July 08, 2002

Brink Lindsey Says: The Human Race Has Been Dealt a Winning (and Invisible) Hand

"I think you're wrong," said one of the barons of the center-left Washington, DC thinktanks. "Cato's biggest problem isn't that its day-to-day stuff is too carefully crafted to be politically useful to those factions of the Republican Party that it approves of. Cato's biggest problem is that it doesn't have a deep enough analytical bench. In fact, it has only one young full-time truly-heavy intellectual hitter."*

"Brink?"

"Yes, Brink Lindsey. Very smart. Very knowledgable. Very thoughtful. And--which is very unusual--very willing to entertain the possibility that he might be wrong."


Now Brink Lindsey has written a book: Brink Lindsey (2002), Against the Dead Hand: The Uncertain Struggle for Global Capitalism (New York: John Wiley: 0471442771). The purpose of the book is to celebrate the end of one of what Lindsey sees as one of the great obstacles to human progress. The obstacle is "the dream of centralized, top-down control over the course of economic development" (p. 2). In Lindsey's mind, whether the policies were the bloody collectivization of agriculture by Stalin, Mao's command that peasants smelt steel in their backyards, French bureaucrats providing indicative guidance to enterprises for capacity expansion, the UK Labour Party nationalizing the "commanding heights" of the economy, Franklin D. Roosevelt commanding the separation of investment from commercial banking and decreeing the creation of the TVA, or Park Chung Hee offering large subsidized loans to chaebol that would successfully export--it was all one dream: the dream that government controls could successfully manage the economy. It is this dream that has crashed in the past twenty-five years:

It died in the United States and Western Europe during the stagflation of the 1970s. It died in China when Deng Xiaoping declared... "it doesn't matter if the cat is black or white..." It died in Latin America during the debt crisis... of the 1980s. It died in the Soviet Empire with the collapse of the Berlin Wall. And it died in East Asia with the bursting of the Japanese bubble and the financial crisis of 1997-98.... As faith in government controls has dissipated, markets have been given wider play.... Trade and investment liberalization are thus of a piece with a broad array of market-oriented policies: in particular, the privatization of state-owned industries, commitment to a monetary policy of price stability; elimination of price and entry controls that sustained domestic monopolies and oligopolies; the resurrection of labor markets; the reform of punitive tax systems; and the overhaul of financial institutions to make the allocation of capital more responsive to market returns... (p. 3).

Government controls have, as Lindsey sees it, collapsed because they simply did not work: "the worldwide rediscovery of markets has been guided by pragmatism, a rejection of the failed dogma of centralized control in favor of something, anything, that works" (p. 7). Call it the invisible hand of the market versus the dead hand of government control. (Yes, I realize that to view grand political economic thought as a two-sided match with people as diverse as Roosevelt, Keynes, Stalin, and Nehru on one side against Friedman and Hayek on the other darkens more than it illuminates, but Lindsey doesn't. Let him run with his orienting concept for a while--he takes it to interesting places.)

Yet Brink Lindsey is also a Manichean. From his perspective, it is not at all certain that the good guys' victory is going to be permanent. Claims (Tom Friedman provides a convenient target) that market pressures enforce neoliberal policies throughout the world are nonsense, for "[t]he plain fact is that market pressures--even souped-up, internet-driven market pressures--exert only modest and occasional discipline on national policies.... [Friedman's] 'golden straightjacket' is a loose fitting garment indeed" (p. 5). Countries around the world have turned to markets because markets promise to deliver economic growth, and successful economic growth is a necessity for their political survival. Should the political wheel turn again, and should something other than market-driven growth turn out to be a prerequisite for assembling dominant political coalitions--either because special-interest propaganda deceives voters about the value of the market, or because psychological flaws drive people to seek community and solidarity rather than liberty and prosperity--then the current pro-market worldwide political consensus will vanish as quickly as it came together. And the political power of special interests always has the market under threat: it was, after all, the dead hand of government control that caused the U.S. savings-and-loan disaster through "distortions caused by the promise of government bailouts" (p. 13).

His finest example of the dead hand in action, in my view at least, comes in his description of the Indian vehicle industry:

With a billion people, India has only around 40 million vehicles.... Total duties on used cars, for instance, are 180 percent.... Known alternately as a "jugaad," a "maruta," or a "boogi," the vehicle offers barebones transportation for Indian farmers. It has no roof. The 10-14 horsepower engine must be hand-cranked. It maxes out at 15 miles per hour. The driver sits on a wooden bench. But the rear compartment--a plywood bed with wood-paneled sides--has plenty of room for passengers or cargo. And the price of only around $1000 makes it an unbeatable bargain. We found boogi manufacturers... no assembly lines, no factories... just three small mechanics' garages spaced out along the semi-paved road.... The mechanics buy minivan spare parts--wheels, axles, transmissions, gear boxes, and steering--from markets in Delhi. They get their engines, made to power water pumps, from Agra. And they pick up steel for the chassis and wood for the framing from Jaipur.... One shop can turn out four or five boogis a month. Technically, these vehicles are illegal (pp. 163-4)...

Because these vehicles are illegal, any shop that tries to expand--to make more than four or five a month--will find itself attracting the attention of the state. An honest magistrate will shut it down. A dishonest magistrate will squeeze it dry through extortion. Only by staying small enough to evade the gaze of the state can the cheap-alternative-vehicle industry survive. And thus it is perhaps two or three times expensive as--with reasonable scale economies--it could be. Here the dead hand has produced enormous social waste: first with the extremely high tariffs on vehicle imports (which are fine with domestic truck and conventional automobile manufacturers), and second with the regulatory hand that cripples the efficiency and the scale (although not the existence) of the alternative-vehicle industry.

For another example of the dead hand in action, consider the commodity trading firm Phibros' involvement in Argentina, in Tucuman. An Argentine sugar mill wanted to expand. Phibro offered $20 million in financing "...secured by the sugar inventory. When the mill ran into problems, workers seized the factory.... Months went by before an accomodation was reached, and Phibro never returned to Tucuman" (p. 173). The next time an Argentine sugar mill wants to borrow on the world capital market to expand, it will in all probability be out of luck: the word in New York is that Argentina has no judges who will enforce contracts. If you think that foreign investment is a source of oppression, surplus value extraction, and "unequal exchange," you cheer the revolutionary sugar mill workers. But for a low- or medium-income country to assemble from its own savings the financing needed to accumulate the capital stock necessary for a modern post-industrial economy is a nearly impossible task.

But this does not mean that Lindsey calls for the abolition of government. He sees government as simultaneously doing "too much and too little. At the root of so many problems... is the failure of governments to provide reliable security for property and contract rights.... [T]op-down develoment schemes diverted attention away from the mundane but crucial work of building workable market institutions" (p. 13). For Lindsey realizes what the hardcore market fundamentalists do not. He realizes that the classical-liberal "night watchman" state--the government that has only two employees: a judge to decide who is right when contracts are disputed, and a constable to make sure nobody steals anything after dark--is a historically-unique, unusual, sophisticated, and immensely powerful politico-social institution. Think of it: The night watchman state must be able to enforce contracts--it must have, in reserve, sufficient authority and force that what its judges command actually happens. The night watchman state must be able to control local notables--it must be able to keep them from applying pressure to sign over property or other rights that those without local wealth, authority, prestige, and dependents cannot resist. (One thinks of the current wave of stories of Wal*Mart managers forcing employees into mandatory, unpaid overtime.) Most important, the night watchman state must be able to control its own functionaries--so that equal and exact justice is administered according to law, rather than according to who is the mayor's cousin or who has offered the biggest bribe.

In short, a government can be weak--can be the background rule maker for a laissez-faire economy--only if it is immensely strong. Lindsey does not shrink from this paradox. And he does not shrink from pointing out how many, many governments around the world--including the government of Thailand--are not strong enough to be a weak laissez-faire-supporting state:

In the case of Kaset Thai, supposedly all-powerful Western capital set out to challenge these breakdowns [in contract enforcement] and was decisively repulsed. Despite the pressure by a French bank to put the case under court supervision, and despite the court appointment of a Big Five accounting firm to oversee restructuring, nothing much changed.... In a high-profile case conducted under the hot spotlight of international scrutiny, the Thai legal system proved incapable of upholding the single most rudimentary norm of any legal system--the rule against murder. Instead, the proceedings degenerated into a squalid and pathetic farce of corruption and fecklessness...

Moreover, Lindsey's description of a free-market economy turns out to have a large amount of centralized control in the mix. He appeals to Ronald Coase to say that a market economy is not an economy in which all transactions are mediated through the market, a market economy is an economy in which firms can decide whether efficiency is best served by exchange or control:

...in a modern economy there is a vital, if limited, role for localized centralization within the market system in the form of large business enterprises. Second, the market system itself exists within a larger political order defined and enforced by the centralized ocercion of government. Collectivists asserted the superiority of a 'planned economy' over the market system, but in fact the market system is intricately planned.... The existence of large, sophisticated 'planning units' within the market order... serve[s] a vital function... created by the coming of mass production (p. 52).

Thus Lindsey's neo-libertarian vision makes contact with a left-wing economist's dream of the ideal social-democratic government: one that compensates for externalities by providing the appropriate market-based incentives while harnessing all the entrepreneurial energy of the market to the problems of invention, production, and distribution.

However, this ideal government--the one that provides the right rules of the game to structure market activity, but that refrains from fixing prices and mandating quantities itself--is not what we had in the decades after World War II. Why and how did we as a species get off track? Lindsey calls the process of getting off-track "the industrial counterrevolution."

In Lindsey's view, the industrial counterrevolution had two wellsprings. The first came in the desire of big businessmen, big bureaucrats, and later big labor unions to stabilize the structure of industry through comfortable oligopolies. People like Otto von Bismarck, first Chancellor of Imperial Germany and Judge Gary, first President of U.S. Steel sought to establish the individual welfare state of publicly-provided health insurance and pensions, and the corporate welfare state of cozy oligopolies and natural monopolies loosely regulated by captured agencies. However, in Lindsey's view there was a second source of the industrial counterrevolution. This second source was spiritual, or rather psychological. The market economy, especially the pre-WWI market economy, offered people liberty and prosperity. But what people wanted was solidarity and community:

...the appeal of the Industrial Counterrevolution was at bottom a spiritual one. The coming of technological urban society was the most... sweeping transformation.... Ways of life that had persisted for thousands of years were suddenly wiped away; the beliefs and institutions that had grown out of and adapted to traditional agricultural society now came under withering assault. Such rapid and radical change could not help but exact a heavy psychological toll.... Amidst the spiritual turmoil and disorientation, collectivism promised deliverance... community... rootedness (p. 96).

This collectivist movement took many names: fascism, communism, socialism, Naziism. It did, however, answer to deep psychological needs. It grew in strength. And the contrast between the failure of market economies to provide full employment during the 1930s and the apparent success of planned industrialization in the Soviet Union--where central planning built the steel mills of Magnitogorsk, and where the T-34 tanks built at Magnitogorsk broke the back of the Nazi army and carried Russian troops to the Elbe River--sealed the fate of the post-World War II World. "The Soviet Revolution.. had lit a bright flame... and laid the foundation for a new civilization" wrote Jawaharlal Nehru. As Lindsey says, "Nehru would be accompanied by Mao in China, Nasser in Egypt, Sukarno in Indonesia, Nkrumah in Ghana, and many others" including Clement Attlee in Britain: "'In matters of economic planning,' Attlee said in 1946, 'We agree with Soviet Russia'" (p. 96).

In the world in which Lindsey dwells, all these countries that adopted the "collectivist" model after World War II doomed their economies to stagnation. Lindsey quotes Latin American economic guru Raul Prebisch's second thoughts on the consequences of the protectionist, import-substituting policies he had recommended: "'the proliferation of industries of every kind in a closed market has deprived the Latin American countreis of the advantages of specialization and econmies of scale, and owing to the protection afforded by excessive tariff duties and restrictions, a healthy form of internal competition has failed to develop, to the detriment of efficient production...'" (p. 104) and asks, "[T]his was a surprise?"

Lindsey thus returns full circle. Collectivism--the dead hand of the state--gained power as a result of the confluence of special interest desires for economic stability, an Eric Fromm-like flight from freedom in search of solidarity and community, and the misinterpreted lessons of the Great Depression. The dead hand of the state throttled growth behind the iron curtain, crippled growth in the Soviet Union-emulating developing countries and in the protectionist-oligarchies of Latin America, and hobbled growth in European social democracies. Eventually, after decades of experience had demonstrated its failures, pragmatic politicians seeking economic growth drew the obvious lessons and abandoned the dead hand of state controls for the invisible hand of the market.

Yet Lindsey is aware--or at least half aware--of flaws in his grand argument. British post-World War II growth was disappointing relative to the U.S., yes, but it was also the fastest growth the country had ever seen. The state intervention-heavy social democracies of northwest Europe built world-class economies and welfare states that absorbed 50% of GDP in the generation after World War II. And the dirigiste export-subsidizing industrial policies of East Asia produced the fastest growth the world had seen, anywhere, anytime, in spite of their failure to worship at the altar of laissez-faire. Clearly the dead hand was not all that dead in at least two major regions of the globe. Clearly Lindsey's model is incomplete. He recognizes that it is incomplete, explaining, for example, that the "...various industrial policies of the East Asian miracle economies... sent a strong cultural signal. The government was committed to fostering economic growth and a pro-business environment. That signal doubtless contributed positively to the development of the strong entrepreneurial cultures that now grace the region. In other words, the cultural effect of industrial policy gave a boost to economic dynamism that was wholly separate from the actual substance" (p. 151) of the industrial policies, which were, in Lindsey's view, destructive of economic efficiency.

Moreover, one is tempted to ask Lindsey: what of the Frommian "flight from freedom" that was the source of the industrial counterrevolution? If people seek solidarity and community--if Labor Secretary Bob Reich's message that American workers should get used to change, should expect to have ten jobs and three careers in a lifetime, laid a big goose egg long before it got to Broadway--then isn't any laissez-faire state likely to be politically unstable unless it has a large does of nanny-state added to the mix?

Nevertheless, even if you don't buy all of Brink Lindsey's assumptions--and I don't, I'm a social democrat, not a neo-libertarian--it is a brilliant, brilliant book: fearlessly and intelligently argued, and a true joy to read.**


*In truth, this is a composite of three center-left Washington think-tank barons.

**I do have a few pickier criticisms, but let me save them for another time: they are worth making only because the rest of the book is of such high quality, and I don't feel like playing the skunk at the garden party right now.

Brink Lindsey a Manichean: not at all certain that the good guys are going to win.

pp. 2-3: ...the dream of centralized, top-down control over the course of economic development... has expired in universal failure. It died in the United States and Western Europe during the stagflation of the 1970s. It died in China when Deng Xiaoping declared... "it doesn't matter if the cat is black or white..." It died in Latin America during the debt crisis... of the 1980s. It died in the Soviet Empire with the collapse of the Berlin Wall. And it died in East Asia with the bursting of the Japanese bubble and the financial crisis of 1997-98.... As faith in government controls has dissipated, markets have been given wider play.... Trade and investment liberalization are thus of a piece with a broad array of market-oriented policies: in particular, the privatization of state-owned industries, commitment to a monetary policy of price stability; elimination of price and entry controls that sustained domestic monopolies and oligopolies; the resurrection of labor markets; the reform of punitive tax systems; and the overhaul of financial institutions to make the allocation of capital more responsive to market returns..."

p. 5: The plain fact is that market pressures--even souped-up, internet-driven market pressures--exert only modest and occasional discipline on national policies.... the 'golden straightjacket' is a loose fitting garment indeed...

p. 7: "By and large, the worldwide rediscovery of markets has been guided by pragmatism, a rejection of the failed dogma of centralized control in favor of something, anything, that works. This is a time of idol smashing, not of setting up new gods."

p. 8: Why are governments increasingly deciding to pay attention to market signals? The usual answer is that the microchip and the Internet have allowed businesses to... move... and give[n] them the leverage to play national governments against each other.... [But] since when did attracting foreign investors become an economically irresistible proposition for countries of the old third world?"

pp. 8-9: However appealing the notion that the two great trends of recent times--the information revolution and globalization--really boil down to the same thing, the spread of more market-oriented policies cannot be explained by crude technological determinism.... Globalization is not a simplistic technological imperative. In fact, it is not primarily an economic phenomenon at all.... [but] a political event. Globalization... [is] but one consequence of the death and repudiation of the old ideal of central planning.... It is the retreat of the state that has allowed international market relationships to regain a foothold. The retreat was provoked, not by the impingement of blind economic forces or by transports of libertarian enthusiasm, but by disillusionment...

p. 12: Call it the invisible hand versus the dead hand...

p. 13: Distortions caused by the promise of government bailouts plague even the banking sectors of the advanced nations, as evidenced by the U.S. savings-and-loan disaster...

p. 13: Governments... are simultaneously doing too much and too little. At the root of so many problems... is the failure of governments to provide reliable security for property and contract rights.... [T]op-down development schemes diverted attention away from the mundane but crucial work of building workable market institutions..."

p. 28: Business leaders like Gary and Perkins stoutly opposed... outright expropriation.... Instead, they pushed for a more moderate course of extinguishing competition through regulation--either government regulation or the self-regulation of industrial cartels. Both sides agreed that competition had to be suppressed...

p. 29: Today it is odd to think of American big business as an inspiration for collectivists, rather than their nemesis. But it was...

pp. 32-33: In Germany, the first and crucial moves toward collectivism were made... by the right--in the form of Otto von Bismarck's 'state socialism'...

pages 34 ff. What Lindsey somehow never says is that proto-authoritarian, relatively-centralized, nationalized-railroads imperial Germany was a great economic success...

page 42 ff. Lindsey can't figure out whether the problem of central planning is a problem of information or a problem of incentives...

p. 52: The market system accelerates the evolution of useful new ideas in a two-step process: First, it increases the number of 'mutations' by decentralizing investment decisions; second, it then applies to those mutations the ruthless selection pressures of profit and loss...

p. 52: ...in a modern economy there is a vital, if limited, role for localized centralization within the market system in the form of large business enterprises. Second, the market system itself exists within a larger political order defined and enforced by the centralized coercion of government. Collectivists asserted the superiority of a 'planned economy' over the market system, but in fact the market system is intricately planned.... The existence of large, sophisticated 'planning units' within the market order... serve[s] a vital function... created by the coming of mass production...

p. 53: Coase recognized that firms represent the supercession of the normal market method of allocating resources... by centralized control. He concluded that corporations supercede markets because it is sometimes less costly to organize production administratively...

p. 57: Most fundamentally, markets rely on the elaboration and enforcement of basic property and contract rights...

p. 63: In 1913, merchandise trade as a percentage of gross output totaled... 11.9 percent for the industrialized countries... not matched again... until sometime in the 1970s... p. 63: Before the advent of the [railroad], a journey form new York to Chicago took three weeks; just one generation later, in 1857, that same trip took only two days...

p. 96: ...the appeal of the Industrial Counterrevolution was at bottom a spiritual one. The coming of technological urban society was the most... sweeping transformation.... Ways of life that had persisted for thousands of years were suddenly wiped away; the beliefs and institutions that had grown out of and adapted to traditional agricultural society now came under withering assault. Such rapid and radical change could not help but exact a heavy psychological toll.... Amidst the spiritual turmoil and disorientation, collectivism promised deliverance... community... rootedness...

p. 99: 'The Soviet Revolution.. had lit a bright flame... and laid the foundation for a new civilization,' wrote Jawaharlal Nehru from prison during World War II.... In 1947 India would win its independence, and under Nehru's leadership, plunge into mimicry of Stalinist planning.... Nehru would be accompanied by Mao in China, Nasser in Egypt, Sukarno in Indonesia, Nkrumah in Ghana, and many others--all eager to mobilize and modernize their people through the agency of the centralizing state.... Collectivism, Nkrumah and his fellow third world leaders believed, would provide the needed shortcut.... 'Capitalism is too complicated a system for a newly-independent nation...'

p. 91: "In matters of economic planning," Attlee said in 1946, "we agree with Soviet Russia."

p. 108: "market mechanisms were a useful way of administering given economic structures, but the task of economic architecture--of choosing and designing those basic structures--remained the preserve of a small technocratic elite."

p. 104: Only 13 years after his manifesto for economic self-sufficiency, Raul Prebisch offered this disillusioned assessment of the consequences of taking his advice: "the proliferation of industries of every kind in a closed market has deprived the Latin American countreis of the advantages of specialization and economies of scale, and owing to the protection afforded by excessive tariff duties and restrictions, a healthy form of internal competition has failed to develop, to the detriment of efficient production." One is tempted to ask: And this was a surprise?

p. 115: "In this same regard, consider the various industrial policies of the East Asian miracle economies. Regardless of their effectiveness as purely economic measures, they sent a strong cultural signal. The government was committed to fostering economic growth and a pro-business environment. That signal doubtless contributed positively to the development of the strong entrepreneurial cultures that now grace the region. In other words, the cultural effect of industrial policy gave a boost to economic dynamism that was wholly separate from the actual substance of the measures taken...

p. 117: As Yegor Gaidar... observed in 1993: "After the first stage of industrialization... no industry in Russia had its resources distributed to other industries. Production would not cease because there was no demand for the products, or because there was a more efficient way to produce them.... This type of economy could be dynamic and could have a high level of growth, but only until its resources were needed to create a new industry"

p. 120: "half the tanks of the Red Army were made from Magnitogorsk steel"

p. 135: Meanwhile, Russian steel mills were especially hard hit by the U.S. steel industry's protectionist rampage..."

p. 143: "On that point Clyde Prestowitz's formulation was typical: 'A key objective in any economy... is to create an industry that produces technologically sophisticated products with high income inelasticity... and a rapid growth rate.... That objective... cannot be achieved without government intervention.' What is most striking about the criteria that Prestowitz uses to identify 'strategic' industries is the one that is missing: namely, profitability..."

p. 161: In the case of Kaset Thai, supposedly all-powerful Western capital set out to challenge these breakdowns and was decisively repulsed. Despite the pressure by a French bank to put the case under court supervision, and despite the court appointment of a Big Five accounting firm to oversee restructuring, nothing much changed.... In a high-profile case conducted under the hot spotlight of international scrutiny, the Thai legal system proved incapable of upholding the single most rudimentary norm of any legal system--the rule against murder. Instead, the proceedings degenerated into a squalid and pathetic farce of corruption and fecklessness...

pp. 163-4: With a billion people, India has only around 40 million vehicles.... Total duties on used cars, for instance, are 180 percent.... Known alternately as a "jugaad," a "maruta," or a "boogi," the vehicle offers barebones transportation for Indian farmers. It has no roof. The 10-14 horsepower engine must be hand-cranked. It maxes out at 15 miles per hour. The driver sits on a wooden bench. But the rear compartment--a plywood bed with wood-paneled sides--has plenty of room for passengers or cargo. And the price of only around $1000 makes it an unbeatable bargain. We found boogi manufacturers... no assembly lines, no factories... just three small mechanics' garages spaced out along the semi-paved road.... The mechanics buy minivan spare parts--wheels, axles, transmissions, gear boxes, and steering--from markets in Delhi. They get their engines, made to power water pumps, from Agra. And they pick up steel for the chassis and wood for the framing from Jaipur.... One shop can turn out four or five boogis a month. Technically, these vehicles are illegal...

p. 172: Argentinian government spending as a percentage of GDP climbed from 9.4% in 1989 to 21% in 2000, "in spite of the fact that sweeping privatizations were at the same time freeing the government of significant fiscal burdens".

p. 173: "Phibro... provid[ed] $20 million in financing to a local sugar mill secured by the sugar inventory. When the mill ran into problems, workers seized the factory.... Months went by before an accommodation was reached, and Phibro never returned to Tucuman..."

p. 175: Olson argued persuasively that underdevelopment reflects, not the absence of markets generally, but rather the absence of particular types of markets--namely, "socially contrived" or "property-rights-intensive" markets that arise and flower only with the help of appropriate, government-provided legal institutions...

p. 176: "Those essential government activities that undergird a liberal market order are, by and large, so routine and uncontroversial that they do not figure in the ongoing debate over the role of government. In that context, economic liberals are always seen demanding less government intervention, and so develops the misconception that 'the less government, the better' is the sum and substance of their position. But the situation is altogether different for roughly five billion of the earth's six billion people.... it is the underdevelopment of legal institutions that is especially debilitating. In a continuum from bad to worse--from corrupt officials and inadequate courts, to laws so dysfunctional that many or most people are chased into the informal sector, to the arbitrary confiscations of kleptocratic misrule, to the chaos of Hobbesian anarchy--the poorer countreis are all plagued by the insufficient protection of property and contract rights. Under these conditions, most economic activity is confined to what Olson called "spontaneous" or "self-enforcing" markets--markets based on personal relationships or face-to-face contact. But those markets, however resilient and durable, cannot produce the division of labor upon which affluence depends..."

p. 209: "A clear distinction can be drawn between the financial systems of Thailand, Korea,and Indonesia--the economies hardest hit by the Asian crisis... heavy reliance on bank lending... poor legal infrastructure... limited access granted to foreign financial institutions...

p. 211: liberalization left untouched many anti-market policies whose effect was to distort the new flows of capital in ultimately calamitous ways... pegged exchange rate systems... segmentation of financial markets... restrictions on foreign banks... moral hazard... overloading of backward domestic financial sectors... none of this can be confused in any way with economic liberalism. And when these anti-market policies operated on newly liberalized capital movements, the results were disastrous...

p. 249: During the Seattle riots, one junior diplomat from Gabon: "They understand nothing, and are as remote from our problems as you'd expect from middle-class whites from Washington State..."

Posted by DeLong at July 8, 2002 06:34 PM | TrackBack

Comments

As it happens I've never been a fan of laissez-faire and so far

at least, prefer something along the lines of what Adam Smith

was arguing for.

But regarding this,

Brad DeLong said, "And the dirigiste export-subsidizing industrial policies

of East Asia produced the fastest growth the world had seen, anywhere,

anytime, in spite of their failure to worship at the altar of

laissez-faire. Clearly the dead hand was not all that dead in at least

two major regions of the globe."

Shouldn't there be a distinction between countries catching up

and those who are up close to the best that has yet been achieved?

Isn't 4 percent productivity growth in the United States rather

a different business than 4 percent productivity growth in Thailand?

With the one being really impressive and the other being ok at best?

Maybe the real point here is that when a country is catching up,

that is the efficiency of economic activity is way behind what's

the best in the world at the time, then economic planning, direction

from above, can be very effective.

But that situation has nothing to say about what will happen

once the economy has neared catching up -- that is to say

when innovation and invention is demanded and copying is no

longer sufficient.

Posted by: Mark Amerman on July 9, 2002 12:12 PM

One small point. I think to say that the growth experienced in Northwestern European and East Asia was similar oversimplifies things a bit. Unless I'm wrong about this, the government "dead hand" directives from the two regions focused on two different things and led to two different outcomes. In Europe much government control was exerted in the area of the "social safety net", allowing for development in the middle classes, whereas in Asia governments actively helped build within industries and individual companies (definitely blurring some lines). To me this was apparent when the "Asian Contagion" (sp) happened in the latter half of the 90's. Foreign demand dried up and domestic demand could not offset it because of an insufficient development of a thriving middle class.

Also Lindsey points out that the US S&L crisis happened because of "distortions caused by the promise of government bailouts". I argue that he is wrong, I always thought that deregulation (the removal of the "dead hand") and lack of appropriate federal monetary controls had more to do with this than anything.

Posted by: A. Mendoza on July 9, 2002 06:14 PM

Nature enforces a tradeoff between exploiting a known resource and exploring for a new one. You can't survive without doing both, so you have to divide your efforts between the two objectives. Get the balance wrong and you run out of resources -- either because the mapped ones ran out or you've run out of resources by mapping sites without ever drawing on them to replenish your stocks.

The resource that keeps growing economies from running up hard against the limits of decreasing returns is innovation. Both centralized and market economies explore for innovations and exploit existing inventions -- but centralized economies are better at exploiting existing inventions and market economies are better at exploring for innovations. Market economies have the balance better.

The rapid growth in Asian economies was based on exploiting existing inventions, as Mark Amerman properly notes. In my writings, this is mobilization, and centralized economies are "Roman Law" -- the authorities prohibit what they don't permit. Everyone does what the authorities want (which eventually bogs down into "they pretend to pay us and we pretend to work"). You have cycles of catch-up and stagnation.

The steadier growth in Anglo economies (US, UK, Canada, Australia, NZ) is exploration, and market economies are "Common Law" -- the authorities permit what they don't prohibit. Everyone does what they think best (which keeps people steadily shifting from productive activities to even more productive activities). You have expansions and recessions, but no periods of long-term stagnation (and the expansions and recessions are blending into steady expansion as the economy has more diverse innovations to expand into).

This comes more out of the complexity literature (esp. Kauffman and Holland, and including Arther) than the standard neoclassical economics literature, or the neo-institutional, or even new growth theory (although Weitzman and Romer have picked up on Kauffman's observations of the limitless innovative potential inherit in combinatorial technology). As such, it's hard to get economists to pay much attention, but it sure does account well for the different development patterns observed in "centralized" and "market" economies, and without throwing in a lot of degrees of freedom.

Posted by: Mark White on July 9, 2002 09:03 PM

This is a minor point, but I would say that William Niskanen is another heavy-hitter at Cato. He's done some fantastic, very serious, academic work.

Posted by: Conor O'Brien on July 10, 2002 07:22 AM

I definitely, definitely agree about Bill Niskanen. But alas, he is no longer young...

Brad DeLong

Posted by: Brad DeLong on July 10, 2002 08:13 AM

Post World War II, the US focused significant resources on rebuilding the Japanese economy. This also included internal US regulations in favor of Japanese business (Television manufacture for example). The other Asian economies benefited from this arrangement by supplying the Japanese business with first world cost goods created at third world labor cost. I am wondering if this action could explain the miracle Asian economies? After all, how many examples exist where economy A willingly hampers itself to the benefit of economy B?

Posted by: James Phelps on July 10, 2002 09:24 AM

A quote from the quotation from Lindsey:

""...various industrial policies of the East Asian miracle economies... sent a strong cultural signal. The government was committed to fostering economic growth and a pro-business environment. That signal doubtless contributed positively to the development of the strong entrepreneurial cultures that now grace the region. In other words, the cultural effect of industrial policy gave a boost to economic dynamism that was wholly separate from the actual substance" (p. 151) of the industrial policies, which were, in Lindsey's view, destructive of economic efficiency."

It seems to me that what he's doing is to spin negative evidence, by claiming that government *intervention* can foster an entrepreneurial culture. Which is something that I rarely see laissez-faire economists maintain.

In the end, what he's doing is taking evidence against his thesis, putting a minus sign on it, and using it to support his thesis.

Barry

Posted by: Barry on July 11, 2002 05:03 AM

James - a similar example might be the 19th century US, after the War of 1812. The US could engage in extensive, world-wide trade, under the protection of Pax Britannica. For most of this time, the US had a small navy, and a small army, which was focused on taking territory from the indians, and not on fighting the British.

This gave the US the best of two worlds - protection of an empire, without the full taxation.

Barry

Posted by: Barry on July 11, 2002 05:05 AM

The invisible hand is far from dead, if you look at expropriation of public resources in grazing, logging, mining and fishing, resource "engines" that had fueled America's emergence as a global player, by large corporations paying little but lip service in return for their exclusive access and despoilation of the public resource.

Then should the invisible hand be killed off?

I hold in my hand a $3 pair of Chinese "dikes", or electrician side-cutters. Exquisitely formed, perfect in function, they cost 1/4th of a US-made one, but you can buy them at any discount store.

Today, via the Internet, I can engage the design services of an India(n) CAD draftsman for $5/hr, about 1/10th of a similar US technician, yet he can produce the same drawings, in English rule.

Should we stay the invisible hand then, allowing global laissaz faire, and crush the dreams and aspirations of America's blue collar workers?

Could YOU survive on $5 an hour in the US? Yet that is precisely what is happening in the global marketplace, Wal-Mart being the perfect example.

The question remains then, not is the invisible hand dead, but to which side is that invisible hand dealing the four aces?

Peter

Posted by: Peter Torbay on July 25, 2002 09:18 AM

THe comment by PEter Torbay is a little confusing to me. There is competition from CHina in manufacturing at $ 2 an hour and we all gain from that. More precisely, the competition is from engineers which work for 10 to 15k a year, as the competitive advantage there is shifting from manual labor to overhead. We all gain from this as more value is delivered to the consumer. The challenge is to produce services and goods which the market can remunerate at USD 100k (pretax) and above per year (the cost level of middle class employment in the US).

TO blame the invisible hand for this is being protectionist, in my opinion.

Posted by: galeazzo scarampi on July 27, 2002 10:33 PM

Brink Lindsey puts his finger on a very important issue when he argues that collectivism (the deand hand) taps into the deep longing in the human psyche for meaning and belonging. Unfortunately libertarian asumptions seem to largely ignore this ethical/spiritual/psychological dimension. Like Marxists, libertarians tend to reduce everything to economics. The illusion, that somehow it is enough that individuals experience the market as the universal organizational mechanism, may be one factor at work in the present crisis of confidence in U.S. financial markets. Markets, in order to functions successfully, seem to require individual participants with internalized ethical impulses that serve to restrain certain types of behavior. The collectivists came to believe that the state could become this normative substitute while the libertarians believe it is the market. Both perspectives end up denying the importance of extra-economic norms as crucial for the functioning of an economy. It would be ironic indeed if this logic eventually plunges U.S. capitalism into a crisis similar to that which overtook the former Soviet Union.

Posted by: Jim Kulk on July 30, 2002 12:17 PM

Can I comment further on these?

From Peter Torbay: "Could YOU survive on $5 an hour in the US? Yet that is precisely what is happening in the global marketplace, Wal-Mart being the perfect example..."

And your reply: "THe comment by PEter Torbay is a little confusing to me. There is competition from CHina in manufacturing at $ 2 an hour and we all gain from that... We all gain from this as more value is delivered to the consumer. The challenge is to produce services and goods which the market can remunerate at USD 100k (pretax) and above per year... TO blame the invisible hand for this is being protectionist, in my opinion."

I believe you have misdirected yourself by arriving too hastily at "we ALL gain from that" (my emphasis), etc. We do not - only those of us who are in a position to benefit actually do so. So, while it is incontrovertible that consumers do benefit, that is irrelevant - it is only looking at those who do not get marginalised. The rest drop off the radar and do not feature in the base to be measured. It is also the case that when people get marginalised that either creates Vagrancy Costs, an exernality that does not feature in hire and fire decisions, or else it gets headed off by Social Security arrangements which create an externality in the taxes or whatever funding them. Unless this is headed off in its turn, say by Pigovian methods in funding Social Security, then there is a market imperfection in favour of downsizing and substituting either capital or foreign production (I have some material on the area at http://users.netlink.com.au/~peterl/publicns.html).

This gives rise to the deeper questions of whether these effects are material, if they are a net improvement after all, etc. Now, the $5 per hour people are often only working for a top up wage, with subsistence coming from a concealed non-cash subsidy in the form of land or similar. To the extent that depriving them of this would be a distortion, you are absolutely right - that is mere protectionism; what they have is actually a Pigovian subsidy to head off Vagrancy Costs, of the sort that developed economies ought to have but don't. But to the extent that the foreign workers have these assistances as a result of concealed protectionism the other way, with deliberate policy distortions creating those assistances, then the boot is on the other foot; Peter Torbay's question about just who is getting the "unfair" advantage makes sense.

There is more. As these third world subsidising resources are not usually properly allocated and owned as property, there may well be disruptions from globalisation causing wealth transfers in the developing countries. (I give historical parallels at http://www.spectacle.org/0901/lawrence.html.)

I hope this helps. PML.

Posted by: P.M.Lawrence on July 31, 2002 09:49 PM

True, Bill Niskanen is no longer young. I just took a look at the Cato staff directory. To the list of potential heavy hitters, I might add Peter VanDoren (taught at Princeton and UNC) and Bob Levy on the legal front.

Posted by: Conor O'Brien on August 1, 2002 08:20 AM

"But for a low- or medium-income country to assemble from its own savings the financing needed to accumulate the capital stock necessary for a modern post-industrial economy is a nearly impossible task."

To me this statement makes little sense. Most recent evidence suggests that FDI, and still less short-term equity and debt, play a meagre part in economic development. Most East Asian countries have far higher savings rates than the US, and hence have the domestic capital available to finance capital expenditure. Many East European states are high savers. The point is to turn this capital to effective use, something which is not always done effectively.

Overseas funds are not magically going to implant the capital stock for a modern post-industrial economy overnight: look at the experience of China over the last 20 years. If there is a benefit from FDI, it is largely in the long-term accrual of accompanying expertise rather than the funds themselves. Foreign companies, particularly in the resource sectors so prevalent in developing countries, often contribute little and feel no obligation to the local economy unless forced. And if foreign cash isn't going to do the job overnight, why expect domestic savings to do any worse?

In fact a number of onetime low-income countries have developed or are developing post-industrial economies from their own savings. Neither South Korea nor Japan relied significantly on foreign capital in achieving economic success. Malaysia, Thailand and Indonesia have all at one time or another used capital controls. The success stories of Eastern and Central Europe -- Poland, Hungary and Slovakia -- have a selective attitude toward foreign investment.

The point is more than superficial. Statements such as these serve to perpetuate the illusion that all low-income developing countries are savings-poor and hence waiting cap-in-hand for outside capital. Actually the cash is often there, and it is a question of deploying it effectively rather than inviting in foreign players with a different agenda. I cheer the revolutionary sugar mill workers.

Posted by: Dan Gay on August 15, 2002 01:45 PM
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