Tyler Cowen explains why freedom is good for prosperity. One might add that prosperity is good for freedom, as well.
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A Patriotic Post
04 Jul 2007 11:01 am
Comments (25)
Posted by Al | July 4, 2007 11:18 AM:"That's certainly the conventional wisdom. I thnk the Chinese are challenging that wisdom, though."
If you follow the links you may find that they discuss that and suggest that over the long term it is not true. China can play catch-up with the West with a dictatorship but once it has caught up, what can it do next? Japan, vastly freer than China, was able to use an authoritarian model to catch up with the West because all it needed to do was copy what the West had done and keep the big companies afloat. It has been lost ever since because no one knows what to do and the straight jack of Japanese society and regulation cannot be removed easily.
Of course historically autocracies have always been richer and more advanced than democracies, but the West seems to manage to be both.
There is a difference between economic freedom (i.e. free markets, free capital flows) and political freedom. Economic freedom does help and aid prosperity, but that need not necessarily lead to political freedom. That explains the Chinese paradox.. well somewhat.
On Independence day it feels good to live in a country with both. For now at least....
Of course historically autocracies have always been richer and more advanced than democracies
Could you please supply some data to justify this assertion?
I guess you can point to early modern Switzerland as a poor democracy. It was geographically isolated and poor, which made invasion both difficult and pointless. Don't know how well the trend holds up though.
If you follow the links
Following the links is for wimps. :-)
Japan, vastly freer than China, was able to use an authoritarian model to catch up with the West because all it needed to do was copy what the West had done and keep the big companies afloat
That's an incredily uninformed explanation of Japan's post-WWII economic success.
"There is a difference between economic freedom (i.e. free markets, free capital flows) and political freedom. Economic freedom does help and aid prosperity, but that need not necessarily lead to political freedom."
This is more true of Hong Kong, which regularly tops the ranks of the WSJ/Heritage Index of Economic Freedom, than Mainland China, which is far down the list.
Economic freedom requires government to effectively play its essential roles: protecting private property rights, enforcing contracts, providing legal recourse for dispute resolution, allowing a free press to expose corruption, etc. Mainland China's relative paucity of these government functions limits its economic freedom and is starting to limit its potential for further economic growth. The poison dog food & toothpaste incidents don't bode well for China's move into higher-end manufacturing sectors, and without effective rule of law and protection of property rights, its securities industry remains a little Wild West, dwarfed in market cap by those of Hong Kong, Japan, etc.
Posted by James Gary | July 4, 2007 11:38 AM:"Could you please supply some data to justify this assertion?"
I could but on the whole I think I'd prefer not to. It is both off topic and immediately self evident for all but the modern period.
Posted by Reality Man | July 4, 2007 11:45 AM:"I guess you can point to early modern Switzerland as a poor democracy. It was geographically isolated and poor, which made invasion both difficult and pointless. Don't know how well the trend holds up though."
I'd object only to the geographically isolated. Switzerland is on one of the main routes between Italy and Germany.
Posted by Al | July 4, 2007 11:45 AM:"Following the links is for wimps. :-)"
Can't fault that logic.
Posted by Peter H | July 4, 2007 12:04 PM :"That's an incredily uninformed explanation of Japan's post-WWII economic success."
I try hard you know. If you think you can do better in one sentence under 50 characters let me know.
Hannah Arendt had some interesting things to say about this question:
The unchained, unbridled 'private initiative' of capitalism in the absence of natural wealth has led everywhere to unhappiness and mass poverty. Free enterprise has been an unmixed blessing only in America, and it is a minor blessing compared with truly political freedoms even under the best conditions. Economic growth may one day turn out to be a curse rather than a good, and under no conditions can it either lead to freedom or constitute a proof for its existence. A competition between America and Russia, therefore, with regard to production and standards of living, trips to the moon and scientific discoveries, may be very interesting in many respects; its outcome may even be understood as a demonstration of the stamina and gifts of the two nations involved, as well as the value of their different social manners and customs. There is only one question this outcome, whatever it may be, will never be able to decide, and that is which form of government is better, a tyranny or a free republic.
The value of freedom has nothing to do with prosperity, which it may contribute to or not depending on the circumstances. One has to wonder how committed folks who insist too strenuously on this connection are to political freedom for its own sake.
It's amusing to watch all these commentators like Tyler and others who were so mooning over Bryan Caplan's anti-democratic spiel to be trying to play the other side today.
Posted by HeiGou | July 4, 2007 11:25 AM
Of course historically autocracies have always been richer and more advanced than democracies, but the West seems to manage to be both.
...on being asked to justify this...
Posted by HeiGou | July 4, 2007 12:34 PM
I could but on the whole I think I'd prefer not to. It is both off topic and immediately self evident for all but the modern period.
No, I don't think you could. If we look at the Early Modern period, the two major autocracies, France and Spain, were richer in absolute terms for much of the period due to control of overseas mineral resources(Spain)and the absolute size of its agricultural sector (France).The two major non-autocratic states were relatively poor in terms of absolute resources, but had economic models predicated on less autocratic government that enabled structural economic and technological change that allowed them to bankrupt their larger and richer autocratic rivals whose sclerotic economies were extremely fragile.
Between the ancient world and the Early Modern period, you can only compare autocracies with autocracies.
That's a very brief synopsis to explain why you are (as always) talking bullshit. It may be immediately self-evident to you, but that's due to your ignorance.
Re: Of course historically autocracies have always been richer and more advanced than democracies
Since democracies in the modern sense did not exist anywhere until the 19th century the question is hard to investigate.
Nevertheless it is true that even in antiquity there were states were were less autocratic than others: ancient Athens compared to either Ancient Sparta; Republican Rome compared to the Hellenistic kingdoms, etc. Of course for much of history location (natural resources, climate, position on major trade routes) probably governed a civilization's propserity more than internal factors did. Hence it was almost impossible for Byzantium or the Caliphate of Baghdad not to be prosperous, no matter that they were ruled by autocrats, and sometimes tyrannical and/or incompetent ones. But even back then in the long term such states suffered when in competition with states with more limited governments: Byzantium fell behind the Italian city states (which were mostly republics), and the Caliphate fell behind Europe (where monarchy did not become absolutist until the early modern period.)
On the whole I do think history shows a weak but not meaningless correlation between prosperity and freedom.
Posted by Peter H | July 4, 2007 12:04 PM :"That's an incredily uninformed explanation of Japan's post-WWII economic success."
I try hard you know. If you think you can do better in one sentence under 50 characters let me know..
I certainly couldn't do worse. For example, the Keirestu is a uniquely Japanese form of corporate organization, and in no way can be considered an example of "copying what the West had done".
Posted by Peter H | July 4, 2007 12:04 PM :"That's an incredily uninformed explanation of Japan's post-WWII economic success."
I try hard you know. If you think you can do better in one sentence under 50 characters let me know..
I certainly couldn't do worse. For example, the Keirestu is a uniquely Japanese form of corporate organization, and in no way can be considered an example of "copying what the West had done".
Many thanks to Alan and JonF for getting my back on the historical end. (I'm assuming the two major non-autocratic states in the Early Modern period were England and the Netherlands.)
I didn't look closely at the study in the original link, but it seems like "'freedom' vs. 'non-freedom'" might well have been replaced with "'provides cheap labor' vs. 'doesn't provide cheap labor'." As JonF points out, it's possible for factors completely external to government (location, low-cost labor, natural resources) to give a nation a short- or long-term advantage.
In my opinion, though, a commitment to flexibility and innovation (being "reality-based," if you will) is the only factor that seems to insure a country's long-term prosperity. Political freedom is just one component of that commitment.
I think the key factors in most of those cases is that those countries bucked the IMF standard neo-liberalism line. China's GDP includes large portions of Keynesian style infrastructure investment, and I think that whether that's a sustainable growth model is far more salient to future economic growth than their political system.
China, like any country, needs a certain level of political stability and state capacity to grow. Beyond that, the "East Asian" growth model (in which China is more or less following in the footsteps of Japan, Taiwan and South Korea) depends on:
1. A reservoir of rural labor to move into industry and other urban sectors, so that labor costs stay low.
2. Mechanisms to keep savings rate high and, more importantly, channel them into domestic investment regardless of returns. A state-controlled banking system and capital controls are two key elements; expropriating the landlord class is helpful too.
3. Export markets. The importance of exports is not so much to finance imports as (a) an alternative to domestic demand, since the latter would conflict with the two conditions above, (b) a substitute for capital markets to discipline firms and (c) to move toward the technological frontier.
4. Catching up to the technological frontier. Being behind the frontier is obviously a necessary condition, but not a sufficient one. Import restrictions are helpful, again not so much to conserve foreign exchange for investment goods (as in Latin American import substitution models) since all these countries run big current account surpluses, as to give exporters a sheltered domestic market to subsidize efforts to gain market share abroad.
South Korea was probably the classic case (Meredith Woo Cummings and Ha-Joon Chang are the authorities here), with the state directly allocating investment capital and foreign exchange to chaebols based on their market share in key export sectors. The Chinese financial system is a bit mysterious, but the basic approach seems to be the same.
The strictly economic constraints facing this model, then, are (1) exhaustion of the rural labor pool (this is the wall Japan hit around 1980), (2) saturation of export markets, or (3) reaching the technological frontier. China is decades from the first and the third; the second is slighlty more problematic but can probably be staved off indefinitely is willing to recycle its export earnings to finance American consumption.
So any slowing of Chinese growth in the next 30 years is far more likely to be the result of political (or possibly environmental) factors than economic ones.
Lemuel,
To what extent does your model apply to The US, Canada and NW Europe in the 19th century when these countries industrialized?
I'm not all that up on the details of Canada or Europe, but other than condition #1 (which was true everywhere in the 1800s) I don't know that the US satisfied the other three. We didn't have a federally controlled banking system until the Fed was founded, or even, arguably, until banking was regulated by FDR in the 30s. We also never expropriated the landlord class's holdings (not even after the Civil War when we should have broken up the large plantations for "40 acres and a mule"!). Also, to what extent was the US economy dependent on exports in the period? It does seem to me that the US market has always mainly been domestic and indeed that the country flourished during the era (mid 20th century, but beginning as early as Henry Ford's $5/a day jobs) when wages rose precipitously, enabling working Americans to participate more fully in this market.
As for the technological frontier, when was the US not on it? Early 1800s perhaps, but at no time later I would have to say.
It's a model of late industrialization. The farther you get from the UK (and Belgium), the more likely successful industrializers are to have followed it.
In the middle tier, large national banks played a lot of the role that the state takes on in East Asia. Even in the US bank finance was more important than in the UK, and the banks made some effort to direct capital to strategic sectors and "champions" -- the first great major wave around the turn of the century was in large part bank driven. Of course this was much more true in central and southern Europe, especially Germany, where you really could talk about "finance capital" with the banks dominating the industrial sector.
The USSR is sort of the extreme example of this model.
And of course the US as a continent-sized economy with vast natural abundance has always been a bit of a special case.
We also never expropriated the landlord class's holdings (not even after the Civil War when we should have broken up the large plantations
Ah, but we did, with the 13th Amendment. Slaves were far more valuable than land in the plantation south -- the whole reason for slavery, in some sense, was that abundant land meant that land ownership as such didn't yield significant rents. And that expropriation was not a trivial factor in US industrialization. The South was committed to exporting primary products and importing manufactures (to/from the UK mainly, and of course the North) and Southern political elites worked hard to force national economic policy to fit that approach. Remember that the great economic debates in the period leading up to the Civil War were over a tariff, federal investment in canals and railroads, and a national banking system -- all opposed by the South. In effect, our East Asia-type elite defeated our Latin America-type elite.
Posted by Alan de Bristol | July 4, 2007 1:56 PM:"If we look at the Early Modern period, the two major autocracies, France and Spain, were richer in absolute terms for much of the period due to control of overseas mineral resources(Spain)and the absolute size of its agricultural sector (France)."
Except it is not simply agriculture that made France rich. Like most of Latin Europe, France was also more technically advanced than non-Latin Europe. Which is why for most of that Early Modern period people imported French lace and other goods. It is even more apparent in Italy. All of which is reflected in things like Fine Art and Opera which tend to be produced in Italy or would become the Austro-Hungarian Empire until fairly late.
Posted by Alan de Bristol | July 4, 2007 1:56 PM:"The two major non-autocratic states were relatively poor in terms of absolute resources"
Sorry but what two major non-autocratic states would these be? Switzerland and?
Posted by Alan de Bristol | July 4, 2007 1:56 PM:"Between the ancient world and the Early Modern period, you can only compare autocracies with autocracies."
Well most tribal societies remained something like democratic at least for some of the time.
Posted by Alan de Bristol | July 4, 2007 1:56 PM:"That's a very brief synopsis to explain why you are (as always) talking bullshit. It may be immediately self-evident to you, but that's due to your ignorance."
I think I'll leave that. I'd point out how little you know about France and Spain, but it is not worth it. I am not actually wrong here.
Posted by JonF | July 4, 2007 2:11 PM:"Nevertheless it is true that even in antiquity there were states were were less autocratic than others: ancient Athens compared to either Ancient Sparta"
It would be nice to compare Athens with Persia for instance. Or Egypt. When Alexander conquered the Persian Empire the wealth was a source of major inflation in so far as anyone can tell. There is the famous crushing response by Alexander to a sneer from his teacher about his use of a generous pinch of incense when Alexander sends him a few tons of the stuff. The Persians were able to intervene so effectively in Greek politics through bribery because they had so much more to bribe people with.
Posted by JonF | July 4, 2007 2:11 PM:"Republican Rome compared to the Hellenistic kingdoms, etc."
Which would prove my point entirely. Assuming you could say that Republican Rome was democratic.
Posted by JonF | July 4, 2007 2:11 PM:"Of course for much of history location (natural resources, climate, position on major trade routes) probably governed a civilization's propserity more than internal factors did."
All other things being equal. But they so rarely are. Brazil and for that matter the US were and are rich in natural resources. Climate is an argument in itself, but India and Congo have very similar climates. Trade routes tend to follow trade and hence wealth rather than create it I'd think.
Posted by JonF | July 4, 2007 2:11 PM:"Hence it was almost impossible for Byzantium or the Caliphate of Baghdad not to be prosperous, no matter that they were ruled by autocrats, and sometimes tyrannical and/or incompetent ones."
And yet what was Byzantium before Constantine chose it? Baghdad suffered so badly under the Mongols that Pegolotti does not even mention it.
Posted by JonF | July 4, 2007 2:11 PM:"Byzantium fell behind the Italian city states (which were mostly republics)"
They were intermittent Republics. Did Byzantium fall behind Italy before it fell in a military sense? There is an argument. Certainly exiles found a welcome in Italy because they brought knowledge and skills the Italians did not have.
Posted by JonF | July 4, 2007 2:11 PM:"and the Caliphate fell behind Europe (where monarchy did not become absolutist until the early modern period.)"
Yes but look at how late that was.
Posted by Peter H | July 4, 2007 2:35 PM:"I certainly couldn't do worse. For example, the Keirestu is a uniquely Japanese form of corporate organization, and in no way can be considered an example of "copying what the West had done"."
I notice you have not done it at all so who is to know if you would do worse? I am unconvinced that the Keiretsu is unique to Japan (even if we ignore direct copies like Korea's Chaebol) or that they were necessary for Japan's success. Germany also produced large families of companies clustered around a bank. So did and does America. However even if this was uniquely Japanese, in one short sentence it is hard to include every single special feature of Japanese life. Especially as my comment was mostly about technology - the Japanese have done badly when they have been required to develop new technologies themselves As opposed to following what the West has done. Your comments get full marks for spite but little for anything else.
I would love to see your one sentence of less than 100 characters explaining Japanese success better than I did. Mentioning, of course, Kereitsu, and no doubt MITI, and the controversy over supposed "harmonious Japanese society". Oh, and education too. And any other special feature of Japanese life that occurs to me in the next few days.
"Posted by Reality Man | July 4, 2007 11:45 AM:"I guess you can point to early modern Switzerland as a poor democracy. It was geographically isolated and poor, which made invasion both difficult and pointless. Don't know how well the trend holds up though."
I'd object only to the geographically isolated. Switzerland is on one of the main routes between Italy and Germany."
Switzerland's mountains were rather hard to cross without modern technology (which is partly why they were never conquered, before the gun argument became anywhere near applicable around WWII). How much trade did the collections of entities making up what are now Germany and Italy engage in? Both countries were not both independent and unified until the 19th century, which coincided with the Industrial Revolution. Are you referring to Prussia and the collection of Italian city-states? Considering how dependent the likes of Venice were on maritime trade in the Mediterranean Sea instead of land routes with Prussia, I would doubt there was enough trade routes with enough traffic to lead to Swiss prosperity. It wasn't exactly a hub like Venice, Timbuktu or the Kingdom of Malacca.
Posted by Reality Man | July 5, 2007 7:47 AM:"Switzerland's mountains were rather hard to cross without modern technology (which is partly why they were never conquered, before the gun argument became anywhere near applicable around WWII)."
These are more quibbles than anything else, but never conquered? You mean Napoleon did not invade it and set up the Helvetic Republic?
Posted by Reality Man | July 5, 2007 7:47 AM:"How much trade did the collections of entities making up what are now Germany and Italy engage in?"
Don't know to be honest but enough that Venice had a permanent settlement for Germans and the Medici Bank nearly went under in its early days when a partner lent too much to some visiting German merchants who promptly legged it back to the Fatherland.
Posted by Reality Man | July 5, 2007 7:47 AM:"Both countries were not both independent and unified until the 19th century, which coincided with the Industrial Revolution."
If you wish to quibble over the terminology I used I won't complain at all.
Posted by Reality Man | July 5, 2007 7:47 AM:"Are you referring to Prussia and the collection of Italian city-states? Considering how dependent the likes of Venice were on maritime trade in the Mediterranean Sea instead of land routes with Prussia, I would doubt there was enough trade routes with enough traffic to lead to Swiss prosperity. It wasn't exactly a hub like Venice, Timbuktu or the Kingdom of Malacca."
Prussia is hardly an important German state until late. I was thinking of the Hapsburgs whose sprawling domains were linked by the "Spanish Road" which went from their holdings in northern Italy (where they could be supplied by Sea from Spain proper) through Switzerland, into Bavaria, across the Rhineland and down into the Spanish Netherlands. This was vital to supply their Armies fighting the French and the Dutch and so features prominently in most books on the Thirty Year War. I agree totally about the poverty of Switzerland, I am not claiming it was anything other than not geographically isolated, but it was still the site of several of the major passes over the Alps - the two St Bernard and the St Gotthard Passes for instance. These were known to the Romans as well.
Re: Climate is an argument in itself, but India and Congo have very similar climates.
Not really. Just as Egypt is the gift of the Nile, India is the gift of the monsoon, a climate phenomenon not found in inland regions.
Re: Trade routes tend to follow trade and hence wealth rather than create it I'd think.
Well, that's rather tautological, don't you think? Still, a community that lies close to a road or seaway on which trade passes from points distant can skim some of the profit from that trade and also piggyback its own trade onto it.
Re: And yet what was Byzantium before Constantine chose it?
A very propserous port city, one strong enough that it gave Athens, Persia and Macedonia more than a few headaches in their bids to dominate the Aegean.
Re: They were intermittent Republics. Did Byzantium fall behind Italy before it fell in a military sense?
Intermittent over their whole history yes. During the medieval period (when their legal but distant and often ineffectual sovereign was either the Byzantine Emperor or the Holy Roman Emperor) they were oligarchial Republics. Monarchy did not come in until later, in some cases when a prominent family like the di Medici promoted itself to royalty, in some cases when a foreign ruler like the King of Spain took over the city outright. The key event in Byzantine economic relations (which subsequently poisoned political relations) with Italy occured in the 11th century, when pressure from Italian merchants compelled the Empire to debase its coinage: a clear statement that the Empire was no longer master of its own financial house and that the Italians had surpassed them. The Fourth Crusade, when Byzantium actually fell to the Italians, was still 150 years away.
Re: Yes but look at how late that was.
Not really that late. The Caliphate was already stagnating by the 10th century, and certainly by the 13th (when it was destroyed by the Mongols) the center of economic gravity for Western Eurasia had moved back to the Mediterranean where the Italians were the dominant economic power. The economic and cultural of Muslim Spain was also not long-lived, destroyed by the fierce intolerance of the Berber rulers who overthrew the Umayyad caliphs of Cordoba.
m160k
Comments closed July 18, 2007.
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Heads in the Sand
One might add that prosperity is good for freedom, as well.
That's certainly the conventional wisdom. I thnk the Chinese are challenging that wisdom, though.
Posted by Al | July 4, 2007 11:18 AM