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 President Kwame Nkrumah of Ghana, left, and Queen Elizabeth II, in 1961. Nkrumah called himself the Redeemer, achieved political independence for Ghana, but wrecked the economy. FROM THE COMMANDING HEIGHTS |
"No new light," wrote the Economist Paul Samuelson in 1976, "has been thrown on the reason why poor countries are poor and rich countries are rich." In his new book, The Wealth and Poverty of Nations, David S. Landes, Coolidge professor of history and professor of economics emeritus at Harvard, attempts to remedy this situation. And in The Commanding Heights, Daniel Yergin, president of Cambridge Energy Research Associates, and his colleague at that consulting firm, Joseph Stanislaw, tackle the same question.edy this situation. And in The Commanding Heights, Daniel Yergin, president of Cambridge Energy Research Associates, and his colleague at that consulting firm, Joseph Stanislaw, tackle the same question.
Although none of the three is a right-wing ideologue, their conclusions are undeniably conservative. Landes believes that Western values--especially hard work, the development of scientific knowledge, and a passion for progress--are the keys to a nation's success. Yergin and Stanislaw chronicle the battle in this century between governments and markets, which, they assert, markets are winning--to the benefit of all economies, poor or rich. They see a rebirth of "traditional liberalism"--liberalism in the sense that John Locke, Adam Smith, John Stuart Mill, and modern Europeans define it--with an emphasis on property rights and on individual freedom. "It means," they write, "less government, not more."
Yergin and Stanislaw also see history coming full circle. The twentieth century "opened with markets ascendant and an expanding global economy, buttressed by a spirit of optimism." It degenerated into war and misery, and the state expanded its responsibilities in an effort to soothe and restore dignity. "The decades after World War II were years of recovery and great growth," but, beginning with the oil crises of the 1970s, voters in the industrial world began to sour on government-imposed solutions. "For the first time in decades," the authors write, "governments would seek to reverse direction--to shed assets and to confront at least the idea of giving up some control." Thus, today, it is markets that control the commanding heights.
The Wealth and Poverty of Nations, by David S. Landes, JF '53, Ph.D. '53 (Norton, $30). The Commanding Heights, by Daniel Yergin, G '71, and Joseph Stanislaw '71 (Simon & Schuster, $26). |
Yergin and Stanislaw properly give credit to intellectuals for this change. "Underlying all this," they write, "has been a fundamental shift in ideas." They quote John Maynard Keynes, the great British economist, writing in 1936 to the effect that ideas "are more powerful than is commonly understood. Indeed, the world is ruled by little else. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribblers of a few years back.... Sooner or later it is ideas, not vested interests, which are dangerous for good or evil."
The "academic scribbler" who had the most influence on market-oriented "madmen" such as Ronald Reagan and Margaret Thatcher was probably Frederick von Hayek, winner in 1974 of the Nobel Prize in economics, an honor he shared that year with Gunnar Myrdal, the preeminent Swedish sociologist and follower of Keynes. Hayek, an Austrian who later taught at the University of Chicago, wrote The Road to Serfdom (1944), which Keynes read on his way to the crucial Bretton Woods monetary conference and pronounced ("more than oddly," write Yergin and Stanislaw) "'a grand book'" with which "he was in 'deeply moved agreement.'"
Actually, he wasn't. Hayek's book was a blistering attack, both economic and moral, on central planning by governments. Keynes was to write to Hayek, "You greatly under-estimate the practicability of the middle course....What we want is not no planning, or even less planning, indeed I should say that we almost certainly want more." But Hayek, in the face of the conventional wisdom of the 1930s and 1940s, argued that planning is impossible since bureaucrats can never have enough information to make their decisions. By contrast, the price system is an efficient means to send signals throughout the economy.
"The marvel," Hayek wrote, "is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction."
Hayek died in 1992, at the age of 93, but he lived long enough to see his vindication. "What's the single most important thing to learn from an economics course today?" the authors quote Lawrence Summers, Ph.D. '82, the former Ropes professor of political economy at Harvard and now Bill Clinton's deputy Treasury secretary, as saying. "What I tried to leave my students with is the view that the invisible hand is more powerful than the hidden hand. Things will happen in well-organized efforts without direction, con- trols, plans. That's the consensus among economists. That's the Hayek legacy."
It's also worth quoting Summers--a mainstream economist who is the nephew of two Nobel Prize winners, Samuelson and Kenneth Arrow--at length on the market revolution at the heart of the Yergin-Stanislaw book.
Three things happened to change people's thinking in recent years. First, they have seen how badly the public sector can mess things up. With competition, things seem to go better. Innovation happens....Secondly, markets are able to do things that people used to think required government coordination. Markets make it possible to rent videos in every town in America, with no public involvement. There is now a skepticism about the view that you have to have a public sector to get things done. And thirdly, a gradual refinement in economic science has led to an upward revision in elasticities, in how systems respond. There is a greater response to tax rates than people used to think. If you interfere with property rights, business responds by going elsewhere. Maybe it is because economies are more global.
Yergin--who won the Pulitzer Prize for his book The Prize: The Epic Quest for Oil, Money, and Power, and has published books in the past on the Cold War, Russia's future, and the energy crisis--and his collaborator construct their book geographically, with chapters on the market transformations in Britain, China, India, Europe, and so on. But their message is the same: privatization, free trade, lower taxes, and a less intrusive government--"traditional liberalism"--are recognized as the foundation for prosperity in the modern world. After the war, Keynesian central planning seemed unassailable, but, while the "Keynesian 'new economics' from Harvard may have dominated the Kennedy and Johnson administrations in the 1960s,...it is the University of Chicago's free-market school that is globally influential in the 1990s."
Landes looks at the same question--how do nations prosper?--and comes up with a different answer. Where the Yergin-Stanislaw book is tightly analytical, sweeping the reader along with a sustained argument, The Wealth and Poverty of Nations is more discursive, but a complete joy to read. It's history loaded with pleasurable insights.
About the Egyptian cotton industry: "In 1822 [Louis-Alexis] Jumel transplanted a bush he had found on the Ile Bourbon (later renamed Réunion) and developed for Egypt the cotton we know by his name." But the British were vexed by "barriers to import of foreign cotton goods into Egypt." So, they "forced free trade" on Muhammad Ali, the Egyptian who controlled the cotton business, and the home-grown industry was smothered. "Scholars of 'progressive' bent see this as the assassination of Egypt's industrial revolution." Landes does not. "Egypt was not ready then. Is it ready now?"
About the spice trade: "People of our day wonder why pepper and other condiments were worth so much to Europeans of long ago. The reason lay in the problem of food preservation in a world of marginal subsistence." Spices in medieval Europe were a necessity, "as their market value testified." Since the problem of odor and spoilage was worse in warm countries than in cold, their cuisine was hotter, spicier. "Stronger spices [also] worked to kill or weaken the bacteria and viruses that promoted and fed on decay. Tabasco and other hot sauces, for instance, will render infected oysters safer for human consumption."
About Chinese economic progress: It was thwarted by anger at foreigners. "Much of this indictment," writes Landes, "was justified: superior power does not bring out the best in people. But insofar as it shifted responsibility for native ills, it was a self-defeating escapism....All this anger blocked modernization.... Steamboats were equated with gunboats-- instruments of penetration and oppression." The result was that "factory industry barely had a foothold at the end of the nineteenth century."
About climate and economics: Landes quotes a contemporary Bangladeshi diplomat as saying, "In India and other tropical countries I have noticed farmers, industrial labourers, and in fact all kinds of manual and office workers working in slow rhythm with long and frequent rest pauses. But in the temperate zone I have noticed the same classes of people working in quick rhythm with great vigour and energy, and with very few rest pauses....This spectacular difference in working energy and efficiency could not be due entirely or even mainly to different levels of nutrition."
These excerpts should give you an idea of the thrust of Landes's argument. He is a social and cultural determinist--unsentimental but sympathetic. He believes in "the ultimate advantage and beneficence of scientific knowledge and technological capability"--a notion which, he says, "is today under sharp attack, even in the Academy." Also controversial today is his belief that "the key factor" behind the dissemination of this knowledge has been Western civilization. Those who deny this are either millenarians "who look to an apocalyptic revolution to right wrongs and generalize happiness" or "nostalgics, harking back to the mythic blessings of stateless, communal, primitive societies" and who are "pissing into the wind. This is not where the world is going."
The world seems to be going in the direction that Yergin and Stanislaw find so exhilarating--toward less government and freer markets. Landes, however, is not ready to embrace this view uncritically. "It always helps to attend and respond to the market," he writes. "But just because markets give signals does not mean that people will respond timely or well. Some people do this better than others, and culture can make all the difference."
Culture again. "History tells us," writes Landes, "that the most successful cures for poverty come from within. Foreign aid can help, but like windfall wealth, can also hurt....No, what counts is work, thrift, honesty, patience, tenacity. To people haunted by misery and hunger, that may add up to selfish indifference. But at bottom, no empowerment is so effective as self-empowerment."
In other words, markets seem to work better than planning, but markets aren't everything. Not only do they fail without the cultural necessities that Landes enumerates, but, paradoxically, they fail without strong governments to back them up. Yergin and Stanislaw, for example, quote Moises Naim, a Venezuelan economist, as saying, "The discovery of the market will soon force Latin American countries to rediscover the state." In other words, markets can't work with a malfunctioning government; they require respect for property rights and the rule of law, a regime that helps the very poor and that regulates business judiciously.
Yergin and Stanislaw don't deny the necessity for a mixed economy, one in which government and free markets both play a role. The role of the state, they say, "is being redefined, and the realm of the market is now expanding. Hard questions result: What services should the state provide? What is its welfare role? And how much less 'mixed' will the economy be?" They don't have the answers, but they have performed an extremely valuable service in defining the current condition--the dominance and success of markets--and how we got there. And, in the end, both of these superb books are right: markets plus culture determine, as Landes's subtitle has it, "why some are so rich and some so poor."