Persistent fallacies

Note: This post was also published at the Adam Smith Institute blog, on 12th June. For all my Adam Smith Institute texts, click here. 

Whilst reading Acemoglu and Robinson's insightful and exhilarating book, I ran across a stunning fact. In the Chapter 5 of the book, entitled "I've Seen the Future and It Works" they talk about why economic growth cannot be sustainable under a set of extractive political institutions. They mention the case of Soviet Russia and emphasize how their rapid growth during the 50-ies and the 60-ies was unsustainable since it wasn't supported by economic dynamism or innovation, i.e. there were no forces of creative destruction. They managed to achieve growth simply by reallocating a huge number of people from under-productive agriculture into industry. It was only natural that rapid growth would follow since productive resources (labour and capital) could now be used in a much more efficient way, and close to full capacity. However, when this reallocation ran out of steam (70-ies and 80-ies), a collapse was imminent. 

What was surprising was that a large group of academics, policymakers and intellectuals in the West were mesmerized by this astonishing growth. In fact, many people believed in the 60-ies that it was a matter of time before Russia would overcome the USA in its economic and global power. In fact, the argument was that not only do the Soviets grow faster, they manage to do that under full employment and a society based on altruism instead of individualism (and apparently better ethical values). 

Sound familiar? 

Now I've been aware of all of that, but this I didn't know:

"...the most widely used university textbook in economics, written by Nobel-prize winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that the Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition there was little change in the analysis, though the two dates were delayed to 2002 and 2012." 

Acemoglu, Robinson (2012) "Why Nations Fail", pp. 128. 

Needless to say, during the years Samuelson predicted the Soviet Union would overtake the US, Russia was bankrupt twice (!), and has returned to a system of extractive political institutions which were again able to produce some growth and better living standards based on rising oil and gas prices during the 2000s. But as the West again slowly begins to realize, this is unsustainable as soon as Russia starts experiencing a twin deficit and when its growth stops being driven by swings in energy prices. 

However, many pundits now share the same thoughts on China and its "miracle". But as the authors of the book clearly emphasize in their final chapter, China's growth now is as unsustainable as Russia's then. They are both based on extractive political systems which can only achieve temporary growth via reallocation of resources, not technological advancements or creative destruction. I just wonder how long will it take some leftist Western pundits to realize this?