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Paths To Prosperity

Free Markets Lead The Way Out Of Poverty.      

Inhalt

 

“I believe the market economy, in concert with limited government and rule of law, holds the greatest promise of freedom and prosperity for all. Poverty
cannot be managed by redistributing a perceived finite pie of wealth, nor by gaining control over limited resources. Instead, prosperity is when society respects the dignity of each person and his or her right to act as a moral agent.”

Shawn Stephenson
Chairman of the Rising Tide Foundation

Dossier

Editorial

von Redaktion «Schweizer Monat»
Editorial
A store owner with the app from ShopUp, a B2B commerce platform from Bangladesh. The app provides small businesses access to a wide range of products they can order for their stores. Image: ShopUp.

For millennia, the average standard of living around the world was more or less flat. Then, around 200 years ago, starting in Europe, a spectacular increase in prosperity set in, in the course of which the average citizen gained more income, more free time, became healthier, lived longer and received better education than ever before in human history.

But what was at the root of this “great enrichment,” as the economic historian Deirdre McCloskey calls it? And why did real average income shoot through the roof in some countries, while others lagged far behind?

Free markets are a decisive factor in achieving a higher standard of living. They give people the opportunity to take their fate into their own hands and develop their potential to the utmost. State transfers of pre-existing wealth, on the other hand, are often only a flash in the pan with no lasting effect.

It is historically evident that the market economy is most effective in combating poverty. And yet, capitalism and poverty reduction are often portrayed as opposites: especially in the mainstream media and thus in public opinion.

The fact that market economies have not worked equally well in all countries straight away raises the question of what it takes for them to have a positive impact. The basic framework of the rule of law plays an important role in this regard, as do the ways in which (government) power can be limited vis-à-vis entrepreneurial individuals. Values such as trust or fairness, on which entrepreneurship is built, also prove crucial.

This offprint analyzes the foundations of prosperity and shows what needs to happen so that even more people can live in prosperity.

Wishing you an exciting and stimulating read,

the Editors

Editorial
A store owner with the app from ShopUp, a B2B commerce platform from Bangladesh. The app provides small businesses access to a wide range of products they can order for their stores. Image: ShopUp.
Editorial
The Enriching Idea of Freedom
Picture provided by courtesy of Deirdre McCloskey.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

The Enriching Idea of Freedom

Over the last two centuries, humanity has become thirty times richer. The reason for this was not an economic, but an ideological change.

von Deirdre McCloskey

 

Lesen Sie die deutsche Version hier.

 

The enrichment of humans has been recent and gigantic. It was caused, I claim, by a sustained ideological change in northwestern Europe in the 18th and 19th centuries. It spread to the rest largely through the ideology of liberalism, that uniquely recent notion of equality of permission – much disdained in these latter days by the left and the right, by the Pikettys and Deneens, not to speak of the Maduros and Putins.

During the millennia from the caves down to 1800 the average person on the planet earned and spent in today’s prices some $2 or $3 a day, as now in the Central African Republic. By 1800 the average person in the richest countries, such as Holland and Britain and Britain’s newly independent daughter in the New World, had attained perhaps $6 a day, as now in Afghanistan. Still pitiful.1 Switzerland was worse.

But in the 19th century, after a precarious beginning during the 18th century in Britain, a Great Enrichment transformed western European countries and their offshoots. Later, of course, enrichment spread to more and more of the planet – not by policy, which was usually counterproductive, but by ethics and ideology. In the comedy “John Bull’s Other Island” (1904), Ireland had not shared in the recent comparative prosperity of Britain, even at the $6 level. As late as 1970 it was still notably lagging. Yet Ireland today, after adopting liberal economic ideas, is the fourth or fifth richest substantial country in the world. The Chinese, who not so long ago were thought to be trapped in an Asian Dilemma, adopted liberal economic policies after 1978, and are now enriched by a factor of upwards of 20, earn roughly $45 or $50 a day per person. It is the level of Brazilians – which is roughly the World Bank’s reckoning of the global average. The global average is a factor of 20 of enrichment over that $2 or $3 a day worldwide in 1800. The numbers are dizzying, and gratifying. Look at the charts, and stand amazed.

They make the recent obsession on the left with inequality within countries look very strange. Seizing in France the riches of all the people like the disgraceful Liliane Bettencourt, the ethics-less heiress to the L’Oréal cosmetics fortune, and giving it to the poor ­people of the country might do as much as double their incomes in one year. Good. But instituting an attainable liberal equality of permission increases incomes permanently by a factor of 20, or by much, much more. It has recently in Hong Kong or Botswana or Italy, and in France itself from the time of “Les Misérables.”

Along with the economic improvement has come along a social and cultural one. Life expectancy and literacy have increased dramatically, while child mortality has dropped around the world. We also ended slavery and the subjection of women, we care about the far Uighurs and the animals around us.

There is little chance that the Great Enrichment will now stop, unless we try hard – as for instance the European Civil War (1914–1945), which had an impact until 1989. A less violent way to stop the world’s enrichment, is to fall prey to imagined fears, finding every couple of years a new “headwind” requiring urgent tackling by the ship of state. The economist Robert Gordon in 2016, for example, pointed to such headwinds to justify extensions of statist policies.2 And the economist Tyler Cowen in 2011 and 2013 worried, too, about the headwinds, though with less enthusiasm for statist tacking.

Neither Gordon nor Cowen note that internationally there is, Covid-19 aside, no evidence of a slowdown in growth. The World Bank expects long-term growth in world income to be about 2 percent per year, indefinitely. Real incomes will double in one long generation. If we can avoid stopping growth with bloody war or panicked policy, a continued Great Enrichment bids fair in the next fifty or one hundred years, that is, to bring every human out of history’s poverty.

Ideas matter

Why did it happen? The timing, location, and magnitude of the Enrichment sets tight limits on possible scientific explanations.

Yet economists and economic historians tend to ­focus on asking why growth varies a little or a lot from place to place, as in the old debate over British as against American and German growth in the late 19th century, or in the recent econometrics of convergence, or in the history of the Great Divergence of the West from, say, a lagging China. Such a turn is like the atheist’s claim that an account of what happened after the Big Bang serves to refute a theistic account of why there was anything to bang in the first place. The divergers are looking in the wrong places for the answer to the question why the Enrichment happened at all. And the answer to this deeper question is what matters for understanding the one reason nations succeed, as against the myriad of ways they have found to fail. All happy families are alike; each unhappy family is unhappy in its own way.

 

 

 

 

Why then did it happen, after 300 000 years of stagnation among Homo sapiens?

Any innovation – mechanical, biological, institutional, scientific, artistic, personal – begins of course as a new idea in a liberated human mind. The point is obvious. But it has not been prominent in economics. The agent in economic models does not have agency. He merely accedes to a budget line or to a law or to a custom or to a habit of thought facing his already known utility function. He does not create, that is, but reacts, in requisite fashion. Human action, the liberated will, is absent. He is a vending machine, not an innovator, or not even an ordinarily choosy consumer exploring her tastes.

Therefore, the unprecedented economic growth since 1800, a Great Enrichment of a fully 3000 percent increase in real income per person, has been traced by economists not to “innovism,” as one might call it rather than the misleading word “capitalism.” The ­Enrichment has been traced to various routine and ­intermediate and largely material causes – investment of capital; exploitation of colonies; the rule of law. Some of these are necessary, but none is sufficient to explain our enrichment. Many are ancient. Many are trivial. None has the great oomph sufficient to explain the Great Enrichment.

The creation of new ideas in human minds, in other words, has been firmly set aside by economists. The non-economists who might save the ideational day, meanwhile, have seized on the wrong ideas, such as an alleged coming of individualism, disenchantment or ­enlightenment.

The economic trouble with the economist’s non-ideational causes such as investment and institutions or exploitation is that they are merely allocative, and are, further, subject to sharply diminishing returns, or even zero sum. They are routine, not transformative. They are small matters beside the 3000 percent increase in human welfare.

And the historical trouble is that most of them, and even most of the non-economist’s ideational causes, are of very, very long standing – ancient Rome had good property rights, ancient China had long canals, early modern Japan experienced long peace, modern Russia sees fierce pursuit of profit, ancient Athens had enlightenment. Yet no Great Enrichment ensued.

Early on, the cause of the Enrichment was said to be piling up physical capital, emphasized by Adam Smith, with the division of labor. Then came an ideational cause, put forward on the left or right of politics by ­anti-economists, such as the rise of “capitalism,” or “possessive individualism,” or “secularized asceticism.” All have been rejected in later research. Then it was the alleged routinization of innovation, such as ­Joseph Schumpeter came to believe, against his early belief in human creativity. Then it was human capital. Then it was institutions of various sorts, from legal to scientific.

But all of them depend of course upon ideas conceived in somebody’s mind – and foundationally on her ideas about ideas, such as ethics, ideologies, political philosophies supporting the liberated imagination. The change of ideas in human minds seems a promising ­hypothesis.

The ideational change is called liberalism. The idea of a non-slave society, it can be shown, has the oomph and the novelty to account for the 3000 percent.

The belief in social and economic progress

The crux was liberalization at the level of ideas in the Netherlands and then in Britain, favoring a culture of free speech and an economy of enterprise. It was followed during the next century by actual liberalization – in the UK the civil emancipation of Catholics, the abolition of Jamaican slavery, the free importation of wheat from Kansas and Ukraine, and then similar liberalizing measures in the US, Sweden, Italy, Japan, Switzerland, and the rest.

Adam Smith and Thomas Jefferson and Mary Wollstonecraft had put forward in the Anglosphere the then-bizarre notion that no one should be a slave, that all people are created equal, and should be permitted a liberated speaking and liberated voting and liberated buying and selling. The equality of permission in liberalism proceeded to erode the inequalities of hierarchies anciently stultifying. It made people bold to venture. As the British say in their sporting manner, ordinary people were permitted by liberalism for the first time, for example, after the French Revolution (1789) or with the abolition of slavery in the United States (1865), to “have a go.” And go they did. Liberalism was gradually implemented in northwestern Europe, as lately it has been, at any rate in the economy, even in far China and India. And the Great Enrichment came.

Both economists and their enemies, in other words, need to understand the conditions for the flourishing of liberty and its fruits in novel ideas for enrichment, and to see that good laws and long railways and creative ­science and strong institutions and eager innovators are all good, but are not themselves originating. They depend on liberty and its ethical accompaniments, every time. Liberation in ethics and ideology yielded ­innovism, not a “capitalism” one can find in Mesoame­rica in 1492 CE.

 

 

To use a mechanical image, the gearing in the historico-economic watch was, to be sure, investment and institutions, necessary for any economy at any time, from the caves of Lascaux to the caves of Wall Street, or for that matter on Crusoe’s island. But liberal thinking was the new and largely sufficient spring imparting ­motion to the old Swiss watch. It happened in Britain, but not immediately in, say, France. It could have happened in Japan or the Ottoman Empire, but by chances of history it did not.

Leave me alone and I’ll make you rich

The implication for policy is straightforward. Ideas in human minds largely rule the world. The Ukrainians ­defend themselves for liberty, not for the policies of left, right, or center. Encouraging a loving and responsible liberty, with its mighty material and spiritual consequences, should be our chief aim. Coercive, illiberal nudges and taxes and regulations and fines and imprisonments, of which policymakers are so very fond, are not the way forward. The liberal path of an honest and competent but restrained state, under which ordinary people are permitted without let or hindrance from other people to have a go, has already led in much of the world to a stunning enrichment of the poorest. Leave me alone and I’ll make you rich. In the next couple of generations, it promises to permit the rest of the wretched of the earth to raise themselves up.

«Encouraging a loving and responsible ­liberty,
with its mighty material and spiritual
consequences, should be our chief aim.”

The illiberal path of statism by contrast leads to the radical populisms of left and right, to Maduro and Putin. And even its middle path of regulation and redistribution leads adults back to a childhood, to a masterful state. It turns back to the subordination that characterized agricultural societies until 1776, and to its corresponding poverty of body and mind and spirit. Liberalism worked to overcome such childishness and subordination.

It works yet. Liberty, that is.

The Enriching Idea of Freedom
Picture provided by courtesy of Deirdre McCloskey.
The Enriching Idea of Freedom

Over the last two centuries, humanity has become thirty times richer. The reason for this was not an economic, but an ideological change.
«Screw poverty alleviation! I want prosperity!»
Picture provided by courtesy of Magatte Wade.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

«Screw poverty alleviation!
I want prosperity!»

Bureaucracy and overregulation are the greatest hurdles Africa faces on the path to prosperity, says the entrepreneur Magatte Wade. Western states should open their markets, instead of sending development aid.

ein Interview von Lukas Leuzinger mit Magatte Wade

 

Lesen Sie die deutsche Version hier.

 

Magatte Wade, you have started several companies in ­Africa that sell their products worldwide. What was the ­biggest obstacle to success?

It’s a constellation of regulations. In any African country, starting and running a company basically means swimming through molasses to try and do business. The main problem is regulation – or to be more precise: overregulation.

 

What kind of regulations?

If I explained all the regulations in my home country of Senegal alone, I’d be talking for the next ten years. But to give you one example: Suppose I want to hire a lab technician. He has a PhD in German, but I don’t care about that, and because of his experience, I am convinced that he has the necessary skills for the job as lab technician. We agree on a salary and want to sign a contract. However, the state requires us to use a contract designed by the government. And since he has a PhD in German, they require me to pay him a salary five times my budget for this job. They also define the hours he can go to work, although we had agreed that he would work 40 hours in four days to have Friday off.

 

This sounds rather complicated …

That’s not the end of it. Once we have signed a contract fulfilling all these restrictions, we have to bring it to the labor inspection office, a government agency. There, some government official who doesn’t know anything about my company gets to decide if we can sign this contract. This can take two weeks, a month or even more, after which they might decide that the technician also needs to provide a medical certificate or some other document. Naturally, every time we need to provide or get a document, we need to physically travel to the capital city or the regional capital, which means two or three hours in my case, because these government agencies don’t respond to emails. And their attitude is always against employers, even though employers and employees sit in the same boat. That’s the problem with governments: They simply don’t understand how markets work.

 

How do you deal with these kinds of obstacles? What’s your advice for would-be entrepreneurs?

How did I overcome these obstacles? Simple, I happened to be very well connected. I won’t pay bribes. But the truth is that many will pay bribes. But I was able to go and see the head of customs and help myself that way. As to my advice for would-be entrepreneurs, I tell them not to start a business in Senegal or other African countries at the bottom of the World Bank’s Ease of Doing Business Index.

«That’s the problem with governments: They simply
don’t understand how markets work.»

 

Why did you do it, then?

Because I want people to understand the obstacles in our way to prosperity. I want them to know why poor nations stay poor. If you look around the world, you see that prosperity has been created in only one way: through entrepreneurial value creation. Other people call it capitalism. And for that you need free markets. It’s plain and simple. I am a natural entrepreneur: if I see a problem, I want to fix it. Entrepreneurs are those who criticize by creating. If we want to build prosperity in Africa, we need to create jobs, and entrepreneurs create these jobs. Ultimately, you’re poor because you don’t have enough money to take care of your basic needs. And where does money come from? For most of us, it comes with a job. Jobs come from the private sector, from small and medium-sized enterprises. So, it’s obvious that we ought to make it easy for entrepreneurs to do business.

 

How hard was it to set up a business?

With my first company, Adina World Beat, for two years, I operated more or less under the radar. We were doing what we had to do, paying our taxes and the like, but running the risk of being stopped in our tracks at any time. It’s a risk I took and now we’re on the other end of it. Some people in Senegal sometimes operate in gray areas until they’ve gained strength and stability. This is nothing new, by the way, even in the West. Many companies started like that. But while it works for me, this is not how you build an economy, because the playing field should be level.

 

What’s the solution to such dispiriting circumstances?

The problem is one of legal infrastructure. If we’re serious about Africa ever making it, we need to be honest about that. Otherwise, we’re just putting band aids on the problem, in which case only 10 percent of entrepreneurs will thrive and 90 percent fail. Unless we have many successful entrepreneurs, we cannot expect to ever see Africa standing on her own two feet. The reason I am so annoyed is because of this idea that we have to optimize our results within this inferior legal infrastructure. Of course, if you’re an entrepreneur, keep on struggling. But if we don’t talk about this suffocating regulatory framework, 100 years from now we will be sorry.

 

But isn’t the problem a more general one? In the 1960’s, ­Senegal’s real GDP per capita was about the same as South Korea’s. Today, South Korea is 15 times richer. What explains this discrepancy?

This is exactly what I’m talking about. The rise of the Asian Tigers, of which South Korea forms a part, along with Taiwan, Hong Kong and Singapore, is a consequence of deregulation and low taxes. Singapore’s first prime minister, Lee Kuan Yew, though maligned by many, did introduce such reforms that lead to an economic boom.

 

So do we just need better politicians?

It’s more about better institutions. It should be as easy for any entrepreneur anywhere in Sub-Saharan Africa to start and run a business as it is for anyone, for any entrepreneur in Scandinavia. All Scandinavian nations are more capitalist than almost any Sub-Saharan African nation. We could use them as a model. Out of dozens of Sub-Saharan African nations, only one is needed to be a leader to set companies free. Piecemeal legislation won’t do, we need wholesale reform.

 

You are the director of the Atlas Network’s African Center for Prosperity. Tell us what kind of work that involves.

I oversee all the free market think tanks that we invest in. Our partners work on various reforms to take down entry barriers for entrepreneurs in their respective nations. That’s a great thing. But the truth is, piecemeal legislation takes forever. By the time you’ve passed one reform, ten more laws have sprung up. Additionally, even if you’re trying to do the right thing, opposition parties or NGOs may get on your back. It may be easier to just allow an unoccupied land in Sub-Saharan Africa to be refashioned into a place like Singapore, to start with a blank slate, give it its own laws and governance, and see how successful it becomes.

 

Western NGOs will tell you that all Africa needs to develop is for the West to send more aid. Do you agree?

I disagree. Let’s make no mistake, the solution to poverty is not charity. The solution to poverty is prosperity, period. How do we build prosperity? Do we build it by just donating? No, it doesn’t work that way. I’m not ­talking about humanitarian aid when a crisis hits – that ­requires immediate international help, of course. But I object to aid becoming chronic, where aid becomes an industry that benefits itself for as long as the people ­remain poor. Aid can also get stuck in the pockets of a nation’s leaders, who then buy châteaus in the south of France, marry five wives and so on.

 

There may also be the self-interest of donors involved.

Yes. The money from aid basically goes straight back into the pockets of the countries that provided it, to their consultants. The only people I see being aided by aid are these consultants in the aid industry. They don’t pay taxes on their salaries, then they go back home at least once or twice a year, flying business class. All of this paid by aid. On top of that, many of them get also paid an extra amount for the alleged harshness of their lives abroad in places full of mosquitoes, pesky insects, and exotic diseases. And the leaders of these countries are also making a killing out of foreign aid.

 

What do you tell Western politicians or people who give to charity? What should they do instead?

Every time European politicians promote more aid, they’re actually condemning us to more poverty and suffering. Instead, they need to become monomaniacal about promoting prosperity. The biggest problem we have is that people have bought into the idea of poverty alleviation. It says that we Africans should be happy because we’ve gone from being dirt poor to simply being poor. Who would find happiness in that?! But that’s unfortunately what the world has decided for Africa. I say: Screw poverty alleviation! I want prosperity building.

 

Some European politicians who are fine with sending aid to Africa oppose opening their borders ­further to accommodate more ­Africans. What do you think about that?

Amongst European politicians, the extreme right and the extreme left are the only ones talking about this ­issue. Italy’s prime minister, Georgia Meloni, is asking Africans to stay home. On the other end of the political spectrum, the extreme left is saying that all Africans are welcome because they want to signal how virtuous they are, how big their heart is. But Africans do not want to be, if I may use a word European politicians use, swarming Europe. It takes something extraordinary for a group of people to decide from one day to the next to leave where they come from, to leave their families, their land, a community and everything that they know to migrate to another place. It takes extraordinary circumstances. This tells you that something is profoundly wrong. So those championing completely open borders have missed the point, as has Meloni. What we need to think about is why people want to leave their home countries in the first place. The reason why people cannot thrive back home is because Africa is one of the world’s most overregulated regions, making it almost impossible for entrepreneurs to build businesses there, which prevents the creation of jobs that provide the income that helps people to join the middle class. At present, both sides are using Africans for political gain.

«So those championing completely open borders have missed the point, as has Meloni. What we need to think about is why people want to leave their home countries in the first place.»

 

How can free trade help build prosperity?

It’s very simple: go back to basics. I am staunchly in favor of the free movement of people, goods, services and ideas. It is a bad idea to have all of these trade barriers on different products from many countries. Therefore, the African Growth Opportunity Act, passed by the US Congress in 2000 is an example of a positive piece of legislation. It allows for a wide class of goods to come to the US from Sub-Saharan Africa free of tariffs. Today, our products benefit from that. When I bring my finished products from Senegal to the US, we pay absolutely zero taxes, which helps us be competitive and compensates for all obstacles my country puts in my way. It helps Africa in many more ways. For instance, shea trees, from which shea butter is made, only grow in Africa. Hence, African producers of shea butter can export to the US with profit.

 

You moved to Europe when you were very young, you’ve lived in the US. What Western views of Africa did you ­encounter in the West, and how did they influence your own thinking?

Africa is talked about as if it were swiftly on the rise. But despite this image of Africa, things haven’t changed. If you open a newspaper, unless there’s something major like Ebola, a war or some other disaster happening, you read nothing about Africa. For most of the West, Africa doesn’t exist, it’s not on the map. The way we change that is by cleaning up our legal framework, to make it easier for entrepreneurs to start and build businesses, which will create the jobs that create income and prosperity. Then we’ll start to matter. If you’re economically insignificant, no one is going to care about you. I know that’s a harsh statement, but it is the way it is. So as long as we ­remain poor, no one is going to give a damn.

 

You have said that, as an entrepreneur, you want to impact and change your culture. What kind of culture do you want to cultivate?

The way the hierarchy of cultural or cultural values stands, the West is leading the way in terms of what’s cool and acceptable. African American youth culture is pretty much permeating the rest of the youth culture around the world. What is going on in America is what you find the rest of the world wanting to emulate and aspire to. Below America you have maybe some Western European nations and cultures that the rest of the world aspires to. The world is very much excited about whatever goes on in the Western world. And what is ­Africa known for? For the most part it’s war and diseases. There has been a little improvement, but not enough to change the stereotypes.

 

How do you want to change that?

What I’m trying to do through my enterprises is to tackle the economics, to achieve the generation of jobs, so that our people get to stay in their home country and make it thrive. At the same time, I always focus on products which give us a chance to showcase ourselves differently to the world, to show a different aspect of ourselves that goes against the grain of what people know of us. I’m trying to elevate African culture, starting with my own. My goal is to prosper and get other countries around the globe to emulate what we do. We win if we become a model worthy of the world’s aspiration, like America is today. When I started my first company, it was the only African brand started by an African based on African products sold in the US. I will never forget how my African friends who went to Harvard, Berkeley or Yale reacted. They told me I was wasting my education by selling flower juice. For them, the only use for fancy degrees and an excellent education is to work for big companies like McKinsey. It was a lonely field to begin with, and people made fun of entrepreneurs like me. I proved them wrong.

 

What are your plans for the future?

What I’m playing is a long game. I’m trying to be the first domino in a chain reaction. It’s going to take time. If you push the first domino, things will have changed big time 100 years down the line, because somebody long ago said that maybe we ought to start with this one domino. I propose myself as the first one or two dominoes to knock everything else down. People may be inspired by that. I’m just sitting out here trying to build a little island of excellence people will seek to recreate elsewhere. I’ve seen it work before, and it will work again.

«Screw poverty alleviation! <br /> I want prosperity!»
Picture provided by courtesy of Magatte Wade.
«Screw poverty alleviation!
I want prosperity!»

Bureaucracy and overregulation are the greatest hurdles Africa faces on the path to prosperity, says the entrepreneur Magatte Wade. Western states should open their markets, instead of sending development aid.

The State Needs a Short Leash
Picture provided by courtesy of Arnold Kling.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

The State Needs a Short Leash

Centralized systems work poorly compared to decentralized ones. Yet they often persist. We need to encourage private solutions instead of waiting for the government to help.

von Arnold Kling

 

Lesen Sie die deutsche Version hier.

 

Decentralized systems have many advantages over centralized systems. For example, in agriculture, the decentralized market economy of the United States far outperformed the centralized command system of the Soviet Union.

Economic and cultural progress requires experimentation, evaluation, and evolution. Individuals and organizations experiment with new products, new services, and new social norms. People evaluate the results. We keep the most helpful new ideas, and we discard the rest.

Decentralization works better at all phases of this process. Markets work better than government at experimentation, evaluation, and evolution.

The value of variety

A central government cannot initiate nearly as many experiments as a decentralized market. In the realm of higher education, the United States became a world leader because many different colleges and universities sprang up, experimenting with a variety of educational models. Unlike many other countries, there is no national university or a nationally harmonized system of higher education. Instead, a great variety of colleges and universities have been allowed to emerge.

In the Swiss and Canadian health care systems,
different provinces and cantons experiment with slightly different organizations and insurance programs. They allow for private provision of health care, unlike Britain’s National Health Service, which as of this writing appears to be suffering from high cost and ineffective care.

Overall, federal systems allow for more experimentation than centralized systems of government. More­over, markets allow for much more experimentation than even federal government systems. Every single participant in a market is an autonomous actor capable of making choices and trying out new things.

Suppression instead of self-reflection

A government has no natural mechanism for evaluating the success or failure of an initiative. In fact, public officials work assiduously to avoid such evaluations. It is human nature to desire authority without accountability. Government officials are eager to issue dictates, as long as they face no personal consequences when things go wrong. When an agency is ineffective in carrying out its mission, its leaders claim that the solution is to give them more power, and certainly not to fire the accountable officials.

In the United States, the national public health bureaucracy performed poorly during the pandemic. The advice to close schools was especially harmful. Testing was delayed by bureaucratic power struggles, and it was never implemented effectively to track and control the spread of Covid-19.

But the nature of government is that agencies do not engage in self-reflection. Incompetent officials are not replaced. Instead of identifying and correcting mistakes, officials tried to suppress dissent by branding as “disinformation” criticism that later proved
to be correct, for example Stanford professor Jay Bhattacharya’s warnings that lockdowns would harm children.

The market has a built-in mechanism for evaluating new experiments. If a business offering is attractive to consumers, then the business will earn profits. If the offering fails to please consumers, then the business will incur losses.

Mohair, the wool of the Angora goat, continued to be subsidized in the US even after there was no longer any need for it. Image: Alamy Stock Photo.

Subsidies are sticky

This brings us to the third mechanism of progress: evolution. Government programs that have become obsolete, or which never worked in the first place, continue to exist. There is no mechanism in place for stopping a program once it has become embedded in the government’s budget. A notorious example in the United States is a subsidy for farmers to increase the supply of mohair, a type of wool that was used in army uniforms during World War II. Not long after the subsidy was enacted, the army stopped using mohair in its uniforms, but the subsidy persisted into the early 1990’s. Even then, after the subsidy was briefly abolished, it was restored a few years later in slightly different fashion.

«Government programs that have become obsolete, or which never worked in the first place, continue to exist. There is no mechanism in place for stopping a program once it has become embedded in the government’s budget.»

In the market, a product that is no longer useful results in the exit of producers. But in government, there is no Darwinian process for keeping only the programs that work and winnowing out those that are ineffective.

In the market, money-losing initiatives fall by the wayside. Firms go out of business unless their projects succeed. The evolutionary process serves to promote progress.

Fear of the new

If decentralized processes work much better at experimentation, evaluation, and evolution, what explains the strong trend toward centralization of power? Why do central governments around the world undertake so much more regulation than it did in the past?

One legitimate reason for a more extensive regulatory state is the increased complexity of our economy. We cannot return to the limited government of 1800 when faced with an environment that includes the possibilities of aircraft drones in the sky, the need to allocate electromagnetic spectrum for different communication services, the effects of new technologies on personal privacy, and the risks posed by new financial instruments, from credit default swaps to cryptocurrencies.

Ironically, the decentralized innovation that emerged from the market requires new forms of regulation. But government often introduces regulations that are not necessary and that stifle further innovation.

Unfortunately, government officials are inclined to exaggerate the perils of new technologies. They stimulate citizens’ fears and then exploit those fears in order to regulate with a heavy hand.

As citizens, I believe that we need to try to find a way to not give in to our worst fears of new technologies. We need to retain confidence in our ability acting in our capacity as individuals and members of organizations to handle the challenges posed by new technologies. We need to encourage solving problems using entrepreneurial approaches from the private sector instead of looking to government to provide the answer. For example, during the early weeks of the pandemic, private labs had developed effective tests for Covid-19. But the national Food and Drug Administration ruled against using these tests, instead insisting on a government-developed test that was not working properly until the pandemic was well underway.

In addition, we need to try to overcome the resistance of public officials to being held accountable for the success or failure of their conduct. We need to establish audit agencies that can provide a check on otherwise unaccountable bureaucrats. Audit agencies ought to have the resources to evaluate government agency performance. And when audit agencies find serious problems within an agency, leaders should fire the officials involved and initiate real reforms. It would be beneficial to change inefficient procurement practices, misguided regulations, and attempts by public officials to suppress criticism.

The State Needs a Short Leash
Picture provided by courtesy of Arnold Kling.
The State Needs a Short Leash

Centralized systems work poorly compared to decentralized ones. Yet they often persist. We need to encourage private solutions instead of waiting for the government to help.
The Rule of Law is Indispensable but Insufficient
Picture provided by courtesy of Richard Epstein.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

The Rule of Law is
Indispensable but Insufficient

No matter how clear and detailed the rules are, there remains some discretionary power for officials and judges. Only comprehensive system of individual rights protects us from their disregard.

von Richard Epstein

 

Lesen Sie die deutsche Version hier.

 

The rule of law is much in vogue today on all sides of the political spectrum as an indispensable constraint on the exercise of political power. Historically, the phrase was first introduced to counter the obvious totalitarian risk associated with this chilling maxim of Justinian: quod principi placuit legis habet vigorem – that which is pleasing unto the prince has the force of law. Under this legal regime, despotic impulses from a king or a legislature can overcome the steady and even-handed application of general legal directives known and articulated beforehand that give ordinary individuals fair notice of the line between legal and illegal conduct in both the public and private law. In both contexts, the dominant conception, closely associated with John Locke and Friedrich Hayek, demands all parties should enjoy the venerable due process guarantees of natural law, including the right to be heard and to present evidence on one’s own behalf before a neutral judge.

Note that this “thin” conception of the rule of law makes no reference to the substantive content of the applicable rules. Yet I know of no serious thinker who rejects this minimum conception of the rule of law, even if there are many who think that a thicker conception of the rule – i.e., one with serious substantive commitments – is needed to complete the system. But even before we reach that issue it is important to note that the appeal of the rule of law is ubiquitous. It is key both in continental European countries that derive from Roman law, and in common law countries that follow the British tradition, and other countries of various wealth and development that incorporate elements of either or both traditions.

The Supreme Court, the highest court in the United States, in Washington D.C. Image: Keystone / Newscom / Ken Cedeno.

Administrative overreach

Yet worldwide, this simple procedural model of the rule of law runs up against the simple proposition that the greater complexity of the administrative state makes it ever harder to satisfy these conditions. The first point is that virtually everywhere modern administrative law is not overly fond of black-and-white rules, but constantly seeks to accommodate an expanded set of substantive goals by developing general principles – the need for equity in the workplace, to control threats to the environment from all sorts of activities, from mining to using fossil fuels. These broad substantive aims cannot be implemented by legislatures, whose broad principles commonly devolve into multifactorial tests whose content is necessarily refined and amplified, first by administrative regulation and then by specific rulings addressed to individual cases. Such conflicts include efficient reductions of pollution with special solicitude for poorer or marginalized groups.

Enormous amounts of slippage can take place within this framework, even on exclusively technical issues. The delegation of administrative authority can empower an unelected board whose own agenda can easily deviate from that of the legislative body, opening a door to political intrigue that is difficult to close. Ideally, the delegated body should fill in the details of basic schemes instead of developing its own schemes. But many courts are unwilling to impose tight restraints out of fear that they lack the technical expertise to second-guess an agency in its area of supposed competence. Thus, many courts prefer to defer to such administrative agency not only on factual matters, but also on the interpretation of the governing legal principles. Administrative activity inevitably runs the gamut from sensible to foolhardy, so that in any given case it is unclear whether an agency has exceeded its administrative authority or whether a court has abused its oversight authority.

It is important to note the enormity of the stakes. A statute may give an agency the power to regulate the use of navigable waters. One reading of that command allows the government to dredge and fill waterways to keep the channels of transportation open. A second allows the government to issue permits to regulate the construction of businesses and homes located miles from any navigable river in order to prevent the possibility of future pollution. Another statute may require that power plants adopt the best systems of emission control. The narrow view permits the government to put safety valves on any piece of equipment, while a broader view includes in emissions control the power to reduce the use of fossil fuels, coupled with a forced reliance on wind and solar energy.

Sadly, it is not clear how an appeal to the rule of law finds the middle ground. In my estimation, the best approach defers to administrative agencies on findings of fact but denies any such deference on matters of legal interpretation of statutes and regulations, where courts, regardless of subject matter, tend to have a comparative advantage. But the deeper problem is that the range of potential solutions in all these areas is so great that the discretion exercised by either administrators or judges could be the soul of good reason in some cases, and destructive of the overall legislative intent in the others. The plot thickens because many ambitious regulatory schemes may be challenged on the grounds that they abridge freedom of religion (for instance, the lockdown of churches during Covid-19), freedom of speech (e.g., by limiting criticism of government Covid programs), or constitute takings (e.g., by onerous health-related restrictions on the use or disposition of private property). At this point, the strength of constitutional norms could influence how regulation is interpreted.

The rule of law alone is insufficient

The multiple challenges that the administrative state poses to the rule of law gives rise to a second round of attack: The thin model of regulation, even if achievable, leaves much to be desired because its procedural virtues are at most necessary conditions for the rule of law. But it is too easy to imagine that many totalitarian regimes could impose deadly sanctions while giving hearings before impartial judges and enforcing rules that allow state agents to arrest speakers who object to any government policy. Such rules may also outline precise procedures that allow governments to shut down religious bodies after full and fair notice, or let government agents seize private homes and businesses after any government statement of public need.

It is no accident that each of these examples reflects a situation in which constitutional claims against the suppression of speech, liberty and private property are at their highest in Western democracies. It seems therefore virtually incumbent upon us to add in these safeguards. And once that is done, it becomes clear that the connection between the rule of law and classical liberal theory becomes tight. The only way to ensure the control of discretion sought by the rule of law is to develop a comprehensive system of individual property rights with clear boundary conditions and clear rules of the road. This general prescription does not preclude the state from punishing speech that is fraudulent or an incitement to violence, religiously motivated human sacrifice, or the use of poisonous gases to overthrow the ­government. Answering this challenge in turn leads to the question of which proposed justifications should be included in the system, and which excluded.

At this point, we come to another junction in the road. The classical liberal position has no difficulty with the use of some form of rate regulation to deal with natural monopolies that cannot sensibly be broken up, nor with the use of antitrust laws to stop cartels and mergers that operate in restraint of trade. But that theory precludes many of the common justifications for government power, including the notion that some inequality of bargaining power justifies the formation of unions, or the application of some antidiscrimination law in competitive markets. Both Great Britain and the United States resisted these incursions until the first half of the twentieth century, where the rise of unions has in turn generated multiple efforts to limit them, without eliminating their monopoly power. In my view, the huge discretion that these laws give to administrators is a strong strike against the initial creation of these monopoly powers, especially concerning government workers who supply such key services as sanitation, education, and law enforcement, where the free entry of nonunionized firms cannot serve as a limit on union power.

«At this point, the rule of law is a useful ­device
to limit ­discretion. But it is never powerful
enough to dictate sound collective ­decision.”

Even this aggressive application of the strong rule of law approach runs into insuperable objections when governments must take key actions dealing with the provisions of public goods: how much to spend on public roads and infrastructure; how much to spend on military operations, and how and when to deploy these resources against our enemies or on behalf of our allies and friends. At this juncture, a move toward a thinner conception of the rule of law becomes inevitable even in well-governed states. Procedures must be designed to organize the level of deliberation required before some government actors are allowed to set budgets, train and compensate key personnel, enter into treaties, declare war, and conduct operations, especially when the polity is sharply divided on matters of policy. At this point, the rule of law is a useful device to limit discretion. But it is never powerful enough to dictate sound collective decision, all of which explains why politics contains at its core a contestable judgment beyond the power of any lowly political theorist to correct.

The Rule of Law is <br /> Indispensable but Insufficient
Picture provided by courtesy of Richard Epstein.
The Rule of Law is
Indispensable but Insufficient

No matter how clear and detailed the rules are, there remains some discretionary power for officials and judges. Only comprehensive system of individual rights protects us from their disregard.

From a Droplet of Revolution to an Engine of Progress
Picture provided by courtesy of Ismael Hernandez.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

From a Droplet of Revolution to an Engine of Progress

Left-wing theorists misunderstand human beings fundamentally by believing them to be determined by forces beyond their control. In truth, we are autonomous resevoirs of great potential.

von Ismael Hernandez

 

Lesen Sie die deutsche Version hier.

 

Mom left swiftly in the middle of the night, with men I had seen before. They were always in front of our modest home. Their vehicle ceased to be inconspicuous long ago, but now Mom had argued with them, and I was a terrified eight-year-old. Is Mom coming back? That night she returned and we did not see the men for a while, but we always sensed that they were closeby.

Many years later I found that they were FBI agents, following my father. I hated them. I blamed them for the poverty that surrounded us, the poverty that resulted from a society in transition from a backward, agricultural system to a more industrial one. I hated them for the troubled marriage between Mom and Dad, as she was in love with him while he seemed to be in love with revolution. The FBI was there on that night because we were a committed Marxist-Leninist family. That was part of my life as a red-diaper baby.3

The dreams of past beliefs

Our poverty was not fate but an imposition of a rigged system, one that kept us looking toward heaven while the capitalists were having a good time here on earth, as my dad used to say. The system we suffered reflected the nature of inexorable historical forces in dialectical motion. Our little Puerto Rican socialist party was at the center of events with universal implications. One day, our flag would fly victorious over the ruins of the old order, heralding the great Valhalla to come. Liberation from the shadows of the momentary unenlightened synthesis of history was imminent. Or so we believed.

We also believed that only by accepting that belonging to a social class defines identity could we come to understand our condition. We needed radical change, a collective effort that used us as faithful drops in the great wave of revolution. The effort was collective, as only the group could change the ideas, patterns of thought and modes of production arising from a system that determined everything. Meaning, purpose, and dignity resided in the wave of revolution, apart from which we were nothing more than curious accumulations of atoms destined to nothingness. I thought of myself as anything but unique and irreplaceable, and denied my moral capacity for self-realization. I did not perceive myself as intrinsically invested with the capacities of reason and volition that make me a subject with purpose, an engine of wealth creation. Only a drop in a wave …

From that perspective, we were informed by a radical skepticism about the notion of progress, human possibilities, and the role of the individual in transcending his reality. A sort of pervasive pessimism informed our thought about a system we perceived to have been forcefully contrived to serve the powerful. Today, the old-guard, orthodox Marxism-Leninism that guided my earlier upbringing seems to have run its course. Its assumptions, however, remain. Instead of a final conflagration, what has ensued is a steady stream of slight neo-Marxist cuts into the bleeding body of liberal society. From demolishing the capitalist system, we have moved to deconstruct the “Enlightenment project.” That is, we are expected to serve as catalyzing agents of the sudden rupture ushering in a new episteme, to use Foucault’s terminology.4

Although new forms of radicalism grew out of a disillusionment with orthodox Marxism, they retained its thrust toward activism and the belief that oppression brings alienation through the exercise of power. These new radicalisms have been deeply influential in culture, activism, education, and scholarship. In their disillusionment, these new forms of radicalism engendered other schools of thought, especially feminism, post-colonialism, and post-modernism.5

In a twist, there is now a desire to return to the younger Marx, the more Hegelian Marx, the Marx less interested in supposed scientific and inexorable historical processes and more interested in the question of ideas and identity. But not to the point of the postmodern erasure of identity or its elitist, academic attitude of nihilistic despair at the state of existence. Rather, this ends in a lack of a political solution. The postmodern critique has been infused with a tool for action, a new praxis, where identity is the weapon. Nihilistic despair by itself is inadequate. Identity, now collectivized and expanded into multiple dimensions, serves as the engine for social action under a new designation, that of “social justice.” As power and knowledge determine social reality, identitarian activism is the new sacrament conveying the indelible mark of authentic revolutionary zeal. The new “liberationist paradigm” is being internalized by the whole of Western culture. Its task of separating identity from biology remains, but identity is now seen as formed against the backdrop of oppressive social constructs, such as knowledge, language, and power, exploited by the powerful.6

The district of La Perla is one of the poorest and most dangerous areas in the Puerto Rican capital of San Juan. Image: Alamy Stock Photo.

 

Culture has become the great battlefront. Capitalism is regarded as the great enemy of true progress, the soul of the new social strictures. We remain coded within that system’s power dynamics and can operate freely only within the constraints of the assumptions, processes, and institutions of capitalism. In the new maze of this radical understanding of society, the individual remains a great obstacle to its transformation.

Old certainties turned upside down

Abandoning this project and returning to the person, conceived as unique and irreplaceable, with the imago Dei imprinted in every cell, is a major step away from the nightmarish idealism of socialism and its monsters.7 I abandoned them long ago, as I left the Jesuit seminary and journeyed from my island to America, ending up at the University of Southern Mississippi. I had entered the seminary because it was composed almost entirely of radicals with whom I could go to Sandinista Nicaragua to study philosophy and join the revolution. Our voyage to Nicaragua did not materialize after seven Jesuits were murdered in nearby El Salvador. Some of them were going to be my professors. The dream of studying at the feet of the masters of liberation theology dead, there was no desire to continue my seminary life. So, just imagine this young, black, communist kid who hates America landing in Dixie, the heart of capitalism! Coming to America confronted me with a new, unexpected reality, and I had the opportunity to challenge the safe assumptions of my ideology and found it wanting.

That encounter with liberty I experienced is the antidote against radicalism. Although my new home was imperfect, I discovered that I was not a drop, a replaceable component of a faceless mass of humanity. I am a free, volitional, and rational being who is capable of self-determination, not reducible to a mere component. Our task, now, is to help people discover the grandeur of their personal dignity, one that inheres in them, not one bestowed on them by external forces. When we create a context for our uniqueness to express itself, an amazing and undirected process of improvement begins.

Liberty, the sum of all our freedoms, can only come from reaffirming a new anthropology that recognizes our capacity to mine the dirt at our feet and, through the sweat of our brow and the insights of our minds, create value for ourselves and for others. When we create the context of liberty and systems that reflect the rational and volitional nature of every person, the poor discover a universe of possibilities and poverty ceases to be destiny.8 The poor cease to be merely mouths to feed, bodies to be clothed, and problems to be solved. Every small step in this direction opens up a tiny new realm for the possibility of truly autonomous action. The poor, now seen as engines of wealth creation, are capable of surveying the landscape of human needs and wants, and of overcoming poverty by incremental progress.

These engines can create a better state of affairs for all. We must believe this, proclaim it boldly, and teach it widely. Even more importantly, we must help the poor experience this reality through simple and practical projects that position the poor as protagonists of their own development, instead of remaining as scenery in the drama of historical forces outside their control or tokens of our magnanimity. We are not drops in an overpowering wave. We are an ocean of possibilities, each of us an independent point of departure. The bureaucracies of the welfare state are instances of the human desire to reduce the complexity of problems. They attempt to simplify complex human beings, whose strength resides in their complexity. It is easy to count the bags of food handed out to people, to deal with a case number. The welfare state becomes a counterfeit, the “colorless paraphrase of the fundamental category of human action,” 9 as von Mises put it.

When one is cured of the “utopia syndrome,” 10 where social existence is understood as a binary dialectical struggle between the oppressed and the oppressor, one can truly become an agent of change alongside the poor, as they struggle and fight for their lives. The problem with socialism and other radicalisms and the main reason for my abandonment of that ideology is not that the doctrine fell into impure hands; it is that these ideologies misunderstand the human person. As our society was saturated with a false anthropology, it began to see more money, better government programs and more “experts” ensconced in compassionate bureaucracies as the solutions to poverty. But the creation of spaces for human action, especially through entrepreneurial initiatives of young people, can better serve the enrichment of the poor, because the palpable realization of their potential confirms the fact that each person is a unique and irreplaceable sea of possibilities.

From a Droplet of Revolution to an Engine of Progress
Picture provided by courtesy of Ismael Hernandez.
From a Droplet of Revolution to an Engine of Progress

Left-wing theorists misunderstand human beings fundamentally by believing them to be determined by forces beyond their control. In truth, we are autonomous resevoirs of great potential.

Capitalism for the Poor
Picture provided by courtesy of Martin Burt.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

Capitalism for the Poor

Even supporters of capitalism often mistrust freedom when it comes to the economically most disadvantaged. Instead of poverty being managed from above, people need to be empowered to master their own lives.

von Martin Burt

 

Lesen Sie die deutsche Version hier.

 

Long have we lauded the capitalist economic framework for its ability to improve life for most dwelling beneath its invisible hand – by embracing new ideas, new combinations, and new leaders who innovate to deliver economic growth. Capitalism’s instability is seen as a necessary evil: failure foments innovation and eliminates inefficiency; poverty pushes us to aspire, to self-improve. This dynamic and often turbulent system is founded upon a single doctrinal truth: we believe in the private ownership of the means of producing wealth. This precept is buttressed by our liberal political framework which, above all, prizes the freedom of self-determination for individuals who are equal under the laws by which they consent to be governed.

This intersection between personal liberty and personal wealth is most visible in the vast range of wealth management tools available on the marketplace. While varying in the specifics, these tools all help high net-worth individuals visualize their wealth, define long-term goals, identify weaknesses, track progress, and connect to a network of dedicated support personnel. At their fingertips lies the power to take data-driven, real-time decisions to create a better tomorrow for you and your family.

Yet when it comes to poverty, why are we happy to discard our liberal ideals? Why do we insist on privatizing wealth but nationalizing poverty? At the other end of the income spectrum, there’s an equally vast range of poverty management tools which are not so much used by as applied to poor individuals – typically via one-size-fits-all state welfare programs or charity handouts. What would happen if we gave poverty back to the poor, allowing them to define and manage their poverty with the same freedoms and tools as the wealthy enjoy?

Cynics claim that poverty management is too big and complex a task to be delegated to poor people – perhaps believing they haven’t the skills and sense to succeed. After all, poverty is complex: income is only one of many moving parts, along with individual and structural deficits in security, health, sanitation, education, water and more. Perhaps cynics believe that all our ­anti-poverty efforts to date have been nothing more than tilting at windmills. Or, perhaps they fear that eliminating structural poverty means abandoning capitalism altogether – an unthinkable remedy to many (including myself).

A tool for self-diagnosis

And yet, when has capitalism ever shied away from complexity? Can we find a way to leverage the innovation and creativity inherent in capitalism to experiment with new ideas, and new combinations, to embrace new leaders in the fight against poverty? (Hint: the answer is yes.)

In less than one generation, we can eliminate global poverty. Yes, eliminate. Not reduce it or alleviate its effects. Zero poverty, everywhere and forever. This is no empty pledge – we’re already doing it across 50 countries with 450 organizations.

The app Poverty Stoplight allows those affected by poverty to analyze their situation and decide which challenges they need to address. Image: Poverty Stoplight.

My team at Fundación Paraguaya developed the Poverty Stoplight app, a color-coded tool defining what it means to be very poor (red), poor (yellow) and not poor (green) in 50 indicators across 6 areas: income and employment; health and environment; housing and infrastructure; education and culture, organization and participation; self-reflection and motivation. The indicators are familiar to anyone well-read in poverty theory, but we didn’t choose them. Our microfinance clients did. They also articulated the thresholds between red, yellow and green in each indicator. A pictorial guide helps households self-diagnose their poverty and produce a color-coded dashboard with detailed, real-time and easy-to-understand data about their strengths and weaknesses. From there, the app’s “Life Map” helps the household decide which areas to tackle, in what order, by when and how.

The Foundation’s role is to activate a family’s agency to get to green in all fifty indicators – either by connecting them to our evolving bank of solutions or other members of their community. After all, each family has its own constellation of deprivations, and no two families are poor in the exact same ways. Horizontal learning networks between families can be just as powerful as any state-run welfare program I’ve ever seen. Perhaps even more so.

You’ll notice that I’m using the term “family” as my unit of analysis (broadly defined as those living under one roof). It’s true that social scientists (and liberal political theorists) focus on individuals, not households – but it’s also true that we’re deeply embedded in kinship and social networks that shape our decisions and provide us with resources. We’ve seen that when families work together to self-diagnose their poverty and create their action plan, they start by leveraging idle resources within the household.

«In less than one generation,
we can eliminate global poverty.»

For us, talking about households leads to interesting opportunities. First, it changes the scale of the problem: at a rate of 3.8 people per household, Paraguay no longer has 7.5 million people but 1.9 million households. This is no sleight of hand; the perceived size of a problem directly and inversely changes our confidence that we can solve it.

Second, talking about households also opens the door to effective coordination between government and the charity sector. Most bring unidimensional solutions to a multidimensional problem: vaccines for kids; business training for women; agricultural skills for men. Yet none of these efforts unfold in a vacuum. Healthier kids equal more time for the mother to work; a more business-savvy mother finds better ways to sell her husband’s crops. If we expect families to work together to eliminate their poverty, the same should apply to organizations helping them succeed.

Mentoring families

Once we undertake this level of coordination, what would it take to eliminate poverty in Paraguay in five years? It’s not a rhetorical question. We have the self-diagnostic tool, mentoring methodology and data platform. Now we need the moral imagination and the political will to use them at scale.

I’ve done the math: 1.9 million families could get themselves to green in 5 years if we mobilized a network of 10 000 mentors who each supported 200 families. We don’t need to create new jobs – we just need to integrate new tasks into existing jobs. Paraguay has 340 000 public servants. Those already working closely with families (teachers, doctors, nurses) simply need the right training and incentives to deliver additional services. We’ve seen successful examples of this in other contexts: witness Finnish postal workers cutting customers’ lawns on Thursdays, or French postal workers checking on your elderly relatives on their rounds.

The private sector is the final piece of this multistakeholder, multisector approach to eliminating multidimensional poverty. For business, Poverty Stoplight is more than goodwill corporate charity – imagine handing your HR manager a powerful productivity tool to target issues that keep workers from reaching their potential. For the companies we work with, it’s not just a boost to Return on Investment – it’s a wake-up call. Imagine a supermarket finding 20 percent of staff were yellow or red in food. Or a bank seeing that 90 percent were red in savings. Now imagine supporting your suppliers to get to green so you can minimize future supply chain disruptions.

The challenges of tomorrow are immune to yesterday’s solutions. Irrespective of whether the capitalist economic framework created the problem in the first place, the weight of responsibility for eliminating global poverty is shifting from those with power and privilege to those without. Let’s embrace not only the idea of a world without poverty, but the challenge to play our part in making it happen.

Capitalism for the Poor
Picture provided by courtesy of Martin Burt.
Capitalism for the Poor

Even supporters of capitalism often mistrust freedom when it comes to the economically most disadvantaged. Instead of poverty being managed from above, people need to be empowered to master their own lives.
Free Markets Need Principled Entrepreneurs
Picture provided by courtesy of Andreas Widmer.
Dossier: «Wege zum Wohlstand»
Ausgabe 1106 – Mai 2023

Free Markets Need Principled Entrepreneurs

Laws and institutions can do little against cronyism and corruption. A culture based on trust, fairness and good faith is needed.

von Andreas Widmer

 

Lesen Sie die deutsche Version hier.

 

Growing discontent with economic conditions, even in the midst of unprecedented prosperity, is palpable in developed nations. There is a sense that even with healthy GDPs, the middle class is stagnating and our major cities are declining. We are frustrated by the dishonesty, exclusion, poverty, environmental degradation and social decline we see in our own communities and eager to make a change.

Because decline has happened gradually, citizens of Western nations may still think of the current system as unregulated free markets, but the reality is that cronyism and corruption abound. Lobbying, over-regulation, unnecessary licensing, and other processes are routinely used to stifle free competition and shut new-­comers out of the market. This market distortion hurts us all, but it especially affects the poor by excluding them from prosperity. It makes a zero-sum game out of what could be a win-win system. Freedom, competition and access are being lost. Yet, too often pundits blame the “free” market.

It is noble to want to do better. In blaming free ­markets, however, we are misdiagnosing the problem and stand to destroy the most effective engine of ­human prosperity and flourishing ever devised.

Markets bring dignity

Over the last 30 years, my career has taken me from all over Europe, to the United States and the developing world. I have experienced the highs and lows of the free economy, a good share of corruption and cronyism. While frankly acknowledging its potential for abuse, I still remain a champion of free and competitive markets. Not only does the free market deliver prosperity, it offers people the freedom necessary to pursue the goods of the human spirit, thus finding deep meaning and dignity in their everyday work and relationships.

The market cannot function in isolation, however, but must be supported by the rule of law, viz by robust legal institutions which don’t play favorites and keep the playing field level. Liberty and free markets also rely on a healthy civic culture that fosters habits of mind, such as honesty, goodwill, community spirit, and a sense of fair play. It is not the freedom of markets that we need fear, but rather the loss of market freedom as the decay of our legal and civic spheres gives rise to crony capitalism, which in turn is causing economic stagnation and breaking down societal trust. People and markets thrive in a climate of hope and trust. Nothing crushes both faster than cronyism, which creates a ­multi-tier system of justice and the dispiriting feeling that the deck is hopelessly stacked.

I was born in Lucerne, Switzerland, and, after a stint in the Swiss Guard, arrived in the US at the age of ­twenty-two. A college there gave me a scholarship even though I could not speak proper English. Later, I worked in Boston as an unpaid intern at an early internet startup – though I knew nothing about computer software. I was eager to learn, and helped bridge the personal computer to the internet, bring speech recognition to the market, and make website content easier to manage. I rose quickly through the ranks, admiring a system that encouraged and rewarded my hard work, spirit of ­service, and risk tolerance. I grew personally, gained ­experience and friends, mastered new practical skills, and learned to shoulder responsibility. I point this out because it’s a mistake to evaluate what people gain from markets solely in material terms.

A.B.M. Shamsuddin (right), owner of a garment factory, inspects as people work at a factory in Gazipur, Bangladesh, in March 2021. Image: Keystone/AFP / Munir Uz Zaman.

 

«This is just how business is done»

But I’m under no illusion that people always use their freedom well. Simply having freedom in the market creates a just society. I lost millions of dollars when one of the companies I helped build was defrauded in a bad sale. When I asked one of the fraudsters how he could do this to us, he looked me right in the eye and said, “It’s nothing personal. This is just how business is done.” The memory still freezes my blood, and the experience left me questioning the legitimacy of the market economy. Was the market, the world of entrepreneurship, exactly what its critics said: a kind of wild West, where the rich and powerful did what they liked with no regard for justice or the less well-connected?

Deeply stung by what had happened to me, my first instinct was to seek refuge in a highly regulated system. I thought that government intervention could prevent such a thing ever happening again and provide more fairness for all. However, I have many friends who fled socialism and speaking to them about their experiences dampened my view of central planning. Then, in the early 90’s, business travel brought me to several of the former Soviet states and I saw firsthand the desperation, poverty and deadened spirits the state-run economy created.

«Nothing enervates a company culture faster
than high ideals in the mission statement
and their violation in the boardroom.»

As I continued to seek answers, I agreed to lead a business strategy company and spun it out as an in­dependent company focusing on emerging markets. We researched and worked with private companies in places like Brazil, Jamaica, Macedonia, Serbia, Rwanda, Viet Nam, and Afghanistan. This experience gave me a window into key differences between developed and emerging economies and peoples. It opened my eyes to the cronyism that has corrupted the most affluent economies, and the dampening effect this has on economic development and human hope. It also showed me that free markets require legal as well as cultural support in order to function properly.

This soul-searching and study renewed my confidence in and commitment to the market economy. It is the system that best supports human flourishing and freedom, harnesses ingenuity, and more reliably serves the common good than any known alternative. This goodness, however, is the function of something deeper than business strategy or regulation. The market will only be as good and as free as the institutions and ­people that undergird it.

The “friend” who told me that defrauding my colleagues and me of our company was “just business” was deeply wrong. But I can understand why he thought so, given the way we portray business in popular culture and train future leaders in business schools. Even the current passion for business to “give back” implies that something has been unjustly taken away. Business schools teach strategy and tactics, but not the “why” of business and its potential contribution to the creation of stable family and community structures and public trust.

At the core of this issue is our culture’s perception of the deeper purpose of business and the economy. If we don’t start teaching that the best business leaders build for the long term and are conscientious, ethical, and capable of self-restraint, we’ll continue asking for trouble.

Corruption is a human temptation

The critics of capitalism sometimes speak as if dishonesty and greed appeared only in free economies – as if socialist and under-developed economies were not rife with corruption and avarice. The truth is that cronyism and corruption are human temptations, and our highly developed Western legal institutions will not save us if we degrade them by our own corruption. It requires a healthy culture to foster citizens who can readily resist such temptations.

In the developed nations we are quick to shake our heads at the corruption that often impedes third-world nations: bribery, nepotism, extortion. We are less keen to police or even see our own corruption: not only pollution and exploitation, but artificial distortion of markets, rent-seeking, and the cronyist collusion between government regulators and businesses that locks out the very newcomers we say we wish to lift out of poverty. The political structures and laws that we put in place make genuine inclusion impossible.

Even our efforts to “fight” poverty are infested with this cronyist mentality. Rich Western countries tell the poor Global South what they must do to earn their aid and create prosperity. Freedom and entrepreneurship are usually not on that menu – especially if it would mean granting access to our own markets. Yet when entrepreneurs in emerging markets are given the freedom to create, they generate lasting prosperity in their communities.

My friend Iqbal Quadir, founder of Grameenphone, helped me see this. While cell phones are practically ubiquitous now, thirty years ago they were not. His is a classic example of how entrepreneurs in a market economy anticipate new possibilities and help bring these about.

Quadir’s strategy was to connect hundreds of thousands of previously excluded low-income people to the global economy by putting simple cell phones in their hands. Grameenphone is a great free-market success story. It swelled the per-capita income and the GDP of Bangladesh. It also opened new markets for Telenor, the Norwegian telephone company. This is the kind of “win-win” solution the free market uniquely can make possible because it affords freedom to entrepreneurs and their communities to act on their ideas.

Our usual approach to “helping” the poor through economic development is very different. In emerging markets, most development experts are suspicious of entrepreneurs like Quadir and condescending about the abilities of people in poor nations. They prefer “managing poverty” to unleashing the power of free actors in a free market. This is perhaps the worst manifestation of Western cronyism: our approach to the developing world is supposed to help the poor but actually profits from their poverty.

Still, corruption is inevitable. I was once asked to pay a bribe to close a sale with a major national European telephone provider. It was, I was told, “standard procedure.” However, after a long and difficult discussion our team just couldn’t live with the bribe. We were so proud of our technology that we felt violated and ­refused to “pay to play.” That particular sale was lost, but we still eventually became the market leader. This gave me hope that overall, the market is still free enough to allow the best products to win eventually.

«In emerging markets, most development experts
are suspicious of entrepreneurs like Quadir and
condescending about the abilities of people in
poor nations.»

Why can we not tell more stories of entrepreneurs and business people upholding and celebrating competition and fair play, even at the cost of personal short-term benefit? Think of Bill Gates saving Apple from ­going out of business, or the founder of the US food company Chobani Yogurt giving his employees 10 percent of the company to keep the ownership structure productive and employees focused. A mentor of mine, Art ­Ciocca of The Wine Group, abolished sales commissions and incentives. Instead, he created a plan for each person in the company to benefit from joint success. And, of course, there is the Elsener family at Victorinox who avoided layoffs during the greatest crisis in their company by subcontracting their workers out and making up for the salary difference if the temporary work didn’t match what they made at Victorinox. The company came back stronger than ever and had the most productive and loyal employees.

The five pillars of Principled Entrepreneurship

Those kinds of stories, at least as common as the tales of corruption and cronyism, deserve more of our attention and praise. The question I wrestled with was: How do we create a system that gets the best of the free market and prosperity for billions of people without descending into the temptation of cronyism?

«Every person in a company is a creator
to be treated as such, rather than as
a mere means to an end.»

I think a good start is to practice and teach Principled Entrepreneurship. The freedom in free markets is an issue of the heart. Sound laws and policies are essential and foster trust when they treat rich and poor alike. But no law or policy will ever be able to fully compel the kind of fair play and goodwill that a healthy culture ­creates. Culture is formed in families, schools, churches, communities and associations. The business community can do its part in creating a positive culture by teaching and achieving all that it is capable of. In my book “The Art of Principled Entrepreneurship”, I define five pillars that help foster companies that create long-term, sustainable value and eschew rent-seeking and cronyism:

 

  1. The Economy Exists for People, Not People for the Economy: The essence of business is captured in the phrase “How may I help you?” By asking customers this classic question, a good business puts the human person at its center. It adds value for its customers and does so profitably through the work of its team. That is its raison d’être. Business must create goods which are truly good and services which truly serve.

 

  1. To Work Is to Create; to Create Is to Be Human: Creativity is not the sole provenance of the artist or musician. Invention, ingenuity, cheerful service and creating profitable solutions to customer needs are overlooked forms of human creativity. Work has the potential to make us more human. Every person in a company is a creator to be treated as such, rather than as a mere means to an end.

 

  1. Culture Eats Strategy for Breakfast: Culture is what we do when no one is looking, when virtue signaling is over and the “real” work begins. There is nothing more important to the long-term success of a company than a strong, sustainable culture. But beware: your cultural values aren’t printed in your mission statement. They’re what you actually do. Nothing enervates a company ­culture faster than high ideals in the mission statement and their violation in the boardroom.

 

  1. Principled Entrepreneurs Always Seek to Create Win-Win Solutions: As the Grameenphone example shows, the economy is not a zero-sum game. In a free market, the lasting path to prosperity requires considering long-term self-interest. Principled Entrepreneurs thrive on fair and open competition and win-win relationships, giving everyone access to opportunity and ­allowing for different outcomes that promote the common good.

 

  1. Always Think Like an Entrepreneur: “Entrepreneurship” is a mindset more than a role. Principled ­Entrepreneurs exist at all levels of a company and in every type of organization. What sets them apart is that they are always creators, not harvesters. Harvesters are short-term thinkers who focus on anything that will make them look good or make them money now. Creators have the mindset of constant improvement. They create successful product portfolios and brands that stand for superior value.

 

Free markets are part of an ecosystem. They depend symbiotically on free institutions and free, ethical people who recognize the human person as the center of the economy. A culture that conveys to each generation anew that investing in persons is the only opportunity that yields infinite returns.

Free Markets Need Principled Entrepreneurs
Picture provided by courtesy of Andreas Widmer.
Free Markets Need Principled Entrepreneurs

Laws and institutions can do little against cronyism and corruption. A culture based on trust, fairness and good faith is needed.

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