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From ksdale in last week's open thread: some thoughts on industrial policy for poorer countries:

I'm often struck by how much economists and politicians agonize over exactly what a country needs to do to enable economic growth. The fact that so many countries struggle seems like evidence that it's not a matter of building just anything, but stories like [the model that railroads added only a tiny amount of GDP relative to counterfactual canals] counter the idea that economic growth is so path dependent. Sure, you can't build anything, but it's perhaps more important to build more, bigger, faster, than it is to build exactly the right things at the right times.

I'm reminded of the story (maybe from a Malcolm Gladwell book?) about a pottery teacher who tells one class to spend the semester crafting a single, perfect piece, while telling another class to produce as many pieces as they could, without regard to quality. According to the story, the class that goes for volume also ends up producing higher quality pieces. Surely apocryphal, but very plausible.

I'm also reminded of the paradox of choice... An economy has infinite configurations, but people just want more, better stuff in exchange for less of their time.

One part of growth is just having enough savings, and some level of either secure property rights or a strong state, such that it's worth it to build any kind of productive asset. When a country can invest the surplus from agriculture in rich-world assets, they see lots of easy gains (electricity, phones, running water, ports, roads between population centers, etc. all have high returns when they were absent before). The challenge, and one part of escaping the middle income trap, is figuring out what to do when the obvious choices have all already been made.

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This is not at all a knock on financial academics, who are very valuable to me and who do in practice have some overlap with practitioners. It's just a statement about where their skills are most applicable: if the anomalies are real, they represent an inefficiency in asset prices and thus capital allocation, and that's a social problem that can be fixed by exploiting the anomalies rather than publishing on them.


This newsletter has noted before that one common kind of ancient finance, in which politicians borrowed money to party and bribe their way to influential positions, and then used that influence to launch wars whose loot could pay back the loans, does look a bit like venture debt. But invading Gaul doesn't quite fit the mold of a productive investment.