The art of the possible

One of my favorite Adam Smith sayings is that “There’s a great deal of ruin in a nation.”  When reading others, I often think that people get too pessimistic about this or that country, based on a few highly visible problems.

But another way of thinking about this idea is that maybe even very well run countries fall far short of their “potential.”  I use quotation marks, as potential seems like a very slippery and unscientific concept.  After all, there may be deep-seated reasons why countries struggle to come up with good governance.  Still, you never get anywhere without setting goals.

Bryan Caplan and Will Wilkinson have been discussing the possibility of a regime of open immigration, and whether it could co-exist with a modern welfare state.  I can’t answer that question, but I will argue that we are very far from the “policy possibilities frontier” for liberaltarianism.  Imagine a country:

1.  Which accepts more immigrants per capita than almost any other nation on earth, despite being the most densely populated country with more than 5 million inhabitants.  So densely populated that they need to reclaim land from the sea in order to find places to put people.

2.  Has very high taxes on activities that produce environmental externalities, yet remains the most free market country according to several indices of economic freedom.

3.  Has a very comprehensive welfare state including national health care and pensions for all, yet still maintains a highly efficient tax system at rates far below that of other developed countries.  And if that’s not enough, runs gigantic budget surpluses year after year, despite the ultra-low tax rates and very generous welfare state.

You think that’s utopia?  No place like that could exist?  Think again.

This example tells me that while there may be some political limits to how many immigrants we can absorb, and we may not be able to provide the same welfare benefits to immigrants as to native-born Americans, we aren’t even close to the policy frontier.  We can have much lower taxes, a much more complete welfare state, and much higher rates of immigration.  And while we’re at it, let’s also run a gigantic budget surplus.  We just need to try harder.

And here’s a nice side effect.  Success get emulated.  As others see how well you are doing with the liberaltarian model, they’ll want to copy the policies.  That speeds up the day when the entire world can become a giant Schengen area.

PS.  I cheated a bit in point #2 above.  As my wife keeps reminding me, Hong Kong is not a “country.”

What country is this?

1.  Unlike Germany, it now has a legal minimum wage.  Plans to enact legislation limiting working hours.

2.  Much of the property market is controlled by the government

3.  Government bought lots of shares of stock to boost economy during recession.  Still owns many shares.

4. Introduced deposit insurance in 2008.

5.  Stopped accepting foreign doctors in 1997 (unless locally-certified.)

6.  Established anti-trust laws.  As elsewhere, policymakers ignore government-connected monopolies and go after purely private firms.

7.  Government first regulated the 4 stock and derivative exchanges, then forced a merger, then became largest shareholder, then prevented new entrants.

8.  Unlike the Nordic countries, the government is taking over formerly private infrastructure such as tunnels.  Huge new projects are now built and run by the government.

9.  The government is increasingly involved in “industrial policies” despite the ineffectiveness and corruption of its initial forays into planning.

Obviously I’m describing what is almost universally viewed as the most laissez-faire country entity on Earth—Hong Kong.

A few comments:

That’s why I wasn’t impressed a few months back by arguments that Adam Smith did not favor laissez-faire, merely because he favored a few government interventions.  It’s all relative.

Commenters frequently question my assertion that Singapore is the second most neoliberal economy—pointing to all sorts of government intervention.  If Hong Kong is number one despite all the intervention listed above, you can imagine how little laissez-faire is required to come in second.

I’m actually not too concerned about these actions, although I agree with The Economist, which is mostly skeptical of how well the new interventions will work.  Indeed they are even critical of a new food labeling law that I didn’t mention.  But this reflects the increasingly democratic nature of Hong Kong.  In my research on neoliberalism and culture, Hong Kong was somewhat of an outlier—much more free market-oriented than you’d expect given it’s not particularly civic-minded culture.  So it’s merely reverting to its natural position.  And there is a lot of ruin in a nation.  Hong Kong will probably continue to come in number one in the various free market rankings for quite some time.  But I expect it to eventually be overtaken by Denmark.

In the long run the challenge is to change culture so that governments respond to the general interest, not special interest.  And the other challenge is to change economic worldviews so that well-meaning government officials (no, not always an oxymoron) understand that free markets are more effective at promoting the general welfare than most people currently believe.  I’m not going to change cultures, but I’m trying to change worldviews.