Arnold Kling  

From Poverty to Prosperity Watch

Dan Seligman, RIP... Percent or Percentage Points?...

I should hold off on plugging the book until it's closer to publication date, but reading it over gets me really excited. We include interviews with a number of famous economists, and there are little nuggets of insight buried in them. Paul Romer and Joel Mokyr get better each time I re-read them.

Robert Solow says that businesses don't much care for free markets, and that they would prefer monopoly. Douglass North says,

The economic interests are the elites that produce economic activity. But they tend to support political groups that, in turn, will protect them from too much competition. The interplay is the elites in the political world protecting the economic elites from too much competition and giving them monopolies, while on the other hand the economic elites provide the funds that support the political elites. And the interplay is all over Latin America. It's a disease, but it's a disease that is a natural thing and it's very hard to get rid of.

Solow and North represent what I might call the dark view, which is that free markets are not natural. What is natural is to try to use force to exclude rivals from profitable activities. I am an extreme believer in the dark view. I take it so far as to claim that nothing that we would recognize as a free market existed until very modern times. From the standpoint of economic history, Matt Ridley is going to argue against the extreme dark view.

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CATEGORIES: Political Economy

COMMENTS (11 to date)
Troy Camplin writes:

Actually, both elements are natural. A few with economic power try to get protection from a few in political power. In the meantime, over time, bottom-up organization of people and the economy overall is occurring, slowly undermining the original structures -- which nonetheless occasionally show resurgences. We see the same political moves being made among chimpanzees. There is one in charge in the troupe -- however, there is constant efforts to undermine him by those who want his position. And if the rest of the troupe decide they don't want to do what the leader wants, he loses. There is an attempt at a top-down imposition of order, but in the end, the bottom-up processes win out. Or, to be more accurate, the two cycle. The goal, then, is to educate everyone else -- neither those with economic or political power -- about the benefits of bottom-up self-organization. That will help keep the pressure on to avoid rigid top-down structures.

Jim Chappelow writes:

What makes North think this phenomenon is limited to Latin America?

fundamentalist writes:

"I am an extreme believer in the dark view."

So am I and history proves us right. Lazy people laminate the evolutionary model onto the history of economic development and pretend that we have enjoyed steady progress toward free markets since the cavemen. But real history teaches the dark side.

The first modern economy was the Dutch Republic of the 17th century (see Jan de Vries' book, "The First Modern Nation"). Several economic historians credit the Dutch with being the first nation to really protect private property. But the Dutch Republic didn't evolve; it was ripped from the bloody hands of the King of Spain after an 80 year war.

The free markets and culture of the Dutch scandalized Europe (see Israel's book). The freedom of women and the wealth of the middle class and religious freedom shocked and disgusted all of Europe. There was nothing in it that was natural to the rest of the world which lived under heavy state control of the market. The Dutch experiment was a major rupture from the past and a true revolution.

Free markets spread to England, the US and much of Europe, and eventually to Japan. Free markets reached their zenith in the 19th century and then began a century long retreat. No nation today has the free markets that existed a century ago.

Free market capitalism was a flash in the pan of the history if mankind and may never return.

Troy Camplin writes:

You're reading very different history books from me, then, fundamentalist. I don't attribute my world view to laziness -- just to better sources. Your version practically makes the claim that the Dutch invented all of that ex nihilo -- and that's ridiculous on the face of it. These aspects of law and social organization were adaptations from things already happening there and elsewhere.

fundamentalist writes:

Troy, apparently I am reading different books. Try the ones I cited above. You can't have better sources than those, not to mention the works of North.

The Dutch didn't invent capitalism ex nihilo; they drew heavily upon scholastic thought that developed over a millenia and came down on the side of free markets. They also emphasized reason in government. But it's clear from history that the Dutch Republic was a major break from traditional government in the world and the institutions it created, especially the respect for property, were unique at the time.

fundamentalist writes:

PS, maybe you're not lazy, but the writers of your sources may be.

Troy Camplin writes:

I wouldn't exactly call Hayek lazy. Consider the English common law tradition, for example. Also, you are giving yourself too easy an out by saying "at the time." Look to the ancient Greeks, where democratic government and property protections and free markets also existed. The Roman Republic, too. Also, the Phoenician traders. There are several examples from history.

As economy, society, culture, and government symbiotically co-evolved, the free market system arose -- often in spite of those in power. It is natural to trade, and it is natural to want to have and use (and abuse) power. The proponents of the latter often try to restrict the former, to gain more power (as trade dissipates power) -- but that does not mean that trade and, ultimately, free markets, aren't natural.

It seems to me that saying that free markets aren't natural is like saying multiceullular organisms aren't natural simply because single-celled organisms were there first, and mutlicellular organisms always end up torn apart by single-celled organisms (think bacteria). We need bacteria, but we don't want them to rule us or take us over, or reduce us to them.

fundamentalist writes:

I didn't know Hayek wrote an economic history. Which book are you referring to?

I think you're referring to the history of economic thought. I'm talking about economic history, the history of per capita gdp.

If you look at economic histories (such as Angus Maddison), not histories of economic thought, the per cap gdp was about the same in 1600 as in ancient Babylon. For most of the world the change didn't begin until 1800. There was almost no progress. The first nation in the history of mankind to escape Malthusian cycles of famine was the Dutch Republic. Its wealth and per cap gdp exploded because it created capitalism. The growth spread to England, Western Europe and the US, sparking the industrial revolution.

In addition, you don't distinguish between the ancient market and modern markets. North makes the distinction very clear. Ancient markets were personal markets in that the buyer had to know the seller personally in order to judge the quality of the product and determine if he might be cheated. That made transaction costs very high. Modern markets are impersonal in that the law, contract and warranties enable buyers to purchase goods without knowing the seller well and feel confident that he is not being cheated.

In the ancient world, markets were heavily controlled by the state. And as North points out, property rights existed for the elite, but not the common people whom the elite were free to plunder at will if they maintained support for the ruler.

If free markets are natural, why does the vast majority of the world still not have them and the West is backtracking daily on the freedom it has?

Bill Greene writes:

As Troy indicates, both free markets and the attempt by elites to control them are natural. Both scenarios have occurred throughout history and are the natural outgrowth of individual human initiative. Free markets have been the rarer situation because the vast bulk of mankind has always lived under tyranny--the Oriental Empires, feudal systems, slave economies, and monarchical regimes.

However, there have been isolated situations where economic freedom existed--usually in young start-up societies or where upward mobility was allowed by the absence of an oppressive clerisy or aristocracy. For example : Phoenicia, the Greek Hoplites (see Hansen's "The Other Greeks"), Italian city states, the Hanseatic League cities, 16th C Holland, and Colonial America allowed widespread commercial activity by a broad segment of their populations--and all relatively free of central governmental controls.

As Cato wrote: "The Administration has always been best executed, and the Publick Liberty best preserved, near the Origin and Rise of States, when plain Honesty and common Sense alone governed the public Affairs, and the Morals of Men." That explains why there were relatively open and free economies in the swamps of Venice, the undersea parts of Holland, the Levant coast-line, and in the 1600 wildernesses of New England--there were not yet any elites, intellectuals or massive governmental bureaucracies to stifle the commercial activities of the common people.

Unfortunately, as such entrepreneurial nations grow and become prosperous, they accumulate, like a middle age gut, the massive overhead of elites and big government. Then the situation resembles the "dark" view described in the post above. Populist democracy attracts demagogues who curry favor by dispensing subsidies to one and all--including big business.

It is actually "wise" for giant companies to curry such favor lest they become the victim of legislative punishment, to prevent their competitors from receiving preference, and to basically buy "protection." The power of Big Government spreads corruption all around! The term "disease" is appropriate.

Hernando de Soto criticizes capitalism as it is practiced today because too often it operates as "a private club, open only to a privileged few, and enrages the billions standing outside looking in. This capitalist apartheid will inevitably continue until we all come to terms with the critical flaw in many countries' legal and political systems." He thus points to the root cause of the Third World's poverty that no amount of foreign aid will end: Any chance for a free and open economy is thwarted by the lack of the legal and financial mechanisms developed in the West. Over half those nation's economies are underground, illegal, suppressed by their bureaucracies and established elites.

In America, we see more and more governmental interference in the economic sphere. With maturity, we have developed the "disease" supporting "the Dark View." There is a growing unholy alliance between the large institutions of the country. If that continues, gradual Decline will be inevitable.

Fortunately, we still have entrepreneurs and upward mobility--the signs of a free economy. But the non-productive elites control the media and schools--and those elites depend on bureaucracy and big government for their livelihoods--they are against the "bottom-up" flow of innovation that Troy mentions. And there is not just one supreme chimp--a large number of very smart chimps have banded together and it is that elite that will be hard to topple! Since the voters get their info from the united elite chimps, guess who will win?

However, at least outside America, many free market forces are on the uptick, so I disagree with "Fundamentalist" that free economies are history. The Heritage Foundation's Annual Report on Economic Freedom indicates a number of nations that have seen the recent blunders of the Western socialist/welfare states and have adopted the legal and financial mechanics that were the original basis for Western economic supremacy.

Bill Greene writes:

The issue isn't when the first free economies existed (although I suggest Phoenicia and Carthage almost 3,000 years ago) but their rarity and brevity of life. In ancient times they only could occur, in my opinion, in new start-up societies that were by their nature free of aristocracies and other oppressive elites. (for example, Iceland's "First European Parliament" was established around 850AD)

In modern times, autocratic rulers attempted to copy the obvious success of free economies but ended with mercantilism--a confused attempt to encourage while still controling businesses. The fact that that system was subverted largely by illegals and smugglers demonstrates the irrepressible nature of individual initiative and free economic activity--in spite of all coercive steps taken by the State. (I believe it was E. L. Jones who suggested that free enterprise succeeded more in England than France because the police were less vigilant in the former--they only hung 50 smugglers and illegals per month whereas in France they hung a hundred)

More recently, enlightened and benevolent despots in Singapore and Dubai have deliberately installed the mechanical institutions of free enterprise that were developed over the past millennia by the West. By empowering their people, and providing an open and free economy, they have accelerated progress for all. It's simple: in addition to granting security, they have minimized regulations, taxes, and other hurdles to enterprise.

As for the future of such free nations, the problem is how do you keep the government involved in maintaing a level playing field while restricting its authority enough to minimize interference with the "free" economy? There are no instances in history that I know of where that fine line has been achieved for any extended time.

The tendency is for a free people to turn populist, to trade a government dole for liberty, and to allow the corruption of big government and special interests to tilt the playing field against the common people. That is the "dark side" of economics--that sooner or later the elites, academics, soft-science experts, and political demagogues hoodwink the people into wanting a maternal big government; and of course that is the first step to failure and decline.

But history shows that a free economy will pop up again somewhere--perhaps in China? Or Iraq ? It's not an ethnic thing--all people want freedom and it breeds prosperity--if only they are given the opportunity.

Troy Camplin writes:

In referring to Hayek, I was referring to the work he did on spontaneous orders. Spontaneous orders are natural -- are found throughout nature -- and require certain criteria to arise. They are bottom-up processes that can be destoyed by top-down ones. True, the modern free market, available to everyone equally, is a recent phenomenon -- but the seeds, and less-than-perfect versions of it, did arise in several places, including ancient Athens. One of Aristophanes' main complaints against the Peloponesian War was that it disrupted trade and the free market system. Seems an odd thing for him to complain about if it didn't exist.

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