Posted by: Martin | December 26, 2011

Letting Entrepreneurs Create Wealth

Hackers and Painters

I’m currently immersed in a book I got for Christmas, Hackers and Painters – Big Ideas from the Computer Age by Paul Graham. It’s in parts absolutely brilliant and, even better, I think I can connect it to the Ivory Coast without too much of a stretch.

From the chapter “How to make Wealth”:

Making wealth is not the only way to get rich. For most of human history it has not even been the most common. Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation.

Two things changed. The first was the rule of law. For most of the world’s history, if you did somehow accumulate a fortune, the ruler or his henchmen would find a way to steal it. But in medieval Europe something new happened. A new class of merchants and manufacturers began to collect in towns. Together they were able to withstand the feudal lord. So for the first time in history, the bullies stopped stealing the nerds’ lunch money. This was naturally a great incentive, and possibly indeed the main cause of the second big change, industrialization.

A great deal has been written about the causes of the industrial revolution. But surely a necessary, if not sufficient, condition was that people who made fortunes be able to enjoy them in peace. One piece of evidence is what happened to countries that tried to return to the old model, like the Soviet Union, and to a lesser extent Britain under the labour governments of the 1960s and early 1970s. Take away the incentive to wealth, and technical innovation grinds to a halt.

Encouraging signs and trends for Africa and the Ivory Coast

Both in pre- and postcolonial times, as an African, if you set up a successful enterprise of any kind, you would be likely to run into the ruler or his henchmen (colonial ruler / homegrown dictator depending on the era) sooner or later.  For a very long time incentives to create wealth in most of Africa have been quite lousy – warriors and politicians regularly squashed entrepreneurs. However, looking at Freedom House scores, the World Bank’s Doing Business survey and other places, it seems that there has been a positive trend since the early 90s that has also resulted in higher growth figures.

In the Ivory Coast, it’s still early days for the Ouattara government, but there are plenty of encouraging signs that the government and the public administration in general, are strengthening the rule of law, and to a lesser extent than before use their power to put wealth created by ordinary Ivorians into their own pockets.

As to risks of things getting worse, I do not think the main problem is Gbagbo’s supporters coming back to power. That would indeed be bad, but I don’t think they can. They don’t have enough support to win a democratic election, even if they were united which they are not.  I think Gbagbo’s figures in the 2010 elections were augmented by his party controlling the state, but even then it wasn’t enough.

As to taking power through a military coup, many exiled Gbagbo supporters certainly would like to, but I don’t think they have the necessary resources or a neighbouring country prepared to offer military support.

Instead my main worry is that Ouattara’s government is behaving itself not because of a strong and independent media (Ivorian media isn’t), not because of strong institutions, civil society, or pressure from the Ivorian people, but because the person of Alassane Ouattara.   Ouattara is turning 70 years soon, and is not going to be there forever.  Hopefully when Ouattara eventually steps down,  institutions and checks and balances have strengthened so that things will work out even if the next guy isn’t as great.  Wealth created by entrepreneurs should contribute to increasing the size of the middle class which in turn is great for strengthening the civil society and democratic institutions. It’s tough being a dictator in a country with a large middle class.

Letting the nerds keep their lunch money

Back to Paul Graham, here’s the follow up on the text above:

Startups are not just something that happened in Silicon Valley in the last couple decades. Since it became possible to get rich by creating wealth, everyone who has done it has used essentially the same recipe: measurement and leverage, where measurement comes from working with a small group, and leverage from developing new techniques. The recipe was the same in Florence in 1200 as it is in Santa Clara today.

Understanding this may help to answer an important question: why Europe grew so powerful. Was it something about the geography of Europe? Was it that Europeans are somehow superior? Was it their religion? The answer (or at least the proximate cause) may be that the Europeans rode on the crest of a powerful new idea: allowing those who made a lot of money keep it.

Once you are allowed to do that, people who want to get rich can do it by generating wealth instead of stealing it. The resulting technological growth translates not only into wealth but into military power. The theory that led to the stealth plane was developed by a Soviet mathematician. But because the Soviet Union didn’t have a computer industry, it remained for them a theory; they didn’t have hardware capable of executing the calculations fast enough to design an actual airplane.

In that respect the Cold War teaches the same lesson as World War II, and for that matter, most wars in recent history. Don’t let a ruling class of warriors and politicians squash the entrepreneurs. The same recipe that makes individuals rich makes countries powerful. Let the nerds keep their lunch money, and you rule the world.

Click to get to a chapter of the book in pdf


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: