"IQ in the Ramsey Model: A Naïve Calibration", Jones 2006:

I show that in a conventional Ramsey model, between one-fourth and one-half of the global income distribution can be explained by a single factor: The effect of large, persistent differences in national average IQ on the private marginal product of labor. Thus, differences in national average IQ may be a driving force behind global income inequality. These persistent differences in cognitive ability - which are well-supported in the psychology literature - are likely to be somewhat malleable through better health care, better education, and especially better nutrition in the world’s poorest countries. A simple calibration exercise in the spirit of Bils and Klenow (2000) and Castro (2005) is conducted. I show that an IQ-augmented Ramsey model can explain more than half of the empirical relationship between national average IQ and GDP per worker. I provide evidence that little of the IQ-productivity relationship is likely to be due to reverse causality.

One question of interest is whether the IQ-productivity relationship has strengthened or weakened over the past few decades. Shocks such as the Great Depression and the Second World War were likely to move nations away from their steady-state paths. Further, many countries have embraced market economies in recent decades, a policy change which is likely to have removed non-IQ-related barriers to riches.11 Accordingly, one would expect the IQ-productivity relationship to have strengthened over the decades.

As Table 2 shows, I indeed found this to be the case. I used LV’s IQ data along with Penn World Table data for each decade from 1960 through 1990 (1950 only had 38 relevant observations, and so is omitted). As before, equation (3) was used to estimate the IQ-productivity relationship, while the IQ-elasticity of wages is assumed to equal 1 for simplicity. Both the unconditional R2 and the fraction of the variance explained by the IQ-wage relationship increase steadily across the decades. This is true regardless of the capital share parameter in question. Further, the log-slope of the IQ-productivity relationship has also increased.

• 11: Lynn and Vanhanen (2002) hypothesize that national average IQ and market institutions are the two crucial determinants of GDP per capita. They provide some bivariate regressions supporting this hypothesis; they show that both variables together explain much more—about 75% of the variance in the level of GDP per capita - than either variable alone, each of which can explain roughly 50%.

The Ramsey-style model of Manuelli and Seshadri (2005) would be a natural extension: In their model, ex-ante differences in total factor productivity of at most 27% interact with education decisions and fertility choices to completely replicate the span of the current global income distribution. In their calibration—less naïve and more complex then the one I present—a 1% rise in TFP (e.g., 1 IQ point) causes a 9% rise in steady- state productivity. Manuelli and Seshadri leave unanswered the question of what those ex-ante differences in TFP might be, but persistent differences in national average IQ are a natural candidate.