The financial crisis was supposed to have
discredited the “Anglo-Saxon” model of economic management as
surely as the fall of the Berlin wall discredited communism. Yet
last week’s numbers on economic growth show emphatically the
opposite. The British economy is up 3.2 per cent in a year, having
generated an astonishing 820,000 jobs. We are behaving more like
Canada, Australia and America than Europe.
If you think one year is too short, consider that (as David Smith pointed out in the Sunday Times)
Britain’s GDP is now 30 per cent higher than it was in 1999,
whereas Germany, France and Italy are just 18 per cent, 17 per cent
and 3 per cent more prosperous respectively. For all Britain’s huge
debt burden, high taxes and chronic problems, we do still seem to
be able to grow the economy. Thank heavens we stayed out of the
euro.
The performance of the euro economies continues to be dismal. Last week’s news was that France is flatlining,
Germany shrinking slightly and Italy back in recession for its
third dip. Spanish unemployment is just a tad under 25 per cent.
The Greek economy continues to contract; even the Dutch economy is
bumping in and out of growth. The eurozone as
a whole is flat and teeters on the brink of debilitating
deflation. This at a time when the world economy, driven by Asia
and Africa, is roaring ahead at a forecast 3.7 per cent this year,
according to the International Monetary Fund.
The euro is not primarily to blame for eurosclerosis; there has
been plenty wrong with domestic policies in the individual
countries, though joining the euro allowed them to conceal their
mistakes for a while. But all the lessons point in the same
direction: public spending and dirigisme to stimulate growth does
not work, while limiting taxes and regulation to unleash growth
does.
Patrick Minford and Jiang Wang produced clear evidence a few years ago that “the
surest way to increase economic growth is to reduce government
spending and taxation”: as figures from the Organisation for
Economic Co-operation and Development confirm, a 10 per cent
increase in public spending produces a 0.5-1 per cent decrease in
growth rates. The encouragement of free enterprise is what has
always brought growth, from ancient Phoenicia to modern Mauritius,
from Renaissance Italy to Silicon Valley.
Poland’s economy has doubled in size since the fall of
communism, while Ukraine’s has stagnated, because Poland made a far
more urgent dash in the direction of free markets in labour,
capital and trade. Estonia has been the top performing of the
former Soviet colonies because Mart Laar, the historian who became
prime minister in 1992 at the age of 32, had read only one book on
economics, Milton Friedman’s Free to Choose and
was in his own words “so ignorant” that he thought
flat taxes, privatisation and the abolition of tariffs and
subsidies constituted normal policy in the West.
Mr Laar ignored the warnings from most Estonian economists, who
told him what he proposed was as “impossible as walking on water”.
There’s a common theme here. Germany’s postwar economic miracle
happened because Ludwig Erhard abolished rationing and freed up
markets in the teeth of expert advice. When the American general
Lucius Clay said his experts thought these policies were a bad
idea, Erhard replied “so do mine”, and did it anyway. When Sir John
Cowperthwaite turned Hong Kong into a low-tax, free-trade enclave
in the 1960s, he had to turn a blind eye to the instructions of his
LSE-educated masters in London. Indeed, he kept failing to send
them data so they could not see what was happening.
A recent analysis by three German economists for
the think-tank Politeia looked at the reasons for the economic
transformations of Ireland (from 1986), Sweden (1991), New Zealand
(1988), Chile (1974) and Brazil (1990), all of which resulted in
sustained bursts of rapid economic growth after long spells of
stagnation, and concluded that the causes in every case were
deregulation of goods and services markets, liberalisation of
labour markets, abolition of tariffs or subsidies, privatisation of
state enterprises and the encouragement of competition.
“Anglo-Saxon” stuff in every case.
Sweden is an interesting case, because many people still think
of it as showing an alternative route to prosperity than the
Anglo-Saxon one. Nima Sanandaji, a Kurdish-Swede, demonstrated the very opposite in a paper for
the Institute for Economic Affairs two years ago. He concluded:
“Sweden did not become wealthy through social democracy, big
government and a large welfare state. It developed economically by
adopting free-market policies in the late 19th century and early
20th century.”
Between 1870 and 1936, when it was a poster boy for Adam Smith,
Sweden had the fastest growth rate in the industrialised world and
spawned Volvo, Ikea, Ericsson, Tetra Pak and Alfa Laval. Then
between 1950 and 1990 it went from having an unusually small state
sector to having a very big one. The result was currency
devaluation, stagnation and slow growth, culminating in a
full-blown economic crisis in 1992 and a rapid fall down the
economic league tables. When it then cut taxes, privatised
education and liberalised private healthcare in the 1990s, it
rediscovered growth and sailed through the financial crisis in
pretty good shape.
Entire continents teach the same lesson. South America and now
Africa have both confirmed the hypothesis that state-directed
commerce leads to stagnation while free enterprise causes rapid
growth.
As the economic historian Deirdre McCloskey argues in her forthcoming
book Bourgeois Equality, the chief beneficiaries
of free enterprise revolutions are the poor. As a result of what
she calls “the great enrichment” since 1800, she says “millions
more have gas heating, cars, smallpox vaccinations, indoor
plumbing, cheap travel, rights for women, lower child mortality,
adequate nutrition, taller bodies, doubled life expectancy,
schooling for their kids, newspapers, a vote, a shot at university
and respect. Never had anything similar happened, not in the glory
of Greece or the grandeur of Rome, not in ancient Egypt or medieval
China.”
When Mahatma Gandhi was asked what he thought about western
civilisation, he said it would be a good idea. Likewise,
continental Europe’s approach to free enterprise should be to “give
it a try”. How many more years of self-imposed depression must the
European continent suffer before its political masters get over
their ideological prejudices against Anglo-Saxons and try reading a
little Adam Smith, Friedrich Hayek or Milton Friedman?"
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