Sunday, February 1, 2009

Rich & Poor Nations and the Process of Natural Selection

In the 18th century Adam Smith came with his opus ' An inquiry into the Nature and Causes of the Wealth of Nations'. In this book he magnificently explained the dynamics of free markets and how some nations become rich. However I always felt that a piece is still missing from what is otherwise an immaculate economic architecture ever written. Don't get me wrong I am nobody to question a genius but understanding economics and wealth creation for mortal minds requires conglomeration of material from various sources even if they seem a little unusual at the first glance.

About a couple of months back I was traveling in a train from Rome to Venice. Trains are usually a good place to learn more about a country and it's people. Sitting a couple of places from me was an interesting person who teaches mathematics in Mestre. The discussion started from countries, interest and religion and went to economics and genetics. How did  genetics came into picture well we were discussing similarities between Indian and Italian culture. But suddenly I realised how genetics and economics are interconnected. How Charles Dickens process of natural selection completes what is missing in the wealth of nation.

Natural Selection is a process by which favorable heritable traits become more common in the successive  generations

Wealth and richness follow the same principle. People become rich by some reason (explained in the Wealth of Nation) of by some accident and then over generations this richness increases exponentially and passed onto successive generations just like good genes are passed on (as explained by natural selection). However unlike in genetics whereby the poor genes are slowly obliterated in economics things behave a little differently. The rich invest their money and the asset value grows over a period of time, hence the rich becomes richer and the sheer weight of their demand push up prices making it unaffordable for poor people so in a way the rich becomes richer and the poor gets poorer. The wealth is not just created but is transfered and in economics the wealth transfer takes place as:

Poor -----> Rich (The flow of wealth)

Hey I am not promoting any socialist ideas here, all I am stating is the process of wealth creation and transfer. This is not just the case with individuals but between countries and within countries. 

So even in India we observe that the rural income growth is just 2-3% while the income growth in services sector is 18-20%. While the Inflation rate is around 6%. This means that people in cities employed in the services sector are becoming richer and the people in villages are getting poorer. This is not a very comfortable situation and can lead to social unrest unless checked quickly by introducing some structural changes in the rural agriculture sector (more on this in some other article)....

So India being a poor country, a part of the reason is because US is rich. Ofcourse I am not blaming US for being rich or shifting blame for ills in this country to US it's just a process and like any process this process ends and reverses. Eons ago Dinosaurs ruled the world but one single event changed all that. Something similar happens in economics. People, countries become rich and richer till some event happens and the pedestal changes. The events happening today may be just that event and if thats the case we are lucky to be witnessing history and being on the right side of the history. So hold on watch as the history unfolds in front of your eyes.......


2 comments:

adi said...

Another way of looking at the fact that service sector is growing faster than agricultural sector is that being new, it has a lot of potential to grow ,which is being realized. The agricultural sector has been evolving since eons and is reaching a saturation level.( The same reason Japan grows at 1-2% while China grows at 10-12%)

Stochastic Process said...

That's true... and I am not saying that we should think of strategies to let agriculture grow at 5-6% so on... But what is needed is to remove the surplus labour in this sector and divert it into other sectors...Ideally agri labour can go into Infra development and manufacturing.....