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Posts Tagged ‘Free Markets’

I’ve written a couple of times about a disturbingly large share of young people support statist economic policies.

A good example can be seen in this polling data from the Pew Research Center (relevant data circled in red).

Christopher Ingraham wrote about this survey in the Washington Post.

According to the Pew Research Center, 39 percent of adults younger than 30 support the view that people whose personal fortunes exceed $1 billion “is a bad thing,” while 16 percent say billionaires are good for society. …These attitudes were likely sharpened by the Democratic presidential campaign, which at one point pitted a multibillionaire (Mike Bloomberg) against a socialist senator who says that billionaires shouldn’t exist (Bernie Sanders)…the Pew data…suggest that young Americans are concluding that billionaires have amassed their wealth “through their rigging of the tax code, through legal political bribery, through their tax avoidance in shelters like the Cayman Islands, and through lobbying for public policy that benefits them privately.” …“The billionaire class is ‘up there’ because they are standing on our backs pinning us down,” Giridharadas said. …Among respondents 50 and older, just 15 percent say billionaires are a bad thing.

This is depressing data, just like the views of America’s young people in the GIEM survey I wrote about recently.

Some of them don’t like capitalism and wealth even when they’re beneficiaries.

The New York Times has a report on “socialist-minded millennial heirs” who want to use the money they inherited to undermine free enterprise.

“The wealth millennials are inheriting came from a mammoth redistribution away from the working masses, creating a super-rich tiny minority at the expense of a fleeting American dream that is now out of reach to most people,” said Richard D. Wolff, a Marxist and an emeritus economics professor at University of Massachusetts Amherst…he has been professionally arguing against capitalism’s selling points since his teaching career began, in 1967, but that his millennial students “are more open to hearing that message than their parents ever were.” …an individual act of wealth redistribution does not, on its own, change a system. But these heirs see themselves as part of a bigger shift, and are dedicated to funding its momentum. …In short, this means using their money to support more equitable economic infrastructures. This includes investing in or donating to credit unions, worker-owned businesses, community land trusts, and nonprofits aiming to maximize quality of life through democratic decision making, instead of maximizing profits through competition.

Here are three examples from the story.

Sam Jacobs has been…trying to gain access to more of his $30 million trust fund. At 25, he…wants to give it all away. “I want to build a world where someone like me, a young person who controls tens of millions of dollars, is impossible,” he said. A socialist since college, Mr. Jacobs sees his family’s “extreme, plutocratic wealth” as both a moral and economic failure. He wants to put his inheritance toward ending capitalism.

Rachel Gelman, a 30-year-old in Oakland, Calif., who describes her politics as “anticapitalist, anti-imperialist and abolitionist.” …“My money is mostly stocks, which means it comes from underpaying and undervaluing working-class people, and that’s impossible to disconnect from the economic legacies of Indigenous genocide and slavery,” Ms. Gelman said.

Pierce Delahunt, a 32-year-old “socialist, anarchist, Marxist, communist or all of the above,” has a trust fund that was financed by their former stepfather’s outlet mall empire. (Mx. Delahunt takes nongendered pronouns.) “…I think about intersectional oppression,” Mx. Delahunt said. There’s the originally Indigenous land each mall was built on, plus the low wages paid to retail and food service workers, who are disproportionately people of color, and the carbon emissions of manufacturing and transporting the goods. With that on their mind, Mx. Delahunt gives away $10,000 a month, divided between 50 small organizations, most of which have an anticapitalist mission.

There’s certainly nothing wrong with giving away one’s inheritance.

Since I’ve (sadly) never inherited any money, I haven’t had any reason to ponder the issue, but one of my dreams would be to use a windfall of money to help finance school choice so poor kids could escape failing government schools.

Needless to say, I wouldn’t finance anti-capitalist groups, like the folks described above.

But I’m digressing. Let’s return to the issue of misguided young people.

In a column for Law & Liberty, Professor John McGinnis offers suggestions about how to rescue them from statism.

…young voters are America’s future, and even if a few years in the workforce brings some greater political wisdom, many people still stick with their youthful paradigms unless some political shock disrupts them. For those who would try to change the mind of this generation (and the following one), it is important to understand how our education, occupational licensing, and entitlement policies are driving them to socialist views which break sharply with America’s political traditions of liberty. …It is not surprising that this structure prompts some young people to demand that the government pony up money for them… More generally, why not vote for radicals in the hope of shaking up the system on the assumption that it can’t get worse for them than it is now? …The classical liberal alternative is clear: reduce the transfers from the young to the old and eliminate those unnecessary barriers to career entry that privilege incumbents.

Here are the reforms that Prof. McGinnis believes would make young people more favorable to liberty.

Reform of the universities thus must be a priority. But it is very difficult. …they are getting worse by the decade if not by the year. Alternative institutions are probably the only answer. …Online education will allow for new challengers to rise, ones who are not as likely to be wedded to political correctness as the incumbents.

…our entitlement structure is currently designed to take from the younger generation and give to the elderly. Social security is a pay-as-you-go system. And given that social security is not actuarially sound, most of the current elderly will get more than they pay in. It is the payment of the young that makes up the difference. Medicare too is a government program from which the elderly benefit at the expense of the young.

The costs of occupational licensing also fall disproportionately on the young. Of course, that burden occurs in part because their elders already have their licenses. But more importantly, the barriers to entering many occupations have grown more expensive over the years.

Since I’ve written about the failures of higher education, the need for entitlement reform, and the downsides of licensing, I obviously have no reason to disagree with any of his suggestions.

But there’s something else that’s needed, especially when you contemplate the Pew data cited at the start of today’s column.

Supporters of free enterprise need to go after cronyism. And not just because the economy will perform better, but also because it’s morally offensive for people to line their pockets thanks to government coercion.

Indeed, half of the main message to young people (and everyone else) should be that honestly earned wealth is great, because that means (as Walter Williams sagely observed) someone accumulated lots of money by serving the needs of others.

And the other half of the main message is that it’s bad to have rich people who obtain loot with subsidies, handouts, protectionism, and other forms of cronyism.

P.S. Before giving up and wondering if young people are simply too stupid to vote, watch this video showing that young people reject socialism when they understand the implications.

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Previous editions of the case for capitalism (Part I, Part II, and Part III) have focused on big-picture analyses of markets vs statism. Today, let’s look at a specific product that free enterprise has delivered.

Younger readers may take smartphones for granted, but I was born during the Eisenhower Administration and grew up with no Internet, no cell phones, and clunky government-sanctioned telephone monopolies.

So I’m still sometimes amazed at how quickly smartphones have evolved. As shown by this image, dozens of bulky products now exist in the a device not much bigger than a checkbook (younger readers may not even be familiar with those!).

In an article for the American Enterprise Institute, Bret Swanson explains what has happened.

“What would an iPhone have cost in 1991?” The purpose is to measure — at least in a rough way — the progress of technology by looking at the components and features integrated in smartphones owned by billions of people. In past years we’ve focused on the three most basic (and easily measurable) components: computation, digital storage, and communications bandwidth. This time, we will also look at another revolutionary facet of smartphones: their cameras. …The iPhone 12, unveiled last month, has three 12-megapixel cameras, which is 36 times the number of pixels of the original DCS 100. At $15,000 per megapixel, circa 1991, that’s $540,000 worth of photographic power in every smartphone. Of course, this most basic measure doesn’t begin to account for the radical improvements in image quality and a hundred other features that make today’s smartphone cameras far superior in many ways to the very best cameras of the past. …Building today’s iPhone in 1991 would thus have cost at least $51 million, with $540,000 worth of cameras thrown in for free.

Maybe I’m too much of a cheerleader for free enterprise, but it seems very impressive that people can now buy, for less than $1,000, something that would have cost $51 million less than 30 years ago.

Not to mention that you don’t need to hire someone to carry around dozens of pieces of equipment.

If you want to peruse the details, here’s Swanson’s chart.

And here’s a timeline showing the prices of phones starting in the 1980s.

Keep in mind, by the way, that a smartphone today is far, far superior to a cell phone in the past.

Now think about sectors of our economy run by the government (Postal Service, air traffic control, etc) or heavily regulated and controlled by government (health care, agriculture, etc).

Call me crazy, but I’ll pick capitalism. It’s an ethical system that delivers prosperity and reduces poverty,

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China is a success if you consider how economic freedom increased after Mao’s death and hundreds of millions of people were lifted out of unimaginable poverty. But I explain in this interview that China is also a failure because the reforms were too limited and the country may now be drifting in the wrong direction.

All you really need to know is that China only ranks #124 in the Fraser Institute’s Economic Freedom of the World. To be sure its score is much higher than it was back in the 1970s, but it’s still way behind even nations such as Greece.

And China is paying a price for excessive government. This chart shows data on economic freedom and economic prosperity for Taiwan, South Korea, Japan, and China – and you can see how China’s growth isn’t so impressive when compared to the more market-oriented nations of East Asia.

I wrote way back in 2010 that Americans don’t need to fear the “Chinese Tiger, and it seems I’m not the only one to peruse the data and express skepticism about China’s economic outlook.

In an article for the Atlantic, Michael Schuman explains that China is unlikely to catch the United States.

Can China do better? Sure, it will almost certainly continue to gain wealth and influence. But to become No. 1, Beijing must overcome hurdles…the U.S. has retained a host of advantages that are often overlooked or underappreciated. …The total output of the U.S. economy was $20.5 trillion in 2018, significantly larger than China’s $13.6 trillion. Calculated on a per-person basis, the gap is even more glaring. …a much better comparison is of national wealth… By this metric, Americans remain significantly richer than the Chinese. In one estimate, U.S. household wealth was $106 trillion in mid-2019…compared with an estimated $64 trillion for China. …China is vulnerable to falling into the “middle-income trap.” That’s where many high-growth, emerging economies tend to end up: After reaching a comfortable level of income, they stall and struggle to leap into the ranks of the world’s most advanced economies… Only a small handful of developing nations, including South Korea and Singapore, have managed that jump in recent times. …China could get stuck in this snare. The heavy hand of the state in China’s economy—a source of envy for many U.S. policy makers—may be dragging it down. Bureaucrats direct bank loans, subsidies, and other resources to notoriously bloated and inefficient state-owned enterprises, loss-making “zombie” companies, and useless infrastructure projects, amassing a potentially destabilizing mountain of debt and killing off much-needed productivity gains.

In a column for the Wall Street Journal, former Secretary of State George Shultz opines on China’s challenges.

People are justifiably worried about China. It is wrecking Hong Kong… Xi Jinping’s statist economic strategy has returned to the Maoist model, putting private enterprise under the thumb of the Communist Party… China’s next 20 years are unlikely to repeat its past 20. Take the labor force. Growth in gross domestic product is a factor of a country’s labor-force and productivity growth. …But the labor force of Mr. Xi’s China is now declining… local governments and businesses are now swamped in contingent debts, often off-book. An example is high-speed rail. State-owned China Railway took on nearly $1 trillion in debt… we should recall…Ronald Reagan and Margaret Thatcher’s calls for markets and personal freedom as engines of human prosperity… Mr. Xi’s campaign to stamp out intellectual discourse in China has threatened…the country’s economic prospects.

In another piece for the Wall Street Journal‘s editorial page, Kevin Rudd (former Prime Minister of Australia) and Daniel Rosen also paint a less-than-optimistic picture of what’s happening in China.

Despite repeated commitments from Chinese authorities to open up and address the country’s overreliance on debt, the China Dashboard has observed delayed attempts and even backtracking on reforms. …An honest look at the forces behind China’s growth this year shows a doubling down on state-managed solutions, not real reform. State-owned entities, or SOEs, drove China’s investment-led recovery. In the first half of 2020, according to China’s National Bureau of Statistics, fixed-asset investment grew by 2.1% among SOEs and decreased by 7.3% in the private sector. …Perhaps the most significant demonstration of mistrust in markets is the “internal circulation” program first floated by President Xi Jinping in May. …expect more subsidies to producers and other government interventions, rather than measures that empower buyers. Dictating to markets and decreeing that consumption will rise aren’t the hallmarks of an advanced economy. …For years, the world has watched and waited for China to become more like a free-market economy…the multiple gauges of reform we have been monitoring through the China Dashboard point in the opposite direction. China’s economic norms are diverging from, rather than converging with, the West’s. …Though Beijing talks about “market allocation” efficiency, it isn’t guided by what mainstream economists would call market principles. The Chinese economy is instead a system of state capitalism in which the arbiter is an uncontestable political authority.

The most impressive evidence comes from an article in the Journal of Applied Corporate Finance.

Authored by Professor Michael Beckley from Tufts University, it’s a comprehensive explanation of why China is lagging.

China’s economy is big but inefficient. It produces vast output but at enormous expense. Chinese businesses suffer from chronically high production costs… The United States, by contrast, is big and efficient. American businesses are among the most productive in the world… China’s economy is barely keeping pace as the burden of propping up loss-making companies and feeding, policing, protecting, and cleaning up after one-fifth of humanity erodes China’s stocks of wealth. …To become an economic superpower, a country needs to amass a large stock of wealth—and to do that it must be big and efficient. It must not only mobilize vast inputs, but also produce significant output per unit of input. …How productive is China’s economy? Remarkably, nearly all of China’s economic growth since 2007 can be attributed to inputs: hiring workers and spending money. China’s productivity growth has not only been unspectacular; it has been virtually nonexistent.5 By contrast, productivity improvements have accounted for roughly 20% of U.S. economic growth over the past decade, as it has for most of the past 100 years.

Here’s some additional data on problems with China’s state-driven economic system.

China’s private sector is relatively efficient, but it is shackled to a bloated state sector that destroys nearly as much value as it creates. Private firms generate roughly two-thirds of China’s wealth and an estimated 80% of its innovations, but the Chinese government prioritizes political control over economic efficiency and thus funnels 80% of loans and subsidies to state-owned enterprises. As a result, state zombie firms are propped up while private companies are starved of capital. All told, more than one-third of China’s industrial capacity goes to waste and nearly two-thirds of China’s infrastructure projects cost more to build than they will ever generate in economic returns. Total losses from this waste are difficult to calculate, but the Chinese government estimates that it blew nearly $7 trillion on “ineffective investment” between 2009 and 2014. …At $40 trillion and counting, China’s debt is not only the largest ever recorded by a developing country, it has risen faster than any country’s, nearly quintupling in absolute size between 2007 and 2019. …the U.S. stock of human capital is several times greater than China’s. China has four times the population of the United States, but the average American worker generates seven times the output of the average Chinese worker. …China also loses 400,000 of its most highly educated workers every year to foreign countries in net terms, including thousands of scientists, engineers, and “inventors” (people that have registered at least one patent). The United States, by contrast, nets one million workers annually from all foreign countries, including roughly 20,000 inventors and 15,000 scientists and engineers, 5,000 of whom come from China. …The United States generates roughly 40% more wealth per unit of energy than China.

We’ll close with this chart from Professor Beckley’s article.

The bottom line is that China is not close to the United States. It’s not even catching up.

P.S. I want China to liberalize and prosper. That would be good for the people of China and it would be good for the world. I’m simply pointing out we won’t get that happy outcome if China persists is following bad ideas such as central planning and industrial policy.

P.P.S. Sadly, China will move further in the wrong direction if it takes awful fiscal advice from the International Monetary Fund or Organization for Economic Cooperation and Development.

P.P.P.S. If you want an example of sloppy and/or malignant media bias, check out how the New York Times tried to blame free markets for the failure of China’s government-run health system.

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While I generally don’t think recycling is economically sensible, I am going to reuse this 2013 BBC interview because it’s time (again) to criticize the economic illiteracy of Pope Francis.

As I’ve previously explained, it’s good to care for the less fortunate. Indeed, as I explain in the interview, it’s part of being a good person.

It’s misguided, however, to think that higher taxes and bigger government are an effective way of lifting people out of poverty.

Indeed, we have centuries of evidence demonstrating that only capitalism produces mass prosperity.

Sadly, Pope Francis has a Peronist mindset on economic matters. So when he issues his thoughts on economic matters, we get erroneous cliches rather than helpful analysis.

A story from the Associated Press summarizes the Pope’s new attack on economic liberty.

Pope Francis says…the “magic theories” of market capitalism have failed and that the world needs a new type of politics that promotes dialogue and solidarity… The document draws its inspiration from…the pope’s previous preaching on the injustices of the global economy. “…not everything can be resolved by market freedom,” he wrote. …As an outgrowth of that, Francis rejected the concept of an absolute right to property for individuals… He repeated his criticism of the “perverse” global economic system, which he said consistently keeps the poor on the margins while enriching the few… Francis also rejected “trickle-down” economic theory… “Neo-liberalism simply reproduces itself by resorting to magic theories of ‘spillover’ or ‘trickle’ — without using the name — as the only solution to societal problems,” he wrote. “There is little appreciation of the fact that the alleged ‘spillover’ does not resolve the inequality.

And here’s how NPR reported the Pope’s anti-market message.

The document..is a scathing description of laissez faire capitalism… Once the pandemic passes, the pope writes, “our worst response would be to plunge even more deeply into feverish consumerism and new forms of egotistic self-preservation.” …Francis says the marketplace cannot resolve every problem, and he denounces what he describes as “this dogma of neoliberal faith” that “resort[s] to the magic theories of ‘spillover’ or ‘trickle.’ ” A good economic policy, he says, creates jobs — it doesn’t eliminate them.

The Pope is right that good policy creates jobs, by the way, but he’s wildly wrong to think that there’s a better alternative than capitalism.

For what it’s worth, I’m guessing that he doesn’t like the fact that capitalism means “creative destruction,” which does result in millions of jobs being eliminated every year. But, barring a recession, that same process also leads to the creation of an even greater number of new jobs.

Equally important, this is the process that results in higher productivity, higher wages, and higher living standards.

The bottom line is that a statist economic agenda – at best – offers the poor a life of dependency (especially when you consider the very high implicit marginal tax rates created by redistribution programs).

Capitalism, by contrast, gives the poor opportunity and upward mobility (as I noted a few years ago, it would be much better to be a poor person in Hong Kong than in France).

P.S. I strongly recommend what Thomas Sowell and George Will wrote about the Pope’s anti-market ideology.

P.P.S. Mauritius is a powerful example of why the Pope is very fallible on economic matters.

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Earlier this month, as part of my ongoing series about convergence and divergence, I wrote about why South Korea has grown so much faster than Brazil.

My main conclusion is that nations need decent policy to prosper, and Johan Norberg shares a similar perspective in this video.

Let’s see what academic researchers have to say about this topic.

In an article for the Journal of Economic Literature, Paul Johnson and Chris Papageorgiou have a somewhat pessimistic assessment about the outlook for lower-income countries.

In its simplest form, convergence suggests that poor countries have the propensity to grow faster than the rich, so to eventually catch up to them. …there is a broad consensus of no evidence supporting absolute convergence in cross-country per capita incomes—that is poor countries do not seem to be unconditionally catching up to rich ones. …Our reading of the evidence…is that recent optimism in favor of rapid and sustainable convergence is unfounded. …with the exception of a few countries in Asia that exhibited transformational growth, most of the economic achievements in developing economies have been the result of removing inefficiencies, especially in governance and in political institutions. But as is now well known, these are merely one-off level effects.

Here’s a table from their study.

As you can see, high-income countries (HIC) generally grew faster last century, which is evidence for divergence.

But in the 2000s, there was better performance by middle-income countries (MIC) and low-income countries (LIC).

That seems to be evidence that the “Washington Consensus” for pro-market policies generated good results.

Indeed, maybe I’m just trying to be hopeful, but I like to think that the last several decades have provided a roadmap for convergence. Simply stated, nations have to shift toward capitalism.

For another point of view, Dev Patel, Justin Sandefur and Arvind Subramanian have a somewhat upbeat article published by the Center for Global Development.

…the basic facts about economic growth around the world turned completely upside down a quarter century ago—and the literature doesn’t seem to have noticed. …While unconditional convergence was singularly absent in the past, there has been unconditional convergence, beginning (weakly) around 1990 and emphatically for the last two decades. …Looking at the 43 countries the World Bank classified as “low income” in 1990, 65 percent have grown faster than the high-income average since 1990. The same is true for 82 percent of the 62 middle-income countries circa 1990. …It’s not “just” China and India, home to a third of the world’s population on their own: developing countries on average are outpacing the developed world.

Here’s a pair of graphs from the article. On the left, we see nations of all income levels grew at roughly the same rate between 1960 and today.

But if we look on the right at the data from 2000 until the present, low-income and middle-income countries are enjoying faster growth.

That article, however, doesn’t include much discussion of why there’s been some convergence.

So let’s cite one more study.

In a report for the European Central Bank, Juan Luis Diaz del Hoyo, Ettore Dorrucci, Frigyes Ferdinand Heinz, and Sona Muzikarova look for lessons from European Union nations.

…sound policymaking plays a key role in the attainment of real convergence, primarily via adequate measures and reforms at national level. …for a given euro area Member State to achieve economic convergence it needs to improve its institutional quality, i.e. that of those institutions and governance standards that facilitate growth… some euro area countries have not met expectations in terms of delivery of sustainable convergence… in the period 1999-2016 income convergence towards the EU average occurred and was significant in some of the late euro adopters (the Baltics and Slovakia), but not in the south of Europe. …Several low-income euro area members have, in fact, only just maintained (Slovenia and Spain) or even increased (Greece, Cyprus and Portugal) their income gaps in respect of the EU average.

Let’s close with two charts from the ECB study.

First, look at this chart tracking the relative performances of Italy, Spain, Portugal, Greece, and Ireland compared to the average of Western European nations.

What stands out is that Ireland went from being a relatively poor nation to a relatively rich nation.

Needless to say, I would argue that Ireland’s dramatic improvement is closely correlated with a shift toward free markets that began in the 1980s.

Indeed, Ireland currently has the 10th-highest level of economic freedom for all countries.

Next, here’s a chart reviewing how various European nations have performed since 1999.

Ireland grew the fastest, given where it started. But notice how Slovakia and the Baltic nations also have been star performers.

So the nations that have adopted free-market reforms have grown faster than one might expect based on convergence theory.

And you won’t be surprised to see that the nations that have lagged – Greece and Italy – are infamous for statist policies and an unwillingness to reform.

The bottom line – assuming you want to improve the lives of people in poor nation – is that the world needs more capitalism and less government.

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Back in 2017, I shared this video explaining why capitalism is unquestionably the best way to help poor people.

I’m recycling the video today because it’s a great introduction for a discussion about how best to help poor people.

As part of my Eighth Theorem of Government, I made the point that it’s wrong to fixate on inequality. Instead, the goal should be poverty reduction.

And the best way to help the poor, as I noted when criticizing Pope Francis’ support for statism in a BBC interview, is free markets and limited government.

Now we have additional evidence for this approach thanks to a new study from the Hoover Institution.

Authored by Ed Lazear, former Chairman of the Council of Economic Advisors, it uses hard data from Economic Freedom of the World and the Index of Economic Freedom to see how poor people do in capitalist nations compared to socialist nations.

If you’re pressed for time, here are the key passages from the introduction.

This study analyzes income data from 162 countries over multiple decades, coupled with measures of economic freedom, size of government, and transfers to determine how various parts of society fare under capitalism and socialism. The main conclusion is that the poor, defined as having income in the lowest 10 percent of a country’s income distribution, do significantly better in economies with free markets, competition, and low state ownership. More impressive is that moving from a heavy emphasis on government to a free market enhances the income of the poor substantially. …Changing freedom from the Mexico level to the Singapore level is predicted to raise the income of the poor by about 40 percent. All income groups benefit from the change, but the change typically helps the poor more than other income groups.

For those interested, let’s now dig into the details.

The study specifically looks at the degree to which state ownership (i.e., textbook socialism) has an impact on income.

As one might suspect, more state ownership means lower income.

A number of measures of free-market capitalism and socialism have been suggested. The analysis starts by examining the metric that most closely matches the dictionary definition of socialism, namely, the amount of state ownership of capital… The basic approach in this section is to examine the relation of income of three groups to state ownership. …All coefficients on the state ownership index are positive, strong, and statistically significant. For example, using the coefficient in column 4, a one standard deviation increase in private ownership increases median income by about 19 percent of the mean value of the log of median income. Also interesting is that the lowest income groups benefit as much or more from private ownership as the highest income groups. …The cross-country correlation between private ownership and income ten years in the future is positive and strong. It is also true that median income seems to rise over time within a country as the country moves toward more private ownership and less state ownership.

The study highlights several interesting examples.

For instance, it shows that poor people immensely benefited from China’s partial shift to capitalism, even though inequality increased (something I pointed out a few years ago).

Here’s the data on Chile, which shows both rich and poor benefited from that nation’s shift to capitalism.

By the way, I have several columns (here, here, here, and here) documenting how poor people have been the big winners from Chile’s pro-market reforms.

Next we have the example of South Korea.

That data is especially powerful, by the way, when you compare South Korea and North Korea.

Last (and, in this case, least), we have the data from the unfortunate nation of Venezuela.

Chavez’s family personally gained from socialism, but this chart shows how the rest of the nation has stagnated.

So what’s the bottom line?

Lazear summarizes his results.

…there is no evidence that, as a general matter, high-income groups benefit more from a move toward capitalism than low-income groups. The effect of changing state ownership and economic freedom on income is not larger for the rich than for the poor. Second, income growth is positively correlated across deciles. The situation is closer to a rising tide lifting all boats than to the fat man becoming fat by making the thin man thin. Finally, there is no consistent evidence across the large number of countries and time periods examined of any strong and widespread link between income growth and inequality. There are examples, like China, where income growth was coupled with large increases in inequality, but others like Chile, where strong income growth came about without much change in inequality, and South Korea, where inequality declined slightly as economic freedom and income grew over time.

Amen. This analysis underscores my oft-made argument that inequality is irrelevant and that policy makers instead should have a laser-like focus on economic growth.

Assuming, of course, that they want poor people to climb the economic ladder to prosperity.

P.S. The Lazear study points out that Scandinavian nations are definitely not socialist based on measures of state ownership.

Some might define socialist economies as merely being those that have high levels of redistribution, meaning high taxes and transfers. …It is certainly true that the Scandinavian countries have higher taxes and transfers than non-Scandinavian countries… Scandinavian countries all have low state ownership index values…and high values of the economic freedom index. The values for Scandinavia look much more like those for the United States than they do for pre-1985 China or post-2000 Venezuela. …Perhaps a more accurate description of Scandinavia is that the countries rely primarily on private ownership and markets but have chosen to have a large government transfer program, which implies not only high transfers but also high taxes.

I’ll simply add that the high transfers and high taxes have negative consequences for Scandinavian nations, but those countries at least have very pro-market policies in other areas to compensate for the damage caused by bad fiscal policy.

P.P.S. For my friends on the left who may suspect that Lazear cherry-picked his examples. I’ll simply challenge them to show a contrary example.

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Traditional economics, specifically convergence theory, tells us that poor nations should grow faster than rich nations.

I’m more interested, however, in why convergence often doesn’t happen, or only partially happens.

And I’m extremely interested in why we often see divergence, which occurs when two countries are at a similar level of development, but then one grows much faster than the other.

Let’s consider the example of Brazil vs, South Korea.  has an interesting article, published by the Center for Macroeconomics and Development, that looks at how the two countries have diverged over the past 50 years.

Here’s the chart that depicts the dramatic difference.

The author analyzes many of the reasons that South Korea has enjoyed faster growth.

It’s especially worth noting that Brazil’s protectionism has been self-defeating.

The “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels… Such a trap may well characterize the experience of Brazil and most of Latin America since the 1980s. Conversely, South Korea maintained its pace of evolution, reaching a high-income status… The path from low- to middle- and then to high-income per capita corresponds to increasing the shares of population moved from subsistence activities to simple modern tasks and then to sophisticated ones. …South Korea relied extensively on international trade to accelerate their labor transfer by inserting themselves into the labor-intensive segments of global value chains… with the “helping winners and saving losers” of Brazil’s industrial policies…, the temptation to use surpluses to accumulate wealth in ways to maximize frontiers of interaction with the public sector prevails… Brazil’s long-standing high levels of trade protection and closure also favored such an option… The Brazilian economy pays a price in terms of productivity foregone because of its lack of trade openness.

As a big fan of trade, I obviously agree with this analysis.

But I also think that’s not the full story.

If you compare the scores the two countries get from the most-recent edition of Economic Freedom of the World, you’ll find that South Korea scores better on trade.

But you’ll also notice that there are much bigger gaps when looking at scores for size of government, legal system and property rights, and regulation (and the gaps for the latter two indices have existed for decades).

The bottom line is that there are many policy reasons why Brazil lags behind South Korea.

So if Brazil wants to break out of the “middle-income trap,” it needs to follow the tried-and-true recipe for growth and prosperity (what used to be known as the “Washington Consensus“).

P.S. And that means ignoring poisonous advice from the International Monetary Fund and Organization for Economic Cooperation and Development.

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Part I of this series featured Dan Hannan explaining how the emergence of capitalism led to mass prosperity, while Part II featured Madeline Grant explaining how competition and cooperation make markets so successful.

Today, in Part III, Andy Puzder compares capitalism with socialism.

The core theoretical argument in the video is that capitalism is based on serving the needs of consumers.

As captured by one of my favorite quotes from Professor Walter Williams, you only make yourself better off in a free market system by serving others.

In a socialist system, by contrast, the only people who get rich are the government elites who plunder the people.

I also like that the video explains that Nordic nations are not socialist. As I’ve also pointed out, there’s no government ownershipcentral planning, and price controls in nations such as Sweden and Denmark.

Those countries do have higher tax burdens and more costly welfare states, which is the main reason they generally rank below the United States in measures of national economic liberty.

More important, the larger fiscal burden in Scandinavia help to explain why Americans enjoy higher living standards.

Indeed, my one complaint about the above video is that it didn’t show any of the data about relative levels of prosperity.

Yes, I want people to understand that Nordic nations have market-based economies, but I also want them to understand that those countries could be significantly more prosperous with less-onerous fiscal policy.

The most powerful data in that regards comes from a Swedish researcher who put together data showing that Americans of Scandinavian descent are much richer than their counterparts who are still in Scandinavia.

So the moral of the story is not only that capitalism is better than socialism, but also that capitalist nations with medium-sized governments do better than capitalist nations with large-sized governments.

P.S. Needless to say, capitalist jurisdictions with small-sized government do best of all.

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Yesterday, in Part I of this series, we enjoyed a video from the U.K.-based Centre for Economic Education, about how capitalism lifted the world from deprivation and oppression (also see videos by Don Boudreaux and Deirdre McCloskey).

Today, in Part II of the Case for Capitalism, here’s a video from CEE that explains how markets provide you a cup of coffee.

An obvious takeaway from the video is that consumers benefit from global markets, which hopefully helps to explain why free trade is desirable.

But there are four other messages that are even more widely applicable.

  1. Capitalism is based on competition, but also should be understood as a system of cooperation.
  2. Voluntary exchange means that both buyers and sellers expect to benefit from a transaction.
  3. Prices should be set by unfettered markets rather than politicians, regulators, or bureaucrats.
  4. Our prosperity is a result of the invisible hand (spontaneous order) rather than central planning.

In other words, the growth-producing concept of classical liberalism (as opposed to the statist version of liberalism that now exists in the United States).

All of which reminds me of this observation by Joseph Schumpeter, an influential economist from the Austrian School.

This quote isn’t as famous as what he said about creative destruction, but it deserves to be highlighted since it succinctly explains how capitalism is the system that delivers big benefits for ordinary people.

P.S. The degree to which nations enjoy convergence (or divergence) is generally a consequence of whether they allow free markets and limited government.

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This video from Dan Hannan crams 10,000 years of human history into 5 minutes. We learn about the “stationary bandit” of government and find out how our ancestors endured pervasive oppression and misery.

But there’s a happy ending to the story. It’s called capitalism.

There are many useful insights in this video.

We learn why it was important to replace arbitrary government with the “rule of law” so that property rights could be protected and so that people wanting to buy and sell no longer had to get permission from the state.

And once capitalism was unleashed beginning a few hundred years ago, living standards dramatically improved (these videos by Don Boudreaux and Deirdre McCloskey have lots of evidence).

Hannan makes the all-important point that capitalism is the opposite of exploitation. It enriches people, but also liberates them.

And, as indicated by one of my favorite quotes from Walter Williams, it means we help ourselves by helping others.

As Hannan concludes, “the free market is the fairest and justest model yet devised.”

P.S. Not everyone has the same definition of fair and just, so I’ll simply observe that market-oriented nations always and easily out-perform state-controlled economies.

For what it’s worth, nobody on the left has ever come up with a response to my never-answered question.

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I periodically share tweets that have some sort of remarkable feature, either good or bad.

Clever counter-tweets are especially appreciated. I even started giving recognition to the most brutally effective response each year.

But I may have been too quick to assign a winner for this year.

That’s because a Twitter account called @architecturpic published this tweet yesterday.

While it’s accurate to point out that highway exits don’t produce scenic architecture, is this an indictment of capitalism?

Not if you compare it to the slums of socialism, which is the message in this devastating response from @BrentCochran1.

Ouch. As the announcers might say at a tennis tournament, “game, set, and match for Brent Cochran.”

Suffice to say that there will have to be co-winners for the best counter-tweet of 2020.

By the way, it’s normally quite easy to find both nice and ugly architecture in any nation.

So to add a bit of hard data to today’s column, I’ll simply note that the average poor American has more spacious housing than the average middle-class person in Europe.

That doesn’t mean the housing will be architecturally significant, but it does indicate that people are better off in countries with smaller government and more economic liberty (indeed, it’s also worth noting that the average poor American enjoys higher overall living standards than middle-class folks in most other industrialized nations).

Which is why any tweet comparing socialism and capitalism has a foregone conclusion.

P.S. At some point, I’ll probably set up a special page for “Remarkable Tweets.” But since that hasn’t yet happened, here are the other tweets that I found to be noteworthy.

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I don’t know whether I’ll live 3 more years or 30 more years.

But I’m increasingly convinced that my “Never-Answered Question” will still be unanswered when I kick the bucket.

One of the reasons for my confidence is that folks on the left have remarkably shoddy arguments on economic issues.

For instance, in a column for the New York Times, Mehrsa Baradaran condemns the “neoliberal” revolution in the United States.

A law professor from the University of California, Irvine, Ms. Baradaran is unhappy that this modern version of classical liberalism resulted in more economic freedom.

…an ideological coup quietly transformed our society over the last 50 years… The roots of this intellectual takeover can be traced to a backlash against socialism… Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, decrying governments who chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — …leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization.

Since I’m a big fan of Prof. Hayek, I like this part of Professor Baradaran’s column.

And it is true that the United States became more “neoliberal” during the Reagan and Clinton years (though it’s definitely a huge exaggeration to think that pro-market ideas were dominant in “universities, law schools, legislatures and courts”).

Indeed, the entire world moved in the direction of free markets during the last two decades of the 20th century, thanks is part to the “Washington Consensus” for more economic liberty.

Ms. Baradaran, however, does not approve of these developments.

And she specifically doesn’t like some of the folks on Wall Street.

The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic. Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. …In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation.

I have no idea whether there’s any validity to the specific estimate of 1.3 million job losses as a result of private equity investors over the past 10 years (an average of 130,000 jobs per year).

But it certainly is true that lots of jobs are lost every year as a result of “creative destruction.” Indeed, 130,000 jobs are just a tiny fraction of the total losses.

Here’s a chart taken directly from the Bureau of Labor Statistics showing that more than 10 million jobs are lost – on average – every single year.

That’s the bad news.

The good news is that average job gains have been even higher over the past decade, averaging more than 12 million per year.

Call me crazy, but this seems like a ringing endorsement of “neoliberalism.” Especially when you consider that Americans enjoy much higher living standards than their counterparts in European nations with bigger burdens of government.

There are two additional excerpts from her column that merit some attention.

First, she regurgitates the myth that the 2008 financial crisis was caused by free markets and deregulation.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. …Faith in market magic was so entrenched that even the 2008 financial crisis did not fully expose the myth: We witnessed the federal government pick up all the risks that markets could not manage and Congress and the Federal Reserve save the banking sector ostensibly on behalf of the people. Neoliberal deregulation was premised on the theory that the invisible hand of the market would discipline risky banks without the need for government oversight.

At the risk of understatement, the Federal Reserve, along with Fannie Mae and Freddie Mac, deserve the lion’s share of the blame.

Also, she closes her column by embracing genuine socialism (i.e., government owning and operating parts of the economy).

Federal or state agencies can provide essential services like banking, health care, internet access, transportation and housing at cost through a public option. …we can move beyond the myths of neoliberalism…we should choose flourishing communities over profits.

At the risk of understatement, I don’t want more of our economy to be like the Post Office or DMV. I prefer private businesses, which face pressure to please consumers, rather than government-run businesses, which care mostly about pleasing politicians.

And I also think Ms. Baradaran needs a lesson from Walter Williams so she learns that profits make flourishing communities possible.

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When writing yesterday’s column about new competitiveness rankings from the IMD business school in Switzerland, I noticed that I have not yet written about this year’s edition of the Index of Economic Freedom.

Time to rectify that oversight.

We’ll start with a look at the nations with the most economic freedom. Interestingly, Singapore has now displaced Hong Kong as the world’s most market-friendly jurisdiction (because Hong Kong’s score declined, not because Singapore’s score increased), with New Zealand, Australia, and Switzerland rounding out the top 5.

The United States, meanwhile, isn’t even in the top 10. Instead, America dropped from #12 last year to #17 this year.

The decline is partly due to a lower score (with Trump’s protectionist policies deserving the biggest share of the blame), but mostly caused by better scores from nations such as Chile, Georgia, Estonia, and Lithuania.

What may shock people, though, is that even supposedly socialist Denmark (score of 78.3) ranks above the United States (score of 76.6). Here’s a look at U.S. and Danish scores from 1995-present.

Regular readers already know that Denmark is not a socialist nation. Indeed, it’s never been socialist. By world standards, there’s basically no history of government ownershipcentral planning, or price controls.

The most accurate way of describing Denmark is that it combines laissez-faire economics with tax-and-spend redistributionism.

Since this is a common approach among nations in that part of the world, some people even refer to this set of economic policies as the Nordic model.

So how does this approach compare to policy in the United States? The short answer, as illustrated by this table, is that America generally does better on fiscal policy, but gets lower scores when looking at almost every other type of policy.

The great irony of all this is that Bernie Sanders wants the U.S. to be more like Denmark, but he only says that because he doesn’t realize it would mean reducing the negative impact of government.

P.S. While Denmark has some awful fiscal policies (the tax burden is terrible), there are some bright spots. It has done a good job in recent years of restraining the growth of government, and it also has a partially private retirement system.

P.P.S. Not that any of these will be a surprise, but the three lowest-ranked nations in the Index of Economic Freedom are Cuba (26.9), Venezuela (25.2), and North Korea (4.2).

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I have applauded the incredible economic success of Hong Kong, which has long been ranked as the world’s most economically free jurisdiction.

Well, given China’s recent decision to impose more controls on Hong Kong, I want to share this interview I did last October.

At the risk of patting myself on the back, I think everything I said still applies.

Especially when compared to what some others are saying. Writing for Bloomberg last October, Shirley Zhao and Bruce Einhorn seemingly want readers to think that low tax rates somehow are the cause of Hong Kong’s challenges.

Hong Kong has remained the world’s freest economy, thanks partly to low taxes and the rule of law. But widening inequality has also fueled the worst unrest the city has seen since the former British colony returned to China in 1997. …The combined net worth of the territory’s 20 richest people…is pegged at $210 billion… the city’s income inequality, as expressed in Gini coefficient, was the most for any developed economy in 2016… About 1 in 5 residents lives below the poverty line. …Lam is under pressure to soothe tensions and find ways to ease the housing crisis in the least-affordable market without rocking a tax regime that made Hong Kong Asia’s financial hub.

I disagree with much of their analysis.

As I noted in the interview, the problem with housing is caused by government ownership of land.

Moreover, I can’t resist pointing out that the assertion about 20 percent of the population living in poverty has been shown to be utter nonsense. That figure comes from “poverty hucksters” who deliberately conflate inequality with poverty (an example of the “Eighth Theorem of Government“).

And, speaking of inequality, Hong Kong historically has been a great place to be poor for the simple reason that it’s a great place to climb out of poverty.

Or, to be more precise, it’s been a great place to climb out of poverty. Whether that will still be true in the future depends on China.

I have no idea what Beijing will do, but I explained in the interview that it would be good for everyone if China took a hands-off approach to Hong Kong.

Why? This chart, based on the Maddison database, shows that Hong Kong’s rapid growth rate has slowed ever since Hong Kong was transferred from British rule to Chinese rule. Since China has wisely not interfered with Hong Kong’s pro-growth economic policy, the most logical explanation for the slowdown is that entrepreneurs and investors are worried about what may happen in the future.

Needless to say, the best way to rejuvenate rapid growth is for Beijing to somehow display a commitment to economic liberty in Hong Kong (consistent with the one-country-two-systems approach).

P.S. As I warned in the interview, the United States should not goad China into any sort of crackdown, either political or economic.

P.P.S. The best-case scenario is a Singapore-style evolution in China, meaning sweeping economic liberalization and gradual political liberalization.

P.P.P.S. The worst-case scenario is backsliding by China on previous economic liberalization, combined with unfriendly relations with the western world.

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The current crisis teaches us that excessive regulation and bureaucratic sloth can have deadly consequences.

Here’s John Stossel’s video with another lesson, explaining that we need more capitalism rather than more government.

This seems like a no-brainer, especially given the wretched economic performance of countries where the government owns or controls the means of production.

But not everyone agrees. The appropriately named Paris Marx wants government to have more power, making the case for nationalization of Amazon in an article for Jacobin.

The government needs to…respond to the needs of people across the country as the pandemic situation deteriorates. The response should be to nationalize Amazon and integrate it with the USPS. …Nationalizing the company would also allow Amazon workers to get covered by the same union as postal workers… Amazon isn’t just an online e-commerce marketplace. …Amazon Web Services (AWS) is a cloud computing platform…the cloud should be placed under public ownership. Taking control of AWS would allow the government to…ensure the cloud platform is serving the public good… We have a rare opportunity to fundamentally alter the economy to serve the needs of people instead of private profit, and it’s time to seize it.

Call me crazy, but if the government takes over Amazon and merges it with the Postal Service, I’m guessing that what emerges will have the inefficiency of the latter rather than the nimbleness of the former.

Just imagine a giant Department of Motor Vehicles (or, on a related note, the government’s track record on teaching kids to drive).

Which is why the U.K.-based Economist warned back in 2017 about the dangers of government-run companies.

Expanded state ownership is a poor way to cure economic ailments. For much of the 20th century, economists were open to a bit of dirigisme. …But in the 1970s economists came to see state ownership as a costly fix to such problems. Owners of private firms benefit directly when innovation reduces costs and boosts profits; bureaucrats usually lack such a clear financial incentive to improve performance. Firms with the backing of the state are less vulnerable to competition; as they lumber on they hoard resources that could be better used elsewhere. …economists saw in the productivity slowdown of the 1970s evidence that an overreaching state was throttling economic dynamism. …State-owned firms pose risks beyond that to dynamism. Government-run companies may prioritise swollen payrolls over customer satisfaction. More worryingly, state firms can become vehicles for corruption, used to dole out the largesse of the state to favoured backers or to funnel social wealth into the pockets of the powerful. As state control over the economy grows, political connections become a surer route to business success than entrepreneurialism.

The good news is that very few politicians are supporting explicit nationalization.

The bad news is that there’s plenty of support for intermediate steps involving cronyism, industrial policy, and various types of direct and indirect subsidies.

Including in the legislation recently approved in Washington (not that anyone should be surprised).

Professor Amit Seru from Stanford and Professor Luigi Zingales from the University of Chicago warn, in a column for the Wall Street Journal, that the U.S. has take a dangerous step on the road to central planning.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector. The expectation is that the central bank will leverage this money… This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private. …The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

In other words, the U.S. is moving in the wrong direction on my “Industrial Policy Spectrum.”

The key unanswered question is whether the government’s new powers will be temporary or permanent.

There’s a legitimate argument for some form of intervention while the crisis in ongoing. But what happens once things go back to normal? Will politicians allow the “creative destruction” of capitalism, or will they use their expanded power to permanently interfere with market forces?

If they choose the latter, there will be less long-run prosperity.

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Five days ago, I wrote “Coronavirus and Big Government” to highlight how sloth-like bureaucracy and stifling red tape deserve much of the blame for America’s slow response to the crisis.

And I started that column by sharing four points from a previous column on “Government, Coronavirus, and Libertarianism.” I’ll start today’s column by repeating the final observation.

4. The federal government has hindered an effective response to the coronavirus.

Here’s a video from John Stossel documenting the federal government’s clumsy incompetence.

And here are a bunch of stories and tweets that provide additional elaboration.

Feel free to click on the underlying stories if you want to get even angrier about the deadly impact of big government.

The silver lining to all the bad news is that politicians and bureaucrats have been relaxing regulatory barriers.

But will they learn the right lesson and permanently repeal government-created barriers that hinder the provision of health care?

Is it true, as Robert Tracinski wrote for the Bulwark, that “We’re All Libertarians now”?

This talking point has since been taken up by others in a more technically accurate form: there are no libertarians in a pandemic. The idea is that when a crisis hits, everyone suddenly realizes how much they need Big Government. This is a bizarre argument to make about a virus that got a foothold partly because of the corrupt and tyrannical policies of a communist government in China. The outbreak is currently at its worst in Italy, where socialized medicine has not turned out to be a panacea. And it was allowed to get out of control in America because the feds imposed an incompetent government monopoly on COVID-19 testing, blocking the use of better and faster tests developed by private companies. …There has been a surge of emergency deregulation to lift artificial barriers that prevent people from solving problems. …the loosening of federal controls on the private development of diagnostic testing, after the disastrous attempt to centralize it all at the CDC. We’re also seeing the suspension of restrictive licensing requirements on doctors and nurses to allow them to work across state lines, so they can go where the shortages are worst. There has also been a whole series of waivers on restrictions on the transportation and serving of food and beverages in order to help restaurants stay in business and feed their customers by offering curb-side service.

Needless to say, I hope Tracinski is right.

But I worry that the net result of this crisis is that we’ll have more red tape and the CDC and FDA will have bigger budgets.

If you think I’m being too pessimistic, just remember that the Department of Veterans Affairs was rewarded with more money after letting veterans die on secret waiting lists, the IRS was rewarded with more money after persecuting Tea Party groups to help Obama’s political prospects, and the education monopoly endlessly gets rewarded with more money even though student outcomes stagnate or deteriorate.

All as predicted by the First Theorem of Government.

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After Hitler’s National Socialists were defeated in World War II, the allies imposed price controls on the German economy for the ostensible purposes of fighting inflation and preventing “price gouging.”

That policy led to massive shortages, black markets, and hoarding. Fortunately, as described in this video, a very clever economist abolished those controls, thus setting the stage for Germany’s post-war economic miracle.

The lesson to be learned is that politicians should let markets determine prices. Price controls of any kind, as indicated by the cartoon, will cause people to withhold goods, services, and/or labor from the marketplace.

Unfortunately, many people overlook that lesson when there’s some sort of disaster.

In a column for Bloomberg, Scott Duke Kominers asserts that sellers should not be allowed to increase prices when there’s a sudden increase in demand.

One might think that steep prices for disinfectant in the middle of an epidemic are just markets at work — a way of getting scarce goods to the people who value them the most. I’m sure that’s what price gougers tell themselves. …But that’s not the right way to think about disinfectant at this particular moment. …if you can pay $87 for a bottle of Purell instead of the usual $2 that probably doesn’t mean you’re more concerned about the risk of infection than your neighbor; it just means that you have more disposable income. Thus buying low-priced disinfectant and selling it at steep markups effectively transfers disinfectant supplies from lower-income people to wealthier ones. …in situations such as this it may be best for society to force prices below market-clearing levels in order to make sure everyone has access; that’s exactly what laws prohibiting price gouging attempt to do. …There’s a serious consequence to keeping the price low, of course: we end up with rationing, since there’s not enough to go around. But that hits everyone — rich or poor — more or less equally.

Politicians obviously like this argument. Most states have laws against “price gouging.”

That may be smart politics, but it’s bad economics.

J.D. Tuccille of Reason explains why such laws are misguided.

…as common as accusations of “price gouging” are, the term has no fixed meaning. Asked when rising prices cross the line to become criminal, New York Attorney General Letitia James told NPR, “there’s no definitive answer to that question, but you know it when you see it.” …Someincluding Alabama, Florida, and Maineforbid selling at an “unconscionable” price. Idaho and Texas ban sales at an “exorbitant or excessive price.” And New York splits the difference with restrictions on “unconscionably excessive price” increases during an emergency… Laws can’t change the market conditions that drive prices up. Prices for hand sanitizer, face masks, and easily stored food are rising right now not because sellers are mean, but because demand is rising relative to the immediately available supply. Those rising prices tell…manufacturers and distributors that they should increase production, and where they should send the goodsif they’re allowed to. …Sure enough, GOJO industries is “operating around the clock” to produce hand sanitizer, 3M has “ramped up production” of respirators, and many other companies are responding to the messages they’re getting from the market. Allowed time, goods will get to where they’re needed, and prices will drop as supply meets demand. …Price-gouging laws, by contrast, falsely tell the public that politicians are watching out for them even as they extend shortages and the resulting pain. Crises like the COVID-19 pandemic come and go, but “price-gouging” laws demonstrate that intrusive politicians are a recurring plague.

Art Carden, an economics professor at Samford University, shows why anti-gouging laws backfire on consumers.

You’ve seen the pictures on your social media feeds: Empty shelves across America. Panic-buying. Hoarding. …this is exactly what the supply-and-demand model we teach in introductory economics courses predicts when we actively prevent the free market from functioning. The shelves are…empty because…governments aren’t letting prices change to reflect new market conditions. …“price gougers”…get tarred as villains while it’s actually the politicians who are making the problem worse by interfering with prices. …the fact remains that we get a lot more hand sanitizer, toilet paper, and other supplies when we make room for people who are just in it for the money. You may not like their motivations, but they’re doing something your state’s governor and attorney general aren’t doing. Namely, they’re getting valuable emergency supplies into your hands.

Veronique de Rugy of the Mercatus Center warns about adverse consequences in her syndicated column.

It’s normal for people to stock up on supplies during crises. The immediate results are empty store shelves, soon followed by higher prices. When this happens, politicians around the globe demand an end to the price hikes. …such heavy-handed intervention is a mistake… If prices are kept artificially low, there’s little incentive for shoppers not to buy as much as they can. …The fact is there’s no better means of slowing the rising demand — and, especially, reducing excessive hoarding — than allowing the very price hikes that governments are trying to prevent. But price hikes have another important advantage: They create the necessary incentives for entrepreneurs to shift resources toward activities that increase the supply of these goods. The higher prices encourage higher levels of production for goods like masks and hand sanitizers, which then increases supply. …When governments prevent price hikes, they unwittingly create shortages of vital supplies. …Aren’t we better off when products are actually on the shelves and available for purchase, even if only at higher prices? When no such products are to be found, except by the politically and socially connected, ordinary citizens lose out.

John Hirschauer’s piece in National Review cites some academic research on this topic.

The unintended consequences of price controls have been confirmed…in empirical literature. Take, for instance, the study published by three scholars in the Journal of Competition Law and Economics who examined the merits of proposed price-control laws in the wake of Hurricanes Katrina and Rita. …The researchers reviewed the historical data on gasoline price hikes and found that “price increases were due to the normal operation of supply and demand and not price manipulation.” Upon reviewing the body of gasoline price-control studies, the group found that “neither consumers nor the economy benefit [from price controls], because the apparent monetary savings to consumers are transformed into costs of waiting or other forms of nonmarket rationing that exceed the monetary savings.” Through econometric analysis, they estimated that the “economic damages would have been increased by $1.5–2.9 billion during the two-month period of price increases” if the federal government had instituted price controls.

The only thing I’ll add to this discussion is that people are sympathetic to anti-gouging laws because of a belief in social equality. We think that everyone – rich and poor – should be treated equally during a disaster.

And in some cases, such as a group of people stranded on a lifeboat, that’s the right approach. Nobody would argue that scarce supplies (limited emergency provisions of fresh water and food) belong to the person with the biggest bank account .

But the economy isn’t a lifeboat. As explained in the above excerpts, it’s possible to get more provisions with the right incentives. Higher prices will encourage entrepreneurs to produce more scarce supplies (in this case, everything from toilet paper and hand sanitizer to respirators and ventilators).

So what’s the bottom line? Price gouging is no fun if you need to buy supplies in an emergency. But a free market is better than the alternative of government controls that lead to shortages, black markets, and hoarding.

I’ll close with this cartoon, which Art Carden included at the end of his AIER column.

And I’ll also add this joke that Mark Perry shared on twitter.

P.S. This video explains why the price system is so important and these three videos explain why anti-gouging laws backfire because they hinder the price system.

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Brexit was a battle over whether the United Kingdom would:

  1. Be a component part of the European Union
  2. Be a self-governing democracy

Now that British voters have chosen the second option, there’s a secondary debate about what path to choose.

Many Brexit supporters hope that the United Kingdom will use its newly restored independence to chart a more laissez-faire path, including lower taxes and less red tape.

Critics fret that this approach would mean the U.K. becoming a European version of Singapore.

My former colleague Marian Tupy explains for CapX that this would be a very desirable outcome.

Earlier this month Guy Verhofstadt, the Belgian MEP…, tweeted that…”We will never accept ‘Singapore by the North Sea’!” What exactly is wrong with being Singapore? …Back in 1755 Adam Smith observed that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice” – that certainly holds true for Singapore, which has become one of the world’s most prosperous countries by following Smith’s formula… In the last few decades, Singapore’s economy grew at a faster pace than that of the UK and the EU… Singapore’s GDP per capita, which amounted to 72 percent of the EU’s GDP per capita in 1950, amounted to 219 percent of the EU’s GDP per capita in 2019. …Life expectancy at birth is the best proximate measure of the overall health of the population. …life expectancy in Singapore trailed the EU and UK in 1960. In 2017, Singaporeans lived, on average, longer than Europeans.

Marian is right.

Singapore is an amazing example of a nation that broke through the middle-income trap, as I noted back in 2014 and 2017.

I’m particularly fond of the country because of the very modest burden of government spending. This chart, based on numbers in the IMF’s world economic outlook database, shows that the public sector consumes less than 20 percent of the economy’s output.

To put the above chart in context, government spending in the United States consume nearly 40 percent of GDP in the United States and more than half of economic output in some European nations.

Why does this matter?

Because good public policy is a recipe for more prosperity (and Singapore is very good in areas other than fiscal policy as well).

Building on Marian’s analysis, I’ve used the Maddison database to to see how Singapore compares to the United States, the United Kingdom (the former colonial master), and Malaysia (it was part of Malaysia until 1965).

This isn’t just convergence. Singapore caught up with the U.K., then caught up to the U.S.A., and now has a comfortable advantage.

Seems like a good model for the U.K. to follow. Though Hong Kong also is a very good option (though it’s unclear if that will be true in the future).

P.S. To be sure, Singapore is not a libertarian paradise. There are some strict laws governing private behavior, including the death penalty for certain drug offenses and a ban on the import and sale of chewing gum. More worrisome (given my focus on economic policy) is that officials have contemplated class-warfare tax policies.

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Since libertarians are motivated by the non-aggression principle, it’s easy to understand why they support the capitalist system of voluntary exchange rather than alternative systems based on government coercion.

But there are some who think markets are immoral, and that’s the topic of this book and this related video.

Virgil Henry Storr and Ginny Seung Choi are the authors of Do Markets Corrupt Our Morals, and the Mercatus Center explains the book’s core message.

…people in market societies are wealthier, healthier, happier and better connected than those in societies where markets are more restricted. More provocatively, they explain that successful markets require and produce virtuous participants. Markets serve as moral spaces that both rely on and reward their participants for being virtuous. Rather than harming individuals morally, the market is an arena where individuals are encouraged to be their best moral selves.

And Professor Michael Munger from Duke University explores the implications in his review.

The useful thing about this book…is that it considers a more dynamic problem than the classical literature on the morality of markets. …doesn’t “commodification” and the pursuit of gain for its own sake distort, and ultimately corrupt, the human impulses of altruism and mutual aid on which society depends? …Their answer is “perhaps, but not necessarily.” And, compared to other actual systems that might be used to organize large scale human activity, they argue that markets are actually more likely to nurture moral spaces in which people can find ways to cooperate and help each other.

He identifies the main arguments about the putative shortcomings of markets.

…there are three central charges commonly leveled against the morality of markets. One is the claim that markets exploit workers and turn them into brutes; the second is that the commodification of things and the use of prices to direct allocation decisions corrupts the moral sense humans naturally possess and would otherwise use to motivate cooperation; and the third is that a common consequence of markets, extreme inequality, is corrosive to collective institutions of community and democracy.

And here’s Munger’s summary of the answers to those three questions.

Markets, in the Storr and Choi view, actually improve the lives of workers, rather than making them brutes. …it quickly becomes cheaper to “pay” workers with better and more comfortable conditions, safer working spaces, and more interesting activities…higher pay and the improvements in access to desirable consumer products that come with a market economy mean that workers have leisure time and the resources to enjoy it.

…commodification and division of labor foster a dramatic increase in scope and variety of new communities for humans to join and be part of. Further, the relation among workers in a firm, or the relation between a seller and a repeat customer, create new and important “moral spaces” in which the importance of character and personal familiarity produce both legitimately warm comradery and an increase in the efficiency of contracts and cooperation because of improvements in trust and personal commitment.

…market systems can in fact be associated with high levels of inequality, but it appears that increased inequality may often be the price a society pays for reducing poverty, a trade-off that very poor citizens are likely to embrace. Further, Storr and Choi show that (a) market societies generally have lower inequality than non-market societies, and (b) market societies show a great deal more social mobility, or a capacity for the very poor to become much more wealthy than their parents, than non-market systems.

In other words, markets generate higher income, better lives, and upward mobility.

Not a bad result.

My two cents on this debate is to expand on Munger’s point about capitalism when “compared to other actual systems.” In my humble option, this is what really matters.

Yes, markets can be cold and impersonal. And, yes, “creative destruction” is no fun when you’re part of the “destruction” (even if it results in your children and grandchildren living better lives).

But if our goal is prosperity, there’s no alternative that comes close.

Especially since every alternative empowers politicians and their cronies. Indeed, my readings on this topic reminded me of this passage in Atlas Shrugged when one of the anti-market interventionists said it was time to replace the “aristocracy of money” and one of the book’s good guys noted that this meant an “aristocracy of pull.”

And when an economy is based on political influence and power, P.J. O’Rourke warns that there’s an inevitable consequence.

P.S. Here’s David Burton’s bullet-point comparison of the morality of capitalism and socialism.

P.P.S. And Walter Williams has a great video on the morality of markets.

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Back in 2013, I talked to the BBC about Pope Francis and his bizarre hostility to free enterprise.

Sadly, it doesn’t appear that the Pope took my advice (though I think it’s amusing that at least someone in the Vatican is paying attention).

There’s a wealth of evidence that markets are the best way of helping the poor. But the Pope wants more government.

Moreover, there’s also plenty of data showing that higher tax rates and more spending hurt the poor. Yet the Pope wants more government.

And there’s lots of research on capitalism and upward mobility for the less fortunate. Nonetheless, the Pope wants more government.

For instance, he’s once again advertising his ignorance about economics, development, and fiscal policy.

Pope Francis blasted the practice of tax cuts for the rich as part of a “structure of sin” and lamented the fact that “billions of dollars” end up in “tax haven accounts” instead of funding “healthcare and education.” Speaking at the seminar set up by the Pontifical Academy for Social Sciences  the Pope criticized “the richest people” for receiving “repeated tax cuts” in the name of “investment and development.” These “tax haven accounts” impede “the possibility of the dignified and sustained development of all social agents,” claims the Pope.  He added that “the poor increase around us” as poverty is rising around the world. This poverty can be ended if the wealthiest gave more.

Wow. Sounds more like Bernie Sanders or Alexandria Ocasio-Cortez rather than a religious leader.

Libertarian Jesus must be very disappointed.

In an attempt to add some rigorous analysis to the discussion, Professors Antony Davies and James Harrigan wrote a column for the Foundation for Economic Education on capitalism and its role in global poverty reduction.

Galileo ran afoul of the Inquisition in 1633 when he was found “vehemently suspect of heresy.” …One might think that being this profoundly wrong about something well outside the realm of theology would cause the magisterium, and the pope specifically, to tread very carefully even 386 years later. But one would be wrong. Because here comes Pope Francis yet again, offering economic opinions from the bulliest of pulpits about something he understands no better than a garden-variety college freshman. …According to the pontiff, “the logic of the market” keeps people hungry. But “the market” has no logic. The market isn’t a thing, let alone a sentient thing. “The market” is the sum total of individual interactions among billions of people. …Whenever a trade occurs, both sides are better off for having made it. We know this because if they weren’t, the trade wouldn’t occur. …Not surprisingly to anyone but perhaps Pope Francis, some of the first financial speculation in which humans ever engaged involved food. Financial speculation and its more evolved cousins, options and futures contracts, evolved precisely as a means to fight hunger. …speculators took some of the risk of price fluctuations off the backs of farmers, and this made it possible for farmers to plant more food.

Davies and Harrigan inject some hard data into the debate.

If these arguments are too esoteric for Francis, there is also overwhelming evidence. Economic freedom measures the degree to which a country’s government permits and supports the very sorts of markets against which Francis rails. …If we list societies according to their economic freedom, the same pattern emerges again and again and again. Whether comparing countries, states, or cities, societies that are more economically free exhibit better social and economic outcomes than those that are less economically free. …even Francis should be able to see it quite clearly from his Vatican perch. …Extreme poverty rates for the half of countries that are less economically free are around seven times the extreme poverty rates for the half of countries that are more economically free.

Here’s one of the charts from their column.

As you can see, the state-controlled economies on the left have much higher levels of poverty than the market-driven economies on the right.

They also share some economic history.

…if the world around Francis doesn’t provide enough compelling evidence, the world prior to Francis certainly does. At the turn of the 18th century, around 95 percent of humans lived in extreme poverty. That was at the advent of the Industrial Revolution and of capitalism. …the extreme poverty rate fell from 95 percent to below ten percent. With the flourishing of capitalism, the extreme poverty rate fell tenfold at the same time that the number of humans grew tenfold.

Amen. Videos by Deirdre McCloskey and by Don Boudreaux confirm how the world went from near-universal poverty to mass prosperity (at least in the nations that embraced free markets and the rule of law).

By contrast, there’s not a single example of a nation that became rich and reduced poverty with big government.

P.S. Mauritius is a good test case of why Pope Francis is wrong. Very wrong.

P.P.S. To learn more about why Pope Francis is off base, I also recommend the wise words of Thomas Sowell and Walter Williams.

P.P.P.S. To be fair, there was plenty of bad economics in the Vatican before Francis became Pope. And also some sound thinking.

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Back in 2014, I compared Hong Kong’s amazing growth with Cuba’s pitiful stagnation and made the obvious point that free markets and limited government are the right recipe for prosperity.

Especially if you care about improving the lives of the less fortunate.

Communists claim that their ideology represents the downtrodden against the elite, yet the evidence from Cuba shows wretched material deprivation for most people.

In Hong Kong, by contrast, incomes have soared for all segments of the population.

Today, let’s update our comparison of Cuba and Hong Kong. Law & Liberty has posted a a fascinating review of Neil Monnery’s book, A Tale of Two Economies, authored by Alberto Mingardi from Italy’s Bruno Leoni Institute.

As Alberto explains, the book is about how developments in both Hong Kong and Cuba were shaped by two individuals.

How important are key individuals in shaping the success or failure of economies? …Neil Monnery’s A Tale of Two Economies is in some sense a polemic against historical determinism, at least insofar as promoting economic reforms is concerned. It stresses the importance of two single individuals, one a great man for many, one an obscure official and political unknown to the most, in shaping the destiny of their respective countries. …Ernesto “Che” Guevara and John Cowperthwaite. …Monnery insists that both of them were “deep and original thinkers.” …The key difference between the two was perhaps that Cowperthwaite had a solid education in economics… Neither the way in which Hong Kong progressed, nor Cuba’s, were thus inevitable.

I’ve written previously about the noble role of John Cowperthwaite.

Here’s what Alberto culled from the book.

Monnery points out that Hong Kong’s success happened not because Cowperthwaite and his colleague were trying “to plant an ideological flag,” but because they were “professional pragmatists.” …Then the success of relatively libertarian arrangements in Hong Kong perpetuated itself. …Cowperthwaite tested what he knew about classical economics when he “first arrived in Hong Kong, in 1945” and “was put in charge of price control.… He soon realized the problems with attempting to set prices low enough to meet consumer needs but high enough to encourage supply, and in a dynamic environment.” He opposed subsidies that he saw as “a brazen attempt to feed at the trough of government subsidies.” …Cowperthwaite is a hero to Monnery, who emphasises his competence, and even more, his integrity.

And I’ve also written about Che Guevara, but only to comment on his brutality.

It turns out he was also a lousy economic planner.

Guevara held office in a variety of capacities related to economic matters and took them seriously. In 1959, he took a three months trip to countries as different as India, Japan and Burma, to learn “how they managed their economy.” He was struck by examples of countries that succeeded in developing heavy industries and thought Cuba could do the same. …Guevara, who, once converted to Marxism, had swallowed the whole thing. Since he maintained that “the sine qua non for an economic plan is that the state controls the bulk of the means of production, and better yet, if possible, all the means of production,” he acted accordingly.

So what’s the bottom line?

Hong Kong and Cuba were roughly equal at the start of the process. Today, not so much.

To the reader of A Tale of Two Economies, it is rather obvious which lessons ought to be taken: “in the late 1950s, both economies had a GDP per capita of around $4,500 in today’s money. By 2018 Cuba had slightly more than doubled its GDP per capita to around $9,000 per person. But Hong Kong reached $64,000 per capita”—seven times Cuba’s, and even exceeding the UK’s as well.

Here’s my modest contribution to the discussion, based on the Maddison database.

P.S. Hong Kong still ranks as the world’s freest economy, though there are increasing worries about whether China will allow economic liberty in the long run.

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I’ve always been puzzled by those who criticize capitalism (“it’s unfair!” and “it’s coercive!”) and urge its overthrow or replacement.

I actually agree with them that markets can be harsh, especially in the short run (think of the damage to the typewriter industry when personal computers exploded on the scene).

But the critics are unable to suggest a successful alternative to capitalism.

This is why I keep reissuing my challenge for them to identify a single nation that has ever become rich because of big government.

Needless to say, my left-wing friends have never provided an answer.

(Some of them say the Nordic nations and other countries in Western Europe are relatively rich, and that’s true, but I point out that those jurisdictions became rich in the 1800s and early 1900s when government was very small.)

By contrast, we have lots of evidence that modern prosperity is the result of free markets.

And so long as we give capitalism enough breathing room to function, we’ll get even more prosperity in the future.

Michael Strain of the American Enterprise Institute, in a column for Bloomberg, debunks the notion that capitalism is failing.

Use of the term “late capitalism” has exploded during the past decade… Capitalism may have once delivered broad prosperity, the critics argue, but now the system serves to entrench the elite. …Now is an odd time to argue that capitalism is broken. Only 35 U.S. workers out of every 1,000 are looking for jobs but unable to find them — the unemployment rate is lower than it has been in a half-century. The rate at which people in their prime working years hold jobs is higher than it has been in over a decade. …The level of inequality is high, but this is an odd decade to bemoan its rise. …from the beginning of the Great Recession, when criticism of capitalism became much more common, to 2016 (the last year data are available), inequality actually decreased by 7 percent.

Here’s the part of the column that is most interesting.

…critics of modern capitalism seem to be confused about the market’s ability to distribute benefits. …In a 2004 paper, the economist and Nobel laureate William Nordhaus concluded that “most of the benefits of technological change are passed on to consumers,” not the innovators themselves. Using data from 1948–2001, his model suggests that innovators capture only 2.2 percent of the total social value they create. Applying a back-of-the-envelope calculation using Nordhaus’s result to Bezos suggests he has created $5.4 trillion in value for the rest of society. A team of economists…recently attempted to measure the benefit of several new digital services that are free to consumers. …The typical U.S.-based Facebook user in their study values the social networking site at $42.17 per month. …Because they are free, these services are not well captured in current national income statistics. Brynjolfsson and his coauthors calculate that the benefits from Facebook alone would have added between 0.05 and 0.11 percentage points to the annual growth in U.S. gross domestic product growth starting in 2004. …Capitalism has delivered significant increases in purchasing power for typical households. The phrase “late capitalism” suggests that capitalism is spent and exhausted. It isn’t.

Interestingly, the academic researchers confirmed the insights provided in this video.

Though it is helpful to have some rigorous evidence to confirm how free enterprise has made our lives better.

The Wall Street Journal recently editorialized about the blessings of capitalism.

…deregulation and tax reform unleashed a surge of business investment…which has drawn workers off the sidelines and raised wages. …wages for the bottom 10% of earners over age 25 rose an average 5.9% annually compared to 2.4% during Barack Obama’s second term, according to the latest demographic data from the Bureau of Labor Statistics. …Less educated workers have also seen the strongest gains. Wages have risen at a 6.1% annual clip for workers over 25 without a high school degree and 3.9% for those with some college—both about three times faster than during the second Obama term. …Socialism-loving young people are getting the biggest pay raises. Wages have increased on average 5.8% annually for teens, 4.4% for 20 to 24-year-olds and 4.8% for 25 to 34-year-olds during the Trump Presidency. …Forty million fewer people last year lived in households receiving government assistance than in 2016, and the food-stamp rolls have shrunk by 9.5 million over the past three years. Reduced government dependence is a social good far beyond the lower costs to taxpayers. …Between 2016 and 2018 the number of taxpayers earning less than $25,000 declined 5% while increasing 8% for those making between $100,000 to $200,000 and 13.9% for those making more than $200,000, according to IRS data.

Here’s the graphic that accompanied the editorial.

By the way, I always warn never to over-rely on short-term economic data.

Yes, the recent numbers look good, but what if they are – at least in part – the result of a monetary policy-driven bubble?

That wouldn’t be an argument against better tax policy and better regulatory policy, of course, but it might mean some of the gains are illusory (much as the good economic news in 2006 now looks rather hollow considering we now know the country was in the midst of a Fed-created bubble).

This is why I prefer to look at multi-decade comparisons. And when you compare market-oriented nations with statism-oriented countries, it becomes very obvious that capitalism is the only way to deliver broadly shared prosperity.

P.S. Regarding capitalism vs. statism, here’s the best-ever tweet.

P.P.S. And here’s the best-ever counter-tweet.

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By global standards, the United States is a bulwark of capitalism. Yes, government is too big and there’s far too much intervention, but we have enough private property and free enterprise to be ranked #5 for economic liberty. Which helps to explain why Americans enjoy higher living standards than Europeans.

But capitalism had to be learned. One of the first European settlements in North America, the Plymouth Plantation in Massachusetts, was based on socialism.

And it was real socialism, with common ownership of the means of production.

Unsurprisingly, it was not a rousing success. Indeed, it was a miserable failure.

Here’s Larry Reed’s analysis of what happened.

We should never forget that the Plymouth colony was headed straight for oblivion under a communal, socialist plan… Land was held in common. Crops were brought to a common storehouse and distributed equally. For two years, every person had to work for everybody else (the community), not for themselves as individuals or families. Did they live happily ever after in this socialist utopia? Hardly. The “common property” approach killed off about half the settlers. Governor Bradford recorded in his diary that everybody was happy to claim their equal share of production, but production only shrank. Slackers showed up late for work in the fields, and the hard workers resented it. …The disincentives of the socialist scheme bred impoverishment and conflict until, facing starvation and extinction, Bradford altered the system. He divided common property into private plots… Communal socialist failure was transformed into private property/capitalist success, something that’s happened so often historically it’s almost monotonous.

And here are some excerpts from a column that Professor Ben Powell wrote back in 2004.

Bad weather or lack of farming knowledge did not cause the pilgrims’ shortages. Bad economic incentives did. In 1620 Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on “equality” and “need” as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. …Because of the poor incentives, little food was produced. Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. …This change, Bradford wrote, “had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been.” Giving people economic incentives changed their behavior. …Once the Pilgrims in the Plymouth Plantation abandoned their communal economic system and adopted one with greater individual property rights, they never again faced the starvation and food shortages of the first three years.

By the way, the settlement in Jamestown, Virginia, also had a very unsuccessful experiment with socialism.

Every Thanksgiving, I like to remind people about America’s failed experiment with big government.

This year, I want to build on that history lesson by looking at how capitalism’s invisible hand is making our modern holidays ever-more affordable.

We’ll start with Mark Perry of the American Enterprise Institute, who explains how free enterprise makes Thanksgiving possible.

…most of you probably didn’t call your local supermarket ahead of time and order a Thanksgiving turkey this year. Why not? Because you automatically assumed that a turkey would be there when you showed up, and it probably was there when you appeared “unannounced” at your local grocery store and selected your Thanksgiving bird. Or it will be there…when you “skip the trip” to the grocery store and get free 2-hour delivery from Amazon Prime Now… The reason your Thanksgiving turkey was waiting for you without an advance order? Because of the economic concepts of “spontaneous order,” “self-interest,” and the “invisible hand” of the free market. Turkeys appeared in your local grocery stores primarily because of the “self-interest” (greed?) of thousands of turkey farmers, truck drivers, and supermarket owners and employees who are complete strangers to you and your family. But all of those strangers throughout the turkey supply chain co-operated on your behalf and were led by the “invisible hand” to make sure your family had a turkey (or two) on the table to celebrate Thanksgiving.

By the way, just imagine what would happen if a government bureaucracy (like the Department of Agriculture) was in charge of Thanksgiving. Everything would cost more and have lower quality.

And the entire experience would be like a trip to the Department of Motor Vehicles.

But this isn’t just a story about how food appears on store shelves because of market forces rather than central planning.

It’s also a story about the competitive forces of capitalism make that food ever-more affordable. As shown in this chart from Marian Tupy of Human Progress, the cost of a Thanksgiving dinner is dropping over time.

But even that’s not the full story.

We’re also getting richer over time thanks to free enterprise.

So the amount of work that is required to buy Thanksgiving dinner is falling even faster. Here’s a chart from Mark Perry.

Now you know what to be thankful for.

P.S. I embedded a couple of humorous anti-libertarian memes in the column. If you want some more Thanksgiving-themed humor, you can click here and here for some mockery of Obama. And here’s a satirical look at a future Thanksgiving in a nation controlled by our friends on the left.

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I’m a big fan of Marco Rubio. The Florida Senator has been very good on some big issues and on some small issues. And he’s willing to fight important philosophical battles.

No politician is perfect (for instance, Rubio defends sugar subsidies), so I’ve always judged them by whether – on net – they’re on the side of more freedom or more statism.

Which is the ideal framework for today’s column.

Earlier this month, Rubio wrote a column for National Review asserting it is time for “common-good capitalism.”

Pope Leo XIII wrote that the ultimate goal for any society should be to “make men better” by providing people the opportunity to attain the dignity that comes from hard work, ownership, and raising a family. …What makes this society possible is the rights of both workers and businesses, but also their obligations to each other. …In the economy Pope Leo described, workers and businesses are not competitors for their share of limited resources, but partners in an effort that strengthens the entire nation. …This…doesn’t describe the economy we actually have today. Large corporations have become vehicles for shareholders and banks to assert claims to cash flows, rather than engines of productive innovation. Over the past 40 years, the financial sector’s share of corporate profits increased from about 10 to nearly 30 percent. The share of profits sent to shareholders increased by 300 percent. This occurred while investment of those profits back into the companies’ workers — and future — dropped 20 percent. …This is what it looks like when, as Pope Francis warned, “finance overwhelms the real economy.” …Diagnosing the problem is something we should be able to achieve… Ultimately, deciding what the government should do about it must be the core question of our politics. …What we need to do is restore common-good capitalism. …our nation does not exist to serve the interests of the market; the market exists to serve our nation.

Some of this rhetoric rubs me the wrong way (and citing an economic illiterate like Pope Francis is appalling), but what really matters is whether Rubio is proposing more power for government or less power for government.

That’s hard to say because he doesn’t offer much in terms of policy.

Though I’m not overly impressed by the handful of ideas that were mentioned.

I don’t pretend to know anything about rare-earth minerals, but it’s laughable to think the Small Business Administration is a wellspring of innovation, and there’s plenty of evidence that paid parental leave is bad policy (child tax credits aren’t bad, but there are other tax policies that are far better for families).

On the other hand, Rubio also has been making the case for “full expensing,” which is a very good policy.

Since we don’t have any additional details, I don’t know whether his new agenda is a net plus or a net negative.

Kevin Williamson of National Review, by contrast, is definitely not a fan of Rubio’s approach. Here’s some of what he wrote last week.

Senator Rubio…joins the ranks of those who propose to reinvent capitalism — “common-good capitalism,” he calls it. …Senator Rubio, working from remarks originally delivered in a speech at Catholic University, references a series of popes — Leo XIII, mostly, but also Benedict and Francis — to describe (whether the senator understands this or not) the familiar moral basis of fascist economic thinking… I write this as a fellow Catholic: God defend us from these backward, primitive-minded Catholic social reformers. …power is what is at issue. Men such as Senator Rubio desire for themselves the power to overrule markets — to limit trade and property rights, enterprise and exchange — in the service of what Senator Rubio describes as the “common good.” The problems with that are…Senator Rubio does not know what the common good is and has no way of knowing. …What we need from men in government is not the quasi-metaphysical project of reinventing capitalism in the name of the “common good.” …This is not a brief for anarchism. …We need stability and predictability from a government that secures our liberty and our property in the least obtrusive way that can be managed.

And he followed up two days later with another critical column, even equating Rubio’s agenda to Elizabeth Warren’s loony proposal.

From Senator Marco Rubio and his “common-good capitalism” to Senator Elizabeth Warren and her “accountable capitalism,” politicians right and left who want politicians to have more power over private economic decisions assume a dilemma in which something called “capitalism” must be balanced against or made subordinate to something called the “common good.” This is the great forgetful stupidity of our time. …Capitalism, meaning security in one’s own property and in the right to work and to trade, is the common good… What is contemplated by Senator Rubio and Senator Warren — along with a few batty adherents of the primitive nonidea known in Catholic circles as “integralism” and everywhere else more forthrightly as “totalitarianism” — is to invert the purpose of the U.S. government. …We’re supposed to give up our property rights so that these two and their ilk can use corporate welfare to fortify their own political interests? …The “stakeholder” thesis put forward by Rubio and Warren would strip shareholders of control of their own property and use that property in the service of interests of other parties, who are not its rightful owners. …the great prosperity currently enjoyed by North Americans and Western Europeans — and, increasingly, by the rest of the world — is a product…of capitalism… It wasn’t magic. It wasn’t the cleverness of Senator Rubio or Senator Warren. It wasn’t the big ideas of Pope Francis, to the modest extent that he has any economic ideas worth identifying as such.

Oren Cass argues that Williamson is both unfair and wrong about Rubio.

Williamson believes that Rubio wants to “be . . . the bandit, taking control of other people’s property”; “strip shareholders of control of their own property,” which “is robbery”; “redefine away the property rights of millions of Americans”; “limit . . . property rights”; and “run Apple or Facebook or Ford.” …I’ve read the Rubio speech carefully and can find none of this. …Rubio’s project is to explore the vast gray expanse between the white of liberty and the black of property theft. …This is the terrain on which many of American history’s great public deliberations have unfolded, yielding policies from Hamilton’s Report on Manufactures to the “internal improvements” of the early 1800s, the tariff debates between McKinley and Bryan, Teddy Roosevelt’s trust-busting, Franklin Roosevelt’s New Deal, Kennedy’s space race, and Reagan’s import quotas. Property theft all of it, at gunpoint no less, if I understand Williamson correctly. …Someone will have to make a value judgment as to what “goods” are in fact “good” and thus worthy of providing publicly.

Cass is right that there’s a lot of space between pure capitalism and awful statism. I’ve made the same point.

But it does worry me that he favorably cites a bunch of historical policy mistakes, such as protectionism, antitrust laws, and the New Deal.

Jonah Goldberg makes the should-be-obvious point that the United States is hardly a laissez-faire paradise.

For as long as I can remember, people on the left have complained about “unfettered capitalism.” …Senator Bernie Sanders said earlier this year that “we have to talk about democratic socialism as an alternative to unfettered capitalism.” …Recently, the concern with capitalism’s unfetteredness has become bipartisan. Senators Josh Hawley and Marco Rubio have taken up the cause in a series of speeches and policy proposals. Conservative intellectuals such as Patrick Deneen and Yoram Hazony have taken dead aim at unrestrained capitalism. J. D. Vance, the author of Hillbilly Elegy, and Tucker Carlson of Fox News have suggested that economic policy is run by . . . libertarians. My response to this dismaying development is: What on earth are these people talking about? …If you think there are no restraints on the market or on economic activity, why on earth do we have the Department of Labor, HHS, HUD, FDA, EPA, OSHA, or IRS? The United States has one of the most progressive tax systems in the world (i.e., the share of taxes paid by the rich versus everyone else). If you take into account all social-welfare spending, we spend more on entitlements than plenty of rich countries. Now, if you think we don’t spend, regulate, or tax enough, fine. Make your case. If you think we should spend and tax differently, I’m right there with you. But the notion that the United States is a libertarian fantasyland is itself a fantasy.

Amen.

And this brings me to my modest contribution to this discussion.

I’ve already admitted that Rubio hasn’t provided enough details to assess whether he wants more liberty or more statism.

That being said, I’m skeptical of “common-good capitalism” in the same way I’m suspicious about “nationalist conservatism” and “reform conservatism” (and we know for a fact that “kinder-and-gentler conservatism” and “compassionate conservatism” meant more statism).

So here’s my challenge to Rubio and Cass (as well as everyone else who proposes an alternative to Reagan-style small-government conservatism). Please specifically identify how much government you want. Yes, there is a “vast gray expanse” between pure laissez-faire and pure statism, as Cass noted. But he didn’t say where in that expanse he wants America to be.

To help people respond to this challenge, here’s a chart, based on the data from Economic Freedom of the World. In that “vast gray expanse” between pure capitalism and pure statism, should policy makers try to shift America in the direction of Hong Kong? Or in the direction of Sweden, or even Greece?

The bottom line is that we need to climb the scale (i.e., have more overall economic liberty) if we want more prosperity.

That’s what will help facilitate all the things, such as good jobs and strong communities, that Senator Rubio wants for America.

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Last month, I criticized the New York Times for a very inaccurate attack against Chile’s successful pro-market reforms.

The paper’s editorial asserted that only the rich have gained, a view that is utterly nonsensical and inaccurate.

Indeed, I visited Chile about a year ago and finished a three-part series (here, here, and here) showing how the less fortunate have been the biggest winners.

But numbers and facts are no match for ideology at the NYT.

We now have a new story, written by Amanda Taub, asserting that free markets have failed in Chile.

For three weeks, Chile has been in upheaval. …Perhaps the only people not shocked are Chileans. …The promise that political leaders…have made for decades — that free markets would lead to prosperity, and prosperity would take care of other problems — has failed them. …Inequality is still deeply entrenched. Chile’s middle class is struggling… There is broad agreement, among protesters and experts alike, that the country needs structural reforms.

This view is echoed by a Chilean professor in a column for the U.K.’s left-leaning Guardian.

Inequality in Chile is scandalous and most middle-class Chileans live in precarity. …the country has a structural problem with a clear name: inequality. The per capita income of the bottom quintile of Chileans is less than $140 a month. Half the population earns about $550. …This crisis is, at heart, an urgent message to the Chilean elite: profound changes are needed to rebuild the social contract.

But if Chile is a failure, then other nations in Latin America must be in a far worse category.

Look at what’s happened to average incomes over the past three decades.

It’s also worth noting Argentina’s decline and Venezuela’s collapse. Does Ms. Taub prefer those outcomes over Chile’s growing prosperity?

Speaking of which, here’s a powerful video comparing Chile and Venezuela.

So why is there discontent when Chile has been so successful?

In her Wall Street Journal column, Mary Anastasia O’Grady worries that the left controls the narrative in Chile.

…the hard left has spent years planting socialism in the Chilean psyche via secondary schools, universities, the media and politics. Even as the country has grown richer than any of its neighbors by defending private property, competition and the rule of law, Chileans marinate in anticapitalist propaganda. The millennials who poured into the streets to promote class warfare reflect that influence. The Chilean right has largely abandoned its obligation to engage in the battle of ideas in the public square. Mr. Piñera isn’t an economic liberal and makes no attempt to defend the morality of the market. He hasn’t even reversed the antigrowth policies of his predecessor, Socialist Michelle Bachelet. Chileans have one side of the story pounded into their heads. As living standards rise, so do expectations. When reality doesn’t keep up, the ground is already fertile for socialists to plow.

Incidentally, even the center-left Economist doesn’t agree with the argument that Chile is a failure.

In Chile, free-marketeers’ favourite economy in the region, protests against a rise in fares on the Santiago metro descended into rioting and then became a 1.2m-person march against inequality… Despite its flaws, Chile is a success story. Its income per person is the second-highest in Latin America and close to that of Portugal and Greece. Since the end of a brutal dictatorship in 1990 Chile’s poverty rate has dropped from 40% to less than 10%. Inflation is consistently low and public finances are well managed. …This is no argument for complacency in Chile. …Chileans still feel underserved by the state. They save for their own pensions, but many have not contributed long enough to provide for a tolerable retirement. Waiting times in the public health service are long. So people pay extra for care.

Sadly, the article then goes on to endorse bigger government and more redistribution – policies which would erode Chile’s competitiveness and prosperity.

Unfortunately, the President of Chile seems willing to embrace these bad policies.

In another column for the WSJ, Ms. O’Grady warns about the possible consequences.

The pain for Latin America’s most successful economy is only beginning. …Mr. Piñera…has opened the door to rewriting Chile’s Constitution to meet the demands of socialists, communists and others on the left. If Latin American history is any guide, a constitutional rewrite will strip away political and economic rights, concentrate power and leave the nation poorer and more unjust. The biggest losers would be the aspirational poor, who will be denied access to a better life in what has become one of the world’s most socially mobile economies. …Mr. Piñera has agreed to talks with the “citizens” whose interests are presumably represented by the firebombers and looters. …This is a stunning surrender and it is hardly surprising that it seems only to have whet the appetite of the radical left.

She points out that Chile’s market reforms have been hugely successful.

What isn’t debatable is the economic gains, across the board, that the market model has created. Less than 9% of the nation now lives below the poverty level. In a 2018 Organization for Economic Cooperation and Development report titled “A Broken Social Elevator? How to Promote Social Mobility,” Chile stands out for its social mobility. According to the data, 23% of sons whose fathers were in the bottom quartile of earners make it to the top quartile. By this measure, Chile had the highest social mobility among 16 OECD countries in the study. …inequality in Chile has been falling for 20 years. …That’s something for Mr. Piñera to think about before he helps the left destroy a model that works.

Amen.

It would be a tragedy if politicians wrecked Latin America’s biggest success story.

Let’s close with some analysis in Harvard’s Latin America Policy Journal by Rodrigo Valdés, who was a finance minister under the previous center-left government.

What are the facts? Chile’s per capita GDP increased almost threefold between 1990 and 2015, with short-lived and shallow recessions in 1999 and 2009 only. More precisely, per capita GDP increased a cumulative 280 percent, or 5.3 percent per year (at PPP and constant dollars). At the same time, the distribution of income improved. …Remarkably, all but the top quintile (actually, all but the top decile) improved their share of total income after taxes and transfers. …For the middle 20 percent or “middle class,” growth explained more than 10 times what they gained through better income distribution. For the bottom 20 percent, the redistribution effort was more relevant, though growth was still dominant, explaining six times more than redistribution. Second, what Chile accomplished in the last 25 years is impressive. For the middle class, even a sudden transformation to the Nordics in terms of income distribution (without changes in aggregate GDP) produces less than one-tenth of what the combination of actual growth and better distribution produced for this segment. The bottom 20 percent gained in these two and half decades more than four times what they would achieve with a sudden Nordic distribution.

I suppose I should highlight the fact that a high-level official for a left-leaning government is pointing out that Chile’s reforms have been very successful.

But what really matters is the point he makes about how growth being far more important than redistribution – assuming the goal is to actually help low-income people live better lives.

The third column shows how much income has expanded for each segment of the population. And you can see (highlighted in red) that the bottom 10 percent has enjoyed more than twice the income gains as the top 10 percent.

But pay extra attention to the first and second columns. Economic growth far and away is the most important factor in boosting prosperity for the less fortunate.

Which shouldn’t be a surprise. I’ve shared lots of evidence (over and over and over again) showing that market-driven growth is the best way of helping low-income people.

Indeed, even the World Bank agrees the Chilean model is vastly superior to the Venezuelan approach.

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Many libertarians support capitalism because of ethics and morality. Simply stated, they want an economic system based on voluntary exchange compared to statist alternatives (socialism, fascism, communism, etc) that rely on government coercion.

I also like the non-aggression principle, so I certainly don’t want to dissuade anyone from supporting free markets for that reason.

But one of my main goals is to show people that economic liberty also is the best approach from the utilitarian perspective.

This is why I share so many examples showing how market-oriented jurisdictions out-perform statist nations over multi-decade periods.

I want to build on this empirical foundation by sharing some 2009 research from Professor Peter Leeson. Here’s the abstract from his study.

According to a popular view that I call “two cheers for capitalism,” capitalism’s effect on development is ambiguous and mixed. This paper empirically investigates that view. I find that it’s wrong. Citizens in countries that became more capitalist over the last quarter century became wealthier, healthier, more educated, and politically freer. Citizens in countries that became significantly less capitalist over this period endured stagnating income, shortening life spans, smaller gains in education, and increasingly oppressive political regimes. The data unequivocally evidence capitalism’s superiority for development. Full-force cheerleading for capitalism is well deserved and three cheers are in order instead of two.

Here are his data sources.

I consider the trajectory of capitalism and four “core” development indicators in countries that have embraced and rejected capitalism over the past quarter century. These categories are average income, life expectancy, years of schooling, and democracy. …My data are drawn from several sources. The first is the Fraser Institute’s Economic Freedom of the World Project (2008), which provides data on the extent of capitalism across countries and over time. …I get data for my development indicators from Shleifer (2009), who collects his information from several standard sources. His data on countries’ GDP per capita and life expectancies are from the World Bank’s World Development Indicators (2006). His data on education and democracy are from the Barro-Lee (2000) dataset and the Polity IV Database (2000) respectively.

He then compares nations that moved toward free markets with those that gravitated to statism.

The results are unambiguous.

The data are clear: countries that became more capitalist became much wealthier. The average country that became more capitalist over the last 25 years saw its GDP per capita (PPP) rise from about $7600 to nearly $11,800—a 43% increase. If rapidly rising wealth deserves cheering, so does capitalism. What about longevity? All the money in the world doesn’t mean anything if you’re not alive to spend it on things that improve your life. Figure 2b charts the movement of average life expectancy at birth in countries that became more capitalist over the last quarter century at 5-year intervals. Growing capitalism is clearly associated with growing life expectancy. In the average country that became more capitalist over the last 25 years, the average citizen gained nearly half a decade in life expectancy. … In the average country that became more capitalist, the average number of years of schooling in the population rose from 4.7 to just over 6. …Countries that became more capitalist over the last 20 years became dramatically more democratic.

Here are the charts showing great results from capitalism.

Now let’s look at what Professor Lesson discovered about nations that moved in the wrong direction.

The good news is that there weren’t that many since this was the era when the “Washington Consensus” held sway.

Although most countries became more capitalist over the past quarter century, not every country did. …Fortunately, only five countries became significantly less capitalist over the last quarter century when most everyone else was busy reaping the rewards of becoming more capitalist. These countries are: Myanmar, Rwanda, Ukraine, Venezuela, and Zimbabwe. Each of these countries lost more than 1 point of economic freedom over the period on Fraser’s 10-point scale. This decline translates into a 20–40% loss of economic freedom depending on the country one considers.

Unsurprisingly, bad things happen when nations suffer a decline in economic liberty.

Here’s what happened to the four key indicators in countries that moved toward statism.

Professor Leeson’s conclusions are very blunt…and very accurate.

Unless one prefers poverty, premature death, ignorance, and political oppression to wealth, longevity, knowledge, and freedom, less capitalism deserve no cheers. …Global capitalism’s effect is clear to the point of smacking one in the face: it has made the world unequivocally better off.

Amen.

We know the recipe for growth and prosperity. The challenge is convincing self-interested politicians to reduce their power and control over the economy.

P.S. I’m still waiting for any of my left-leaning friends to provide an answer – even just a partial answer – to my two-question challenge.

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In early September, I wrote about how capital and labor are both necessary to create prosperity.

Economists sometimes explain this with lots of jargon, referring to capital and labor as “factors of production” and pointing out how they are “complementary.”

In ordinary English, this simply means that workers earn more income when they are equipped with better machinery, equipment, and technology. Similarly, investors can only generate earnings if they have people to utilize capital.

This doesn’t mean that there’s a happy relationship between labor and capital. Indeed, there’s a constant tug or war over who gets what slice of the economic pie.

That being said, the relationship tends to be reasonably cordial so long as the pie is growing.

According to some folks on the left, though, that’s not the case. From their perspective, workers get screwed and capitalists grab ever-larger slices. Consider, for example, this tweet from @existentialcoms.

This tweet made a big splash, with nearly 30,000 likes and more than 12,500 re-tweets.

But there was a slight problem. Actually, a big problem.

There was a counter-tweet from @ne0liberal featuring three graphs that demolish the core premise of the tweet from @existentialcoms.

Here are the three graphs that @ne0liberal shared.

The first one confirms that workers enjoy far more leisure time than in the past.

The second one uses current data to show that more productive workers have much more leisure time.

And the third one reveals that worker compensation has increased significantly.

The unambiguous conclusion is that capitalism produces very good outcomes for workers. If @existentialcoms and @ne0liberal were in a boxing match, this would be a first-round knockout.

My modest contribution to this discussion is to point out that there are no real-world examples of good results produced by socialism. Or Marxism. Or fascism. Or by any form of statism.

Yes, there are some rich nations with big welfare states, but they only imposed those policies after they became rich.

Which is why I’m still waiting for any of my friends on the left to successfully respond to this challenge.

P.S. Since I’ve decided that @ne0liberal produced the counter-tweet of the year, I may as well also call attention to the best-ever tweet about capitalism and socialism, the world’s most-depressing tweet, and Trump’s worst-ever tweet.

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By every possible measure, Chile is the most successful country in Latin America.

Income has soared and poverty has plummeted thanks to market-based reforms.

It’s not perfect, of course. The nation’s economic freedom score – 7.89 on a 0-10 scale – is good enough for a #13 ranking, but there’s still room for improvement.

But there’s also plenty of room for economic decline, and that might be the unfortunate outcome if politicians respond in a misguided way to recent protests.

Especially if they take advice from the wrong sources. For instance, the New York Times opined yesterday about the supposed shortcomings of the Chilean model.

Chile is often praised as a capitalist oasis, a prospering and stable nation on a continent where both prosperity and stability have been in short supply. But that prosperity has accumulated mostly in the hands of a lucky few. As a result, Chile has one of the highest levels of economic inequality in the developed world. …Chileans live in a society of extraordinary economic disparities. …What makes Chile an outlier among those 36 nations is that the government does less than nearly any other developed nation to reduce economic inequality through taxes and transfers. As a result, Chile has the highest level of post-tax income inequality among O.E.C.D. members. …Even after increases in recent years, the Chilean government still spends a smaller share of total economic output than every other nation in the O.E.C.D. The obvious path for Chile is for the government to spend more money.

As is sometimes the case with the New York Times, parts of the editorial are downright false. Income in Chile has jumped significantly for all quintiles, not just a “lucky few.”

And even the parts that are technically accurate are very misleading.

Notice, for instance, what the NYT is doing with inequality numbers. It is comparing Chile with rich nations, mostly from Europe.

But what happens if Chile is compared to other countries from Latin America.

That tells an entirely different story, as you can see from this poverty map (dark red is bad, light yellow is good) produced by the Center for Distributive, Labor, and Social Studies in Argentina.

All of a sudden, Chile looks very good.

Even if you use U.N. numbers that rely on the left’s misleading definition of poverty (i.e., based on relative income), Chile is a success story compared to other nations in the region.

It’s especially important to understand that Chile is getting good results for the right reason.

Poverty is falling because of the private economy rather than coercive redistribution. Here are some excerpts from a recent U.N. release.

In an analysis of the countries with the greatest reductions in poverty in the 2012-2017 period, in Chile, El Salvador and the Dominican Republic, the increase in income from wages in lower-income households was the source that contributed the most to that reduction, while in Costa Rica, Panama and Uruguay, the main factor was pensions and transfers received by lower-income households.

Sadly, some people in Chile don’t have the fortitude to build on the market reforms that have boosted national prosperity.

Indeed, it appears there will be backsliding according to the aforementioned New York Times editorial

Sebastián Piñera, the billionaire elected president in 2017, …proposed a slate of reforms, including an increase in the top income tax rate, an increase in retirement benefits, and a guaranteed minimum monthly income. …Andrónico Luksic Craig, chairman of Quiñenco, a financial and industrial conglomerate, wrote on Saturday on Twitter that he was ready to pay higher taxes.

I’m disappointed but never surprised when politicians unravel progress.

But it’s always discouraging when guilt-ridden rich people embrace statist policies (sounds familiar, huh?).

For the sake of the Chilean people, let’s hope this is empty rhetoric.

P.S. Since we’re on the topic of Chile, here are some excerpts from the abstract of a study in the Journal of Development Economics that estimated the heavy economic cost of the nation’s detour to socialism in the 1970s.

…we look at share prices in the Santiago exchange during the tumultuous political events that characterized Chile in the early 1970s. …deploying previously unused daily data and exploiting two largely unexpected shocks which involved substantial variation in policies and institutions, providing a rare natural experiment. Allende’s election and subsequent socialist experiment decreased share values, while the military coup and dictatorship that replaced him boosted them, in both cases by magnitudes unprecedented in the literature. The most parsimonious interpretation of these share price changes is that they reflected, respectively, the perceived threat to private ownership of the means of production under a socialist government, and its subsequent reversal.

By the way, this in no way should be interpreted as support for the Pinochet dictatorship.

But what it does say is that dictatorships that allow economic freedom produce much better results than dictatorships impose totalitarian economic policies in addition to totalitarian political policies.

Which is basically the point Milton Friedman made when asked about his connection to Chile.

For what it’s worth, Pinochet eventually allowed a transition to democracy, which somewhat atones for his sins.

P.S. To be fair, the NYT editorial was merely misguided, which is better than the wild inaccuracy that has characterized some analyses.

P.P.S. If you want to learn about Chile’s reforms, here are columns about the private social security system and the national school choice system. And this World Bank comparison of Chile and Venezuela is very instructive as well.

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John Papola has done it again. His video showing a Keynes v. Hayek rap contest was superb, and was followed by an equally enjoyable sequel featuring a boxing match between Keynes and Hayek.

Now he has a rap contest about capitalism and socialism featuring Ludwig von Mises and Karl Marx.

The video touches on three economic topics.

The obvious focus is the track record of capitalism vs. socialism. Given the wealth of evidence, that’s a slam-dunk victory for free markets.

But there are also two wonky issues referenced in the video.

  • The socialist calculation debate – As I’ve repeatedly noted, genuine socialism involves government ownershipcentral planning, and price controls. Economists from the Austrian school, such as Mises, were the ones who explained that governments were incapable of having either the information or knowledge to make such a system work.
  • The labor theory of value – Marxism is based on the strange notion that the value of a product is a function of the hours it took to produce. This overlooks the role of capital and entrepreneurship. Moreover, as explained in the video, value is subjective, determined by the preferences of consumers.

Let’s close with a nice compare-and-contrast image a reader sent to me.

P.S. John Papola also did a great satirical commercial for left-wing toys.

P.P.S. Even though it’s not the right time of year, here’s his satirical commercial for Keynesian Christmas carols.

P.P.P.S. If you want to learn about the Austrian macroeconomics, click here and here.

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Last century, I remember reading about the “Washington Consensus,” which was a term that was used to describe the kind of policy advice in those days provided to (or imposed upon) the developing world by the IMF, World Bank, and U.S. Treasury.

I never studied the topic since I was focused at the time on domestic issues such as tax reform, Social Security reform, and the economic effect of government spending.

But I recall thinking that the Washington Consensus was pro-market, but nonetheless a bit timid because it did not include a plank to limit the size of government.

Wikipedia helpfully lists the 10 policies that defined this consensus.

  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.

With the benefit of hindsight, I now want to praise the Washington Consensus.

Yes, it would be nice if there had been some focus on the size of government, but all of the advice on trade, regulation, monetary policy, and quality of governance was very sound. And those policies account for 80 percent of a nation’s grade according to Economic Freedom of the World.

Moreover, the planks on fiscal policy were good, even if they didn’t go far enough.

Additionally, it was good to have multilateral institutions such as the International Monetary Fund and World Bank using their leverage to push for pro-market reforms (unlike today, when international bureaucracies often push a statist agenda).

So what was the effect of – to use the terms of opponents – this emphasis on “neoliberalism” or “market fundamentalism”?

Well, it seems to have made a difference. Here the data from the Fraser Institute on economic freedom for all nations. As you can see, economic liberty around the world increased significantly between 1980-2000, the years when the Washington Consensus was most influential.

But did that period of pro-market reform lead to better outcomes?

The answer is a resounding yes, at least in my humble opinion.

Here’s the most persuasive evidence, showing the dramatic decline in extreme poverty.

Let’s also look at some new research from Professor William Easterly, who worked for many years as an economist at the World Bank.

He notes that many people think the Washington Consensus was a failure. So he took a fresh look at the data.

Many authors…have proclaimed the failure of a package of market-oriented reforms proposed in the 1980s and 1990s — variously known as the Washington Consensus, …globalization, or neoliberalism. This paper seeks to update the stylized facts on policies and growth that influenced this verdict. …The earlier stylized facts featured the zero or low per capita growth in the regions that were the focus of reform: Africa and Latin America. …these stylized facts have not been updated in the literature, as much more data have become available with the passage of time. …This paper will report new stylized facts. First, there has been additional and quite remarkable progress on reform outcomes since the late 1990s — this is a principal finding of this paper. Earlier judgments on the reforms often happened before the reform process was complete and/or had enough post-reform growth data to evaluate reforms. …The second stylized fact is that there is a strong correlation between improvements in policy outcomes and changes in growth outcomes. The third stylized fact is that growth has recovered in Africa and Latin America in the new millennium, and the regression of growth on policy outcomes explains a substantial part of the growth recovery. …This paper will extend the method of analyzing extremely bad and moderately bad policy outcomes to other policies, specifically — in addition to inflation — the black market premium on foreign exchange, overvaluation of the domestic currency, negative real interest rates on bank savings deposits, and abnormally low trade shares to GDP. Updating the data on these outcomes is not trivial and constitutes one of the main contributions of this paper.

And what did Prof. Easterly discover?

It turns out that the prevalence of bad outcomes has declined.

Figure 6 shows a summary measure of share of countries with any bad policy. Any bad policy is defined as having any of the moderate or extreme policy dummies set to one, with a minimum of 4 policy observations available for that country-year. The summary measure shows a downward trend in bad policy outcomes worldwide, in Latin America, and in Sub-Saharan Africa. The sharpest break is around the mid-1990s, somewhat after the formulation of the Washington Consensus and the first negative reactions it received.

Here’s the aforementioned Figure 6.

And he also looks at the prevalence of extremely bad poliicy.

Figure 7 shows a similar graph to Figure 6, but now limited to extremely bad policy outcomes. It shows if any of the extremely bad policy dummies is set to one, for the sample with a minimum of at least two out of five policy outcomes available. The decline in the prevalence of any extreme policy is even more dramatic beginning in the early 1990s, going from surprisingly common (above 35 percent of countries up to the early 1990s) to almost non-existent for the world. The same pattern is even more striking for Africa and for Latin America.

Here’s Figure 7.

Most important, these better outcomes also are associated with stronger growth.

This paper showed these changes in policy outcomes – especially away from extreme policies — were accompanied by growth increases. It documented that the policy reforms can explain the growth increases in the regions most emphasized earlier – Africa and Latin America. We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.

Prof. Easterly acknowledges that there are still many issues to investigate and that his research is just one slice at a big pie.

But the bottom line is that we now have some good evidence that the Washington Consensus led to better results. Simply stated, capitalism produces more growth and less poverty. Too bad the IMF and other international bureaucracies have forgotten this lesson.

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