Economist have a hard time understanding the causes of growth and wealth creation. For instance, economic theory, as much as it has tried, has yet to explain the industrial revolution. The weighty tomes of economists talk of “animal spirits,” or “the invisible hand” as if all that activity happens with no rhyme or reason. In the end they can’t explain or seem to understand the really important. This recent op ed in the WSJ gets it.
Actually, the “we” of comparative enrichment includes most countries nowadays, with sad exceptions. Two centuries ago, the average world income per human (in present-day prices) was about $3 a day. It had been so since we lived in caves. Now it is $33 a day—which is Brazil’s current level and the level of the U.S. in 1940. Over the past 200 years, the average real income per person—including even such present-day tragedies as Chad and North Korea—has grown by a factor of 10. It is stunning. In countries that adopted trade and economic betterment wholeheartedly, like Japan, Sweden and the U.S., it is more like a factor of 30—even more stunning.
And these figures don’t take into account the radical improvement since 1800 in commonly available goods and services. Today’s concerns over the stagnation of real wages in the U.S. and other developed economies are overblown if put in historical perspective. As the economists Donald Boudreaux and Mark Perry have argued in these pages, the official figures don’t take account of the real benefits of our astonishing material progress…
Nothing like the Great Enrichment of the past two centuries had ever happened before. Doublings of income—mere 100% betterments in the human condition—had happened often, during the glory of Greece and the grandeur of Rome, in Song China and Mughal India. But people soon fell back to the miserable routine of Afghanistan’s income nowadays, $3 or worse. A revolutionary betterment of 10,000%, taking into account everything from canned goods to antidepressants, was out of the question. Until it happened.
What caused it? The usual explanations follow ideology. On the left, from Marx onward, the key is said to be exploitation. Capitalists after 1800 seized surplus value from their workers and invested it in dark, satanic mills. On the right, from the blessed Adam Smith onward, the trick was thought to be savings. The wild Highlanders could become as rich as the Dutch—”the highest degree of opulence,” as Smith put it in 1776—if they would merely save enough to accumulate capital (and stop stealing cattle from one another).
A recent extension of Smith’s claim, put forward by the late economics Nobelist Douglass North (and now embraced as orthodoxy by the World Bank) is that the real elixir is institutions. On this view, if you give a nation’s lawyers fine robes and white wigs, you will get something like English common law. Legislation will follow, corruption will vanish, and the nation will be carried by the accumulation of capital to the highest degree of opulence….
Look around your room and note the hundreds of post-1800 ideas embedded in it: electric lights, central heating and cooling, carpet woven by machine, windows larger than any achievable until the float-glass process. Or consider your own human capital formed at college, or your dog’s health from visits to the vet.
The ideas sufficed. Once we had the ideas for railroads or air conditioning or the modern research university, getting the wherewithal to do them was comparatively simple, because they were so obviously profitable….
Why did ideas so suddenly start having sex, there and then? Why did it all start at first in Holland about 1600 and then England about 1700 and then the North American colonies and England’s impoverished neighbor, Scotland, and then Belgium and northern France and the Rhineland?
The answer, in a word, is “liberty.” Liberated people, it turns out, are ingenious. Slaves, serfs, subordinated women, people frozen in a hierarchy of lords or bureaucrats are not. By certain accidents of European politics, having nothing to do with deep European virtue, more and more Europeans were liberated. From Luther’s reformation through the Dutch revolt against Spain after 1568 and England’s turmoil in the Civil War of the 1640s, down to the American and French revolutions, Europeans came to believe that common people should be liberated to have a go. You might call it: life, liberty and the pursuit of happiness.
The answer to growth is as simple as that. Liberty, the ability to own your own property, make your own mistakes and chart your own destiny is the key to growth for everybody. When you are free to pursue wealth, wealth happens. That’s because when people make free exchanges, both sides benefit from the exchange. When that happens, business and civilization thrive and grow.
Not only that, with liberty people, can make the choices and risks that can improve their lives. It’s the chance to go to California and be a ’49ner or Nebraska and get a job on the transcontinental railroad. It’s opening a clothing business or making stuff right off the boat in NYC. Here’s more from the article.
I would supplement his remark. It will also come from the businessperson who buys low to sell high, the hairdresser who spots an opportunity for a new shop, the oil roughneck who moves to and from North Dakota with alacrity and all the other commoners who agree to the basic bourgeois deal: Let me seize an opportunity for economic betterment, tested in trade, and I’ll make us all rich.
Perhaps there’s no more powerful example of the power of economic liberty than the little island of Hong Kong. Which had the advantage of having a remarkable individual in charge of finance who managed to get the busybody’s hands off.
This latest ranking in the WSJ/Heritage report confirms what Canada’s Fraser Institute found in its latest Economic Freedom of the World Index, which also ranked HK as the world’s freest. The World Bank rates the “ease of doing business” in HK as just about the best on the planet.
To say that an economy is “the freest” is to say that it’s “the most capitalist.” Capitalism is what happens when you leave peaceful people alone. It doesn’t require some elaborate and artificial, Rube Goldberg contrivance cooked up by tenured central planners in their insular ivory towers. But if we are to believe the critics of capitalism, HK must also be a veritable Hell’s Kitchen of greed, poverty, exploitation and despair.
Not so. Not even close.
Maybe this is why socialists don’t like to talk about Hong Kong: It’s not only the freest economy, it’s also one of the richest. Its per capita income, at 264 percent of the world’s average, has more than doubled in the past 15 years. People don’t flee from HK; they flock to it. At the close of World War II, the population numbered 750,000. Today it’s nearly ten times that, at 7.1 million.
The news that the HK economy is once again rated the world’s freest is an occasion to celebrate the one man most responsible for this perennial achievement. The name of Sir John James Cowperthwaite (1915–2006) should forever occupy top shelf in the pantheon of great libertarians. Some of us just write about libertarian ideas. This guy actually made them public policy for millions of citizens.
The late Milton Friedman explained in a 1997 tribute to Cowperthwaite how remarkable his economic legacy is: “Compare Britain—the birthplace of the Industrial Revolution, the nineteenth-century economic superpower on whose empire the sun never set—with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbor. Yet within four decades the residents of this spit of overcrowded land had achieved a level of income one-third higher than that enjoyed by the residents of its former mother country.”
A Scot by birth, Cowperthwaite attended Merchiston Castle School in Edinburgh and then studied classics at St Andrews University and at Christ’s College at Cambridge. He served in the British Colonial Administrative Service in HK during the early 1940s. After the war he was asked to come up with plans for the government to boost economic growth. To his credit, he had his eyes open and noticed that the economy was already recovering quite nicely without government direction. So while the mother country lurched in a socialist direction at home under Clement Attlee, Cowperthwaite became an advocate of what he called “positive non-interventionism” in HK. Later as the colony’s Financial Secretary from 1961 to 1971, he personally administered it.
“Over a wide field of our economy it is still the better course to rely on the nineteenth century’s ‘hidden hand’ than to thrust clumsy bureaucratic fingers into its sensitive mechanism,” Cowperthwaite declared in 1962. “In particular, we cannot afford to damage its mainspring, freedom of competitive enterprise.” He didn’t like protectionism or subsidies even for new, so-called “infant” industries: “An infant industry, if coddled, tends to remain an infant industry and never grows up or expands.” He believed firmly that “in the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.”
A truly remarkable man indeed. He understood that the fundamental complexity of an economy work best when as many decisions are made as close to the people who will be affected by those decisions as possible.
By the time I met Sir John, the success of Hong Kong had already been firmly established. Hong Kong was and is the world’s freest economy and one of the greatest triumphs of the laissez-faire approach to economic development. Sir John arrived in Hong Kong in 1947. At that time, Hong Kong’s residents were poorer than citizens of some African countries. The territory was small in size and had no natural resources. Many economists, Nobel laureate Gunnar Myrdal among them, predicted prosperity for Africa and a bleak future for Asia.
By the end of the 20th century, however, Hong Kong had become one of the most prosperous territories in the world. Economist Angus Maddison estimates that in 1950 Hong Kong’s citizens were 40 percent poorer on a per capita basis than the citizens of the oil rich African country of Gabon. By 1998, Hong Kong’s residents were over four times richer than the Gabonese. In the long run, in other words, Hong Kong’s free market policies proved more important than Gabon’s natural riches or its more advanced starting position.
At the time I started my studies, I did not know that the chief architect of Hong Kong’s prosperity lived on the same street as I did — a mere three houses away. Once I learned of his whereabouts, I sent him a letter asking him for a meeting. His affirmative reply, like so many of our future communications, came courtesy of the Royal Mail. Sir John was an old-fashioned man. When I finally met him, I found him to be modest but self-assured. While other colonial administrators throughout the British Empire were busy adopting statist economic policies, Sir John rejected the socialist zeitgeist. Heavily influenced by Adam Smith, Sir John let the Hong Kong economy grow unhindered by bureaucratic overreach. As he told me, “I came to Hong Kong and found the economy working just fine. So, I left it that way.” Some 50 years after he first set foot in Hong Kong, Sir John was clearly enjoying seeing his policies vindicated.
In the best tradition of the British colonial service, Sir John made few public statements after his retirement, but he was eager to share his insights with the next generation of free market liberals. We spent hours talking about Hong Kong’s 16 percent tax rate, business-friendly regulatory environment, lack of state subsidies, tariff-free trade relations with the rest of the world and other policies he promoted while Financial Secretary. Of all the policies that we discussed, one stands out in my mind — if for no other reason than because it is so thoroughly counterintuitive. I asked him to name the one reform that he was most proud of. “I abolished the collection of statistics,” he replied. Sir John believed that statistics are dangerous, because they enable social engineers of all stripes to justify state intervention in the economy.
At some point during our first conversation I managed to irk him by suggesting that he was chiefly known “for doing nothing.” In fact, he pointed out, keeping the British political busy-bodies from interfering in Hong Kong’s economic affairs took up a large portion of his time. Throughout Sir John’s tenure in office, the British political elite tried to impose its own ailing socialist economic model on Britain’s colonies, including Hong Kong. Sir John managed to quash all such attempts and Hong Kong benefited as a result. In 2004, the World Bank estimated, Hong Kong’s per capita income adjusted for purchasing power parity (GNI PPP) was $31,510. Great Britain’s 2004 GNI PPP was $31,460.
Economic freedom pays off everywhere it’s tried. Dynamic economies increase entropy and ideas having sex, creating growth and optimism. That’s as simple as it gets. The more freedom you have the more wealth you create. Which means that just about everybody gets rich. This is something that all the economists have not been able to deal with.
Of course it may be the goal that not everybody get rich. If you are already rich, what does it matter that other people get rich. In fact other people getting rich has it’s downsides for you. Especially if your income depend on rents from activities that might be rendered suddenly obsolete by the economic disruptions created by people getting rich. Wretchard has an interesting post about that.
Perhaps the first major 20th century writer to realize that the ambition of all true Communists should be to become billionaire revolutionaries was Hilaire Belloc. In his 1912 book, The Servile State, Belloc argued the then-burgeoning Communist movement would find more success ditching Leninism in favor of an alliance with Crony Capitalists to reinstate Slavery. “Slavery, or a Servile State in which those who do not own the means of production shall be legally compelled to work for those who do, and shall receive in exchange a security of livelihood.”
This modern form of slavery would address not only the concerns of the revolutionaries by fixing job insecurity and guaranteeing retirement on a plantation basis, but also assuage the monopolists, who stay up nights worrying about preserving market share in the face of competition. An alliance between socialists and crony capitalists would solve both problems at once. The only price to pay for this convenience is the loss of public freedom and that is readily paid.
As for the rest, it would be sustainable. The crony capitalists would underwrite the projects of the collectivists. The ant-heaps of each would be so similar to the other that only a few changes in signage would be needed to turn regulated capitalism into the workers’ paradise. It was a tremendous insight. Belloc realized Bolshevism was was too obviously destructive to last and anticipated the rise of what we would now call the Blue Model. F.A. Hayek paid tribute: “Hilaire Belloc … explained that the effects of Socialist doctrine on Capitalist society is to produce a third thing different from either of its two begetters – to wit, the Servile State.” Regarding the Servile State, George Orwell realized whatever name it gave itself, such an unholy alliance would be much the same quantity.
For the Davos crowd and the rest of the power elites, a servile state makes perfect sense, for them. At least it will for a while. The problem is that they don’t understand the consequences of what will happen if society becomes more static and servile. What’s going to happen is total breakdown. The world won’t be something like the Hunger Games with a few being able to run things and live the high life through high technology. There won’t BE any technology at all, or at least none above the animal and waterwheel level.
The Davos crowd and the rest of the swells, with their degrees from the Ivy Covered Snob Factories don’t understand that technology is not magic. To work, any technology requires many people voluntarily working, taking risks and maintaining the machines without having to be told what to do. This is exactly the opposite of the servile culture. In fact, when servile cultures encounter technology things break and break down.
Which is how you get stuff like this.
All that shiny city and no sewers. How stupid was that? Yet the people working so hard to create one form of servile state or another, through socialism, communism or Gaia worship can’t seem to grasp that the very complexities of a technological post industrial society make trying to make a more servile culture a path to a disaster.
Consider a simple pencil, and just how much complexity and how many people are involved to put a simple pencil on your desk. How many people voluntarily working, without ever meeting and no central plan, does it take to just do this seemingly simple thing.
We all rely on the good work of millions of people that we will never meet and the Swells want to put them, and us in chains to feed their petty egos and preserve their perogatives. The problem is that their plans are doomed to fail. The soft landing, for everybody, is new technologies emerging and disrupting the status quo frequently enough to maintain liberty in some places and industries. That’s the way things have been for the last fifty years or so. The swells, though, have done everything in their great power, used every tool at their disposal to make that harder and harder. What they can’t seem to understand that the alternative to liberty is going to be the hard landing.
The problem is that things are too networked, too complicated for anybody or any kind of control to keep track. There are too many people doing too many different things for any one entity to begin to have the knowledge required to understand all of it, let alone plan and control it. A command economy is OK maybe, for an essentially agricultural society. For anything else, servility just doesn’t work. For modern society you need competent people making their own decisions. Or things stop working much faster than most people imagine.
In the face of this failure perhaps it is time to revisit Belloc’s alternatives. If the only remaining path is to encourage a return to the popular ownership of property and making markets freer as opposed to cutting deals with monopolists — then so be it. Technology may be working in favor of the path not taken. As intellectual property becomes the dominant means of production, every human is automatically born with a certain amount of capital, provided Planned Parenthood doesn’t get to him first.
Lincoln Steffens thought he saw a future that worked but it was cruel fraud. Why not try property this time instead of slavery? We’ve tried being slaves. Let’s try being free. Belloc points out this idea is so revolutionary that anyone who espouses it will almost certainly be suspected of mental incapacity.
It’s time to decide who we want to be. We can be the servile desiring crowd above, wanting more stuff produced by other people and slavish in their loyalty to those who want to give them tighter and stringer chains. They may have believed that they were getting something for nothing, but it’s not going to work out that way. Of course The “bliss” that they get from their following the latest glorious leader willing to separate them from the hard task of making decisions for themselves will be replaced by the pain of hard understanding when they realize that there is no way to escape the gods of the copybook headings.
Or we can be like Art up top, who’s already lived in the servile paradise that the people above dream about and knows all too well what that means. Art has chosen liberty, defiantly and boldly because he’s lived the alternative. He escaped and soon after, his native Poland escaped. That’s why he was speaking out across the street from the people above.
That’s the choice at hand. Liberty and prosperity, with wealth for all. Or succumbing to envy, petty jealousy, and the promise of free stuff followed all too quickly by the onrush of tyranny, bad central planning, cronyism, corruption, the red tape worm and all the other joys that’s come out of the mind of those with more power and connection than common sense.
For more on the dysfunctional economy click Here or on the tag below.