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Posts Tagged ‘Free Markets’

I have shared five videos (Part I, Part II, Part III, Part IV, and Part V) that make the case for capitalism.

Here’s a sixth example.

The video notes that poverty was the natural condition for humanity (notwithstanding the economic illiteracy of Congresswoman Pressley).

But then, starting a couple of hundred years ago, capitalism gained a foothold and – for the first time in world history – there were nations with mass prosperity.

We learn about how various places became rich, including the United States, Hong Kong, and New Zealand.

The narrator also pointed out that Ireland experienced a period of dramatic market-driven growth.

Which gives me a good excuse to make the following comparison, which shows the dramatic divergence between Ireland and Greece beginning in the mid-1980s.

Why the stunning divergence (one of many examples I’ve collected)?

Ireland controlled spending and cut tax rates and now routinely ranks among the nations with the most economic liberty.

Greece, by contrast, has imposed more and more government over time.

Let’s close with this tweet, which nicely summarizes Walter Williams’ famous observation.

P.S. This comparison of Sweden and Greece also makes the key point about the superiority of markets over statism.

P.P.S. Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

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As I warned a few days ago, Biden’s so-called Build Back Better plan is not dead.

There’s still a significant risk that this economy-sapping plan will get enacted, resulting in big tax increases and a larger burden of government spending.

Proponents of a bigger welfare state say the President’s plan should be approved so that the United States can be more like Europe.

This argument is baffling because it doesn’t make sense to copy countries where living standards are significantly lower.

In some cases dramatically lower.

Let’s explore this issue in greater detail.

In a column for Bloomberg, Allison Schrager analyzes America’s supply-chain problems and the impact on consumption patterns.

But what caught my eye were the numbers comparing the United States and Europe.

Americans can’t spend like they used to. Store shelves are emptying, and it can take months to find a car, refrigerator or sofa. If this continues, we may need to learn to do without — and, horrors, live more like the Europeans. That actually might not be a bad thing, because the U.S. economy could be healthier if it were less reliant on consumption. …We consume much more than we used to and more than other countries.  Consumption per capita grew about 65% from 1990 to 2015, compared with about 35% growth in Europe. …What would that mean for the U.S. economy? European levels of consumption coexist with lower levels of growth.

Here’s the chart that accompanied her article.

As you can see, consumption in the United States is far higher than it is in major European nations – about $15,000-per-year higher than the United Kingdom and about double the levels in Germany, Belgium, and France.

So when someone says we should expand the welfare state and be more like Europe, what they’re really saying is that we should copy nations that are far behind the United States.

Some of you may have noticed that Ms. Schrager is citing per-capita consumption data from the World Bank and you may be wondering whether other numbers tell a different story.

After all, if higher levels of consumption in America are simply the result of borrowing from overseas, that would be a negative rather than a positive.

So I went to the same website and downloaded the data for per-capita gross domestic product instead. I then created this chart (going all the way back to 1971). As you can see, it shows that Americans not only consume more, but we also produce more.

For those interested, I also included Japan and China, as well as the average for the entire world.

The bottom line is that it’s good to be part of western civilization. But it’s especially good to be in the United States.

Since we’re on the topic of comparative economics, David Harsanyi of National Review recently wrote about the gap between the United States and Europe.

More than anything, it is the ingrained American entrepreneurial spirit and work ethic that separates us from Europe and the rest of the world. …Europe, despite its wealth, its relatively stable institutions, its giant marketplace, and its intellectual firepower, is home to only one of the top 30 global Internet companies in the world (Spotify), while the United States is home to 18 of the top 30. …One of the most underrated traits we hold, for instance, is our relative comfort with risk — a behavior embedded in the American character. …Americans, self-selected risk-takers, created an individual and communal independence that engendered creativity. …Because of a preoccupation with “inequality” — one shared by the modern American Left — European rules and taxation for stock-option remuneration make it difficult for start-up employees to enjoy the benefits of innovation — and make it harder for new companies to attract talent. …But the deeper problem is that European culture values stability over success, security over invention…in Europe, hard work is less likely to guarantee results because policies that allow people to keep the fruits of their labor and compete matter far less.

In other words, there’s less economic dynamism because the reward for being productive is lower in Europe (which is simply another way of saying taxes are higher in Europe).

P.S. The main forcus of Ms. Schrager’s Bloomberg article was whether the U.S. economy is too dependent on consumption.

It feels like our voracious consumption is what fuels the economy. But that needn’t be the case. Long-term, sustainable growth doesn’t come from going deep into debt to buy stuff we don’t really need. It comes from technology and innovation, where we come up with new products and better ways of doing things. An economy based on consumption is not sustainable.

I sort of agree with her point.

Simply stated high levels of consumption don’t cause a strong economy. It’s the other way around. A strong economy enables high levels of consumption.

But this doesn’t mean consumption is bad, or that it would be good for America to be more like Europe.

Instead, the real lesson is that you want the types of policies (free markets and limited government) that will produce innovation and investment.

That results in higher levels of income, which then allows higher levels of consumption.

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A new edition of the Human Freedom Index has been released. When you combine measures of personal freedom and economic freedom, the “sensible nation” of Switzerland is at the top of the rankings.

I don’t know if this means we should view Switzerland as the world’s most libertarian nation (or perhaps the world’s least statist nation), but it’s obviously good to lead this list.

And it’s not surprising that New Zealand is next, though many people are probably shocked to see Denmark in third place (it has very bad fiscal policy, but otherwise is a very laissez-faire nation).

The United States is #15, which is good but not great.

Here are a few passages from the report’s executive summary.

The Human Freedom Index (HFI) presents a broad measure of human freedom, understood as the absence of coercive constraint. This seventh annual index uses 82 distinct indicators of personal and economic freedom… The HFI covers 165 jurisdictions for 2019, the most recent year for which sufficient data are available. …fully 83 percent of the global population lives in jurisdictions that have seen a fall in human freedom since 2008. That includes decreases in overall freedom in the 10 most populous countries in the world. Only 17 percent of the global population lives in countries that have seen increases in freedom over the same time period. …Jurisdictions in the top quartile of freedom enjoy a significantly higher average per capita income ($48,748) than those in other quartiles; the average per capita income in the least free quartile is $11,259. The HFI also finds a strong relationship between human freedom and democracy

If you want to know the world’s worst nations, here are the bottom 10.

Venezuela is normally the worst of the worst, but in this case Syria wins the Booby Prize.

Let’s now give some extra attention to Hong Kong.

The report notes that there’s been a very unfortunate decline in human freedom in Hong Kong, mostly because of an erosion of personal freedom.

And Hong Kong’s score is expected to drop even further in future editions.

Freedom has suffered a precipitous decline in Hong Kong. The territory was once one of the freest places in the world, but the Chinese Communist Party’s (CCP) escalating violations of Hong Kong’s traditional liberties has caused its ranking in our index to fall from 4th place in 2008—when the first globally comprehensive data appeared—to 30th place in 2019, the most recent year in our report… Our survey does not yet capture the suppression of 2020 and 2021, including the CCP’s imposition of a draconian security law that enabled its aggressive takeover of Hong Kong.

Thanks to the recent election, I expect we will see a similar discussion of Chile’s decline in future editions.

Here’s a final observation that should be highlighted.

Because the report relies on hard data (which often takes a year or two to be finalized and reported), this year’s HFI is based on 2019 data.

And that means we won’t see the effect of pandemic-related restrictions, which generally were adopted in early 2020, until next year’s version.

…this year’s report does not capture the effects of the coronavirus pandemic on freedom.

P.S. Here’s what I wrote about the previous edition of the Human Freedom Index. And if you want to dig into the archives, I also wrote about the publication in 2016 and 2018.

P.P.S. For what it’s worth, I still think Australia might have the best long-run outlook for human freedom.

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Since it’s Christmas Eve, let’s use this opportunity for a holiday-themed economics lesson.

I did a version of this back in 2012 by sharing a remake of Christmas songs. This year, we’re going to look at A Christmas Carol by Charles Dickens.

Let’s start with an analysis of the story from Jacqueline Isaacs.

Many communist and socialist leaders have looked to Dickens as a champion for their cause. Even Karl Marx was a self-professed fan. …many have labeled Dickens a socialist and have used his ever-popular seasonal classic A Christmas Carol, as a condemnation of capitalism and consumerism. …I would challenge anyone…to notice the decidedly non-socialist themes Dickens presents. …First, Dickens never condemns capitalism, decries the success of business owners, nor denounces the trading by which they amassed their wealth. …When the character has gone through his revelatory experience and come out a better man, he does not then become poor. Instead, the new Scrooge uses his wealth to help those around him. …Secondly, Dickens seems to go out of his way to point out the inadequacies of government anti-poverty programs. …If the government takes over the responsibility of caring for the poor, then we will all be Scrooges. …Lastly, Dickens takes a relatively narrow view of community. The New Ebenezer did not set forth to save all of England, but he took care of those needy people whom he encountered every day. …Socialism and communism take very large views of community. They require large numbers of people to participate in the system so that the more productive members of society can fully support the less productive.

Senator Phil Gramm and a former aide, Mike Solon, pointed out in the Wall Street Journal last year that Scrooge may have been an unhappy miser, but his frugality generated benefits for everyone else.

Scrooge is a distilled caricature of a businessman in the Victorian era: a rich, obsessive wealth hoarder. …It does not appear that Dickens seriously considered the possibility that Scrooge and Marley’s business contributed to the common welfare of mankind. Like Scrooge, Marley created and accumulated wealth, leaving it to Scrooge, who continued to invest and accumulate. When Dickens has Scrooge’s nephew say his uncle’s wealth “is of no use to him” because he doesn’t spend it, it is made clear that Dickens never considered who Scrooge’s wealth was useful to. …For all Dickens knew or could envision, the only hope for the poor was charity. Yet unknown to him and his contemporaries, a revolution was beginning at the moment “A Christmas Carol” was published. The Market Revolution, funded by the thrift of Britain’s Scrooges, was already enriching mankind. …the period from 1840-1900 to have been the beginning of a golden age for workers. Wages, stagnant for more than 600 years, exploded during the Victorian era—rising from less than $567 a year in 1840 to $1,216 in 1900 (expressed in 1970 dollars). Life expectancy rose by 20%. Literacy rates soared. …Who then benefited from the accumulated wealth of Scrooge and Marley? First Britain and then all mankind. Since Scrooge and Marley never consumed the wealth they created, its use was a gift to all. It funded the factories and railroads, the tools and jobs that fed and clothed millions of British subjects and then billions around the world. Their unspent wealth was of no use to them, but it was of sublime use to humanity.

Gary North then explains how the thrift of rich people is good for the rest of us, as well as how free enterprise translates self interest into the common interest.

Dickens was living in the second generation after the Industrial Revolution began. Sometime around 1780, an economic revolution like no other in history had begun. It was marked by compound economic growth… The driving force of this revolution was specialization — specialization funded by capital, itself the product of thrift, by double-entry bookkeeping, and by attention to detail. In short, it was men like Ebenezer Scrooge who were the architects of capitalism. …The spread of capital is the basis for men’s increased productivity. The spread of the bookkeeper’s mindset is the basis of net retained earnings, which in turn finance additional capital. Taking care of business reduces poverty as nothing else in man’s history ever has. …without Scrooge and men like him, who are devoted to the details of their businesses, the shops of London would not be filled with cornucopias — at Christmas or all year round. …The heart of capitalism is service to the consumer. In serving the consumer, the producer must pay attention to what the consumer wants, at what price, when, and where. But the same is true of the producers’ attitude toward his employees. They, too, must be served… The free market does not make men good. It does encourage them to serve the consumer. It forces losses on them if they are less efficient in their service than their competitors. The free market society is not a dog-eat-dog world. It is dog-serve-master world. The consumer is the master.

Jerry Bowyer then puts Dickens’ work in context, noting that it could be viewed as a debunking of Malthus.

Thomas Malthus. Malthus’ ideas were still current in British intellectual life at the time A Christmas Carol was written. …What was Dickens really doing when he wrote A Christmas Carol? Answer: He was weighing in on one of the central economic debates of his time… Malthus famously argued that in a world in which economies grew arithmetically and population grew geometrically, mass want would be inevitable. …Jean Baptiste Say…argued on the other hand…that the gains from global population growth, spread over vast expanses of trading, trigger gains from a division of labor which exceed those ever thought possible before the rise of the market order. …If Scrooge has modern counterparts, they’re more likely to be found among those sad, self-sterilizing minimizers of carbon footprints than in the circles of supply-side entrepreneurs. …The debate between Say and Malthus, between Scrooge and the Ghosts, continues to this day. Is the market economy a source of abundance or shortage? Is each new little boy or a girl mostly mouth, or mostly mind? Is it a Say/(Julian) Simon/Forbes/Wanniski/Gilder world, or is it a Keynes/Ehrlich/Krugman/Gore world?

In other words, three cheers for capitalism.

P.S. Another famous character this time of year is George Bailey, the lead character in Frank Capra’s classic, It’s a Wonderful Life.

In a 2019 column for the Wall Street Journal, Gramm and Solon highlight the film’s main economic lesson.

The film’s antagonist is the banker Henry Potter (Lionel Barrymore), who epitomizes the Democrats’ caricature of unredeemable capitalism. Peter Bailey (Samuel Hinds) defends capitalism in an often overlooked dialogue when he asks his son George (Jimmy Stewart) to join his building-and-loan business. …George…wants no part of “this business of nickels and dimes and spending all your life trying to figure out how to save 3 cents on a length of pipe.” His father, being older and wiser, responds: “I feel that in a small way we are doing something important. Satisfying a fundamental urge. It’s deep in the race for a man to want his own roof and walls and fireplace, and we’re helping him get those things in our shabby little office.” By squeezing nickels and dimes, the Baileys made limited resources and labor go further, producing “dozens of the prettiest little homes you ever saw, 90% owned by suckers who used to pay rent” to old Potter. …Peter Bailey’s insight reflects a vision originating in the Enlightenment, which set people free to promote their interest, and in the process, through Adam Smith’s invisible hand, promote the interests of mankind. …Capitalism alone respects life’s greatest gift: the freedom to choose how you live your life, where you discover meaning, and what you sacrifice for.

P.P.S. If you still need to do some last-minute shopping, here’s a gift for your left-wing friends, another for your right-wing friends, and a lot of options for your libertarian friends.

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Greetings from Santiago. Chileans vote today for a new president and there’s a risk that a Venezuelan-style leftist, Gabriel Boric, will prevail.

And that puts at risk the economic progress described in this video.

The video has a good discussion of Chile’s very successful system of private pensions (which will be in danger if Boric wins).

But it also points out how free trade helped create the prosperity of modern Chile.

And that narrative is confirmed by looking at Chile’s score from the Fraser Institute’s Economic Freedom of the World.

I’m always happy to sing the praises of free trade and condemn protectionism, but let’s keep the focus on today’s election in Chile and why it matters.

That’s why this tweet tells you everything you need to know.

Notice how Chile began to prosper after it began to shift to free markets around 1980 and notice how Venezuela began to fall after it shifted to statism starting around 2000.

Notwithstanding all this evidence, Boric is favored to win today’s election. Which would be a vote for national economic suicide – perhaps akin to the British people voting for the pro-nationalization Labour Party after World War II (described in this video, for those interested).

I hope I’m wrong, both about the results of the election and the potential changes to economic policy if Boric prevails.

P.S. If you’ve enjoyed my Chilean election coverage, I did the same thing a couple of years ago in the United Kingdom (see here, here, here, here, and here).

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I explained a few days ago that Sunday’s presidential runoff in Chile should be viewed as the most important election of 2021.

This is because the left’s candidate, Gabriel Boric, wants to turn Chile into Venezuela, as I mention in this radio interview with Ross Kaminsky.

For some reason, you only hear my voice during this Zoom discussion, which means I don’t even have a face good enough for radio.

But let’s set aside that technical glitch and focus on Mr. Boric’s agenda.

Here’s a flyer that a campaign worker gave me as I was walking around Santiago yesterday.

It’s in Spanish, but one of my Chilean friends translated. Here are Boric’s economic proposals.

There was one attractive proposal. He’s proposing to cut the pay of politicians. But that will yield trivial savings if it happens and the odds of it actually happening are laughably small.

Also, he says he wants to fight crime, which is good (in theory).

His worst idea, though, is not on this flyer. If you go to his website, you’ll find this passage in his economic plan (as translated by Google): “The tax reform will collect on the order of 8% of GDP under the regime.”

He is not overly specific on how he will collect so much additional money, but the website mentions higher income taxes, green taxes, and the imposition of a wealth tax.

All of which sounds like a recipe to drive entrepreneurs and investors (and/or their money) out of the country.

To understand the radical nature of his plan, tax revenues in Chile currently grab about 21 percent of the country’s economic output according to the OECD – so Boric is advocating a 38-percent increase.

By comparison, Biden’s tax plan in the U.S. is awful, but he’s “only” proposing a 4-percent increase in the tax burden (about 1 percent of GDP).

P.S. Since Ross and I were comparing Argentina and Chile, here’s a chart I put together using the Maddison database.

P.S. Given that Chile’s free-market reforms have been especially beneficial to poor people (see here, here, here, and here), I wonder if they understand how Boric’s election would threaten their upward mobility.

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If you want visual proof of Chile’s “improbable success,” this chart tells you everything you need to know.

Thanks to free-market reforms in the 1980s and 1990s, growth exploded, Chile became the Latin Tiger and poverty plummeted.

It’s remarkable how quickly per-capita GDP has increased compared to the average of other major Latin American economies (Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, Paraguay, Uruguay, and Venezuela).

Some folks on the left (including editors at the New York Times) bizarrely think Chile’s “neoliberal experiment” has been a failure. Given their upside-down perspective, they probably think Venezuela is a smashing success.

But today’s column is not about what’s happened in the past. It’s about what may happen in the future because of an upcoming presidential election.

Let’s start with this article from the Economist, which expressed concern back in November that the first round of the presidential election would lead to a stark ideological choice between the hard left and hard right.

…stable Chile disappeared two years ago, in an explosion of massive and sometimes violent protests…In a vote for the constitutional convention in May (in which only 43% turned out), support surged for the hard left while drying up for mainstream parties. As a result, the convention has become a theatre of wokeness, with calls to wage war against pivotal industries…, alongside…for a bigger role for the state in pensions, health care and green regulation. …pessimists fear a Utopian list of unaffordable rights and anti-capitalism. …Gabriel Boric, the candidate of the hard left, has seemed poised to win the presidential election. A former student leader, …some of his allies…include the Communist Party… Mr Boric wants to expand tax revenues by 8% of gdp over six to eight years (impossible, say many economists) and review trade agreements in order to engage in industrial policy. …That is why support has grown for José Antonio Kast of the hard right. …Whereas Mr Boric promises the most left-wing government since the chaotic Socialist-Communist administration of Salvador Allende, Mr Kast offers the most right-wing one since the dictatorship of General Augusto Pinochet.

Sure enough, the November election put Boric and Kast in a runoff, which is scheduled for December 19.

I don’t know if it would be accurate to say this is akin to a hypothetical Rand Paul-Bernie Sanders contest, but a report in the Wall Street Journal suggests that are very big economic implications.

After years of protests and political upheaval that seemed certain to shift Chile’s politics sharply to the left, voters in the first round of a presidential election largely backed candidates who support the country’s free-market economy… More than half of the ballots in the Sunday vote went to three right-wing candidates who support the market economy, led by first-place finisher José Antonio Kast with 28% of the vote. Gabriel Boric, the leftist candidate who backs dismantling a private pension system and creating a state-run lithium company, finished second with 26% of the votes… “People didn’t buy the idea that Chile needs to dismantle the market-friendly model, they just want a stronger social safety net,” said Patricio Navia, a Chilean political scientist at New York University. …The future of Chile’s once-lauded economic model that bolstered foreign trade and slashed poverty over the last three decades has been in doubt since mass protests erupted two years ago… Mr. Kast, a 55-year-old former lawmaker…, says he is a democrat who is offering Chileans economic prosperity and freedom.

By the way, the presidential election isn’t the only big thing that’s about to happen in Chile.

The article also acknowledges something I wrote about last year, which is the possibility of a new constitution based on entitlements rather than liberties (i.e., positive rights vs negative rights).

The election is being held as a special assembly made up of mainly leftist delegates is writing a new constitution, which could weaken investor protections and expand social rights. The constitution is expected to be finished next year when it will be put to a referendum.

A Washington Post column published yesterday by Professor Michael Albertus summarizes what’s at stake.

Chile’s presidential runoff election on Dec. 19 is the country’s most important election since its return to democracy in 1990. …Chile’s election pits José Antonio Kast, a bombastic far-right politician whom many liken to Donald Trump and Jair Bolsonaro, against Gabriel Boric, a far-left lawmaker and former student organizer. …The stakes couldn’t be higher. Chile’s ongoing constitutional convention is poised to propose next year the biggest overhaul to the country’s political system since the Pinochet dictatorship.

Prof. Albertus points out that the election isn’t just about economics.

There are big fights about immigration, law and order, abortion, and indigenous rights.

For those of us who care a lot about prosperity, Mary Anastasia O’Grady of the Wall Street Journal opined two days ago on the implications of Chile’s upcoming choice.

The stakes are high in Chile’s Dec. 19 runoff presidential election pitting the free-market former Congressman José Antonio Kast against socialist Congressman Gabriel Boric. The country has been trending left for years. But Mr. Kast’s surprise first-place finish in the election’s first round—with 28% of the vote—and the center-right’s strong showing in legislative elections suggests that Chileans are reconsidering national suicide. …If the vote goes left, Chileans can expect policy geared toward greater redistribution of the existing wealth-and-income pie—higher taxes, nationalization of pensions, populism, etc. If the vote goes right, there will be a chance to restore the fast growth of the 1990s by deepening the liberal economic agenda. …there’s something much bigger at stake. That is the survival of the democratic institutions protecting the pluralism, property rights and public order that have made Chile one of Latin America’s richest countries. Mr. Boric is backed by a coalition—Approved Dignity—heavily influenced by the Communist Party and other hard-left groups. …If Mr. Boric wins the runoff, you can bet they will demand their pound of flesh.

Ms. O’Grady’s column notes that Chile’s free-market reforms dramatically reduced poverty (for more details, see here, here, and here).

The market economy has been enormously successful in Chile. The share of Chileans living in poverty fell to 8.6% in 2017 from 68.5% in 1990, according to official data. Extreme poverty over the same period dropped to 2.3% from 48.8%. It’s a development record that few countries in the world have achieved.

Last but not least, she makes a very important point that Chile’s recent performance has not been very impressive.

…the clamor for change isn’t irrational. According to Chilean economist and investor José Luis Daza, …In the five years before the pandemic in 2020, the country grew at an average annual rate of 1.9%, less than half that of the world economy. “After 2000,” he told me in a phone interview from Santiago last week, “there has been zero productivity growth. In fact, it has been marginally negative.” …It was in the midst of this economic malaise in October 2019 that extreme-left militants burst onto the scene in Santiago. …Mr. Daza recently put his work in New York on hold to join Mr. Kast’s economic advisory team with a focus on growth.

I’m not surprised. There has not been any meaningful pro-growth reform this century. Indeed, the opposite is true. Policy has actually drifted in the wrong direction.

But if Boric wins this weekend, a drift in the wrong direction could become a tidal wave, washing away the Chilean Miracle.

The last thing Latin America needs is another Venezuela. Milton Friedman will be rolling over in his grave.

P.S. I’m especially concerned that a victory for the left could lead to the repeal of some of Chile’s best policies, including social security personal accounts and nationwide school choice.

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A couple of years ago, to help build the case against socialism, I showed how West Germany enjoyed much faster growth and much more prosperity than East Germany.

The obvious lesson to be learned from this example of “anti-convergence” is that market-oriented economies out-perform state-controlled economies.

I want to revisit this topic because I recently dealt with someone who claimed that government spending via the Marshall Plan deserves the credit for West Germany’s post-war economic renaissance.

What does the evidence say? Was foreign aid from the United States after World War II a key driver (for Keynesian or socialist reasons) of the West German economy.

The answer is no.

Professor David Henderson explained the role of the Marshall Plan for Econlib.

After World War II the German economy lay in shambles. …less than ten years after the war people already were talking about the German economic miracle. What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949. …Marshall Plan aid to West Germany was not that large. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.

Moreover, the money that was dumped into Germany as part of the Marshall plan was offset by money that was taken out of the country.

…while West Germany was receiving aid, it was also making reparations and restitution payments well in excess of $1 billion. Finally, and most important, the Allies charged the Germans DM7.2 billion annually ($2.4 billion) for their costs of occupying Germany.

Inconvenient facts like this make the socialism or Keynesian argument very difficult to maintain.

In a 1990 study on whether there should be something similar to the Marshall Plan for Eastern Europe, Melanie Tammen summarized some of the research on how the original plan for Western Europe was a flop.

…those that received relatively large amounts of aid per capita, such as Greece and Austria, did not recover economically until U.S. assistance was winding down. Germany, France, and Italy, on the other hand, began their recovery before receiving Marshall Plan funds. As for Belgium, it embarked on a radical monetary reform program in October 1944, only one month after liberation. Belgium’s economic stabilization and recovery were well under way by 1946, fully two years before the arrival of U.S. aid. Great Britain, conversely, received more Marshall Plan aid than any other nation but had the lowest postwar economic growth rate of any European country. The critical problem facing Europe was…simply bad economic policy.

Kai Weiss of the Austrian Economic Center in Vienna also addressed this issue. Here’s some of what he wrote for the Foundation for Economic Education.

Common knowledge says that the United States’ Marshall Plan was responsible for the rapid economic growth, rebuilding the country by throwing a lot of money at it. But that’s a mistaken view. …why was there a “Wirtschaftswunder”? …two main reasons: a monetary reform and the freeing of the economy by abolishing price controls and cutting taxes. All of this was implemented thanks to one man: Ludwig Erhard. …What Erhard did was unthinkable in a hostile environment. The Allied forces, still heavily controlling Germany, left the Nazi price controls and rationing intact. But when Erhard became Secretary of the Economy in West Germany, he quickly ended all price controls and stopped rationing — to the dismay of the US advisors. …He, not a Keynesian Project like the Marshall Plan, enabled the miracle.

Speaking of Ludwig Erhard, here’s a video clip on what he did to trigger West Germany’s prosperity.

I have one minor disagreement with that video.

It states that Germany combined “free markets with a strong welfare state.”

That’s a very accurate description of, say, current policy in Denmark.

But total social welfare spending in Germany was less than 20 percent of GDP for the first few decades after World War II, considerably less than social welfare spending today in the United States.

At the risk of being pedantic, it would be more accurate to state that Germany combined free markets with a medium-sized welfare state.

Let’s close with one final bit of evidence.

Here’s a look at the most pro-market nations in the decades after the war. Germany (outlined in red) was never at the top of the list, but it was almost always in the top 10.

Was Germany a libertarian paradise?

Hardly.

But the main takeaway from today’s column is that it’s even more absurd to claim that Germany’s post-war growth was because of big government.

P.S. Regarding Eastern Europe, western nations ultimately decided to create a cronyist institution, the European Bank for Reconstruction and Development, in hopes of boosting post-Soviet economies. Needless to say, that was a mistake. Many nations have enjoyed good growth after escaping communist tyranny, but the cause was good policy rather than handouts.

P.P.S. The Erhard video is an excerpt from The Commanding Heights, a must-watch video that basically tells the economic history of the 20th century).

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Back in 2016, I shared a television program about the “Improbable Success” of Switzerland. Today, here’s a follow-up look at that “sensible country.”

There are elements to this video that are outside my area of expertise, such as the role of the reformation.

But the video mentions policies that I find very appealing, such as the country’s strong federalist system (unlike the United States, federalism hasn’t eroded).

This means jurisdictional competition, which has played a big role in curtailing bad policy.

And there was a brief indirect mention of the nation’s spending cap, which also has been a big success.

Interestingly, Switzerland’s strong track record is getting noticed in unusual places.

Here are some excerpts from a New York Times column by Ruchir Sharma.

There is…a country far richer and just as fair as any in the Scandinavian trio of Sweden, Denmark and Norway. ….with lighter taxes, smaller government, and a more open and stable economy. Steady growth recently made it the second richest nation in the world…with an average income of $84,000, or $20,000 more than the Scandinavian average. …surveys also rank this nation as one of the world’s 10 happiest. This less socialist but more successful utopia is Switzerland. …Wealth and income are distributed across the populace almost as equally as in Scandinavia, with the middle class holding about 70 percent of the nation’s assets. The big difference: The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer. …Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy. …Only one in seven Swiss work for the government, about half the Scandinavian average. …The Swiss have become the world’s richest nation by getting it right, and their model is hiding in plain sight.

Kristian Niemietz of London’s Institute of Economic Affairs also pointed out that Switzerland is a role model.

Classical liberal ideas work. But they are usually counterintuitive, and often hard to explain. …It is therefore helpful for classical liberals if we can point to a practical example…it is Switzerland which, in many ways, represents such an example. Switzerland is not a libertarian paradise. But it is a country which, through its mere existence and its economic success, refutes a lot of…conventional wisdoms. …Take decentralisation. …the Swiss example shows that local autonomy and pluralism can be a recipe for success. In Switzerland, even tiny cantons like Glarus or Obwalden, which have far fewer inhabitants than a typical London borough, enjoy a degree of political autonomy that London, which has more inhabitants than the whole of Switzerland, can only dream of. …the Swiss system shows that a healthcare system based on choice and competition can work exceptionally well. The Swiss system offers ample choice between insurers, insurance plans, providers and delivery models. …Liberal market economists…can simply refer to the successful example of Switzerland. We can end a lot of tedious discussions by simply saying, “Of course it works – just look at Switzerland”.

Amen.

Switzerland is a great role model.

By the way, neither the video nor the two articles mentions Switzerland’s private pension system, which is another big advantage the country has over most other nations.

If you want to see a chart that illustrates Switzerland’s stunning success, this look at both life expectancy and per-capita economic output is very revealing.

The link between prosperity and longevity isn’t big news, but Switzerland’s rapid upward ascent is very remarkable.

To conclude, there are numerous reasons to rank Switzerland above the United States, at least with regard to public policy.

P.S. The video mentions that Switzerland is the closest example in the world of a direct democracy. I’m instinctively opposed to that approach, because of the dangers of majoritarianism.

That being said, Swiss voters usually vote the right way.

P.P.S. It wasn’t mentioned in the video, but I like that Switzerland is one of the few European nations with widespread gun ownership.

P.P.P.S. We should not be surprised that some folks in Sardinia would like to secede from Italy and join Switzerland.

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If you want to understand why some nations enjoy much stronger economic growth than other nations, the best place to start is the Fraser Institute’s Economic Freedom of the World.

And if you want to understand why some states have more vibrant economies than other states, you should check out the latest edition of the Fraser Institute’s Economic Freedom of North America.

Since most readers are from the United States, I’ll start with a look at the publication’s sub-national index, which shows how American states rank in terms of economic liberty. Unsurprisingly, a bunch of jurisdictions with no income tax are at the top of the list and California and New York are at the bottom.

By the way, the authors (Dean Stansel, José Torra, and Fred McMahon) specifically note that the rankings are based on 2019 data (the latest-available data) and thus “do not capture the effect on economic freedom of COVID-19 and government responses to it.

With that caveat out of the way, here are some of the findings for the sub-national index (which is where Figure 1.2b from above can be found).

Since the Fraser Institute is based in Canada, they understandably start by looking at Canadian provinces, but you can then read about results for the rest of North America.

For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2019 was again Alberta with 6.17, followed by British Columbia with 5.44, and Ontario at 5.31. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.30 points in 2014 to 0.73 in 2019. The least free by far was Quebec at 2.83, following New Brunswick at 4.09, and Prince Edward Island and Nova Scotia at 4.20. In the United States, the most economically free state was New Hampshire at 7.83, followed closely by Tennessee at 7.82, Florida at 7.78, Texas at 7.75, and Virginia at 7.59. …In Mexico, the most economically free state was Baja California at 6.01.

Here are the provincial rankings from Canada.

Alberta is the best place for economic growth and Quebec is the worst (by a significant margin).

Here are the some of the findings for the all-government index (which uses a different methodology than the sub-national index mentioned above).

The good news, from the perspective of folks in the U.S., is that most states rank above every other jurisdiction in North America (and the Mexican state all rank at the bottom).

The top jurisdiction is New Hampshire at 8.23, followed by Florida (8.17), Idaho (8.16), and then South Carolina, Utah, and Wyoming tied for fourth (8.15). Alberta is the highest ranking Canadian province, tied for 33rd place with a score of 8.00. The next highest Canadian province is British Columbia in 47th at 7.91. Alberta had spent seven years at the top of the index but fell out of the top spot in the 2018 report (reflecting 2016 data). The highest-ranked Mexican state is Baja California with 6.65, followed by Nayarit (6.62)… Seven of the Canadian provinces are ranked behind all 50 US states.

By the way, here’s some historical context showing that all three nations had their best scores back in the early 2000s (when the “Washington Consensus” for pro-market policy still had some impact.

Historically, average economic freedom in all three countries peaked in 2004 at 7.74 then fell steadily to 7.24 in 2011. Canadian provinces saw the smallest decline, only 0.19, whereas the decline in the United States was 0.51 and, in Mexico, 0.58. Since then average economic freedom in North America has risen slowly to 7.43 but still remains below that peak in 2004. However, economic freedom has increased in the United States and Mexico since 2013. In contrast, in Canada, after an increase in 2014, it has fallen back below its 2013 level.

P.S. If you want some additional historical context, Alberta’s fall from the top (mentioned in the first excerpt) can be partly blamed on the provincial government’s fiscal profligacy when it was collecting a lot of energy-related tax revenue.

P.P.S. I first wrote about Economic Freedom of North America in 2013 and more recently shared commentary about the 2019 and 2020 versions.

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There are certain topics that seem to be slam-dunk wins for those who favor free markets and limited government, and one reason I make this assertion is that folks on the left don’t even bother to make counter-arguments.

Here are just a few examples:

Prior to today, I also would have included this example:

But now I can no longer include Chile’s economic renaissance because I finally found someone who concocted an alternative explanation.

As part of a column in today’s Washington Post about Chile’s upcoming presidential election, Anthony Faiola made this claim about that nation’s economic performance.

After Pinochet’s ruthless rule came to an end in 1990, the newly democratic nation witnessed a historic period of economic growth. Gross domestic product growth between 1990 and 2018 averaged 4.7 percent annually, well above the Latin American average. Over that same period, democratic governments increased social spending. Extreme poverty (below $1.5 per day) was virtually wiped out.

But now let’s consider whether this alternative explanation is accurate.

Mr. Faiola wants readers to believe that the positive developments in Chile (“historic period of growth” and “extreme poverty…was virtually wiped out”) occurred after 1990.

But if that’s the case, why did per-capita living standards begin to climb much earlier?

As shown by these two charts, it’s far more likely that the dramatic rise in per-capita economic performance around 1980 is the result of a big increase in economic liberty (as measured by Economic Freedom of the World) that also was occurring around that time.

(There is a separate measure of economic freedom for the years before 1970, so the orange and blue lines are discontinuous.)

One should always be careful about interpreting numbers. For instance, national economic data at a given moment in time will be affected when there are periods of global recession, such as the early 1980s and 2008.

Which is why it is important to look at longer periods of time. And when looking at decades of data for Chile, the big jump in prosperity clearly began after the economy was liberalized, not after Pinochet ceded power in 1990.

We’ll close with some bad news and good news.

The bad news, as captured by the bottom-half of the stacked charts abvoe, is that there hasn’t been much pro-market reform in recent decades.

But the good news is that Chile hasn’t deteriorated. The nation has endured some left-leaning governments, but economic freedom has remained high by world standards. Which means the economy continues to grow.

P.S. I’ll add some worrisome news. The left in Chile wants a new constitution that would give politicians more power over the economy. If that effort is successful, I fear the country will suffer Argentinianstyle decline.

P.P.S. I suppose Mr. Faiola deserves some credit for cleverness. Some leftists have tried to argue Chile is a failed “neoliberal experiment.” Given the nation’s superior performance, that’s obviously an absurd strategy. So Faiola came up with a new hypothesis that acknowledges the growth, but tries to convince readers that it’s all the result of things that happened after 1990. He’s wildly wrong, but at least he tried.

P.P.P.S. I have a three-part series (here, here, and here) on how low-income people have been big winners as a result of Chile’s shift to free enterprise.

P.P.P.P.S. Here’s a column on Milton Friedman’s indirect contribution to Chilean prosperity.

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Back in May, as part of a discussion about the tradeoff between free markets (efficiency) and redistribution (equity), I put together a chart to show how poor people are better off in the long run if policy makers focus on the former rather than the latter.

I made sure to assume that pro-market policies would generate only a small increase in growth.

However, thanks to “the miracle of compounding growth,” even that tiny increase results in the poor being better off when compared to a world with less growth and more redistribution.

But I was just providing a theoretical example, and it would be easy to change some assumptions to show that the poor would have better lives (as measured by consumption levels) with bigger government.

Fortunately, there’s a new study, authored by Justin Callais of Texas Tech University and Vincent Geloso of George Mason University, that looks at hard data to see which approach is best for poor people.

Here’s a description of their methodological approach, which uses the positive liberty vs negative liberty construct.

While it is true that economic freedom speaks directly to negative liberty, it also speaks indirectly to positive liberty because of its welldocumented effects on economic growth, health outcomes and education. We build on these works by using a rich dataset of estimates of income mobility of people born in the 1980s. …the dataset employed includes a larger number of poor and rich countries. Combining these data with those of the Fraser Institute’s Economic Freedom of the World (henceforth EFW) index, we try to measure its indirect effect (through growth and income levels) on intergenerational income mobility in a horse race with income inequality.

For all intents and purposes, they want to see which effect dominates in this flowchart.

And here’s the way they describe the chart.

…the true effect of economic freedom on intergenerational mobility is 𝛽1 + 𝛼1𝛽2. As long as 𝛽1 + 𝛼1𝛽2 > β3, economic freedom’s effects outweigh those of income inequality on positive liberty (as intergenerational income mobility is a standin for positive liberty).

So what did they find?

We find that economic freedom has both a direct and indirect effect on intergenerational income mobility. More importantly, those effects are more important than those of income inequality. We argue that our results militate for the claim that good institutions matter more to securing positive liberty than income redistribution does.we find that the lifetime institutional environment is a strong predictor of incomes today. The indirect effect of economic freedom (through income levels) on mobility is again strong and negatively correlated (indicated greater income mobility). economic freedom has both a direct and indirect effect on intergenerational income mobility. Economic freedom provides the legal right to engage in commerce, but through economic freedom’s impact on income, the institutional environment speaks to increasing the practical and realistic choice sets of people to better their situation.

The bottom line is that the poor are better off with economic freedom (i.e., negative liberty). Free markets lead to more upward mobility and higher living standards.

So if you want less poverty, push for more capitalism.

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I’ve shared several videos (here, here, here, and here) that use rigorous data to show that grinding poverty and severe material deprivation was the norm for humanity – until capitalism gained a foothold a few hundred years ago.

Fortunately, as free enterprise has gradually spread around the world, there’s been a remarkable increase in living standards, leading to a stunning drop in poverty.

For today’s column, let’s look at some new academic evidence about the link between capitalism and poverty reduction.

Here the abstract of a new study by Colin Doran and Thomas Stratmann of George Mason University.

We study the relationship between economic freedom and poverty rates in 151 countries over a twentyyear period. Using the World Bank’s poverty headcounts of those living on less than $1.90 per day, $3.20 per day, and $5.50 per day, we find evidence that economic freedom, measured by the Heritage Foundation’s Index of Economic Freedom, is associated with lower poverty rates. We also test the effect of various components of the Index of Economic Freedom. We find that a government’s integrity and a country’s trade freedom are associated with lower poverty rates.

Keep in mind that this study is looking at the relationship between free markets and extreme poverty (not the relatively comfortable type of poverty that exists in the United States).

More specifically, the authors were investigating the impact of public policy on people who live on between about $700-$2000 per year. In other words, poor people in poor nations.

And the big takeaway is that capitalism leads to less poverty, but what really makes a difference is to have open trade and less corruption.

The good news is that we know how to get free trade. Just get rid of protectionist policies.

The bad news is that corruption in government is a much more challenging topic. Yes, shrinking government would mean less opportunity for graft, but that doesn’t solve the problem of delivering “public goods” in a competent and honest manner.

P.S. Foreign aid makes things worse rather than better.

P.P.S. Click here is you want to learn about poverty reduction in rich nations.

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Two days ago, I shared the most morally reprehensible tweet of the year.

Today, we’re going to share a tweet that also is painful to read, but in this case only our friends on the left will be discomforted.

I’ve opined about Chile’s success and Venezuela’s failure on multiple occasions, but here’s the great José Piñera with an especially powerful comparison of the two nations.

I’ve had dozens and dozens of conversations with friends on the left about Chile and Venezuela and they have no response other than to sputter “Pinochet was a dictator!”

That’s true, I tell them, but please respond to my question about what we can learn when we compare Chile’s successful experience with economic liberty and Venezuela’s awful experience with statism.

At which point they bring up Pinochet again and refuse to deal with the actual data.

Speaking of data, since embedding a chart in a tweet sometimes doesn’t lead to the most user-friendly presentation, I went to the Our World in Data website to create my own version of Jose’s chart.

This type of chart looks at “relative changes” in per-capita economic output, so all nations start at the same place and we then examine which ones grew the fastest.

Or, in the case of Venezuela, which ones declined (and the ones, such as Argentina, that performed poorly).

Here’s another version of the chart, but this one gets rid of all the other nations so we can more easily compare Chile and Venezuela. As José Piñera wrote in his tweet, this is “extraordinary.”

Because Venezuela has a lot of oil, the nation’s economy does face exaggerated ups and downs as energy prices fluctuate.

But it’s easy to see a trend of economic stagnation (the nation’s energy industry was nationalized and is now collapsing, so that will augment Venezuela’s misery).

Our final version of the chart adds the average performance for the world and the average performance for Latin America. As you can see, Chile is still the best performer and Venezuela is still at the bottom.

I’ll close with two final observations.

But perhaps José Piñera‘s preferred candidate, José Antonio Kast Rist, will win this year’s election and save Chile from going in the wrong direction.

P.S. Venezuela used to be much richer than Chile, so it makes sense that Chile began to converge. But now the two countries are part of the anti-convergence club because Chile is now richer and continuing to grow much faster.

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Don Boudreaux, Deirdre McCloskey, and Dan Hannan have all explained how capitalism enabled mass prosperity after endless stagnation and poverty.

There’s a similar message in this video from Kite & Key Media. The most relevant parts start at 2:30, though I recommend watching the entire video.

But if you don’t have time to watch any of the video, here are four of the key points.

  1. We are much richer, on average, than we were 50 years ago. This is a point I made both in June and September, and it’s worth adding that the all income groups tend to rise together.
  2. There was almost no growth for much of world history, a dismal reality that is beyond the comprehension of politicians such as Congresswoman Ayanna Pressley.
  3. Technological progress enabled by capitalism not only ended mass poverty, but it also brings many luxuries within reach of lower-income and middle-class people.
  4. As shown by basket cases such as Venezuela, Lebanon, and North Korea, bad policy can wreck economic progress.

Regarding point #4, my only complaint with the video is that some viewers might conclude that economic growth will be automatic so long as politicians don’t make catastrophic Venezuelan-style policy mistakes.

It would have been nice to point out that, yes, the worst-possible set of policies produces the worst-possible economic damage, but also to explain that a modest amount of statism can hurt growth by a modest amount and a lot of statism can hurt growth by a significant amount.

In other words, there’s a spectrum of possible policy outcomes (I’ve also referred to this as the “socialism slide“) and it’s best to get as close to laissez-faire capitalism as possible.

Remember, even small differences in economic growth lead to big differences in long-run living standards. And the “size of the pie” is a good predictor of whether a nation enjoys broadly shared prosperity.

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Economists of all types agree with “convergence theory,” which is the notion that poor countries should grow faster than rich countries.

Though they are usually wise enough to also say “ceteris parisbus,” which means the theory applies if other variables are similar (the translation from Latin is “other things equal”).

I’m very interested in this theory because we can learn a lot when we look at nations that don’t have “equal” policies.

And the biggest lesson is that you have divergence rather than convergence if one nation follows good policies and the other one embraces statism.

Take a look, for instance, at what’s happened to per-capita economic output (GDP) since 1950 in Taiwan and Cuba.

The obvious takeaway from these numbers from the Maddison database is that Taiwan has enjoyed spectacular growth while Cuba has suffered decades of stagnation.

If this was a boxing match between capitalism and socialism, the refs would have stopped the fight several decades ago.

By the way, some folks on the left claim that Cuba’s economic misery is a result of the U.S. trade embargo.

In a column for the Foundation for Economic Education, Emmanuel Rincón explains the real reason why these two jurisdictions are so wildly divergent.

…the Communist Party of Cuba has blamed the United States for Cuba’s misery and poverty, alluding to the “blockade” that the U.S. maintains against Cuba. However, …the rest of the world can trade freely with the island. …Taiwan’s economy is one of the most important in the world, with a poverty rate of 0.7%, as opposed to Cuba, which has one of the most depressed economies on the planet and 90% of its population living in poverty. What is the difference between the two islands? The economic and political model they applied in their nations. …Taiwan has the sixth freest economy according to the Index of Economic Freedom… While Taiwan took off with a capitalist model, Cuba remained anchored in the old revolutionary dogmas of Fidel Castro… With popular slogans such as redistribution of wealth, supposed aid to the poor, and socialism, Fidel Castro began to expropriate land and private companies to be managed by the state…today the GDP of the Caribbean island is five times less than that of Taiwan, and 90% of its population lives in poverty, while in the Asian island only 0.7% of its population is poor. It is definitely not the fault of the “blockade”, but of socialism.

To be sure, Cuba would be slightly less poor if there was unfettered trade with the United States, so maybe Taiwan would only be four and one-half times richer rather than five times richer in the absence of an embargo.

The moral of the story is that there’s no substitute for free markets and small government.

P.S. Though I appreciate the fact that our friends on the left are willing to extol the virtues of free trade, at least in this rare instance.

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Writing last week about the new edition of Economic Freedom of the World, I largely focused on the jurisdictions that got high scores (Hong Kong, Singapore, and New Zealand) and countries that got low scores (Venezuela in last place, of course).

But I also included a chart showing that higher levels of economic liberty are correlated with higher levels of income.

That’s hardly a surprise for anyone who’s compared North Korea and South Korea. Or West Germany and East Germany.

But what about income mobility? Do free markets give low-income people an opportunity to climb the economic ladder?

Some new research from Vincent Geloso of George Mason University and James Dean of West Virginia University answers that question.

Here’s the abstract from their study.

Economic freedom is robustly associated with income growth, but does this association extend to the poorest in a society? In this paper, we employ Canada’s longitudinal cohorts of income mobility between 1982 and 2018 to answer this question. We find that economic freedom, as measured by the Fraser Institute’s Economic Freedom of North America (EFNA) index, is positively associated with multiple measures of income mobility for people in the lowest income deciles, including a) absolute income gain; b) the percentage of people with rising income; and c) average decile mobility. For the overall population, economic freedom has weaker effects.

And here’s the part of the study that I found most interesting.

We learn that labor market freedom is most important.

When focusing on the bottom decile’s average decile mobility (see table 5), we must note this variable only measures upward decile mobility, as those in the poorest decile cannot move down a decile and the upper decile can only move down or stay put. As a result, the effect of economic freedom is likely somewhat understated because of these mathematical boundaries. Nevertheless, we see that greater economic freedom increases the lowest decile’s upward decile mobility. In essence, higher amounts of economic freedom improve the relative gains of those at the bottom of the distribution, allowing them to move to higher deciles. Here, again, we see that the labor market freedom component is key for the nation’s poorest, such that an additional point of labor market freedom allows those beginning in the poorest decile to move up an additional 0.145 deciles… To put that number into perspective, using the differences in economic freedom between Quebec and Alberta (i.e. the lowest and highest economic freedom units in our data) is again useful. The greater labor market freedom of Alberta entails that the poorest Albertans have 0.44 extra deciles of mobility on average than the poorest Quebeckers.

Wonky readers may enjoy the aforementioned Table 5.

The bottom line is that free markets and limited government are the recipe to help poor people climb the economic ladder, not class warfare and redistribution (as I explained here, here, here, and here).

It’s much better to focus on how to make poor people rich rather than trying to make rich people poor.

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The Fraser Institute in Canada has released its latest edition of Economic Freedom of the World, an index that measure and ranks nations based on whether they follow pro-growth policy.

Based on the latest available data on key indicators such as taxes, spending, regulation, trade policy, rule of law, and monetary policy, here are the top-20 nations.

You may be wondering how Hong Kong is still ranked #1.

In this summary of the findings, the authors explain that EFW is based on 2019 data. In other words, before Beijing cracked down. This means Hong Kong will probably not be the most-free jurisdiction when future editions are released.

The most recent comprehensive data available are from 2019. Hong Kong remains in the top position. The apparent increased insecurity of property rights and the weakening of the rule of law caused by the interventions of the Chinese government during 2020 and 2021 will likely have a negative impact on Hong Kong’s score, especially in Area 2, Legal System and Property Rights, going forward. Singapore, once again, comes in second. The next highest scoring nations are New Zealand, Switzerland, Georgia, United States, Ireland, Lithuania, Australia, and Denmark.

The United States was #6 in last year’s edition and it remains at #6 this year.

There are some other notable changes. The country of Georgia jumped to #5 while Australia dropped to #9.

Perhaps the most discouraging development is that Chile dropped to #29, a very disappointing result (and perhaps a harbinger of further decline in the nation that used to be known as the Latin Tiger).

And it’s also bad news that Canada has deteriorated over the past five years, dropping from #6 to #14.

The good news is that the world, on average, is slowly but surely moving in the right direction. Not as rapidly as it did during the era of the “Washington Consensus,” but progress nonetheless.

By the way, the progress is almost entirely a consequence of better policy in developing nations, especially the countries that escaped the tyranny of Soviet communism.

Policy has drifted in the wrong direction, by contrast, in the United States and Western Europe.

Indeed, the United States currently would be ranked #3 if it still enjoyed the level of economic liberty that existed in 2000.

In other words, the BushObamaTrump years have been somewhat disappointing.

Let’s look at another chart from the report. I’ve previously pointed out that there’s a strong relationship between economic freedom and national prosperity.

Well, here’s some additional evidence.

Let’s close by considering some of the nations represented by the red bar in the above chart.

You probably won’t be surprised to learn that Venezuela is once again ranked last. Though it is noteworthy that its score dropped from 3.31 to 2.83. I guess Maduro and the other socialists in Venezuela have a motto, “when you’re in a hole, keep digging.”

Argentina isn’t quite as bad as Venezuela, but I also think it’s remarkable that its score dropped from 5.88 to 5.50. That’s a big drop from a nation that already has a bad score.

Given these developments (as well as what’s happening in Chile), it’s not easy to be optimistic about Latin America.

P.S. There isn’t enough reliable data to rank Cuba and North Korea, so it’s quite likely that Venezuela doesn’t actually have the world’s most-oppressive economic policies.

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I’ve made the case for capitalism (Part I, Part II, Part III, Part IV, and Part V) and the case against socialism (Part I, Part II, and Part III), while also noting that there’s a separate case to be made against redistribution and the welfare state.

This video hopefully ties together all that analysis.

If you don’t want to spend 10-plus minutes watching the video, I can sum everything up in just two sentences.

  1. Genuine socialism (government ownershipcentral planning, and price controls) is an utter failure and is almost nonexistent today (only in a few basket-case economies like Cuba and North Korea).
  2. The real threat to free enterprise and economic liberty is from redistributionism, the notion that politicians should play Santa Claus and give us a never-ending stream of cradle-to-grave goodies.

For purposes of today’s column, though, I want to focus on a small slice of the presentation (beginning about 2:00).

Here’s the slide from that portion of the video.

I make the all-important point that profits are laudable – but only if they are earned in the free market and not because of bailoutssubsidiesprotectionism, or a tilted playing field.

This is hardly a recent revelation.

I first wrote about this topic back in 2009.

And many other supporters of genuine economic liberty have been making this point for much longer.

Or more recently. In a new article for City Journal, Luigi Zingales emphasizes that being pro-market does not mean being pro-business.

The first time I visited the Grand Canyon many years ago, I was struck…by a sign that said, “Please don’t feed the wild animals.” Underneath was an explanation: you shouldn’t feed them because it’s not good for them. …We should post something of this kind on Capitol Hill as well—with the difference being that the sign would read, “Please don’t feed the businesses.” That’s not because we don’t like business. Quite the opposite: we love business so much that we don’t want to create a situation where business is so dependent on…a system of subsidies, that it is unable to compete and succeed… This is the…difference between being pro-market and being pro-business. If you are pro-business, you like subsidies for businesses; you want to make sure that they make the largest profits possible. If, on the other hand, you are pro-markets, you want to behave like the ranger in the Grand Canyon: …ensuring that markets remain competitive and…preventing businesses from becoming too dependent on a crony system to survive.

Amen.

Cronyism is bad economic policy because government is tilting the playing field and luring people and businesses into making inefficient choices.

But I also despise cronyism because some people mistakenly think it is a feature of free enterprise (particularly the people who incorrectly assume that being pro-market is the same as being pro-business).

The moral of the story is that we should have separation of business and state.

P.S. There’s one other point from Prof. Zingales’ article that deserves attention.

He gives us a definition of capitalism (oops, I mean free enterprise).

We use the term “free markets” so often that we sometimes forget what it actually means. If you look up “free markets” in the dictionary, you might see “an economy operating by free competition,” or better, “an economic market or system in which prices are based on competition among private businesses and not controlled by a government.”

For what it’s worth, I did the same thing for my presentation (which was to the New Economic School in the country of Georgia).

Here’s what I came up with.

By the way, the last bullet point is what economists mean when they say things are “complementary.”

In other words, capital is more valuable when combined with labor and labor is more valuable when combined with capital – as illustrated by this old British cartoon (and it’s the role of entrepreneurs to figure out newer and better ways of combining those two factors of production).

One takeaway from this is that Marx was wrong. Capital doesn’t exploit labor. Capital enriches labor (just as labor enriches capital).

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When writing Friday’s column about Somalia, I noticed that I have not written about the Human Freedom Index (HFI) since 2016 and 2018.

Let’s rectify that oversight by highlighting the results from the most-recent edition of that publication.

But first, some background. The Human Freedom Index is 50-percent-based on the data from Economic Freedom of the World and 50-percent-based on a set of variables that measure personal liberty.

Back in 2016, the world’s freest nation wasn’t actually a nation. It was Hong Kong, the autonomous (at the time) region of China. Switzerland was in second place, followed by New Zealand, Ireland, and Denmark (the United States was 23rd).

And in 2018, the top five were New Zealand, Switzerland, Hong Kong, Australia, and Canada (the United States was 17th).

The newest edition of the HFI shows that things have not changed much. New Zealand is still at the top, narrowly edging out Switzerland.

Hong Kong is next, followed by Denmark and Australia. Here are the top-10 jurisdictions.

For what it’s worth, the United States is tied for #17, which is an improvement compared to 2016 but identical to the 2018 score.

Here are some excerpts from the new HFI.

The Human Freedom Index (HFI) presents a broad measure of human freedom, understood as the absence of coercive constraint. This sixth annual index uses 76 distinct indicators of personal and economic freedom… The HFI covers 162 countries for 2018, the most recent year for which sufficient data are available. …the regions with the highest levels of freedom are North America (Canada and the United States), Western Europe, and East Asia. The lowest levels are in the Middle East and North Africa, sub-Saharan Africa, and South Asia. Countries in the top quartile of freedom enjoy a significantly higher average per capita income ($50,340) than those in other quartiles; the average per capita income in the least free quartile is $7,720.

As a general rule, there’s a reasonably strong correlation between economic freedom and personal freedom.

Nations that have one tend to have the other.

But there are some interesting exceptions.

Some countries ranked consistently high in the human freedom subindexes, including Switzerland, New Zealand, and Australia, each of which ranked in the top 10 in both personal and economic freedom. By contrast, some countries that ranked high on personal freedom ranked significantly lower in economic freedom. For example, Sweden ranked 1st in personal freedom but 46th in economic freedom; Norway ranked 3rd in personal freedom but 43rd in economic freedom; and Argentina ranked 37th in personal freedom but 144th in economic freedom. Similarly, some countries that ranked high in economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked 2nd in economic freedom while ranking 53rd in personal freedom; Jordan ranked 39th in economic freedom but 113th in personal freedom; and Malaysia ranked 46th in economic freedom but tied Jordan in personal freedom by ranking 113th.

By the way, Hong Kong’s score seems improbably high, but that’s because the report is based on data through 2018.

It’s quite likely that the jurisdiction’s score will take a tumble in the near future.

Although Hong Kong’s ratings and rankings have decreased since 2008, the impact of the Chinese Communist Party’s unprecedented interventions in the territory in 2019 and 2020 are not reflected in this year’s report (which, as noted, is based on 2018 data). Those recent events will likely decrease Hong Kong’s score noticeably in the future.

Here’s one final bit of information. This visual shows the nations enjoying the biggest improvements and biggest declines between 2008-2018. Congratulations to Sri Lanka and Myanmar (Burma to those of us with lots of gray hair), but I think Taiwan deserves special praise because it started with relatively good scores, which makes a big increase harder to achieve.

By contrast, is anybody surprised that Venezuela has suffered the biggest decline? The only good news (grading on a curve) is that Venezuela isn’t in last place in the HFI because Sudan and Syria are slightly more oppressive.

P.S. Tucker Carlson of Fox News recently asserted that Hungary has more freedom than the United States. That’s a silly claim. The United States (#17) ranks much higher than Hungary (#49), with better scores for both economic freedom and personal freedom.

That being said, Hungary is among the top-third of nations, so accusations of authoritarianism seem overwrought (and I have knee-jerk fondness for Hungary because it’s often butting heads with the dirigiste bureaucrats with the European Union in Brussels).

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As I’ve repeatedly pointed out, capitalism (oops, I mean free enterprise) is far superior than the various forms of statism.

Just last month, I shared a video with 20 example of market-friendly jurisdictions growing much faster than government-dominated nations.

But markets aren’t just superior at producing mass prosperity. Or at reducing mass poverty (the normal state of human existence).

Free enterprise also is the best option for dealing with a pandemic.

I wrote back in March about how free markets saved the day after the coronavirus struck.

In a column for the Wall Street Journal, Walter Russell Mead further elaborates on this theme.

The World Health Organization has been a shame and a disgrace, from its initial silence over China’s coverup of early data on the outbreak through its unreasoning hostility toward Taiwan and its collusion with Beijing’s efforts to discredit the lab-leak hypothesis. The premier international health agency has failed. Covax, the much-touted international program aimed at providing vaccines to citizens of countries too poor to purchase adequate supplies on the open market, has also fallen abysmally short. …What’s worked in the pandemic so far has been the dog everyone wants to kick: Big Pharma. Pfizer, Moderna, AstraZeneca and Johnson & Johnson succeeded where the internationalists failed. Scientists in free societies working with the resources that capitalism provides have given the world hope. The WHO, Covax, the Chinese and Russian vaccines, and the “global community,” not so much.

Amen. Let’s be thankful for pharmaceutical companies. Their pursuit of profit is what led to the vaccines that have saved millions of lives.

By contrast, the WHO has been very unhelpful.

And America’s domestic bureaucracies, the FDA and CDC, have arguably been harmful.

Notwithstanding this track record, the Biden Administration wants to weaken the private sector.

The Biden administration…seems to believe that the best response…is to sabotage the American pharmaceutical industry. The U.S. development bank—the International Development Finance Corp.—will provide billions of dollars to firms based in countries like Brazil, Rwanda, Senegal, South Africa and South Korea that agree to manufacture Covid-19 vaccines. Meanwhile, the State Department’s coordinator for global Covid response, Gayle Smith, said last week that she wants to push Big Pharma to share its technology with its new government-subsidized foreign competitors. …one wonders exactly how President Biden squares subsidizing cheap overseas competition for one of the most successful industries in the U.S. with promoting jobs for the American middle class.

This proposal is nuts.

Only curmudgeonly libertarians will get upset about an effort to subsidize vaccines for the developing world.

But every rational person should be horrified about a plan that would weaken one of America’s most successful industries.

P.S. Moreover, we should reject short-sighted policies such as European-style price controls on drug companies. Such an approach would undermine our ability to deal with future pandemics and also reduce the likelihood of new and improved treatments for things such as cancer, dementia, and heart disease.

P.P.S. I like pharmaceutical companies when they are being honest participants in a free market. I don’t like them when they get in bed with big government.

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Economists widely agree with the theory of “convergence,” which is the (mostly true) idea that poor nations should grow faster than rich nations.

This means that we can learn important lessons by looking at examples of “divergence,” and I provide 20 examples in this presentation.

The above video is an excerpt from a presentation I made earlier this week to a seminar organized by the New Economic School in the country of Georgia.

While it seems like I was making the same point, over and over again (and I was), I wanted the students to understand that the real-world evidence clearly shows that good policy is critical if less-developed nations want convergence.

And I also wanted them to realize that there are many examples of free market-oriented nations growing much faster than anti-market countries.

But, by contrast, there are not examples that go the other way.

I’ve challenged my leftist friends to cite one case study of a poor nation that became a rich nation with big government.

Or to cite a single example of an anti-market nation that has grown faster than a market-oriented country.

Especially when using decades of data, which means there’s no ability to cherry-pick the data and create a misleading impression.

Needless to say, I’m still waiting for them to give me an answer.

Here are the background stories from the examples of divergence in my presentation.

My last example showed important examples of convergence.

  • Example #20: United States vs. Hong Kong, Singapore, and Switzerland

And here are a few other examples of divergence that I didn’t include in my presentation.

Shifting back to convergence, my column on breaking out of the “middle income trap” also has very interesting data on how Hong Kong, Singapore, Ireland, and Taiwan have closed the gap with (or even exceeded) the United States.

I also recommend this column which looks at a wide range of nations that are converging with, diverging from, or staying flat compared with the United States, as well as this column showing how Ireland has caught up and surpassed other European nations.

The moral of the story is that there’s a very simple recipe showing how poor nations can become rich nations.

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In my four-part series on inequality (here, here, here, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.

One reason is that some of them don’t care.

As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.

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Last year, I weighed in on the debate about whether companies should be operated for the benefit of owners (shareholders) or for the broader community (stakeholders).

Unsurprisingly, I sided with Milton Friedman and argued that businesses have a responsibility to maximize profits – assuming, of course, ethical behavior.

Moreover, I cited research showing how this is the approach that actually produces the maximum benefits for the rest of us (i.e., stakeholders).

But some people are not convinced by these insights.

David Gelles of the New York Times has a glowing profile of a former CEO, Hubert Joly, largely because of his apparent hostility to free markets.

Hubert Joly took over Best Buy in 2012… Since stepping down as chief executive in 2019, Mr. Joly has taken up a post teaching at Harvard Business School… In his book, on the speaking circuit and in meetings with other executives, Mr. Joly has taken up a campaign against the capitalist st atus quo. “…on the top of my F.B.I. most wanted list…is Milton Friedman, with his shareholder primacy — the excessive, obsessive focus on profits as the key thing that matters.”

Mr. Joly’s overt disdain for Friedman’s position seems noteworthy.

But it also seems hypocritical.

Why?

Because Joly did exactly what Friedman recommended. He is viewed as a successful CEO because he made changes that had the effect of making shareholders richer.

…the electronics retailer was struggling… Sales and profits were sagging, and the stock price had cratered. …Eschewing the conventional wisdom — that Best Buy should slash wages and cut costs in a bid to jack up profitability — Mr. Joly began investing in the company. He gave workers better perks… The strategy worked, and Best Buy shares soared during his tenure.

So why, then, is Mr. Joly so hostile to Friedman when he followed his approach?

Beats me, but I’m guessing he somehow thinks Friedman’s maxim means that a CEO should “slash wages” and close stores. And that sounds mean and heartless.

But Joly showed that Friedman’s maxim could be fulfilled in a different way. He figured out how to please consumers so that it was possible to expand the business and make workers better off.

Which is actually what capitalism – oops, I mean free enterprise – is all about. People getting richer over time as competition and liberty combine to raise living standards.

Sometimes that happens because a poorly run company contracts (the seemingly heartless process of creative destruction) and sometimes that happens because a well-run company expands.

P.S. There’s one more quote from Mr. Joly that I want to address. As part of his interview with the NYT, he seemingly played the role of a guilt-ridden rich guy.

“I’m on the record saying that the more taxes I pay, the happier I am.”

To be fair, he didn’t actually say that he supported tax increases, either on himself or anyone else. It’s possible that he was really saying that he likes earning more money, which then results in a higher tax bill.

But just in case he was doing some left-wing virtue signalling in favor of tax increases, I’m glad to inform him that there is a website at the Treasury Department that allows him to voluntary turn more money over to the crowd in Washington.

Somehow, I suspect he’ll be like other hypocrites on the left and fail to take advantage of that opportunity.

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I like capitalism, both because it’s moral and it delivers superior results compared to any alternative.

I even have a 2-part series (here and here) on “defending capitalism” and a 5-part series on the “case for capitalism.”

Perhaps most important, it’s a system that delivers great results if the goal is lifting people out of poverty.

Is it possible, though, that “capitalism” is a tarnished word?

That may be the case, according to new polling data from the United Kingdom.

Edward Malnick recently wrote about Frank Luntz’s research, which is finding knee-jerk hostility to the “C” word.

Dr Frank Luntz is testing public opinion in Britain to find an alternative to “capitalism”, after 170 years of use, because he fears it is becoming a “bad word”. …Capitalism itself is already a “bad word” in the US and is fast becoming so in the UK too, he says, adding: “It’s one of the key things I’m trying to figure out … does this country need an alternative to the word capitalism? I think it does. We’re about to find out.” Questions on capitalism, and voters’ approach to it, form part of a giant survey Dr Luntz has put together as part of a project for the Centre for Policy Studies (CPS) think tank, at which he has based himself for the summer.

Nick King of the Centre for Policy Studies suggests we use something other than “capitalism” when describing an agenda of limited government.

…language matters. Capitalism is unpopular. But to many of capitalism’s advocates, terms like free enterprise and open markets can be used interchangeably with it and other polling suggests these concepts are more favourably received. If a phrase is more appealing than capitalism to those who reject it as a concept, then it makes sense for those who believe in the benefits of this system to adopt the language which people more readily accept.

I’m perfectly happy to talk about “free enterprise” rather than “capitalism.”

I even wrote about making that verbal shift back in 2016, though I obviously still frequently use “capitalism” when talking about economic liberty.

But perhaps I need to be more disciplined. Especially if I want my message to be heard by young people.

Kristian Niemietz of London’s Institute of Economic Affairs has a very depressing assessment of what millennials are thinking.

Surveys show that there is a lot of truth in the cliché of the ‘woke socialist Millennial’. Younger people really do quite consistently express hostility to capitalism, and positive views of socialist alternatives of some sort. For example, around 40 per cent of Millennials claim to have a favourable opinion of socialism and a similar proportion agree with the statement that ‘communism could have worked if it had been better executed’. …67 per cent of younger people say they would like to live in a socialist economic system. Young people associate ‘socialism’ predominantly with positive terms, such as ‘workers’, ‘public’, ‘equal’ and ‘fair’. Very few associate it with ‘failure’ and virtually nobody associates it with Venezuela, the erstwhile showcase of ‘21st Century Socialism’. Capitalism, meanwhile, is predominantly associated with terms such as ‘exploitative’, ‘unfair’, ‘the rich’ and ‘corporations’. …When presented with an anti-capitalist statement, the vast majority of young people agree with it… However, when presented with a diametrically opposed pro-capitalist statement, we often find net approval for that statement too. This suggests that when young people embrace a socialist argument, this is often not a deeply-held conviction.

None of this is a surprise. I’ve written a couple of times about the foolish views of young people.

Heck, I was writing about this problem way back in 2013.

I’m tempted to conclude that young people are simply stupid and we shouldn’t allow them to vote.

But I realize that’s not a constructive sentiment. So perhaps instead we should send them to live for a year in Greece, Argentina, or Italy. And if that doesn’t sober them up, they can spend a second year in Venezuela, North Korea, or Cuba.

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Last week, I shared Part I of my discussion with John Stossel about “capitalism myths.” Here’s Part II.

In the first video, we discussed three myths about free enterprise.

  • Myth #1 – Capitalists get rich by ‘taking’ money from others.
  • Myth #2 – The rich getting richer, and the poor getting poorer.
  • Myth #3 – Monopolies destroyed the free market.

Here are the final four myths.

Myth #4: Free markets create unsafe workplaces.

Proponents of government intervention often claim that greedy capitalists will skimp on safety in order to get more profits. To support their argument, they cite data on how workplace deaths have declined since the Occupational Safety and Health Administration was created.

That data is accurate, bu what they fail to mention is that workplace deaths were falling at exactly the same rate before OSHA.

This is because wealthier societies, created by capitalism, have both the capacity and desire to invest more in safety.

Myth #5: Capitalism created evil Robber Barons.

During the 1800s, the United States experienced an “industrial revolution,” and many people became enormously wealthy (though only by the standards of that era).

The anti-capitalist crowd asserted that these people were “robber barons” who profited at the expense of ordinary people.

Yet this was the era when the nation evolved from agricultural poverty to middle-class prosperity, as shown by Oxford University’s Our World in Data.

Notice how per-capita economic output grew especially fast in the last half of the 1800s when the industrial revolution was in full swing.

Myth #6: Capitalism just isn’t good for us.

This myth is based on the stereotype that capitalism is a soulless and materialistic system.

And there certainly are some people who are so myopically fixated on their personal wealth that they don’t properly enjoy the intangible benefits of family, community, and leisure.

But that’s a failing of human nature, not of markets. There surely are plenty of materialistic and soulless people, after all, who use socialism to get wealthy.

The key difference, as the great Walter Williams noted, is that you have to serve other people to get wealthy in a capitalist society, whereas you use government coercion to get rich when government controls the economy.

Myth #7: Capitalism will eliminate our jobs.

It’s certainly true that jobs are destroyed by capitalism. As noted in the video, the personal computer destroyed typewriter jobs.

This is the process of “creative destruction” and we should all recognize that it can be very bad news for people who have careers that are upended by technological change (such as candle makers when the electric light bulb was invented).

What’s special about capitalism, though, is that this process is what makes all of us richer over time.

Even the children and grandchildren of people who lost their jobs.

The bottom line, as I said to conclude the video, is that, “No other system, anywhere in the world, has ever come close to capitalism’s ability to generate mass prosperity.”

 

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I was a big fan of (and occasional guest on) John Stossel’s TV show, and I’m now a big fan of his videos (see here, here, here, here, here, here, and here).

So it was an honor to appear in his latest video about “Capitalism Myths.”

It’s a two-part series. In this first video, we discussed three myths about free enterprise.

Myth #1 – Capitalists get rich by ‘taking’ money from others.

Since voluntary exchange, by definition, is mutually beneficial, this is a truly absurd argument. Indeed, only the most vapid politicians and pundits suggest otherwise.

The most definitive research in this area came from Professor William Nordhaus of Yale, who estimated that, “innovators are able to capture about 2.2 percent of the total social surplus from innovation.”

Translated from economic jargon, that means the rest of society gets nearly 98 percent of the value created by rich entrepreneurs.

Myth #2 – The rich getting richer, and the poor getting poorer.

This is an issue I’ve repeatedly addressed, showing how poverty was the natural state of humanity until capitalism appeared a few hundred years ago.

Now we are incomprehensibly rich by comparison. At least in market-oriented nations.

Focusing on more-recent data, I’ve shown that living standards have dramatically increased in the post-World War II era.

In the video, John and I also discussed the Census Bureau’s data showing that the middle class is shrinking, but only because more people are becoming rich.

Myth #3 – Monopolies destroyed the free market.

Supporters of government intervention commonly argue that capitalism produces monopolies, meaning big producers capture the market and exploit consumers.

This is a rather puzzling argument since monopolies almost always are the result of government favoritism.

Even if we go back to the days of the so-called Robber Barons, we find that the consumers were only exploited when politicians decided to prohibit competition.

P.S. Next week, the second video will look at four other myths about capitalism.

P.P.S. On a related note, I have a five-part series (Part IPart IIPart III, and Part IV, and Part V) on “The Case for Capitalism.”

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When I debate public policy with leftists, I frequently stump them by asking for an example of a country where their ideas have worked.

They get flummoxed for the simple reason that no nation has ever become rich with big government.

There are some rich nations that have big governments, to be sure, but they all became rich in the 1800s and early 1900s, back when government was a tiny burden (and there often were no income taxes).

That’s true for the United States. And it’s true for Western Europe.

It’s also worth noting that places that have become rich in the modern era, such as Hong Kong and Singapore, have small governments and low tax burdens.

I’m making these points because Jim Tankersley of the New York Times has a thorough article on the Biden Administration’s budgetary philosophy.

And that philosophy is based on a completely different perspective. Indeed, the headline and subtitle are a very good summary of the entire article.

Here are some passages that further capture the Biden approach.

President Biden’s $6 trillion budget bets on the power of government to propel workers, families and businesses to new heights of prosperity…by redistributing income and wealth from high earners and corporations to grow the middle class. …it sets the nation on a new and higher spending path, with total federal outlays rising to $8.2 trillion by 2031… That spending represents an attempt to expand the size and scope of federal engagement in Americans’ daily lives… Mr. Biden also seeks to expand the government safety net in an effort to help Americans — particularly women of all races and men of color — work and earn more, rather than relying on corporate America to funnel higher wages to workers. …Mr. Biden is pushing what amounts to a permanent increase in the size of the federal footprint on the U.S. economy. Since 1980, annual federal spending has been, on average, about one-fifth the size of the nation’s economic output; under Mr. Biden’s plans, that would grow to close to one-fourth.

The article is definitely correct about one thing. As I wrote yesterday, Biden wants a big expansion of government spending.

But is he correct about the consequences? Will bigger government “help Americans” and allow more of them to “enjoy prosperity”?

If the evidence from Europe is any indication, adopting bigger welfare states is not a recipe for more prosperity.

For instance, OECD data on “actual individual consumption” show that people in the United States enjoy much higher living standards than their counterparts on the other side of the Atlantic Ocean.

There’s also very powerful data showing that poor Americans (those at the 20th percentile) have higher living standards than most middle-class Europeans.

There’s even data showing that very poor Americans (those at the 10th percentile) have living standards equal to most middle-class Europeans.

The bottom line is that Biden wants higher taxes and more redistribution, but that’s been a big failure in the part of the world that has tried that approach.

Not that we should be surprised. Both theory and evidence tell us that bigger government is bad for prosperity.

P.S. There’s a very sobering example of what happens when a rich nation decides to dramatically curtail economic liberty.

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Why do folks on the left support punitive policies such as high tax rates and a bigger burden of government?

Some of them are motivated by resentment against those who have achieved success. These are the people who support the hate-and-envy message of politicians such as Bernie Sanders and Elizabeth Warren.

Others folks on the left, by contrast, are motivated by sympathy for the less fortunate.

That’s a noble sentiment. Where they go wrong is in thinking that the economy is a fixed pie. This leads them to the mistaken conclusion that some people are poor because other people are rich.

Maybe I’m overly optimistic, but I think these people can be convinced to support good policy if they learn the facts about how free markets and limited government are a proven recipe for prosperity.

This is why I shared data earlier this year showing how per-capita economic output jumped dramatically once capitalism was allowed starting a couple of hundred years ago.

Today, let’s look at how poor people have been the biggest winners. Professor Max Roser of Oxford University recently shared a profoundly important tweet about the dramatic reduction in global poverty. We see not only that poverty rates have plummeted, but also that falling poverty rates are correlated with increases in per-capita GDP.

In other words, everyone is getting richer. There’s no fixed pie.

As you might expect, regions that are friendlier to capitalism have enjoyed bigger increases in prosperity and bigger reductions in poverty.

The bottom line is that people who care about the poor should be the biggest advocates of free enterprise.

P.S. It’s worth noting that, according to both U.S. data and global data, the big reduction in poverty occurred before welfare states were created.

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If nothing else, Biden’s big-government agenda is triggering a debate about fundamental issues, such as whether it’s a good idea to make America’s economy more like Singapore or more like Italy.

In making the case for the Italian approach of higher taxes and bigger government during his speech to Congress, President Biden exclaimed that “trickle-down economics has never worked.”

But we need to realize that Biden is using a straw-man definition. In his mind, “trickle-down economics” is giving a tax cut to rich people under the assumption that some of that cash eventually will wind up in other people’s pockets.

However, if you actually ask proponents of pro-growth tax policy what they support, they will explain that they want lower tax rates for everyone in order to reduce penalties on productive behaviors such as work, saving, investment, and entrepreneurship.

And they will be especially interested in getting rid of the tax code’s bias against saving and investment.

Why? Because every economic theory – even socialism, even Marxism – agrees that saving and investment are a key to long-run growth and rising living standards.

Which is why there’s such a strong relationship in the data between the amount of capital and workers’ wages.

Indeed, it’s almost a tautology to say that this form of “trickle-down taxation” leads to higher productivity, which leads to higher wages for workers.

As Stanford Professor John Shoven observed several decades ago:

The mechanism of raising real wages by stimulating investment is sometimes derisively referred to as “trickle-down” economics. But regardless of the label used, no one doubts that the primary mechanism for raising the return to work is providing each worker with better and more numerous tools. One can wonder about the length of time it takes for such a policy of increasing saving and investments to have a pronounced effect on wages, but I know of no one who doubts the correctness of the underlying mechanism. In fact, most economists would state the only way to increase real wages in the long run is through extra investments per worker.

In other words, everyone agrees with the “trickle-down economics” as a concept, but people disagree on other things.

So I guess it depends on how the term is defined. If it simply means tax cuts while ignoring other policies (or making those other policies worse, like we saw during the Bush years or Trump years), then you can make an argument that trickle-down economics has a mediocre track record.

But if the term is simply shorthand for a broader agenda of encouraging more saving and investment with an agenda of small government and free markets, then trickle-down economics has a great track record.

For instance, here’s a chart from the most-recent edition of Economic Freedom of the World. Nations with market-oriented economies are far more prosperous than countries with state-controlled economies.

By the way, Biden is not an honest redistributionist.

Instead of admitting that higher taxes and bigger government will lead to less economic output (and justifying that outcome by saying incomes will be more equal), Biden actually wants people to believe that bigger government somehow will lead to more prosperity.

To be fair, he’s not the only one to make this argument. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development also have claimed that there will be more prosperity if governments get more control over the economy.

I call this the “magic beans” theory of economic development.

Which is why I always ask people making this argument to cite a single example – anywhere in the world, at any point in history – of a nation that has prospered by expanding the burden of government.

In other words, I want a response to my never-answered question.

The response is always deafening silence.

To be sure, I don’t expect Joe Biden to answer the question. Or to understand economics. Heck, I don’t even expect him to care. He’s just trying to buy votes, using other people’s money.

But there are plenty of smart folks on the left, and none of them have a response to the never-answered question, either. Heck, none of them have ever given me a good reason why we should copy Europe when incomes are so much lower on that side of the Atlantic Ocean.

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