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Government
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.
Copyright
Robert Schenk
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