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Sunday, 24 February 2008

Reply to Kaplan's Demographics of the Oligarchs

Bryan Kaplan said the following at the EconLog post Demographics of the Oligarchs:
You've heard about the Russian "oligarchs," right? They're the richest men in Russia. The insinuation is almost invariably that they owe their riches not to entrepreneurial ability, but to political connections. It's not "what you know," but "who you know," right?

If this theory were true, you would expect the oligarchs to have unusual demographics for business leaders. In particular, they should be:

# Unusually likely to have been important members of the Communist Party before they went into business.

# Unusually unlikely to come from groups - like Jews and Armenians - known around the world for their entrepreneurial talent.

Both predictions are wrong.

Most of the oligarchs are too young to have been Communist Party bigwigs. As one interesting paper explains, "Most of the individuals... are relatively young: nine of them are in their 30s, and 13 are in their 40s." The older oligarchs generally had Communist backgrounds, but were hardly leading figures in the Party: "The older oligarchs have typically come from Soviet-era nomenklatura. Prior to transition, they were either managing the respective enterprises or working in government agencies supervising the enterprises, and when the Soviet-era firms were privatized, they converted their de facto control into ownership rights."

Even more striking: The oligarchs are disproportionately Jewish. 90% of Russian Jews have left the country over the last 30 years, but 6 out of the 7 leading oligarchs have Jewish ancestry. This would be hard to explain if their success were primarily due to political connections - but expected if their success largely reflected entrepreneurial ability.
Bryan claims that because Russian Oligarchs are mostly of Jewish ancestry that means that they got there because Jews have entrepreneurial talent and not political connections. However, he never considered the alternative hypothesis that their Jewish ancestry gave them political connections.

In the comments section of Kaplan's blog, Mike argues that immigration does not help the US and he says the following:
Hispanic immigration is not making America a better place. Quite the opposite.

National resources certainly help-- especially if they are used wisely. But the most important predictive factor of economic success in the long run is the average IQ of a nation. The only instances where low IQ nations are successful is when they have an abundance of natural resources combined with an authoritarian government capable of employing those resources in an intelligent way.

By contrast, nations with high IQs and capitalist economic systems, even with few resources (like Singapore), are bound to prosper in the long run.

Armenia is not successful, in part, because of decades of Communism and the fact that corruption and authoritarian power structures are the norm in business and political relations throughout most of the former USSR.

I also wouldn't be surprised to find out that the national IQ of Armenia really isn't very high and that some process has led to the selective emigration of the more intelligent and entrepreneurial Armenians to the West over the years. If the sum total of the world's Armenian population is of above-average intelligence, and the diaspora has been selected strongly for intelligence, the fact that so many Armenians live abroad would help explain both the low average IQ of Armenia and the economic success of the diaspora.

A similar relationship exists between the Cuban exile population in Florida and Cubans living under Fidel. The average IQ of Cubans isn't very high, but the Cuban exiles in the U.S. have been reasonably successful because they represent an exceptionally intelligent and economically successful segment of the Cuban population.
What Mike doesn't consider is the fact that people will low IQs have resources as well because unskilled labor is useful. Those people who serve fries at McDonald's needn't have high IQs, yet they have an important role in the economy. Furthermore, Mike looks at the median or arithmetic average IQ of a population without considering the variances. If we consider the variances then a population with low median IQ can still be exploited for high IQ if the variance in IQ is large.

For example, suppose populations can be modeled using the normal distribution. Suppose we have two populations, population A has mean IQ of 80 with standard deviation of 40. Population B has mean IQ of 100 with standard deviation of 10. Population B is "smarter" than population A because the average IQ of the people in population B is higher than that in population A. However, if we define someone smart as someone whose IQ is over 120 then there are more smart people in population A than in population B. Those with IQ over 120 make up 15.87 per cent of population A and make up only 2.27 per cent of population B. There are more smart people in population A than in population B even though population B has a higher average IQ.

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