Michael Kremer and O-Rings

Congratulations to Abhijit Banajee, Esther Duflo and Michael Kremer for their well-deserved Nobel Prize!

Kremer’s paper The O-Ring Theory of Economic Development (1993) is both dated in allusion and timeless in its deeper meaning.  It argues that high skill workers in sequential processes cooperate to minimise errors that would otherwise destroy output value.  The “O-Ring” alludes to the Challenger space shuttle disaster that occurred when just one part – an O-Ring – failed on launch.  Only those of us of a certain age remember it vividly with sadness for the astronauts who “slipped the surly bonds of earth to touch the face of God…” in President Reagan’s words.

Kremer argues correctly that skilled workers cluster together, that quantity cannot substitute for quality, and that small differences in worker skill lead to large wage and productivity differences between countries.  The argument resonates with Lucas’s rationale for why skilled people move not to where skill is scarce but to where it is plentiful.  Highly skilled people lift others’ productivity.  Furthermore, a chain is only as strong as its weakest part – a rocket is only reliable when all the key components work effectively.

Kremer uses his model to help explain why agriculture is associated with low economic development levels.  He argues that countries with high skill workers specialise in products that require expensive intermediate inputs and countries with low skill workers “specialise in primary production” with poverty associated with it.

Historically, agriculture was an industry that permitted large error margins.  Shepherds could pipe on oaten straws oblivious to time – including “just in time!”  Illiterate and innumerate workers could find work because their low skills did not create “O-Ring” like risks.  Those days are now over, and on this point Kremer’s wonderful paper needs to be updated.

A low skill worker who causes a food safety or biosecurity failure at any point in the supply chain can cause massive damage to our food and fibre exports.  These supply chains are under social media and other scrutiny. The “O-Ring risks” are ethical and psychic as well as safety, surety and security-related.  Animal welfare, working conditions and environmental impacts all impinge on what is allowed in markets let alone creating value in such markets.

 

About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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