so it doesn’t have as much economic value as other smaller rivers in other parts of the world.
  • All the major rivers of the world have their beginnings in mountains. This is because when moisture-laden winds collide with mountain slopes, they’re forced upwards where colder air reduces their moisture-carrying capacity, leading to rain and snow which then falls down the mountains and forms rivers.
  • Africa has no major mountain ranges compared to other regions of the world, which means during the dry seasons there are no melting snows from mountains that can keep rivers flowing strong, which in turn makes agriculture very difficult.
  • Large bodies of water modify temperature on adjacent lands. Water does not heat up as fast as land, so coastal regions don’t tend to be as hot in the summer as the center of the continent. Conversely, water cools slower than land, so coastal regions also don’t tend to be as cold in the winter as the center of the continent. Some crazy examples: the Gulf Stream which originates in the Gulf of Mexico brings warm air up to Europe, which gives it a warmer environment than most U.S. cities hundreds of miles south of it in latitude. Conversely, other ocean currents bring cold water down from northern latitudes to the west coast of the U.S. such that coastal San Francisco only has highs of 60s and 70s in summer while Sacramento further inland has highs of over 90.
  • Some regions are also more cloudy than others, which causes lower temperatures. Cities with cloudless skies like Vegas and Phoenix tend to be the places with the hottest temperatures.
  • Some regions are also home to beasts of burden like horses, water Buffalo, camels, and oxen which were massively essential for economic development back in the day.
  • The Europeans brought horses to the new world, which changed the economic life of people living there. This type of animal revolution wasn’t possible in tropical Africa though because of the tsetse fly and diseases it carried.
  • The Eurasian landmass had the benefit of an East-West orientation (as also noted in Guns, Germs, and Steel) which meant its cultural universe was massive- that is, discoveries made in one region could easily spread to another because the same animals, climate, and plants were available throughout the same latitude.
  • Isolation is correlated with lagging economics. Australia has been a prime historical example, isolated from the rest of Asia with no beasts of burden and with incredibly unpredictable rainfall patterns and infertile soil.
  • Diseases have also played a role historically in the development of empires. Europeans were carriers of disease microorganisms but they had their own biological resistance to it. This meant that when they went to different places in the Americas, they wiped out hoards of people who had no resistance to these diseases. Disease killed far more natives than guns did. It is said that a priest who walked among natives and attempted to convert them to Christianity inadvertently killed more people than any vicious conquistador ever did.
  • Geography influences the economic fate of people, but human capital has arguably a bigger influence. For example, there are places that are rich in natural resources (oil in Saudi Arabia and gold in South Africa) but lack human capital (i.e. knowledge of how to best extract and use those resources) prevents those resources from producing wealth.
  • “There are many groups with a particular culture of their own, who take that culture with them wherever they go.”
  • Cultures include skills and talents that more directly affect economic outcomes, and which economists call human capital.
  • “Different groups living in the same external environment can have very different productivity if their internal cultural values produce very different priorities as to what they want to do, and at what sacrifices of other things.”
  • Example: Germans have always placed a high priority on education and have historically had the highest literacy rates even when they live in different places around the world. It’s just their culture.
  • Another example: Chinese people have a long history of immigrating to different countries and working ridiculously hard to achieve impressive economic outcomes, despite historically being discriminated against. Immigrants from the Fujian province in China are known for moving to Brooklyn, working insane hours, and sending their kids to Stuyvesant, one of New York’s most prestigious high schools.
  • Jews in the U.S. also have a history of being discriminated against, yet working extremely hard to attain education and build businesses.
  • Lebanese immigrants in West Africa, South America, and Australia have similarly gained impressive economic outcomes through dogged perseverance and hard work.
  • Cuban immigrants to the U.S. had a similar experience with working their way up from the bottom. “Forty years after Cuban refugees arrived in the United States, total revenue of Cuban American businesses was greater than the total revenue of the entire nation of Cuba.”
  • Just look at median income by race in the U.S. and you’ll see Asians consistently have the highest among all races – their cultural view of education and hard work is unmatched, which leads to differences in income and wealth.
  • Bottom line: Differences among cultures in attitude about getting an education and working hard account for huge economic differences.
  • “For different nations around the world to all have even approximate similar incomes or wealth, despite their great differences in geography, culture, history, political systems, religious beliefs and the demographic makeups of their respective populations, would require virtually a miracle.”
  • A country’s receptiveness to other cultures technology and practices also affects their own economy. A prime example is Japan – from 1638 to 1868, emigration from Japan was forbidden. During this time they lagged behind other countries of the world economically. Once this ban was lifted, they were highly receptive to technologies developed by other countries and quickly adopted them and made them even better and leapfrogged many countries economically as a result.
  • Conversely, countries that are not receptive to technological advances from other countries tend to lag behind. Examples include China and most of the Middle East. “Since no given culture is better in all things, much less for all time, a lack of receptivity to the cultural advances made by others is a self-imposed isolation that can be as damaging as isolation imposed by geography.”
  • Economic progress relies on both tangible factors (geography & natural resources) and intangible factors (human capital)
  • Trustworthiness in a given society also affects its economic outcomes. For example, the Soviet Union was the most richly endowed country in history in terms of natural resources, yet widespread corruption meant less entrepreneurs started businesses there and less business as a whole was conducted there, which lead to an awful economy.
  • One study in which wallets were left in public places in different countries revealed that citizens of some countries return them at much higher rates than others. In short, trustworthiness varies greatly from one country to the next.
  • “Besides being a moral issue, honesty is also an economic factor whose presence or absence can be of major importance. Like other factors that effect income and wealth, it is neither evenly nor randomly distributed among nations or within nations.”
  • Interesting: most of the early people to come from Europe to the U.S. were of lower incomes and lower IQ since most elites had no reason to leave their comfy lives or well paying jobs to make a dangerous trip overseas. Yet these are the people that built the U.S. into one of the strongest economies in the world.
  • The idea that some people are mentally capable genetically is just plain wrong. There are countless examples of individuals from low income areas getting out of poverty simply because they attend the right schools and take education seriously.
  • “Affirmative action policies can ensure that there are more minority students on campus, but these policies cannot ensure that they will graduate, much less graduate with degrees in challenging subjects like mathematics, science, and engineering.”
  • Affirmative action can actually lead to unqualified students getting admitted to overly challenging schools like Berkeley or UCLA and the graduation rates can actually decline among these individuals.
  • Work ethic and attitude towards education matters more than innate ability. Similar to the idea of growth vs fixed mindset.
  • Political decisions by governments can also affect the economic fates of countries. The decision of the Chinese emperor to cut off the country from the outside world in the 1400s had horrible economic consequences. Conversely the decision of the Spanish government to finances Columbus’ voyage across the Atlantic had wonderful economic consequences for their country.
  • At least some form of government is helpful in an economy because they can enforce laws that ensure people can own their property and receive returns on investments they’re owed, etc.
  • Large political units offered economic benefits – trade could be conducted peacefully among a larger group of people, which meant specialization could occur on a larger scale (i.e. one person could focus on just one task and get really good at it) this was the big argument made in The Rational Optimist for why humanity continues to progress. More specialization leads to higher standards of living and economies of scale could occur more often too.
  • Historically it has been hard for mountain regions to form large political units just because it has been hard to communicate with lots of people between mountains. The exceptions have been places with navigable waterways between mountains like Switzerland.
  • Corrupt or unstable political institutions can prevent the citizens of a country from realizing their potential economically. Examples include Nigeria and India, whose citizens that immigrate to the U.S. have some of the highest average incomes of any race in the U.S. “Despite widespread poverty in India, Americans of Indian ancestry have the highest incomes of any group tracked by the U.S. Bureau of the Census”
  • Recurring lesson in this book: Not all cultures value education or hard work as much as others.
  • There have been many instances (particularly in India and China) where transferring economic decision-making from governments to private individuals and organizations has lead to profound economic growth. This is because millions of individuals will inherently have more knowledge than a select few in government and thus more optimal economic decisions will be made.
  • The development of the welfare state – the government providing aid to underprivileged and low income households – has actually been correlated with higher crime rates and worse income inequalities because it encourages people not to work.
  • “The welfare state reduces the need to develop human capital.” Incentives control human actions. Why would someone work to learn a new skill and earn an income when they can just receive income from the government without working?
  • The government-defined word “poverty” changes over time. People living in “poverty” today are more well off than even rich people from 100 years ago.
  • People who obsess over income distribution should actually be looking at production distribution – why are some people producing significantly less than others? Those who don’t produce don’t earn income.
  • Conclusion: There is no one single reason that can explain economic differences between individuals and nations. Instead, a combination of many reasons – geographical, social, cultural, and political – explain the differences. Because of the sheer amount of differences, there’s no way we could expect economic outcomes to be equal across all individuals.
  • Many studies that look at income inequality only look at deciles of groups and calculate their corresponding incomes over time. However, when you track individual people, data shows that most people who start in the bottom decile actually move up significantly over their lifetime, and as much as 30% of individuals who start in the bottom quintile are able to rise to the top quintile. Sadly, statistical surveys that track individuals are more expensive to carry out and thus they’re not conducted as often as aggregate surveys.
  • Individuals in the top 10% of income earners are usually just old people in their peak earning years.
  • Also, people in the top 10% of earners also tend to live in high cost cities like San Francisco where their income actually doesn’t go that far.
  • Something that isn’t mentioned often: more than half of households in the bottom 20 percent in income have no one working.
  • Income inequality is not strange. What would be strange is if, given all of the differences in cultural, geographical, political, and social factors, income was somehow equal among individuals and nations.
  • Differences in income and wealth are due to differences in productivity.
  • Wealth inequality may be increasing, but (1) the people in the bottom quintile rarely stay there and (2) the lives of the poorest people on earth have been steadily improving over time.
  • People might get angry about multinational corporations setting up shop in poor countries but these corporations typically pay higher wages than local companies in the same region.
  • “When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear.” This is what politicians do.
  • “If racism prevents blacks from moving up, then why do 25% of Nigerian-American households make $100k+ yearly but only 10% of Black-Americans do the same?” Attitude towards education and hard work matters.
  • “If everyone’s income doubles, that will almost certainly reduce poverty, but it will also increase economic disparities.” Politicians obsess over income inequality, even if everyone’s living standards are increasing over time.
  • People complain about the wealth of Bill Gates, but he didn’t get rich by being greedy. Instead, he got rich because millions of people were willing to pay him for Microsoft products, which enriched the individuals lives.

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