Johan Fourie's blog

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Piketty in South Africa

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After missing his flight and his much-anticipated Cape Town lecture, Thomas Piketty, the French economist who published the widely-acclaimed and best-selling Capital in the Twenty-First Century last year, arrived in South Africa to deliver a lecture at Wits University yesterday. And he did not disappoint, calling for higher minimum wages, land redistribution and, echoing his call in Capital, a wealth tax. But his most stinging critique he reserved, it seems, for economists: “No such science as economics”, one conference attendee tweeted Piketty, “everyone can have an opinion. Applause from room full of social scientists & historians”.

I can understand the frustration with economists. They write in a language few other social scientists understand. They tend to support a system of wealth creation that is not very hipster. And Piketty is right: For a while in the previous century economists may have believed that economics is a science on par with physics, and that the economy can be manipulated much like a giant computer. But for the most part, economists have now realised (and incorporated into our models) the knowledge that people are not always rational agents, and that they make decisions within social settings where context and institutions matter as much as incentives. Witness the rise of behavioural economics and the renaissance of economic history.

Yet bashing economics is a favourite past-time of social scientists in South Africa. At the recent South Africa Historical Society conference in Stellenbosch, a historian and one of the organisers of yesterday’s Piketty event suggested to a room full of his colleagues and students that instead of studying economics, historians should just read more. I agree that we all should read more, but why deride economics in the process?

It is difficult to not attribute such ridicule from social scientists and historians to a fear of numbers. Because what economists – and certainly most South African economists – do, is measure. We measure the increase in prices in order to determine the most appropriate level for the interest rate. We measure the quality of schools to ascertain why kids drop out too early, or why many of our high-school graduates struggle to find jobs. We measure the international trade of goods and services to understand competitiveness and adjust tariffs. And yes, we measure income levels to say something about inequality and its historical evolution. Still, there is much we don’t yet measure, which is why we need more (historical) statistics, not less, much like Piketty called for yesterday: “We need data to have a better conversation about inequality in South Africa.”

More data allow us to test our hypotheses about how the world works. Because we believe, much like other (social) scientists do, that theories help us to explain and understand the world better than simply ‘having an opinion’. Astrologers have an opinion. Homeopaths have an opinion. But I don’t rely on them to tell me why I am ill. Social scientists (yes, all of them, even historians) construct theories about how the world works, and then use evidence (quantitative or qualitative) to test the relevance of these theories.

Which is why I find it surprising that very few of the commentators at yesterday’s Piketty lecture actually engaged with Piketty’s theory at all. I assume everyone actually read the book – or at least the first chapter that summarises the thesis quite nicely. But did any take the trouble to read at least some of the critiques? This paper is a good start, written by an economist and political scientist. It actually uses South Africa as a case study (in comparison to Sweden) to show why Piketty’s measurement of inequality misrepresents what actually happened in both countries during the twentieth century. Or there is this (rather long) response from Deirdre McCloskey, certainly no proponent of the mathematical direction economics took in the 80s but also not averse to fighting with numbers.

And why did no one – not even Piketty himself – make an effort to gather historical data on wealth inequality in South Africa? With little effort and using Reserve Bank data, a PhD student at Stellenbosch could calculate wealth and income rates for South Africa going back to 1975. Instead of finding the same U-shaped rebound in private accumulated wealth as Piketty did for rich countries, she found that in South Africa the wealth-to-income ratio has been relatively low and stable at about 250% for the past 40 years.

This is important not only because it shows that social context and institutions matter, but because it could have very real policy implications. The Davis Tax Committee’s recent recommendation on estate duties is partly motivated by extensive references to Piketty’s book. Acccording to the Financial Mail, the committee suggests that the rules should change so that tax revenue from estate duties increases by about 10 times. Here’s Stan du Plessis, dean of Economic and Management Sciences at Stellenbosch and PhD supervisor of the student, on the topic: “The Davis Tax Committee and everyone else in SA assumed that since inequality is so high in SA, what Piketty was saying must also hold true for SA. It does not.” That is what economists do.

Land expropriation is another policy of choice to reduce inequality. Piketty argues that because land redistribution have reduced inequality in Brazil, for example, it should work in South Africa too. Not quite: I don’t know much about farming, but I do know that most land in South Africa is not as fertile as in tropical Brazil. Here a farmer needs a lot of capital equipment to be productive, which in turn requires large scale farming to be profitable. It also requires management and technical expertise. Those things, in contrast to land, are difficult to expropriate and transfer. Why not, instead, give poor, black South Africans a choice: I am quite confident that not all would prefer to become farmers. Offer them shares (at massively discounted rates, perhaps subsidised with the income from the wealth tax) in companies listed on the Johannesburg Stock Exchange. To begin with, the SA government owns shares in several listed companies too: if these are transferred to poor South Africans, they have liquid capital which they can – if they so choose – either sell and buy land or hold on to earn dividends. This is what BEE is all about, and in the few cases where it was implemented correctly, like in Naspers selling discounted shares to black South Africans, it has created immense wealth. Giving someone land without the necessary scale, capital and skills to work it (especially someone living in a city, like most South Africans now do), dooms them to a live of subsistence farming.

Piketty’s other proposal of a higher minimum wage also fails to acknowledge the excellent work of South African economists over the last few years. Yes, a higher minimum wage in the United States might not increase unemployment (because it is off a low base and much lower than the median income level), but to recommend such a policy in a country with an unemployment rate above 30% is not only irresponsible but disastrous. New research by labour economists in my Department at Stellenbosch shows a stark rise in unemployment, 4.8% in the Western Cape of mostly temporary workers, following the increase in the Western Cape minimum wage on farms two years ago.

Because data allow us to test and improve our models, certain theories become generally accepted. One of them is the likely impact of a wealth tax. I am not necessarily against a limited wealth tax (for political economy reasons), but what Piketty and his commentators failed to do was spell out the likely effects of such a tax. So let me attempt to do so. A wealth tax favours the young and punishes the old. Young people, like me, have many debts. If the wealth tax is instituted on net wealth (which I think is what Piketty argues for), then it will have a limited impact on me but will tax my parents heavily, who have paid their debts during their lifetime. So here are my options: either I live frugally now, saving carefully and repaying my debts, only to be taxed by government when I’ve done so, or I stop saving and buy a fancy new car, because that’s better than giving it to government. Rather than growing my savings, I would instead find ways to consume all my earnings. (This is why Bill Gates suggests a progressive consumption tax instead. Piketty warns that consumption is difficult to measure, which is true. But it actually encourages saving, investment and accumulation, something a wealth tax does not do.)

Except, of course, one type of investment which cannot be (directly) taxed: education. So expect to see parents, because they cannot leave their children a large physical inheritance, spend even more on educating them. Surprisingly, this will likely increase inequality in South Africa even further. As economists know very well and as Kuben Naidoo, Deputy Governor of the South African Reserve Bank, so eloquently put it yesterday, “the major increase in inequality in South Africa is as a result of rising skills and not wealth accumulation”. Even if all the gains from the wealth tax is spent by government on education (unlikely to be the case), we will continue to have a schooling system that is horribly unfair. A lot of tax money so far has failed to fix the problem; South African economists that have measured these things clearly show that more school resources (like higher teacher salaries or buying more books) help little to improve education outcomes. Why is that likely to change if we add even more money to the mix?

Wealth taxes are most likely to reduce investment and social mobility, exactly the opposite of what is necessary to fix South Africa’s economy. Yes, we may get the richest billionaires to cough up some more of their wealth to government. But will it really matter to the kid from Soweto or Soshanguve whether Nicky Oppenheimer or Johann Rupert or Patrice Motsepe has R8 billion or R4 billion in wealth? Not a lot.

What will matter to that kid is whether he will get a fair chance in life. That is unlikely to happen if we don’t fix our education system first and make it easier for people to do business and create jobs. A wealth tax that discourages investment and raises the cost of education is not going to help, and might even have a perverse impact.

I agree that we need to address South Africa’s massive inequality. To correct this wrong is the reason many economists choose to study economics in the first place. And I also understand Piketty’s appeal: he proposes three policies that are relatively easy to implement and requires little more than political will. But, unfortunately, these policies are disconnected from the real world, the world which South African economists study. In a best case scenario these policies will reduce inequality marginally in the short run; a worst case scenario is that they inhibit investment and put further limits on social mobility by raising the returns to quality education.

I realise that I cannot convince everyone about the need to study economics. As an economic historian I’ve had my own gripes with the mathematisation of the discipline. But to ignore the theories of human behaviour that economists construct, theories that have been empirically shown to be worth keeping, is wrong. Opinions without facts are not worth listening to, as Hans Rosling perfectly explained. Let’s encourage our students to engage with Piketty’s theories, test them against the evidence, and keep them and use them if they apply to South Africa. Or improve them if they don’t.

Fort Hare deserves a better future

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Two former graduates of the University of Fort Hare: Oliver Tambo and Nelson Mandela

Two former graduates of the University of Fort Hare: Oliver Tambo and Nelson Mandela

Imagine a university that trained most of the leaders of the largest political party of a country. A university which educated many past and existing leaders of several other countries. A university which trained thousands of doctors, lawyers and other civil servants. A university which educated a Nobel Peace Prize winner.

This university would be the flagship of any country’s education system, yet in South Africa it is not. Fort Hare, despite its illustrious history, is not ranked in the top 10 universities in South Africa. It barely makes it into the top 100 in Africa.

And, unfortunately, UFH seems poised to remain there.  The university has a R100-million deficit. It has reportedly used National Student Financial Aid Scheme (NSFAS) money – intended to subsidise students from poor backgrounds – to pay staff salaries. And only last Friday it emerged that the university’s registrar, Prof Mike Somniso‚ was recorded saying to a colleague that he will unleash the ANC’s uMkhonto weSizwe military veterans on DASO, the Democratic Alliance’s Student Organisations that, surprisingly, won the Student Representative Council elections last year. Let’s think carefully about that: a university registrar calling for violence against students.

Here is Max du Preez on Facebook about the recording:

So how come this is not a scandal in South Africa? A senior administrator at a university planning violent attacks on student leaders to make it impossible for groups other than the ANC to operate on campus? Where is the reaction of the minister of Higher Education – this was revealed on Friday morning already. Have we written off Fort Hare as an academic institution? Isn’t it perhaps time to launch an ‪#‎OpenFortHare‬ campaign?

It is difficult not to become cynical about the attempts on other South African campuses to reform higher education when Fort Hare, a beacon of hope for many black scholars in South Africa and elsewhere in Africa during apartheid’s darkest days, is withering away. Just imagine, some would say, what the response would have been had a UCT or Stellenbosch or Wits registrar called for violence against students!

Instead, we find a deafening silence. No resignation. No national twitter campaign ostracizing the individual or institution. No call to appear before Parliament’s Higher Education Portfolio Committee. (To be sure, UFH was due to appear on the 23rd of September to explain the charges of fraud, but the meeting was postponed indefinitely.)

Those of us who care deeply about the state of higher education in South Africa are left bewildered. What will it take to transform Fort Hare (and many of the other formerly black universities) into a national asset that can deliver minds that can contribute to a more prosperous South Africa? Funding? Management? Student activism? I don’t know, but the many brilliant minds that go there – I know, one of my own PhD students is a former graduate – deserve better.

I don’t want to belittle the legitimate demands for transformation at South Africa’s top universities. But the number of classrooms and lecturers at these universities are simply too few to provide a quality education to all who want it. If we want to improve South Africa, we – the government, yes, but also civil society like the campus movements pushing for change – need to shine a light on all places that can provide quality education for thousands of students who won’t find places at (or cannot afford) the top universities. That includes Fort Hare.

This is currently not happening, which means that the financial mismanagement and the utterances of a registrar is not delivering on Fort Hare’s vision of In lumine tuo videbimus lumen (In Thy Light We See Light), a vision that had inspired the likes of Oliver Tambo, Nelson Mandela, Govan Mbeki, Robert Sobukwe and Mangosuthu Buthelezi.

We need to #LightUpFortHare. Their future students (and the legends of the past) deserve nothing less.

Written by Johan Fourie

September 30, 2015 at 07:33

What we can learn from university rankings (and the Chinese)

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The Masters in Statistics at Columbia in 2015: Any guesses where these students are from?

The 2015 Masters class in Statistics at Columbia University: Any guesses where these students are from?

Last week I presented a paper at the Economic History Association conference in Nashville, Tennessee. As with the two earlier EHA meetings I attended (in 2010 and 2013), what impressed me was not only the quality and sophistication of the research, but the breadth of the topics and questions investigated. I listened to excellent presentations on how labour scarcity during the American Civil War affected racial relations afterwards (Tim Larson), on how concessions given to private companies in the Congo Free State affects development outcomes today (Sara Lowes and Eduardo Montero), on how the spread of malaria in the US South raised the price of slaves immune to the disease (Elena Esposito), and on how US military investments during World War II had absolutely no long-term impact on local industrialization (Taylor Jaworski). (A story in the South African press this morning suggests that our own government’s attempts to stimulate local manufacturing through investment in military technology, the Centu­rion Aerospace Village, has yielded very few returns…) For the economists: what made these papers great were their transparent and innovative identification strategies, coupled with a simple but strong narrative. The full conference programme is available here.

The scale and scope of such world-class research in the US is reflected in the latest QS World University Rankings that was released last week. Ten of the world’s top 20 universities are in the US, and 18 of the top 50. In economics, the US advantage is even more dominant: 15 of the top 20 Economics departments are  at US universities, and 21 of the top 50. Which explains why US universities attract the best talent from across the world, notably India and China.

As I’ve written before, if African countries are to benefit from globalization and innovation, it needs to send its students to places that can offer them elite education. That is why China sends 250 000 of their students to US universities every year. Some remain in the US afterwards, but most return, improving the quality of teaching and research at Chinese universities. Just look at how fast Chinese universities are moving up the QS rankings and you will realise the benefits of this system.

Despite what many might say, these rankings are important and becoming more so. Potential students use them to determine which university to attend, potential employees use them to decide where to apply for a job, scholars use them to choose where to spend a sabbatical or with whom to collaborate, and funding institutions use them to judge applications. For that reason it is great to see that Stellenbosch University, my home for the last fifteen years, is moving steadily up the rankings, from position 390 last year to 302 in the current edition. That progress is the result of incentives to produce quality research (Stellenbosch is in the top 100 universities globally in terms of citations received, the only university to break the top 100 in Africa). In the overall list, the University of Cape Town fell slightly to 171, but it remains the highest-ranked African university.

South African universities face the dual challenge of having to racially transform their staff body and improving their competitiveness. These are often seen as competing, mutually exclusive challenges, but I don’t think that is necessarily the case. Achieving transformation and competitiveness simultaneously will, however, require different (and possibly more demanding) solutions than only focusing on one or the other.

The answer is to look beyond our shores. Very few South African students end up at US universities. Importantly: very few black South African students study towards an (Economics) PhD in the US. This needs to change: We need to do much more to encourage our best and brightest (black) students to study abroad. Such a strategy, I believe, is the only sustainable way to transform the South African academic landscape within a generation from mostly white to mostly black, while continuing to move up the rankings ladder.

A strong higher education sector has massive spillovers for the rest of the economy too. There is no reason Africa cannot aim for at least two or three universities in the top 100. Because of our location and affordability, South Africa can become a hub for the best and brightest African scholars. Exporting higher education services is a comparative advantage we should exploit. And students often remain in the country where they study; some of the most innovative (and most transformative) companies in the world were started by immigrant students who moved to the States to study. Think Google and Tesla.

The problem is the poor incentives for South African universities to make this happen. The Department of Higher Education gives large financial rewards to universities for each PhD that graduates. In contrast, there are no rewards for sending your best (black) students to go and study in the States. That means that universities do their best to hold on to their best students instead of encouraging them to obtain a degree from a higher-ranked university elsewhere, even though that might be in the student’s best interest. In addition, PhD bursaries are frequently available for South African students studying here, while a first year of studies in the States can be in excess of R500 000. (Fortunately only the first year is usually expensive; thereafter research and teaching positions can help.)

This is a market failure where the South African government should intervene. So here is my request to Minister Nhlanhla Nene: Do as China does (see picture). Provide several hundred bursaries for students to study in the States. Some of them will (and should) remain behind; for example, a South African Economics professor at Harvard will yield long-term returns for the South African economy in terms of research questions and collaboration. But many of the graduates will return to South Africa, filling positions vacated by a retiring, white professoriate. That is how you transform into a world-class African university.

As I write this, I discover an online article about the tragic events of the last few days at the University of Kwazulu-Natal. Early on Thursday, a Westville campus residence was torched. On Sunday night, two cars and the building which houses the office of vice-chancellor Albert van Jaarsveld were torched. You don’t need a PhD to realise that this is not a sustainable way to transform the South African academic landscape. Instead, let’s look at ways to send our intellectually gifted to the best universities in the world. And bring them back to train and teach the next generation of engineers, computers scientists and… economic historians.

The lives of others

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Yesterday Helanya and I attended an art exhibition during Utrecht’s classical music festival (when in Rome…). The exhibition was on the topic of privacy, and several young artists exhibited their projects. There’s this Danish guy who travels to distant countries so he can be photographed by obscure security cameras. (He always wears the same clothes.) And this Dutch guy who exhibits pictures of beautiful desert hills, and then explains that these are the backgrounds of the beheading videos released in August 2014. And this Swiss guy who takes pictures of the hyper-secure bunkers that store plant, animal and human data. And this British guy who creates CCTV images of the 100 most powerful Londoners. Here’s his explanation:

A few months after the 2011 riots in London, the police handed out leaflets showing grainy, security camera images of youngsters who had supposedly taken part in the violence. But is a photo without context, analysis or interpretation of the facts sufficient to prove someone’s guilt, just because they have been caught on CCTV? By mimicking CCTV images of the 100 most powerful Londoners (according to British magazine Square Mile), I turn the cameras back on their controllers. I do not set out to assign blame but rather to draw attention to the ease with which the youngsters were pilloried while these influential individuals have remained comfortably anonymous. Just as it is impossible to be sure that the youngsters portrayed by the police are criminals, we cannot conclude that the people shown here had any involvement in the global financial crisis. My point is: in an age of visual control, the way in which images are produced and used can impact our assumptions about the truth.

I thought it was fantastic.

But my favourite was a small project by Milan Rijnders*, a Dutch art student. Earlier this year, Milan stopped a tourist in Amsterdam and asked to take his photo. He agreed and gave Milan his email address to send him a copy of the photo. Milan then decided to find out as much as he could about this man, but limiting himself to only using Facebook. The result is extraordinary: in a collage shown in the gallery (see photo), Milan has outlined the life of Canadian Mikael Labrecque, the man he photographed in Amsterdam. He has pictures of him travelling abroad, of his girlfriend, of their families and extended families, even pictures of them and their families’ cats and dogs. All from an email address.

Where are the boundaries between public and private? How much of our lives do we want to be known, recorded, downloadable? I work a lot with historical information of (mostly dead) people. I always wish for more data, but perhaps there’s a limit to what we need to preserve. In the era of Big Data, future historians’ challenge will not be too little information but too much.

When Milan told Mikael of his project, he wasn’t upset. In fact, he seems to have been indifferent. As Milan notes, his reaction is perhaps illustrative of a whole generation of Facebook users who seem barely aware of the public access of the material they post. The secret lives of others are, for good or bad, more visible than we might think.

PS: Two years ago, Milan also made this short film about a Dutch rugby player. See if you can spot the Stormers jersey.

Written by Johan Fourie

September 7, 2015 at 22:08

Posted in Art, History

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Why (African) business schools need more business history

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Early retail and distribution? Parade sales in early twentieth-century Cape Town (Source: Cape Town Archives Repository, Elliot collection, E8308)

Early retail and distribution? Parade sales in early twentieth-century Cape Town (Source: Cape Town Archives Repository, Elliot collection, E8308)

On Monday, when stock markets crashed globally, Larry Summers tweeted: “As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.”

The first thing Summers did was to reference financial history. Implicitly he asked: what can we learn from the past to make sure we adapt, survive and prosper when conditions in the present change? I would think that the same applies to the world of business too: CEOs, directors and managers need to know how to react when change inevitably comes, either externally to the firm – for example, when the economy is heading into a recession (as the South African economy seems to be doing) or when the state decides to intervene – or internally to the firm – for example, when the firm grows beyond what it’s organisational structure can support or when developing a Corporate Social Responsibility strategy. And one source of wisdom to learn from (not the only one, granted, but an underappreciated one) is history.

The need for business history is understood in the world’s top business schools. Harvard Business School, most famously, has a large team of business historians and publishes the Business History Review. The reason a place like Harvard invests in business history is because of intellectual honesty. As Andrew Godley, director of the Centre of Entrepreneurship at the Henley Business School explained to me,

almost all MBA subjects are taught using case studies. Case studies are, by definition, historical. They are justified as devices to aid student learning of a particular theme (e.g. Diversification strategies). But because they are historical by definition, any successful interpretation of the case study (and so any successful learning outcome) depends on the students understand the historical context facing the decision makers in that particular firm. Acknowledging explicitly that context matters and that context changes therefore leads to the further acknowledgement that MBA students need some sort of grounding in business history methods to be able to correctly interpret (and so learn from) case studies.

While business history was born in the early twentieth century, it took off  in the 1960s. Alfred Chandler’s seminal Visible Hand (1977) explained the development of the firm from small-scale (often family-owned) businesses to large corporations and conglomerates. A 2002 paper by Naomi Lamoreaux, Daniel Raff and Peter Temin explain this Chandlerian view most succinctly:

Writing in the mid 1970s, Alfred D. Chandler, Jr., attributed the success of the U.S. economy in the twentieth century to the rise of large, vertically-integrated, managerially directed enterprises in the nation’s most important industries. These enterprises, Chandler argued, were dramatically more efficient than the small, family owned and managed firms that had characterized the economy earlier. Small firms had to depend on the market to coordinate their purchases of raw materials and the sale of their output, but large firms took on these supply and marketing functions themselves, coordinating them internally by means of managerial hierarchies. This visible hand of management, Chandler claimed, was such a vast improvement over the invisible hand of the market that firms that exploited its capabilities were able not only to dominate their own industries but to diversify and attain positions of power in other sectors of the economy as well.

The problem, though, is that this linear trajectory of firm development reversed by the 1980s. Conglomerates dissolved and large corporations began to divest their vertically integrated components. Here’s Lamoreaux et al. again:

Indeed, as the economic environment changed during the 1980s and 1990s, classic Chandlerian firms increasingly found themselves outperformed, even in their home industries, by smaller, more specialized, vertically disintegrated rivals. Many of the enterprises that now rose to the top succeeded by substituting for the visible hand of management alternative means of coordinating vertically and horizontally linked activities—most notably long-term relationships that were intriguingly similar to those that prevailed before the “rise of big business” or even before the so-called “market revolution.” Large Chandlerian firms in turn sought to improve their competitiveness in this new environment by refocusing resources on their “core” businesses, selling off subsidiaries and even entire divisions and, in the process, reducing significantly the range of economic activity subject to managerial coordination.

Lamoreaux et al. then develop a framework to understand why this trend reversed. Although there is much more in the paper, the following paragraph effectively summarize their view:

The perspective of hindsight enables us to see that this puzzling combination of trends can be attributed in part to the effects of communication and transportation costs on the location and organization of economic activity. When these costs are high, economic activity tends to be local and consequently small in scale. At the other extreme, when communication is virtually free, as on the internet, and transportation is very cheap, then economic activity can be located anywhere and even tailored to individual needs. In the middle, however, when communication and transportation costs are neither prohibitive nor trivial, there are advantages to be obtained from concentrating productive activity in specific locations and in large firms.

Thus, a u-shaped curve: when communication and transport costs are high, firms will be small; when they are infinitely small, they will also tend to be small. But when they are somewhere in-between, large firms will be the equilibrium outcomes.

Except: the paper was published just before the tech industry blossomed. (Google was four years old, Facebook was yet to be founded, the iPhone would only be released four years later.) How have their model held up to these developments? Not great. Only last week, Google announced that it will restructure into Alphabet as a conglomerate in industries ranging from ‘search’ (the original Google), to self-driving cars, to health, to finance. Apple, originally in PCs, now has phones, and watches and there is talk of a car too. I’m perhaps oversimplifying their argument, but it is clear that business forms do not only depend on communication and transportation costs.

This is especially true in emerging markets. As Harvard’s Aldo Musacchio suggests, emerging markets have specific ‘institutional voids’ that entrepreneurs must overcome if they are to be successful. This may be anything from capital market failures, a poor education system, or severe labour market regulations. How businesses react to these institutional voids determine the type of firm that will be established. His example: the rise of the Tata Group in India.

Our lack of understanding how these institutional voids gave rise to indigenous businesses is especially acute in Africa. In South Africa, we have two excellent business historians (Anton Ehlers at Stellenbosch and Grietjie Verhoef at UJ), but both are within a decade of retirement. There is much to be done to understand the institutional voids that gave rise to firms like SAB, or Discovery, or Black-Like-Me or the myriad of family businesses and informal businesses that continue to co-exist with larger corporations. We need to understand the rise and decline of state corporations. We need to know why banks collapse. We need to know why not-for-profit corporations exist. What are the role of ethnic minorities? What about black-owned businesses? What role for the apartheid state and sanctions? And what about colonialism and independence and state capitalism and corruption and its interplay with businesses in other African countries?

The rise of African capitalism over the next decades will require a large pool of skilled managers that can both understand the domestic complexities and global supply chains. I hope that these managers, trained in Africa’s leading business schools, will draw from the lessons of our own history and context. This, then, is my challenge to South Africa’s top business schools: Encourage student dissertations on the histories of indigenous businesses, introduce a course in business history (or the History of African Capitalism), appoint a tenure-track professor to research the histories of African businesses, create an archive of business history to protect the documents that future generations will need to understand our current successes and failures..

These challenges are not easy to fulfill in the time and resource constrained business schools of today, where accreditation uber alles. Yet we must try harder. We have a rich continent, with a rich (if largely unwritten) history. This history is messy and it still affects us. Which is why I love this quote by Stephen Mihm of the University of Georgia:

Business history – or the history of capitalism – is not a science. It’s a way of looking at the world that acknowledges the messiness of human economic activity even as it promises to explain both the recurrent patterns of the past and the unique factors that led up to the present. For business school students, history breeds recognition that the present is nothing more than the leading edge of the past.

What do Pope Francis and Julius Malema have in common?

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Beautiful but poor: The Transkei is still largely untouched by capitalism Source:

Beautiful but poor: The Transkei is still largely untouched by capitalism. Source: Tyler Brown

Pope Francis and Julius Malema live worlds apart. But both have a deep dislike – one might even say hatred – of an economic system in which trade, industries, and the means of production are largely or entirely privately owned and operated for profit. This system is called Capitalism.

During a march in Limpopo yesterday, Malema again pronounced the EFFs anti-capitalist sentiments. An Economic Freedom Fighters retweet summarised it best: (The) EFF HAS DECLARED WAR ON #CAPITALISM; MALEMA: THIS IS A DECLARATION OF WAR AGAINST EUROPEAN CAPITALISM.

And a month earlier, Pope Francis made an arguably more eloquent (and damning) critique of capitalism:

Time, my brothers and sisters, seems to be running out; we are not yet tearing one another apart, but we are tearing apart our common home. Today, the scientific community realizes what the poor have long told us: harm, perhaps irreversible harm, is being done to the ecosystem. The earth, entire peoples and individual persons are being brutally punished. And behind all this pain, death and destruction there is the stench of what Basil of Caesarea – one of the first theologians of the Church – called “the dung of the devil”. An unfettered pursuit of money rules. This is the “dung of the devil”. The service of the common good is left behind. Once capital becomes an idol and guides people’s decisions, once greed for money presides over the entire socioeconomic system, it ruins society, it condemns and enslaves men and women, it destroys human fraternity, it sets people against one another and, as we clearly see, it even puts at risk our common home, sister and mother earth.

Ouch. If the Pope and Malema are against it, who on earth wants to be for it?

Well, actually, history is. #awkward

Let’s look at what’s happened to world poverty since 1936, when the Pope was born. Or since 1981, when Julius Malema was born. The remarkable thing is that in 1936, more than half of the world’s people were living in extreme poverty (56%). In 1981, the year that World Bank data starts, 43% of the world’s people were still living in poverty. In 2011, that figure had fallen to 14%. In short, global poverty has fallen enormously in the space of Pope Francis’s lifetime. And the reason? The ‘dung of the devil’: capitalism.

Here’s another statistic to baffle the mind: As The Economist reports, in the decade between 2003 and 2013 (which includes a global financial crisis), the income of the median-person in the world has doubled. Yes, doubled! Why? Because India and China have opened their economies, encouraged innovation, reduced state-involvement and allowed economic growth to improve the living standards of their people.

And all of this has happened despite immense global population growth; in 1936, there were roughly 2.7 billion people, and in 1981 there were 4.5 billion.

We are not only more affluent, but we also live longer. And healthier: we have eradicated illnesses, like smallpox, and we have access to modern medicine that can fight diseases from the common cold to tuberculosis that in the past would have likely killed us.

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Blame capitalism for reducing poverty in China: The Shanghai skyline in three decades

Even the poorest of the poor have access to services that the richest of the rich could never have imagined in 1936. With the press of one button, a cellphone now has access to the world’s information on Wikipedia. It is estimated that 90% of the world’s population has watched at least one episode of Idols, an unthinkable share only two decades ago. And most governments now provide free or affordable schooling and sometimes even university education – a luxury product in 1936 (just ask anyone older than 80).

Of course, capitalism is not perfect. The market cannot and does not solve everything; no economist in their right mind would claim this. Adam Smith, the father of economics, was clear about how the state should create the rules and institutions for the ‘invisible hand’ to do its thing. And those people that, for whatever reason, are excluded should be taken care of by state institutions like pension funds, disability insurance and free schooling.

We can also just ask the poor. If capitalism is so bad, why is it that poor people in non-capitalist countries want to migrate to capitalist countries? Why is it that poor, rural people in South Africa migrate to the cities (where ‘European capitalism’ arguably has a bigger footprint)? Is it because, and this might sound radical to some, they believe they can attain a better life for them and their children in these capitalist places? I think so.

I appreciate the leadership qualities of the Pope and Malema; they are charismatic and have large numbers of followers that look to them for guidance. That is even more reason they need to understand that people are not poor because of capitalism, they are poor because of not having enough capitalism. (Replace the word capitalism with innovation, as Deirdre McCloskey suggests, and suddenly the ideological blinkers fall off.) Here is Venezuelan economist Ricardo Hausmann:

In poverty-stricken Bolivia, Francis criticized “the mentality of profit at any price, with no concern for social exclusion or the destruction of nature,” along with “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

But this explanation of capitalism’s failure is wide of the mark. The world’s most profitable companies are not exploiting Bolivia. They are simply not there, because they find the place unprofitable. The developing world’s fundamental problem is that capitalism has not reorganized production and employment in the poorest countries and regions, leaving the bulk of the labor force outside its scope of operation.

As Rafael Di Tella and Robert MacCulloch have shown, the world’s poorest countries are not characterized by naive trust in capitalism, but by utter distrust, which leads to heavy government intervention and regulation of business. Under such conditions, capitalism does not thrive and economies remain poor.

The ANC, in a discussion document released last week, knows this. It says

capitalism remains the dominant socio-economic system on a global scale. In the era of globalisation, there has been much technological progress which has opened up vistas for human progress and created the basis for the alleviation of poverty on a grand scale.

Spot on. Excellent. But then:

However, the rampant unregulated practices of the past 30 years, including appropriation of most of national income by a few, have undermined its legitimacy.

That is incorrect. Poverty has fallen significantly in South Africa over the last 30 years (the ANC should know better, they ruled for 21 of those 30 years). What has undermined the legitimacy of the ruling government is its inability to get capitalism (or innovation) working in places like the former bantustans (see picture), where conditions are not much better than they were 30 years ago. Where capitalism has worked – in the main metros – it has created jobs and wealth and a better life for all (although for some more than for others). Where capitalism has not been allowed – where chiefs still prevent private ownership, for example – poverty has remained high and living standards low.

If the Economic Freedom Fighters and others continue their campaign in South Africa to discredit capitalism as the solution to poverty, we will never alleviate it, especially not in those regions where the problem is acute. If Pope Francis continues to discredit capitalism in his speeches to the poor and destitute of the world, they will continue to remain poor and destitute. (The conspiracy theorists would say that that is what the church wants. That would be silly, because the church benefits from a rich flock. Ask John Oliver.)

Let us learn from that one true source of wisdom: history. India and China have managed to reduce poverty dramatically by embracing capitalism, not rejecting it. South Korea have managed to reduce poverty dramatically by embracing capitalism, while North Korea, by rejecting capitalism, could not. Pope Francis and Julius Malema should embrace capitalism if they really cared about the plight of the poor.

Books for the (never-ending) winter

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BooksCottonAt the end of August, Helanya and I will move to Utrecht, the Netherlands for an eight-month sabbatical. (This time, I’m tagging along.) There are many things to look forward to: a vibrant economic history research group (in Utrecht, but also in many other departments across Holland: Wageningen, Nijmegen, Groningen), fast internet (and no load-shedding), and a biertje en bitterballen at one of the quaint canal cafes.

BookPhishingBut there will also be challenges, and none more demanding than the never-ending winter. We leave exactly when the southern hemisphere transforms from winter to summer, and will return when it transforms back again, from summer to winter. In short: we will have 18 months of winter.

So, to keep myself entertained for the year-without-a-summer, I went book shopping. But book shopping presents a dilemma, one, I imagine, that is shared by many book buyers. I really like a printed book (especially a hardcover). It smells and feels great and sits nice and pretty on our bookshelf. And I like the idea of having shelves of unread books; Umberto Eco explains why:

The writer Umberto Eco belongs to that small class of scholars who are encyclopedic, insightful, and nondull. He is the owner of a large personal library (containing thirty thousand books), and separates visitors into two categories: those who react with “Wow! Signore professore dottore Eco, what a library you have! How many of these books have you read?” and the others — a very small minority — who get the point that a private library is not an ego-boosting appendage but a research tool. Read books are far less valuable than unread ones. The library should contain as much of what you do not know as your financial means, mortgage rates, and the currently tight real-estate market allows you to put there. You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at you menacingly. Indeed, the more you know, the larger the rows of unread books. Let us call this collection of unread books an antilibrary.

BooksAskariBut the thing is, a Kindle is just bloody amazing. It fits hundreds of books into a small device that is so user-friendly that it is often better than reading the hardcover. (This is especially true in winter when you want to minimize your contact with the world beyond your duvet.)

BooksFishermanSo, do I buy the hardcover to sit in my bookshelf, possibly never to be read? Or do I buy it for the Kindle with a higher likelihood of reading it but with no contribution to the antilibrary? #Firstworldproblems

Back to the books themselves. Here are my top sixteen picks for the coming cold winter nights:


  • Misbehaving – The Making of Behavioral Economics, by Richard H. Thaler [Why we make the often irrational decisions we do]
  • Capitalist Crusader: Fighting Poverty Through Economic Growth, by Herman Mashaba and Isabella Morris [A mix of South African biography and how-to-fix-South Africa proposals]
  • Who Gets What – And Why – The New Economics of Matchmaking and Market Design, by Alvin E. Roth [Because, despite what a prominent South African historian might think, understanding game theory is important]
  • Uncharted – Big Data as a Lens on Human Culture, by Erez Aiden andJean-Baptiste Michel [Big Data is all around us, and exploiting it can make us better]
  • Why Information Grows: The Evolution of Order, from Atoms to Economies, by César Hidalgo [Economic growth explained by a physicist]
  • Phishing for Phools: The Economics of Manipulation and Deception, by George A. Akerlof and Robert J. Shiller [Why markets fail, and how to fix it]
  • Money and Soccer: A Soccernomics Guide, by Stefan Szymanski [Because, soccer]


  • Political Order and Inequality – Their Foundations and Their Consequences for Human Welfare, by Carles Boix [A new big theory book on how the world is the way it is, this time from political science]
  • Cotton: The Fabric That Made the Modern World, by Giorgio Riello [World history through the lens of a plant]
  • Why Did Europe Conquer the World?, by Philip T. Hoffman [More guns, germs and steel]
  • The Rich: From Slaves to Super-Yachts: A 2,000-Year History, by John Kampfner [If you can’t beat them, join them. And if you can’t join then, read about them]
  • Revolutions Without Borders – The Call to Liberty in the Atlantic World, by Janet Polasky [What inspires people to protest?]
  • Askari – A Story Of Collaboration And Betrayal In The Anti-Apartheid Struggle, by Jacob Dlamini [History is never black and white]

Okay, fiction can be fun too:

  • All Our Names, by Dinaw Mengestu
  • A Man Of Good Hope, by Jonny Steinberg [Granted, more biography than fiction]
  • The Fisherman, by Chigozie Obioma

Written by Johan Fourie

August 13, 2015 at 06:40

Posted in General


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