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Controlled experiments are usually impossible in economics, which makes advancement of economic knowledge slow and uncertain. Near the end of the 20th century, a number of bright, young economists began looking for what they called "natural experiments," situations in which the conditions of a controlled experiment were met even though no researcher arranged them. However, much earlier a "natural experiment" of sorts was conducted when after World War II three nations were split and placed under radically different economic systems. In the years that followed the split of Germany into East and West, Korea into North and South, and China into mainland and Taiwan, the two parts of these split nations had dramatically different economic growth. West Germany, South Korea, and Taiwan were market based and grew rapidly. East Germany, North Korea, and mainland China were command-based and stagnated, with North Korea becoming one of the poorest nations on earth.

From the 1930s until the 1970s, economists debated whether socialism or capitalism would result in faster economic growth. The advocates of socialism argued that planning experts could better move resources away from current use to investment and could target investment in areas most conducive to growth. In part this faith in government experts and distrust of markets reflected an interpretation of the Great Depression, which formed a generation of economists who were skeptical of unregulated markets. However, by the 1980s evidence from the actual performance of many market-based and command-based economies, in addition to the "natural experiments" mentioned above, convinced all but true believers that real-world socialism had failed in a massive way to live up to the expectations that earlier generations had placed in it.

The evidence of the 20th century supports the hypothesis that a country seeking economic growth is far more likely to get it with a market system than with a command- or centrally-planned economy. Another lesson that was learned is that countries that tried to develop by separating themselves from the rest of the world and developing industries internally to compete with imports were less successful than countries that opened themselves to the rest of the world and developed strong export sectors. In the decades after World War II, many development experts recommended the import-substitution approach. Today few do.

The comparison of Hong Kong and Singapore provides another "natural experiment" of a sort. Both were tiny nations with no natural resources except excellent harbors. Both were populated largely by ethnic Chinese so they were culturally similar. And both have been economically successful although they have had substantially different economic and political environments. Hong Kong had as close to a laissez-faire economic system as any nation has had. Singapore's economic policy was interventionist, with the government enacting a variety of policies designed to encourage growth. Their successes show that there is a range of political and economic environments that are compatible with economic growth, but the exact boundaries of that range are not well understood. There is, by the way, abundant evidence that democracy is not necessary for economic growth.

Starting and running a business are inherently risky, and government policies can reduce or increase that risk. Inflation, corruption, arbitrary rules, and red tape all make entrepreneurship more risky and decrease it. The nations in which government has prohibited, penalized, or severely curtailed business entrepreneurship (a form of creativity) have generally had much poorer results than nations that have not discouraged entrepreneurship. When business entrepreneurship is eliminated, citizens are unable to substantially improve their lot through economic activity, and either must be content with their station in life or turn to other avenues for improvement, such as the military, politics, or religion. Sometimes nations discourage business entrepreneurship under the banner of socialism, but often they do so as a way of protecting existing businessmen and others of wealth. Incentives matter, and some government policies give incentives that encourage growth while other government policies give incentives that discourage it.

Many non-economists believe that abundant natural resources are a source of economic growth, but there is little or no evidence for that position. On the contrary, there is evidence of a "resource curse." Countries with an abundance of some natural resources, such as oil, have grown less rapidly than other countries. There are a number of possible reasons for this. One is that the government revenues flowing from the resource make the government less responsive to needs and wants of the population.

Historically, the idea that the government is meant to serve the people is a rare idea among those actually in power. More common has been the idea that the people are meant to serve the government. Unfortunately, the latter idea still persists, and where it does, economic growth will almost certainly be low.

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Copyright Robert Schenk