What makes a country rich? Hint: It has nothing to do with natural resources. Places like Singapore, Hong Kong, and Japan prove that. (See also: How to Get Rich by Being Evil)
We’ve known how to have rich countries for a while now; Adam Smith laid most of the ground work in 1776 with The Wealth of Nations, and we’ve improved on it modestly since then. You need three things:
- Private property
- Free markets
- Rule of law
None of those things have to be perfect for a country to get rich. Look at what China and India have done over the past twenty years. Allow a little private property, reduce government regulation a little, and you unleash a lot of entrepreneurial activity. Pretty soon, you have a bigger economy, higher incomes, and a richer population.
What’s interesting to me is how important that third point turned out to be.
As the Soviet Union began to collapse, a lot of people were offering advice on how to free the economies of the formerly communist countries. Most of the advice had to do with getting state property into the hands of ordinary people in ways that would allow the greater productivity that private property and free markets allow.
There was a lot less focus on how to imbed the rule of law into the system. It was almost as if people figured that the shift from a police state to the rule of law would be easier than getting there from a state of anarchy. (A dumb idea, once you think about it.)
So, thanks to the unhappy experiments in Russia (and other places) we now know what happens if you have (some) private property and (moderately) free markets without the rule of law. You don’t get a rich country; you just get a lot of rich people.
This insight has been guiding me politically for a while now. Obviously, it would be great to be a rich person in a rich country, but few of us have that option. Pretty much by definition, most of us are going to be somewhere in the broad middle. But if you’re going to be in the broad middle, it’s a lot better to do so in a rich country.
Happily, we know how to have a rich country.
Note: This was originally written for Wise Bread, but they decided it wasn’t for them, so I’m posting it here. I’ve kept it just as I’d written it, including the “see also” link back to Wise Bread. And, since it was written for a monetized market, I’ve gone ahead and put some ads in this post, even though I don’t general monetize my blog. Somehow, the post seemed lonely without them.
Hey, Philip – Have you looked at the history of Third World countries becoming powerhouses only AFTER socializing? Because both China and India were socialist economies before they were capitalist – they both nationalized most of their industries and kept foreign investment at bay while building their own products and brands. It’s an interesting flip to the Marxist model, which sees Communism as the be-all, end-all, instead of capitalism. Just curious what you think about it. As someone who borders on socialist, it’s something I think about a great deal.
I’m doubtful. If you take a longer view, China and India were always the richest countries in ancient times, right up until the industrial revolution.
Wealth is usually about trade. Free markets, private property, and the rule of law all help mainly by encouraging trade. In ancient times, the west coast of India had thriving trade with the middle east (except during wars).
Of course, trade can also be pernicious, as for example the British East India Company’s “trade” with India.
Phil, I think you have an interesting idea here. I’d like to push it a step further. I would suggest that right-wing elements want in the U.S. precisely the failure that exists in Russia, that is, they want private property (guaranteed by the government and prevented from failing by the same government), they want free trade, but they do not want the rule of law. Listen to the spin masters and nonsense weavers of blathering right-wing radio and FAUX News. They want to cut taxes on rich folks; to redefine rich folks’s income as not being income and so subject to lower tax rates; to cut government regulation with the demonstrably false assertion that doing so will create jobs. Nonsense. We need a strong central government to regulate out-of-control capitalism.
I think things could work with central governments of various strengths. The key is for them to be even-handed.
The problem in the US is that the government has been co-opted by a subset of the monied interests. Under the guise of “protecting the financial system,” it’s making sure that the losers get bailed out. That would be problematic, even if the money to do so came from the winners. But it isn’t. The money is coming from everyone.
The whole “privatized profits but socialized losses” system is the main way in which the US is falling short of offering the rule of law.