What’s missing is a recognition of how mysterious the secret of
economic growth remains, despite all the energy that economists have
poured into solving it.
That’s James Surowiecki, reviewing Ha-Joon Chang’s Bad Samaritans and writing on free trade; the piece is interesting throughout. The pointer is from Ben Casnocha.
There is no secret to economic growth. Freedom + Secure Property Rights = Growth.
Kevin puts it very succinctly. You have to be a two-dimensional thinker to disagree.
Ok. Cursory glance around the world.
China — Transition from socialist, command economy to capitalist, freer economy has yielded huge gains in economic growth.
India — See above.
Europe — Stifling regulations and socialism/welfarism has stunted the growth of what was once the richest region in the world; except for places that have recently liberalized their economy (Estonia, Ireland, Latvia)
USA — Stifling regulations and socialism/welfarism/militarism has stunted the growth of what still is the richest large region in the world; whose wealth was built on a legacy of freedom and strong property rights.
Please show me an example that disputes my claim.
There is probably a difference between developing modern economic growth ab initio (North Italy, then the Netherlands, then Britain, say) from copying it (the USA, Germany, Japan, China, say).
“I find Jacob’s comment amusing considering Kevin’s formula is literally two-dimensional.”
Ditto – actually laughed out loud.
Unfortunately, even the most intelligent and sophisticated economists do not know what definitively causes economic growth. There are a few attributes that successful economies share, mainly: property rights, stable institutions, educated citizenry, high rates of national savings and technological innovation. But even a combination of these does not fully explain why some economies grow and others are stagnant. Gregory Clark in his book, A Farewell to Alms, explains that many countries before the industrial revolution had seemingly hospitable circumstances for economic growth such as low taxes (relative to today’s standards), a mobile labor force, and established legal systems. Despite all this, the economies remained stagnant until the 19th century. So even today, after a plethora of research in the field, economic growth continues to be a mystery.
Kevin Nowell: USA — Stifling regulations and socialism/welfarism/militarism has stunted the growth of what still is the richest large region in the world; whose wealth was built on a legacy of freedom and strong property rights
And yet, the period of America’s immense economic growth between the years 1945-1975 came to a screeching halt at just about the same time that Milton Friedman and his acolytes got their feet firmly in D.C.’s door. It certainly wasn’t FDR or his followers who made the monumentally inept and fatal decision to give the nation’s primary economic golden goose – its domestic manufacturing apparatus -the unceremonial boot.
Agee with you about the “militarism”, though.
Here’s a counterexample for Kevin: India appears to me to have decidedly better property rights and especially freedom. Why isn’t it outperforming China bigtime?
Jacob, China isn’t remotely Communist. It’s a capitalist oligarchy.
With all due respect, K. Williams, the appropriate question is not whether countries can be successful under economically illiberal regimes; the appropriate question is whether, all other things equal, a country with free trade is better than one without. China seems to be an ideal case; it’s not free by any means now, but it is economically more liberal than it was twenty, thirty years ago. India’s case likewise supports free trade; it was governed by very socialist thinking, with very strict foreign exchange controls and very limited free markets until the early 90s, when the present Prime Minister, an economist, was instrumental in structuring more open economic policies.
John, that’s not actually the appropriate question: the question is what are the major sources of economic growth? And there’s just not much evidence to suggest that free trade (in the sense of allowing the free flow of goods into your borders) has much of an impact one way or the other. More important, China is not an ideal case, at least not for the truisms of free-market thought. It still has foreign-exchange controls, tightly restricts foreign investment, and doesn’t allow the convertibility of its currency (along with massive state ownership, etc.) The issue that’s at stake in this debate is not whether some form of capitalism is superior to state ownership or whatever: of course it is. The issue is whether the kind of unfettered capitalism that developing countries were pushed over the last twenty-five years is beneficial or inimical to economic growth. And I think the answer is that the empirical evidence can’t really tell us.
As for India, the evidence there is far more ambiguous than you suggest. As you can see from this Dani Rodrik paper for the IMF (www.imf.org/external/pubs/ft/wp/2004/wp0477.pdf), India’s productivity and growth surge began in the early 1980s, long before any of the liberalization occurred, and appears to be uncorrelated with any market reforms. Those reforms might have helped keep the ball rolling, but they did not set it in motion.
“The issue that’s at stake in this debate is not whether some form of capitalism is superior to state ownership or whatever: of course it is. The issue is whether the kind of unfettered capitalism that developing countries were pushed over the last twenty-five years is beneficial or inimical to economic growth.”
I’m not sure I see the meaningful difference, to be quite honest. More capitalism, ceteris paribus, seems to produce more economic growth. I don’t think we know exactly why this is the case, but the evidence points to this conclusion.
I think Vietnam is a pretty good example. Their economy went nowhere until they introduced limited market reforms in the early ’80s. The economy grew a bit, then stagnated again until they introduced more far-reaching market reforms – Doi Moi. Since then they’ve been on an upward trend.
I would hasten to add that although comparing countries before and after they change economic policies is the best we can get to experimental economics proving or disproving hypotheses about the provenance of the market, this is by no means a perfect method. Sometimes global economic conditions lift all boats, even the ones leaking like crazy. I don’t know much about the Indian case in the early ’80s, and indeed global economic conditions were probably not too conducive to growth then, but generally research in this area is subject far too much to the “correlation does not imply causation” caveat. All we can do is hypothesise to the best degree that the data let us; I’m open to the suggestion that markets don’t produce growth, but my reading of the data is that, all other things equal, they do.
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