IQ and Economic Growth

NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.

I finally got around the writing up a review of Hive Mind, by Garett Jones. Short version is that the book is excellent, and well worth reading. I’ll get into more detail below, but the book explores the importance of cognitive skills (as measured by IQ) for economic development.

There are several reasons to like it. First, the book has absolutely no fat on it. This is a model of concise explanatory writing. Most books that try to bring recent research to the public end up bloated. Not this one. Five stars for clarity here.

Onto the content. There are really two parts to the book. First, Jones establishes that “cognitive skills” are in fact highly correlated with economic development, and a subsidiary part of this is establishing that IQ is just one of many ways of measuring “cognitive skills”.

I’m not going to go into a lot of detail here. Like I said, the book is very lean and you can easily read Jones’ own words on this. Let me summarize by listing his own five main channels for how IQ is related to economic development. In italics next to the channel are a few comments of my own on them.

  1. High IQ’s are related to higher savings rates. But we have evidence that savings rates don’t actually vary a whole lot across countries, and that what variation there is explains little.
  2. High IQ’s are related to more cooperation. For my money, the most important channel. Economic development looks a lot like people choosing the “cooperate” equilibrium in a repeated game. High IQ may be a marker for people willing to play this move, and to play it first, and often, even though the other players could take advantage of them.
  3. High IQ’s are related to market-oriented policies. Perhaps it is that high IQ people believe in their own ability to succeed?
  4. High IQ’s are related to using team-based technologies. I think I would lump this in with cooperation.
  5. People like to conform. This isn’t about IQ itself. But if you have lots of high IQ people with those other traits, then even those without high IQ’s will try to conform. A critical mass of high IQ people may be sufficient to reach the good equilibrium.

Let’s be clear here about the role of high IQ’s. They are a marker, not necessarily a cause, of these behaviors and traits. Jones is clear on this, and is not making some strong causal claim. Rather, think of all these traits (including high IQ scores) as a package of traits that tend to come together. Call these traits “cognitive skills”, as they typically involve some kind of ability to do abstract thinking.

An interesting note here is that lots of what the labor literature calls “non-cognitive skills” are what, I think, Jones would lump under cognitive skills. For example, patience is something that some refer to as a non-cognitive skill, but for Jones it is part of the package of abilities that come along with relatively high IQ levels.

The wrong conclusion to draw from Jones’ book is that there is some kind of fixed genetic difference in intelligence across countries that explains why some are rich and some are poor. These traits are malleable, as evidenced by the “Flynn Effect” of rising IQ scores over time. Cognitive skills certainly are related to economic development, but they are better seen as a more refined measure of human capital than years of schooling. You can invest in cognitive skills the same way that you can invest in years of schooling. One possibility might be more extensive pre-schooling that teaches those “non-cognitive skills” that are associated with IQ.

By the way, Feyrer, Politi, and Weil have a paper coming out on how iodizing water helped raise IQ scores in the US. There may be direct public health measures that could materially impact cognitive skills and IQ in developing countries.

The second part of the book delves more specifically into Jones’ research on the returns to IQ, or cognitive skills. Namely, why is there such a small premium on IQ within countries, but such a large premium to IQ across countries? Again, I’m not going to lay into a lot of detail here, he does a nice job in the book explaining the theory here. Let me try to give you the basic intuition.

High-IQ places are able to take on “fragile” production processes, where even one mistake ruins the output (e.g. a semiconductor or a hit movie). Economists often call these “O-ring” processes, after the Challenger disaster. Having lots of high IQ people means you have lots of high productivity, fragile, production processes, and this creates demand for other, non-fragile, production processes (e.g. retail). The high demand for the non-fragile process means that wages are relatively high for the low IQ people who can work that sector. Hence there is little difference in wages between the high-IQ people and the low-IQ people. But the average wage is incredibly high, because the economy engages in these productive, fragile production processes. So high IQ countries are very rich compared to low IQ countries.

Let me add that this disconnect of the within-country return to a trait (IQ, years of education, etc..) and the cross-country return to the same trait is littered all over the growth literature. Sometimes we think about these positive spillovers/externalities, but for the most part we do not. One nice thing about Jones’ book (and prior research) is that he does think about these things seriously. Even if you don’t buy the first part of the book, it is worth reading the second part (substitute “high-skill” or “high-education” in everywhere you see “high-IQ” and you’ll be fine).

I’ll be assigning parts of this to my undergrads this semester. It should be a fun day of class.

 

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26 thoughts on “IQ and Economic Growth

  1. The wrong conclusion to draw from Jones’ book is that there is some kind of fixed genetic difference in intelligence across countries that explains why some are rich and some are poor. These traits are malleable, as evidenced by the “Flynn Effect” of rising IQ scores over time.

    -I think Flynn-adjusted IQ is largely fixed and genetic in origin, which will have greater and greater explanatory power in showing why some countries are rich and others are poor as time goes on. IQ probably had the least explanatory power in explaining GDP/capita in the pre-plague Medieval period and the 1940s-1970s, when China’s GDP/capita had fallen far behind that of the United States, Lebanon was quite rich while Egypt was quite poor, the Arab oil states were at their peak, Africa had not gone through its severe economic decline, and much of Latin America was as rich as much of Southern Europe. Maybe the 1930s, as well.

    You can invest in cognitive skills the same way that you can invest in years of schooling.

    -Sure. But most people don’t do that much.

    Namely, why is there such a small premium on IQ within countries, but such a large premium to IQ across countries?

    -In low-IQ societies, low-IQ people are taught by other low-IQ people. And the reverse is true in high-IQ societies.

    • I’ll go out on a limb and say that the your answers are probably too short to actually be right.

      Why Flynn-adjust IQ scores? The Flynn effect shows they are changeable – that’s the point. The fact that people don’t invest in more cognitive skill (which is itself debatable) doesn’t mean you cannot. And your last explanation doesn’t account for why low and high IQ people within countries don’t see a big difference in wages – regardless of the average level of IQ in that country.

      • “I’ll go out on a limb and say that the your answers are probably too short to actually be right.”

        -A longer answer is not necessarily a more correct one. And a shorter answer is not necessarily a less correct one. In fact, I doubt there’s even a correlation between the two.

        “Why Flynn-adjust IQ scores?”

        -To account for the effects of changing technology (broadly spoken) over time. And some of the most important elements of human capital have shown virtually no Flynn Effect over the past half-century:
        http://www.vdare.com/posts/has-a-15-year-old-explained-iqs-flynn-effect
        So I suspect that the Flynn Effect is in many respects a rather facile phenomenon. Although it can’t be totally unimportant.
        But what, exactly, did you intend to ask by this question?

        “The Flynn effect shows they are changeable – that’s the point.”

        -True. Yet, the gaps between races and nations remain constant.

        “The fact that people don’t invest in more cognitive skill (which is itself debatable) doesn’t mean you cannot.”

        -Agreed. But that will require some draconian measures, especially for low-average-IQ countries.

        “And your last explanation doesn’t account for why low and high IQ people within countries don’t see a big difference in wages – regardless of the average level of IQ in that country.”

        -How doesn’t it?

      • If absolute IQ matters, then adjusting for the Flynn effect ignores the fact that they rise over time. Within countries, I get why you’d want to Flynn-adjust when explaining relative wages. But x-country and x-time, I think you want to leave that variation in there.

        The fact that the gaps between countries remain doesn’t mean it’s impossible to close those gaps. But even if it is, it doesn’t change the idea that improving IQ in all countries would be good for development.

  2. Sounds like an interesting book. A small correction to the post. The name of one of the co-authors to the paper on the economic effects of micronutrient deficiency was misspelled. It should be Politi instead of Polita.

  3. This is old news, Lynn and Vanhanen wrote a great book I think 10 years ago. The Flynn effect adds nothing Jensen effect is the one that matters.

  4. Readers here might want to look at Unz’s writings about European IQ. There were substantial gaps between countries in the early 1900s in Europe plus the fact that Irish IQ averaged 85 as recently as 1970. As far as I know, the study on Irish IQ had a large random sample and followed proper methodology. Coincidentally, Irish IQ caught up to the UK average upon the “Celtic Tiger” miracle.

    • So perhaps the causality runs the other way – from development to IQ. I don’t know that we have a definitive way of proving this right or wrong. What you probably want is actual information on the distribution of IQ. Does having a cohort of high IQ people matter for growth, but growth brings up the average by raising IQ at the low end through schooling, etc..?

  5. This might be only vaguely related to your blog post, but I am going to post it anyway.

    Between the two factors of production, labour is in excess in India. Yet, the recent emphasis in the economy is on tech-based entrepreneurship which, in essence, looks to consistently replace labour with capital. As an example, think about this excerpt from something I wrote on my blog.

    …the second wave of start-ups like BigBasket.com has penetrated deeper. The ‘online’ grocery stores enable you to order your daily requirements through the comfort of an app.

    Unlike luxury goods, groceries and vegetables are staple items required by the masses. Inherently, the supply chain of these staple goods employs many more people from the lower income classes (the vegetable marketplace near your house, the trucking industry delivering fruits and vegetables to the sellers at the marketplace etc). Disruptions here will inevitably affect the more vulnerable sections. The ease that these start-ups introduce in our lives is phenomenal: no more bargaining at the marketplace and you get your daily needs delivered to your doorstep at a time of your convenience. Add to that the discounts that these start-ups can provide because they cut through the supply chain. To a population whose median age is 26, this option seems much better than the alternatives of yesteryears.

    Research by the economist and author of ‘Why Nations Fail’, Daron Acemoglu, shows that the progress in an economy is often biased towards the factor of production that is relatively more in demand than the other; the case in point here being capital. An Economist article on this theme describes it aptly. “…substituting capital for labour through automation is increasingly attractive; as a result owners of capital have captured even more of the world’s income since the 1980s, while the share going to labour has fallen.” The founder of Keynesian economics – John Maynard Keynes – pointed out that one of the reasons for America’s economic pessimism during the Great Depression was technological unemployment.

    The fact that high IQ is correlated with economic development is true here. Only the top engineers of the country end up becoming successful entrepreneurs (if education from the best colleges of the country were a proxy for high IQ). However, I don’t quite agree with high IQs being related to market-oriented policies. If that was the case, then why aren’t entrepreneurs tapping the labour excess in the country as compared to making them redundant?

    • Thanks for the comment. A few things. First, I’m not sure what “excess labor” means. I think I get the general idea you’re after, but it would help to be more specific.

      I think maybe one answer to why those entrepreneurs do not use the “excess labor” is these fragile production chains that Jones writes about. It isn’t necessarily true that I can substitute 100 poorly trained workers who makes mistakes for 1 well-trained worker who does not. If any mistake is fatal, then it isn’t worth using those 100 extra workers, no matter how cheap they are.

  6. None of your five channels include the actual skills and better decision making that are more likely with higher cognitive abilities. Clearly a country with a high percentage of engineers, MBAs, scientists, technicians, etc. should be much more productive than one with very few.

    • Ok, I guess you cover this, “But the average wage is incredibly high, because the economy engages in these productive, fragile production processes. So high IQ countries are very rich compared to low IQ countries.” Normally, I don’t rush the comments out without a good thorough read first. Getting a bit late….

  7. I’ve always disliked studies like this. Not because of the results, but because of how people interpret the results.

    Professor, if you share these results with your class, you’ll need to include a giant asterisk about what IQ scores actually mean. Don’t assume your students have taken enough psych classes to know what IQ scores really represent.

    You mention health policies, and that is absolutely what we should conclude from this. Were you aware that every malaria infection (possibly other than the first) someone has during their life permanently lowers their IQ?

  8. How about this? Iq is a product of Northian institutions. 1, nothing else makes sense except to a racialist, and 2, any example you can give of things that impact iq is an institution.

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  10. “..on how iodizing water helped raise IQ scores in the US” Uh, salt is iodised, water supplies have been fluoridated [different halogen].

    “Clearly a country with a high percentage of engineers, MBAs, scientists, technicians, etc. should be much more productive than one with very few” MBA’s? Productive? I laughed.

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  12. In my mental model it’s development that fuels IQ growth. It’s all endogenous, but how else do you explain the Flynn effect? Industry and more so the service sectors require these cognitive skills and abstract thinking, which let’s be honest, is basically what measures of IQ are really picking up. It would be odd to say that the average farmer is “less smart” than the average banker, but the latter 9 times out of 10 would register a higher IQ. More evidence, why do Jewish people typically register significantly higher IQs than average? Because they were pushed into the services sector long before anyone else because of racist restrictions related to land holding. I would put the direction of causality much more strongly running from development to IQ than the other way around.

    • So what do we make of the results regarding iodinization and IQ increases? Or do you lump that under development, because it was a public health intervention?

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