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:
“Lucas: You’re the Democratic nominee for Senator.
John McKay: You make that sound like a death sentence.”
—Jeremy Larner, U.S. screenwriter. Lucas (Peter Boyle)
“Our fathers and grandfathers who poured over the Midwest were self-reliant, rugged, God-fearing people of indomitable courage.... They asked only for freedom of opportunity and equal chance. In these conceptions lies the real basis of American democracy. They and their fathers give a genius to American institutions that distinguished our people from any other in the world.”
—Herbert Hoover (1874–1964)
“The chief reason warfare is still with us is neither a secret death-wish of the human species, nor an irrepressible instinct of aggression, nor, finally and more plausibly, the serious economic and social dangers inherent in disarmament, but the simple fact that no substitute for this final arbiter in international affairs has yet appeared on the political scene.”
—Hannah Arendt (1906–1975)
“I have an intense personal interest in making the use of American capital in the development of China an instrument for the promotion of the welfare of China, and an increase in her material prosperity without entanglements or creating embarrassment affecting the growth of her independent political power, and the preservation of her territorial integrity.”
—William Howard Taft (1857–1930)