I’ve been surprised how much discussion has occurred in response to my neoliberalism post. Perhaps that was because Paul Krugman responded. In any case, I’d like to briefly discuss what I regard as some fallacies of the left and right on the subject of market reforms. I’ll start with the left:
1. Forgetting that things were even worse in the past. Many developing countries have deplorable working conditions, environmental standards, income inequality, human rights abuses, etc. If these countries have adopted free market reforms, it is easy to look at these problems and forget that conditions were even worse before the reforms occurred. It is hard for someone who grew up in a rich country to understand just how difficult life is in a developing country. When you see deplorable conditions, it is hard to imagine how they could have been much worse in previous decades. But all one has to do is walk across the border from China to North Korea, to see what China was like before the reforms. As big as China’s problems are (and they are huge) North Korea is far worse off. China’s living standards aren’t just higher than North Korea, they are dramatically higher. Most don’t recall that China was poorer than India before the reforms began in 1979.
2. Assuming that Dickensian conditions implies a country must be capitalist. Many people on the left seem to create left/right mental boxes for countries based on their perception of working conditions. Thus a country with poor working conditions and low wages (again China is a good example) is assumed to be “capitalist” and a country with good working conditions and a high level of equality (such as Denmark) is assumed to be “socialist.” Actually it is much more complicated. Economically speaking, China is a half-communist country with low levels of social insurance, whereas Denmark is an extremely free market economy with a large welfare state.
3. Assuming that economic reforms failed because real GDP growth didn’t increase after 1980. I’ve already addressed that in another post. Growth slowed everywhere, but the neoliberal reformers saw growth slow less than the non-reformers
4. Assuming the Soviet Union went into a depression after economic reforms began. Actually the real GDP of the Soviet Union collapsed before economic reforms began in 1992. And the places that reformed the most slowly, recovered the most slowly. Those that didn’t reform at all (such as North Korea) saw an almost complete collapse of their economies. Economic reforms didn’t cause a Depression in the Soviet bloc. Rather a “Great Depression” in the Soviet bloc caused economic reforms to occur. This misconception occurred because conditions continued to deteriorate for some time after the reforms began in 1992, and this is when people began to focus on the issue in the West. So they saw horrific economic problems, and assumed they were caused by the reforms. In Russia, people probably had trouble distinguishing between Gorbachev’s reforms (which weren’t market reforms but rather attempts to make communism work better) and true market reforms.
5. Assuming neoliberal reforms are associated with authoritarian governments. Many people seem to think China adopted free market reforms after the 1989 crackdown at Tiananmen. Exactly the reverse; the free market reformers were discredited by the protesters (who supported reform) and thus the Chinese government moved back toward statist policies. In Argentina, the generals who ruled the country adopted statist policies, and market reforms were associated with the movement toward democracy in the 1990s. In Chile, the generals that overthrew Allende opposed free market reforms, and only turned toward them (out of desperation) in 1975 when their statist policies put Chile into a depression. There is an EXTREMELY strong correlation between neoliberalism and democracy. Look at the Heritage list of economic freedom and you will see that most of the high scorers are democratic (although the top 2 countries are not, or at least not entirely.) I plan to read Naomi Klein’s book this summer–I’m told it has some of these misconceptions.
6. Capitalism is based on greed. In fact, it is almost impossible to make capitalism work without altruism. If people are not civic-minded you will not get free markets. This is because individual producers are much better off if protected from competition. Businesses generally do not support capitalism in their own industry. To get a free market system you need people willing to put aside their special interests and support open and transparent economic governance. After 1980, the countries that moved most rapidly toward free markets (Denmark, New Zealand, etc) were the countries whose citizens score highest on polls of civic-minded attitudes (and generally lowest on corruption indices.) The most statist of the developed economies (i.e. Greece) also exhibit the least civic-minded attitudes in surveys. If neoliberalism was a right-wing plot to enrich capitalists, you’d expect exactly the opposite pattern–you’d expect the most civic-minded or idealistic countries to be the least like to adopt neoliberal reforms.
7. Assuming increased income inequality negates the gains from freer markets. I’m not saying this can never occur (deregulating the gains in finance while the government continues to socialize the losses might be one counterexample) but in general there is little evidence that free markets produce lots of inequality. If you look at the 8 categories in the Heritage index other than size of government, then Denmark is actually the most free market economy on earth. Yet it also has the most equal distribution of income. International differences in income equality are strongly correlated with ethnic diversity. Even in relative equal Europe, inequality is associated with the presence of ethnic groups like the Roma (aka gypsies.) In Australia the greatest inequality is associated with the presence of indigenous people (aka aborigines.)
8. European countries have more progressive tax systems than the US. Not true. Because supply-side problems are REAL, the more social democratic countries of Europe have found it necessary to have much more regressive taxes than the US. They need highly efficient tax systems to raise enough revenue for their extensive social insurance programs.
Here are some fallacies on the right:
1. Countries with big government tend to be poorer. As Statsguy showed in a recent post, it is just the opposite. In developed countries governments tend to spend a higher share of GDP. I do think that, ceteris paribus, beyond 20% of GDP larger government lowers GDP. But the effect isn’t strong enough to prevent countries like Denmark and Sweden from having high living standards, despite their large governments.
2. Denmark and Sweden are socialist countries. I’ve already indicated that they are capitalist countries with high levels of social insurance. Denmark has freer markets than the USA.
3. Singapore and Hong Kong are not really capitalist. This is the opposite from point two. Just as some on the right focus too much on size of government, others focus too much on a few deviations from free markets that they have read about in these two countries. There is a tendency to forget that in every single country in the world the government plays a major role in the economy, including the US. Singapore and HK do some things we don’t do (for instance their governments control much of the housing stock) but we do lots of things they don’t. There is always a tendency to notice flaws in others that we don’t notice in ourselves. I am amazed how often people mention the $500 fine for throwing gum on the sidewalk in Singapore, but I rarely see people mention that we have 500,000 people in prison for using drugs. Which is the greater outrage? This isn’t to excuse abuses in other countries (I’d still rather live here), but merely to point out that no country comes close to being the sort of libertarian paradise than many on the right would like to see. You can have a lot of markets and still be rigidly communist. Even North Korea occasionally allows farmer’s markets. And you can have a lot of statism and still be one of the most free market countries in the world. The US deviates from pure capitalism in literally 1000s of ways. You can’t even be a hairdresser or a taxi driver w/o a government permit.
4. Europe/Canada/Australia, etc, are much more socialist than the US. This is not true. In the Heritage rankings the US is right in the mix, slightly more capitalist than most, but less capitalist than a few of these countries. Bryan Caplan recently linked to a survey that showed the US government spends more dollars (PPP) on health care (per capita) than all other countries save oil -rich Norway. Many of these countries have privatized industries and services that are still traditionally done by government in the US. (BTW, if we are already spending so much, why do we have to spend even more to pay for Obama-care? Answer: It doesn’t include meaningful cost controls.)
5. Capitalism is based on individualism. Actually just the opposite. Fukuyama showed that large private corporations thrive in cultures where people work well in groups, and don’t do well in cultures where people are distrustful of those outside the family. This is why the Nordic economies are the most multinational corporation-dominated economies on earth. The industries that are privately-owned in the Nordic countries are often state-run in less group-oriented cultures. I admit to knowing little about Ayn Rand (and assume I’ll get pushback here) but based on what I have read about her prickly and individualistic personality, I wonder of a country of Ayn Rands could produce a successful capitalist system.
Update 5/29/10: I hope all my discussion of culture didn’t lead you to think I am a cultural determinist. I’m not. Doc Merlin mentioned reverse causation in the comments, and I buy the Adam Smith/Deirdre McCloskey argument that markets make society behave better.