John Cochrane used a theory about Lisa Cook to dismiss her as a member of the Board of Governors of the Federal Reserve System. I know Lisa well enough to know that John’s theory does not fit the facts.

I respect both John and Lisa as economists but recognize how they differ. John is a theorist. Lisa is an empiricist. Of the two, I would rather have Lisa on the Board of Governors because she is more attentive to the facts.

I may not be able to convince John that she is better suited to the job than he, but perhaps I can persuade him that she is better suited than I, a theorist like John.

Rule of Law and Economic Growth

I proposed a theory in which growth happens because of things that people do. The abstract implication of this theory is that good policy can increase the rate of growth by encouraging people to do more of those things. The practical policy implication seemed to be that improving contract law and offering more protection for intellectual property rights would be one of the most direct ways to increase a nation’s rate of growth.

In a paper available here or here, Lisa presents evidence that she spent many years accumulating about a crucial point that this line of reasoning missed. She used patenting as a proxy for the activities that spur growth and assembled convincing evidence that there is another part of the legal system that has a bigger effect: the degree to which it creates a climate of personal security by protecting citizens from the threat of violence.

This insight could be of first order significance for our understanding of differences in national rates of growth. For example, it could be crucial to our understanding of growth in post-communist Russia (the focus of Lisa’s Ph.D. thesis) relative to growth in China after the reforms initiated by Deng Xiaoping. Deng took over as part of a backlash to the wave of violence unleashed during Mao’s cultural revolution. Under him, the government returned to its commitment to creating a climate of security that seems to have been broadly supported by Chinese citizens. Then, the Chinese legal system did not support contracts or intellectual property in the way that Western legal systems did, but it seems to have been effective at providing a social climate characterized by personal security. This may have done more to create the conditions necessary for growth than many of us realized.

The Results

The gist of Lisa’s paper is conveyed in two figures. The first presents patenting rates for black inventors and the control group, white inventors. The logic behind her analysis is simple. Many things might influence the patenting rate of both groups; racial violence would affect only the black inventors and cause a divergence in the patenting rates between the two groups. So a comparison shows the effect that an erosion in personal security can have. The challenge in implementing this test that took years to overcome was to assemble historical data on patenting by race.

The second shows the timing of violence against Blacks during these years.

The surprise for me was the size of the effect on black patenting at a time when the control group of white inventors shows no comparable change.

Had I considered the effect that changes in personal security can have on an activity like patenting, I might have concluded that it could have some effect, but I would not have expected the effect to be so large. After Lisa’s evidence forced me to think again about how easy it is to take personal security for granted and about the profound effect that a lack of personal security can have on optimism and a willingness to invest in the future, it seems entirely plausible that the threat of violence that prevailed during the Cultural Revolution in China, during reform in Russia, or in South Africa today can depress the activities required for economic growth.

It suggests that growth theorists could learn a lot by looking beyond the degree to which a system of law provides protection for contracts and intellectual property rights and evaluating the degree to which it creates a climate of personal security.

Theories and Facts

There is a role for the type of theory that John and I do. Theorists build tools. Some of these tools turn out to be useful because they fit the facts. Many do not. Little harm comes from positing an imaginative new theory that turns out to be wrong provided that empiricists check it against the facts before someone uses it to make an important decision.

John is a glider pilot so he understands the importance of this intellectual division of labor. When a passenger plane runs out of fuel – and yes, this can happen – neither John nor I would rely on a theorist skilled in computational aerodynamics to choose between landing at a nearby airport that has a short runway or a more distant one with a longer runway. We’d both want to give the judgment call about where to land to someone who knows the facts about the landing speed and glide ratio of the plane.

For the same reason, he should prefer having someone like Lisa on the Board of Governors over someone like me because she will insist doggedly that important decisions be based on facts rather than theories. In so doing, she will support the fundamental commitment of science – that a fact beats a theory every time.