Physioeconomics: The Basis for Long-Run Economic Growth

Published by EH.NET (September 2001)

Philip Parker, Physioeconomics: The Basis for Long-Run Economic Growth.

Cambridge, MA: MIT Press, 2000. xi + 315 pp. $29.95 (cloth), ISBN:

0-262-16194-X.

Reviewed for EH.NET by Sylvain H. Boko, Department of Economics, Wake Forest

University.

This book offers a unique approach to explaining differences in growth

performance across countries. The approach is based on the so-called

“equatorial paradox,” the observation that the closer a country is to the

equator the more likely it will have lower than average consumption per

capita. The author argues that the latitude of a country is the main

determinant of its inhabitants’ “homeostatic utility,” which, in turn, is

determined by the laws of physics (thermodynamics), and the brain’s

hypothalamus, a major regulator of homeostasis. For Parker, each country has a

natural homeostatic steady state, governed by physioeconomics. Further, he

proposes that a country’s economic performance should be gauged “not by its

absolute level of income or consumption, but rather by how far it is from

[its] homeostatic steady state” (p. ix). With respect to the empirical

application of these ideas, Parker proposes four innovative approaches, the

results of which are sometimes unexpected.

The first idea stems from the observation that international economic data are

spatially correlated. As is well known, failure to account for these

correlations results in inefficient parameter estimates, biased estimates and

bad inference. Attempts to correct for such autocorrelation or serial

autocorrelation problems through the inclusion of dummy variables in

traditional growth models have proven “disappointing” from the author’s point

of view. A proposed solution is a sample matching approach, which consists of

clustering countries based on their “physioeconomic dispositions” (p 212).

Within each cluster, countries are then ranked by various measures of

performance, allowing for standard econometric modeling to be applied. The

approach is said to effectively eliminate spatial correlations, easily

revealing the successes and failures of each country’s policies relative to

other members of the cluster. One shortcoming of this approach is that it

provides only limited insight into the dynamics of within-cluster performance.

To remedy this, Parker proposes “filtering” cross-country data “for exogenous

climatic variables, as one might deseasonalize times series data prior to

measuring the impact of policy” (p 216). The final residuals series after this

filtering is completed is termed a Relative Performance Index (RPI) by the

author. It is claimed that the RPI controls for exogenous factors that

underlie systematic differences in the steady state of homeostatic utility.

The higher the RPI, the better-ranked countries are. This procedure, when

applied to a cross-section of countries sometimes generated some highly

unexpected results. For example, according to this method, Burkina Faso “is an

above average performer, given its starting position, compared to the United

States^? [meaning that] it has been better at generating more income given its

steady-state endowments than the United States with its endowments” (p. 225).

This is not a conclusion that one would expect to obtain from traditional

growth models.

The author points out that the filtering procedure lacks utility maximization

and “homeostatic comfort” as a central notion. Thus, an alternative solution

is to use “local performance measures.” Roughly, this method calls for the

determination of local (country-specific) and “unambiguous” measures of

physical consumption (food, housing, clothing, transportation, energy and

various forms of entertainment) that is required to establish human comfort,

this being determined by the country’s “thermodynamic disposition.” A relative

performance index is then derived by dividing actual per capita income by the

income required for a “decent standard of living.” On the basis of this

measure, a country is ranked as a high performer when it has been able to

generate average incomes that are higher than the minimal requirements for

the country’s specifically determined “decent living conditions.” The

application of this methodology to a cross-section of countries also reveals

surprising results. For instance, contrary to the popular notion in the

literature, some of the highest performing countries (with Gabon as a prime

example) are in Africa.

The fourth idea advanced in the book, and the least convincing, is to ask

groups of selected respondents from various countries, what income levels they

believe would be necessary in their respective countries to achieve the same

level of utility as in some selected base country (Germany for example). The

author terms this method “direct inspection.” Groups of World Bank or IMF

types, MBA students, and economists from various points on the globe are asked

to answer this question. The apparently consistent result is that the

utility-equalizing income levels indicated by those who originate from hotter

countries are significantly lower than those indicated by respondents

originating from colder countries. It is a rather “obtuse” methodology as

recognized by the author himself, and one that seems forced. The most glaring

shortcoming of this method is that it polls people or groups of people who are

not representative of the average person in their countries of origin, and

may have a distorted notion of what income that average person would need to

achieve the same level of utility as other countries. However, the results do

seem to corroborate the hypothesis — i.e., warmer countries have lower

requirements for physical consumption to maintain their steady-state level of

homeostatic utility than colder countries — that the book purports to test.

The book ends with long-term predictions with respect to various measures of

development. Generally, the predictions are that longevity, literacy,

population growth, and migration, as well as the adoption of liberal political

and economic institutions, will converge in the long run (by the end of the

twenty-first century), both in terms of mean and dispersion, across all

countries. However, consumption patterns will remain divergent and

physioeconomic factors will generate most variances in the long run. It is

somewhat disappointing that most of the arguments used to support these

predictions are intuitive. There is no treatment of the dynamics that will

determine the convergence or divergence of the different measures considered

in this analysis.

In the end, the book makes a valiant effort in its attempts to find innovative

ways to measure the relative performance of countries. If one were to agree

with the book’s contention that a country’s latitude, through the laws of

thermodynamics, determines its population’s homeostatic consumption level and

utility, then this implies a major shift in development policy. Lower income

countries need not emulate higher income countries with respect to consumption

levels, since the former group needs lowers levels of physical consumption to

achieve the same level of utility as the latter group. The policy focus ought

to be to invest in education, health and infrastructure to assure that for

each country, the inhabitants have achieved a comfort level that is at least

equal to the minimum required level of consumption, determined locally on the

basis of physioeconomics. As suggested by the author, “the World Bank and

similar institutions should invest greater resources in estimating the real

income required to maintain human decency^? Abject poverty, whether in urban

America or rural Somalia, remains abject” (p. 234). This is a potentially

powerful line of research that can help to redirect countries’ resources to

more efficient and more effective usage by shifting the focus of development

policy from unattainable goals. As the opening chapters of the book

demonstrate however, the approach attempts to coordinate complex,

multidimensional and multidisciplinary issues and factors that affect human

behavior and human interaction, and perform economic analysis and predictions

on that basis. It is a difficult task that certainly requires further

development. Hopefully Physioeconomics will generate increased interest

in such an inquiry.

Sylvain H. Boko is currently completing a book on Decentralization and Reform

in Africa (Kluwer Academic Press, forthcoming). His articles include “The

Impact of International Agreements on Domestic Policy: An Analysis of Tariff

Policy in African Countries”(Atlantic Economic Journal, March 2001); and “A

New Look At Africa’s Growth Performance and Prospects for the 21st Century”

(in Ebere Onwudiwe and Minabere Ibelema, (eds), Afro-Optimism: Perspectives on

Africa’s Advances, Praeger. Forthcoming.)