The social sciences provide few controlled experiments; there is no Cern Laboratory for sociology or economics. But the 20th century provided something rather close.
The impoverished, war-torn Korean peninsula was split in two, the North trying communism and the South opting for capitalism. After 60 years South Koreans are on average three inches taller than North Koreans and live 12 years longer.
Germany and its capital city were split down the middle in 1945, the west going capitalist and the east going communist. The architects of the Workers’ Paradise in the east had to build walls to stop the unappreciative proles escaping to the west to be exploited. And then the Workers’ Paradise collapsed.
The results of these experiments have proved problematic for statists. In recent years the economist Ha-Joon Chang has become popular on the left for arguing that the economic success of West Germany and South Korea relative to their eastern and northern neighbours is not because of a lack of state intervention but because they had just the right kind of intervention in just the right amount. For Chang there is nothing inherently wrong with a Gosplan, you just have to make sure you have the right boffins drawing it up.
In his new book, Heavens on Earth, JP Floru utterly rejects this argument. He takes eight case studies, from Britain’s Industrial Revolution of the 18th and 19th centuries to Singapore’s journey to prosperity, and argues that the spectacular results achieved came from the release of market forces. Where Chang prescribes intensive government involvement in the economy, Floru recommends that politicians and bureaucrats set up a solid legal framework then get out of the way.
Economically speaking, the source of the increase in wealth these countries experienced was increasing productivity, the production of as much with less or more with as much. The increase in the quantity of goods and services available for consumption which this permits is the essence of increasing wealth.
The Theory of Comparative Advantage, outlined by David Ricardo 200 years ago, extends this worldwide. As a unit a country will grow rich if it produces goods or services for which the inhabitants of other countries are willing to exchange the goods and services they have produced. And countries will see their terms of trade improve the more efficient, or productive, they are.
Floru’s argument echoes that of Douglas Carswell’s recent book The End of Politics, its central feature the ‘Hayekian Knowledge Problem’. Economics is, as Alfred Marshall wrote, “a study of mankind in the ordinary business of life. It examines that part of individual & social action which is most closely connected with the attainment and with the use of material requisites of well-being”.
It is not, as much mainstream neo-classical economics would suggest, the study of the allocation of given resources among known ends via some identified production function. It is, in fact, the study of the process of the discovery of all these things; resources, ends, and means.
The knowledge of how best to produce cars, linen, or financial services does not exist in some one place where one of Ha-Joon Chang’s Platonic philosopher kings can simply go and get it prêt-à-porter. It is lurking somewhere, probably dispersed, in the vast collective brain made up of each individual in the wider economy, and it has to be discovered.
A free market economy is far better at tapping this collective brain and efficiently discovering and coordinating the hidden, dispersed information it contains than a state command system which relies on the brains of a handful of experts. That is the lesson of Korea and Germany.
There is an incredible amount of economic gloom as debts rocket, growth stagnates, and incomes fall in the developed world. But, as the United Nations recently reported,
“The world is witnessing a epochal ‘global rebalancing’ with higher growth in at least 40 poor countries, helping lift hundreds of millions out of poverty and into a new ‘global middle class’. Never in history have the living conditions and prospects of so many people changed so dramatically and so fast”.
Thanks to free market capitalism more people are living better than ever before.
Since at least 1798, when Ricardo’s friend Thomas Malthus predicted a destiny of misery for mankind, there have been people warning of an imminent end to our material progress. But whatever the situation with regard to his material resources, one truly inexhaustible resource man possesses is his (or her) ingenuity, or human capital in the economists’ terminology. A system which allows for the maximum exploitation of this ingenuity, of its discovery and coordination, remains humanity’s best hope for the ever more prosperous future which is on offer.
In 1776 Adam Smith wrote that “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice”. JP Floru’s excellent new book performs the vital service of reaffirming this fundamental lesson.
This article originally appeared at The Commentator