THE HEARTY AND CHEERY STATE

"The progressive state is really the hearty and cheery state of all the different orders of society, the stationery is dull, the declining melancholy." (Adam Smith, Wealth of Nations, p. 91) Two countries, the Philippines and South Korea, were nearly alike in 1960. Per capita income (in 1975 U.S. dollars) was around the same at $640. Populations were approximately similar in size and schooling as well as in life expectancy. This is the way in which Robert E. Lucas, Jr. (1991) began his lecture, "The Making of a Miracle." Over the next 28 years from 1960 to 1988, per capita income increased at a respectable but modest rate of 1.8% a year in the Philippines. It climbed at an impressive rate of 6.2% a year in South Korea. By 1995, the South Koreans enjoyed a per capita income that was nearly 10 times larger than that realized by the Filipinos. Lucas developed a model that might explain this divergence in growth paths. Production is characterized by increasing returns due to learning. New products are exogenously created over time, but the composition of output between old and new goods can differ. The Philippines chose a product mix that put it on a nearly flat growth trajectory, while South Korea put its resources into new goods with steeper learning curves. Lucas was silent on the role of professional vs. entrepreneurial human capital. Someone once said that silence was golden. Harry Johnson wrote an article subtitled, "Are You Worth Your Weight in Gold?" My erstwhile colleague, Judith Thorton, could say "yes." The rest of us could not. The discovery of the cyanide process has lowered the relative value of gold. The cost of breaking the silence is smaller. I have organized my remarks under the following headings. (i) Per capita income is an imperfect yardstick of well-being. (ii) People differ across countries and over time. I estimate that an employee in 1995 is 72% more productive than an employee in 1900 because the former owns a larger stock of human capital. (iii) Entrepreneurial capital and entrepreneurial activities are concepts that defy quantification. (iv) Professional human capital is a euphemism. (v) Public goods and the growth of the government sector imparts an upward bias in the growth of an economy. (vi) Education is not the engine of income growth but a caboose. Higher education in the U.S. is clearly superior to the state controlled systems in most of the rest of the world. (vii) "It is in the progressive state ... that the condition of the labouring poor and the great body of people are happiest and most comfortable." Progress in an uncertain world is most likely to occur when each man is allowed to go his own way. A free and open society governed by a rule of law is the path most likely to lead to the hearty and cheery state. [TABULAR DATA FOR TABLE 1 OMITTED] II. AN IMPERFECT YARDSTICK Two thousand years ago, planet earth was home for only 170 million people who had to struggle for survival. It was not until 1815 in the early stages of the industrial revolution that the population reached a billion. Fully 75% to 80% of the workforce was engaged in the production of food. Technological advances in transportation, manufacturing, and agriculture resulted in a rapid growth in real income. This was associated with an equally impressive growth in the world population that reached 1.6 billion in 1900 and 2.5 billion in 1950.(1) By 1995, the world population was 5.6 billion, some 3.45 times larger than it was at the turn of the century. The large flows of immigrants from 1870 to 1920 contributed to a rapid rate of growth of the U.S. population. Some 13.6% of the U.S. population in 1900 were foreign born. The inflow of immigrants was reduced from 1920 to 1960, but immigration is still responsible for a significant part of the U.S. population growth. The gross national product in billions of 1958 dollars climbed from 76.9 in 1900 to 1,487.2 in 1995, as shown in the third line of Table 1. …