Sunday, April 26, 2009

Diversity is a strength

Last week I mentioned that I have started reading Wars, Guns and Votes. The book is excellent and full of lots of thought-provoking information. Here is one excerpt that struck me as particularly insightful:
For what it is worth, I constructed estimates, country by country, of the public and private capital stock and then investigated whether the productivity of these two types of capital was affected by the degree of ethnic diversity of the society. Each of these steps is precarious, but what came out was that ethnic diversity reduced the productivity of public capital, while increasing the productivity of private capital. While this may be spurious, it is at least consistent both with the micro-level evidence and with other macro-level results.

...The beneficial effects of diversity only set in at higher levels of income: diversity is good news for America, and while Europe's rising diversity may well weaken its welfare state, it will be compensated by a more vibrant private economy.

...Why might diversity help high-income societies but hinder low-income societies? Perhaps it is because the key advantages of diversity come from skills and knowledge. In an economy with high levels of skill and knowledge, the larger the pool of diverse skills and knowledge, the better. But in economies where skills and knowledge are more rudimentary, there is less scope for diversity and less use for it.
In other words, ethnically diverse societies obtain more bang for the buck with the private sector than government. My first thought when reading this was whether this explains some of the success of the Scandinavian welfare states. The left loves to hold up these countries as virtuous examples of societies with large public sectors, and there is no denying that for the most part these countries seem well run and highly functioning. Their homogeneity, however, may be a key explanation of this phenomenon.

Indeed, it is worth noting that no two governments are alike. The existence of efficient government elsewhere does not mean that it can be replicated with the same efficiency here, even if such a thing is possible. I don't think most people would cite government in the U.S., either on the state, local or federal level, as particularly efficient and I see no reason why this would change anytime soon. Based on Wars, Guns and Money this may be our fate given the extreme ethnic heterogeneity of the U.S.

The obvious upside, however, is that this liability for the public sector is an asset for the private sector. It would seem that diversity IS a strength -- and just another reason to emphasize a smaller government and encouragement of the private sector.

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