Blog Post

AEIdeas

What happens when societies reject economic freedom? Perhaps the most vivid illustration of that outcome is the famous photo of the two Koreas at night. This natural experiment shows the democratic capitalist South as a bright hub of progress and prosperity, the totalitarian communist North a dark nightmare of poverty and wasted human potential. A less dramatic, though still illustrative, photo is the above viral Twitter pic of San Francisco from the air, giving needed context to that city’s housing crisis and its restrictions on building high-density dwellings.

A picture may be worth a thousand words, but the following couple hundred by economist William Easterly also have plenty of value. In the Boston Review, Easterly writes in “defense of neoliberalism” and explain why markets are important to raising living standards and increase opportunity.

… there are numerous examples of disaster when extreme policies inhibit market functioning. By 1982, for example, Ghana had lost its historic domination of the world cacao market after centralized control meant that Ghanaian cacao exporters received only 6 percent of the world price of cacao. With so little incentive to produce, there were not many cacao exporters left. Moreover, those who tried to smuggle their product out of the country in order to find better prices faced the death penalty. This was but one example of the draconian controls of markets in Ghana that are associated with a steep decline in living standards in the decades after independence in 1957. After a drought in 1983 made things even worse, economic reforms to liberalize markets finally began — reforms that have been associated with healthy, positive growth. This is a familiar story — indeed, one that gets to the heart of why many economists tend to believe in markets. In the 1980s and 1990s, in Latin America and Africa, extreme policies on inflation, interest rate controls, foreign exchange controls, artificial exchange rates, and international trade used to be common — and growth was poor. Now, extreme anti-market policies have mostly disappeared, which is correlated with growth recoveries in both Latin America and Africa. (A big exception is Venezuela, where severe price controls have led to starvation.) Even more famously, the movement from a planned economy toward markets in China (though hardly ending up at laissez-faire) is associated with rapid growth and a historic decline in poverty.

Of course, there’s always the risk that embracing market capitalism might, you know, bring with it uncomfortable disruption as well as wealth-creating technological progress. And some people seem pretty allergic to the former. Probably the latter, too. As Carl Benedikt Frey and Ebrahim Rahbari write over at VoxEU:

Indeed, historically, resistance to new technologies that threaten people’s jobs and skills have been the norm rather than the exception (Citi 2019, Frey 2019). The Luddite risings, which have been the focus of most popular commentary, were merely part of numerous machinery riots in Britain, France, Germany, and China. For example, as the Parisian crowds stormed the Bastille at the dawn of the French Revolution, woollen workers in Saint-Sever destroyed all the machines that had been used there (Horn 2009). What’s more, in the 17th century, a host of European cities banned automatic looms fearing social unrest. Economic historians have also argued that one reason for China’s late industrialisation is that resistance to labour-replacing technologies persisted even longer there. In the late 19th century, for example, imported sewing machines were smashed by local workers (Desment et al. 2018). As Frey (2019) points out, British governments were actually the first to side with inventors rather than rioting workers, which might explain why Britain was the first country to industrialise.

And the resistance continues. Frey and Rahbari also point out a 2017 Pew Research survey that found 85 percent of US respondents favored policies to restrict the use of machines beyond hazardous work. Then there’s a post earlier this week from my AEI colleague Brent Swanson, in which he highlights a piece in The Atlantic, which asked: “If you could go back in time and change one thing, what would it be?” And a Rutgers professor gave this gem of an answer:

The invention of agriculture. Imagine: far less environmental degradation and income inequality, a shorter workday for all, a varied diet and possibly better health outcomes for certain communities, and a profound confidence that the future would provide. A world without industrial agriculture would pretty much be the Eden of the Bible. Hunter-gatherer life isn’t sounding so bad.

I like agriculture and how it helped lead to our modern civilization. Of course, innovation-generating market capitalism, liberalism, gave a big boost, as this chart shows: