Counterexample of The Lucas Paradox; American Economic Development
Although Lucas’ original hypothesis has widely been accepted as descriptive of the modern period in history, the paradox does not emerge as clearly before the 20th century. The colonial era, for instance, stands out as an age of unimpeded capital flows. The system of imperialism produced economic conditions particularly amenable to the movement of capital according to the assumptions of classical economics. Britain, for instance, was able to design, impose, and control the quality of institutions in their colonies to capitalize on the high returns to capital in the new world.
Jeffrey Williamson has explored in depth this reversal of the Lucas Paradox in the colonial context. Although not emphasized by Lucas himself, Williamson maintains that unimpeded labor migration is one way that capital flows to the citizens of developing nations. The empire structure was particularly important for facilitating low-cost international migration, allowing wage rates to converge across the regions in the British Empire. For instance, in the 17th and 18th century, England incentivized its citizens to move to the labor-scarce America, endorsing a system of indentured servitude to make overseas migration affordable.
While Britain enabled free capital flow from old to new world, the success of the American enterprise after the American Revolution is a good example of the role of institutional and legal frameworks for facilitating a continued flow of capital. The American Constitution’s commitment to private property rights, rights of personal liberty; and strong contract law enabled investment from Britain to America to continue even without the incentives of the colonial relationship. In these ways, early American economic development, both pre and post-revolution, provides a case study for the conditions under which the Lucas Paradox is reversed. Even after the average income level in America exceeded that of Britain, the institutions exported under imperialism and the legal frameworks established after independence enabled long term capital flows from Europe to America.
Read more about this topic: Lucas Paradox
Famous quotes containing the words lucas, american, economic and/or development:
“Use the Force, Luke. Let go, Luke. Luke, trust me.”
—George Lucas (b. 1944)
“An American Virgin would never dare command; an American Venus would never dare exist.”
—Henry Brooks Adams (1838–1918)
“What exacerbates the strain in the working class is the absence of money to pay for services they need, economic insecurity, poor daycare, and lack of dignity and boredom in each partner’s job. What exacerbates it in upper-middle class is the instability of paid help and the enormous demands of the career system in which both partners become willing believers. But the tug between traditional and egalitarian models of marriage runs from top to bottom of the class ladder.”
—Arlie Hochschild (20th century)
“Men are only as good as their technical development allows them to be.”
—George Orwell (1903–1950)