Beware panacea for economic growth

One of the more endearing features of working at a research university is the seemingly endless well of available knowledge. The library, which sits unassumingly just a few steps from my office, is a gateway to nearly all the known world.

Far more impressive is the constant creation of new knowledge. Want to better understand medieval Celtic literature or learn more about Papal transition? The world’s experts are right here. You don’t need to become the world’s single most knowledgeable person on the ways families in small towns create livelihood strategies during tough economic times or the effect of property tax caps on Indiana’s municipal governments. Those folks work right here at the research university which employs me.

These sound like disparate pursuits, but they are actually very much alike. Nearly all this follows some form of the scientific method. Many folks are confused by this approach because they think science is about proving something. It is not. The scientific method is one of refutation, not proof. Researchers in these and nearly every other domain work to disprove ideas. It’s not a perfect approach, but it has brought us the modern world.

The more data that’s available, the more mathematical and statistical methods are used to disprove an idea. So, in finance, economics, or physics, the method of disproof is highly mathematical. In fields where data is scarcer, like biology, sociology or psychology, much of the work involves collecting new data. In some fields, like international relations, the only available data are past experiences. In this case, falsification comes from historical examples and centuries of interpretation.

I used to think there was a hierarchy of difficulty in these approaches. Now that I have published work across several disciplines, I have come to understand that my view was wholly wrong. The more data and math that is available, the easier the topic to research. The problem with the less traditionally quantitative disciplines is that they are so susceptible to folks who want to tell a compelling story, but are not really testing their ideas. Let me offer an example in economic growth and development.

It is almost impossible to go a week without reading about some new fad or insight about those factors that cause a region to grow and prosper. These often come from business consultants, journalists and even some think-tank folks. Over the years I’ve read claims that low taxes or a good business climate are the key. I’ve heard others claim that all a region needs is strong public infrastructure or an intermodal facility, while others write that public-private partnerships, business incubators or the presence of a research university are the key to prosperity. These are all interesting hypotheses that share one common attribute. As causal factors in economic growth and prosperity, each of these factors have been repeatedly proven false.

This begs the question, just what does cause regional prosperity? After literally decades of research that worked to reject false theories, the surviving causal factor in regional growth is human capital. Quite simply, it is the education, skills and health of a population determines regional prosperity and economic growth. Insofar as any other factor improves human capital it might indirectly contribute to economic growth. But, as a stand-alone feature of economic growth, only human capital matters.

Moreover, given that the most recent Nobel Prize in economics was for work in human capital and growth, it is remarkable that anyone still struggles with this point. Maybe the best comparison is the anti-vaccine movement comprising anti-science charlatans and dupes. So, let me say it again. People alone matter in economic growth, and no other factor is meaningful to regional prosperity unless it contributes to human capital.

Now, I do not want to dismiss the highly nuanced and heterogeneous elements of human capital. In some places, the most critical factor in developing people is simply eradicating childhood diseases. In other places, universal literacy and numeracy matters. Here in the United States, the share of adult residents with a college degree explains almost all the growth and prosperity differences between regions. There are many ways to improve human capital, and they may involve better infrastructure or a research university. However, unless those features actually make your people smarter, healthier, better skilled or educated, or attract more folks to your region, they will not deliver prosperity.

It is certainly fine to listen to journalists and business consultants. The marketplace for ideas should be broad and readily accessible to all. However, the policy lesson from these talks is clear. Be wary of claims of a secret recipe for prosperity, or some panacea for growth. There is not one.

Moreover, across America’s research universities, literally thousands of scholars have spent decades looking for and rejecting sophomoric recipes for economic growth. When it comes down to it, I am afraid to report that the one thing that does make a difference is the single most difficult and time-consuming thing to change. Nevertheless, it is the only one that matters.

Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].