Wednesday, January 16, 2008

How Not to Promote Capitalism of 1/15/07 links to a WSJ article on how the free market works best at providing prosperity for poor countries. I was hoping to see an explanation as to how freedom unleashes the power of the mind and/or how the concept of individual rights provides that freedom. But alas, it was not forthcoming. In fact there was no mention of the role of the mind at all. The word capitalism was not mentioned once either. What I read was:
Yet the evidence is piling up that neither government nor multilateral spending on education and infrastructure are key to development. To move out of poverty, countries instead need fast growth; and to get that they need to unleash the animal spirits of entrepreneurs.
Animal spirits? Voluntary free trade between individuals to mutual benefit is an example of animal spirits? The freedom to think, the right to act on those thoughts and keep the just rewards is now reduced to animal spirits?
"Economic freedom" is good because it unleashed not man's mind but his animal spirits? What is the nature of these spirits? How do they create wealth? The reporter, Mary Anastasia O'Grady doesn't say but goes on to cite the 2008 index of economic freedom which she correctly notes that: "In other words, economic freedom and prosperity are strongly correlated." Very true. But as rational people know, correlation is not causation. So what is the cause? No mention though 3 feeble attempts are offered. As you read these, keep in mind the efforts used to avoid any mention of the role of the mind in production.

Three essays in the 2008 Index help illustrate why economic liberty matters to human progress. In "Economic Fluidity: A Crucial Dimension of Economic Freedom," Carl Schramm, president of the Kaufmann Foundation, explains that growth-driving innovation results not only from sound macroeconomic policy, but also from dynamism at the micro level.
What is "economic fluidity" precisely? It can't mean economic freedom because it is part of that. If he means the free flow of capitol sans government regulations, why doesn't he say so? I take the rest of the sentence to mean that "growth-driven innovation results not only from" the guys with the guns (government) backing off a little and being nice to our businessmen so they will be more dynamic "at the micro level". He continues:
Most important is the interaction between "institutional, organizational and individual elements of an economy," which gives rise to "the entrepreneurial energy and the speed of economic evolution." Such "fluidity," he writes, "facilitates the exchange and networking of knowledge across boundaries. This fosters both innovation and its propagation through entrepreneurship."

Mr. Schramm's essay illuminates why successful economies cannot be centrally planned. Fluidity, he writes, resembles "the idea of the 'the edge of chaos,' the estuary region where rigid order and random chaos meet and generate high levels of adaptation, complexity and creativity." It is "ideas on the margins, challenging the status quo, that lift the trajectory of an economy's performance." Try that in Cuba.
So "high levels of adaptation, complexity and creativity" are generated when rigid order (government controls) meet random chaos (the free market) and magically bring about prosperity. Also, "fluidity is not 'the edge of chaos' but only resembles the idea of it. This gives new meaning to the concept obfuscation. But we plod on:
In "Narrowing the Economic Gap in the 21st Century," Stephen Parente, associate professor of economics at the University of Illinois at Urbana-Champaign, debunks several World Bank myths by showing that it is not the resources -- land, workforce and capital -- of an economy that play the most important role in explaining higher income countries. Instead it is "the efficiency at which a society uses its resources to produce goods and services."

Mr. Parente cites the microeconomic research of McKinsey Global Institute, which estimates that modern industry in India could take a huge bite out of its productivity gap with U.S. competitors by simply upgrading production techniques. India doesn't need another multilateral education project. It needs to tap into knowledge already available in successful economies -- the information and technology is out there. The trouble is that it is unavailable in many countries like India, because government barriers and constraints to limit competition make access difficult or impossible.
While this last sentence is manifestly true, it is manifestly not true that the cause of poverty is the inefficiency with which society uses its resources and that the solution is "simply upgrading production techniques". How does one do this 'simple' thing? blankout. If it is so simple, why doesn't North Korea or Cuba or Africa do it? The last essay says:
French journalist Guy Sorman's "Globalization is Making the World a Better Place" is a treatise on "one of the most powerful and positive forces ever to have arisen in the history of mankind." It fosters economic development, moves countries from tyranny to democracy, sends information and knowledge to the most remote corners of the globe, reinforces the rule of law, and enriches culture. International commerce in post-World War II Europe, he reminds us, wasn't invented by diplomats, but by entrepreneurs who wanted to end centuries of strife on their continent and build a peaceful union based on commerce.

Today's entrepreneurs, across the globe, have similar aspirations and abilities. If only the politicians would let them be free.
I have not read those 3 essays myself so I don't know if they get better or worse than the quotes given. But it is true that globalization is helping economic development. It is not true that entrepreneurs were motivated by a desire to end centuries of strife and build a peaceful union. They did it for reasons of rational self-interest. For profit. For self-interested reasons. It is this rational selfishness that created America's great wealth.

While Ms. O'Grady was right on many of her practical reasons for promoting economic freedom-capitalism-it is futile to defend or promote it solely on those grounds, especially when the dominant moral code of our culture considers any self-interested action to be immoral. Nobody will buy the idea that entrepreneurs seek to sacrifice themselves for any noble, social 'good'. Nor should they. To promote capitalism, one must promote the ethics on which is rests, rational self-interest. To do that, one must adopt it first.


Burgess Laughlin said...


Thank you for this very well written article. Among its many other virtues, it weaves back and forth between the particulars of the WSJ article and the broad principles that should be driving that article.

Your conclusion--"To promote capitalism, one must promote the ethics on which is rests, rational self-interest."--is powerful, partly because in establishing an ethical foundation for capitalism (philosophical politics), you have also linked ethics, in turn, to epistemology: rational self-interest.

P. S.--Seeing that phrase in your concluding paragraph made me realize that I never hear the words that actually label the opposite foundation: "mystical altruism." Of course, that might detract from the message for an audience that necessarily holds mixed premises (or they couldn't survive). That is especially true today, when I hear many people trying to justify altruism on grounds of "self-interest." For example, I hear the argument that holds that we should sacrifice our prosperity for the well-being of others who have less, so "they won't hate us" and do us harm.

Mike N said...


Thanks for the compliment. It is very tempting to wander off and try to make other related points. But doing so would only water down my main point which was that the main justification of Capitalism is its moral worth, rational self-interest. The practical argument is impotent without moral support.

You're right. I did not want to attack altruism at this time precisely because it would detract from my promotion of rational self-interest. I referred to sacrifice only to point out that it was not a causal motive of the innovators.

But getting a compliment from a scholar like yourself brightens my day. Thanks again.