This book is about how to reduce poverty and improve global living standards. Topics include economic growth, income inequality, corruption, sustainable development, the future of technology, and much more.
Below is a sample of questions answered th...
The Industrial Revolution began in the late 1700s and early 1800s after the discovery of fossil fuels (coal, oil, and natural gas). Over the next two centuries, there was a quantum leap in technology. The steam engine, the combustion engine, trains, factories, cars, airplanes, and countless other marvels. These machines were powered by fossil fuels. Together, they helped spur the largest leap in economic growth humanity had ever seen.
The Industrial Revolution occurred concomitantly with Adam Smith's variant of capitalism.
How do we know economic growth after the late 1700s wasn't just from the discovery of fossil fuels? Perhaps the emergence of capitalism was a coincidence.
Recall the graphs in the previous chapter. Those countries had poor economies before they adopted free markets. And they had access to the same technologies and fossil fuels that capitalist nations did.
If technology and new energy sources are the sole causes of economic growth, then why don't countries that are opposed to free markets ever have strong economies? Before embracing capitalism, Russia, China, India, Bulgaria, Romania, Mongolia, Poland, Angola, Benin, and several other nations had the same access to technology and energy as the capitalist countries of the Western world. Yet they had stagnant GDPs.
Sometimes socialist economies grow quite a bit, but sooner or later, they crash. This happened to the Soviet Union. When it launched Sputnik—the first satellite—in the 1950s, Russia had a decent GDP. But as with all communist countries, it couldn't sustain past gains. In the 1980s and 1990s, GDP fell back to the impoverished levels typical of socialist states. That's when the people decided they had enough and switched to capitalism.
Today, North Korea has access to factories, computers, the internet, and fossil fuels. Yet it's still poor. It will remain impoverished until it embraces capitalism.
One could argue that the North Korean economy would function better if it kept socialism but ditched its dictatorship. However, there's a reason we always find socialism and totalitarianism together. A nation must have an authoritarian setup to ban people from creating businesses and conducting economic-related transactions. Individuals naturally want to acquire tools and property; to sell things; to expect compensation for their labor; to come to arrangements with other people (i.e. conduct business). Banning all business activity requires force. It requires an authoritarian government. Perhaps not in the case of tiny "utopian" communities, which are often democratic-socialist. But for entire nations, telling people they can't come to contractual arrangements with others requires force.
Socialism isn't a system based on what individuals are allowed to do. It's a system based on what individuals are not allowed to do. That's why it requires a police state.
I'm not talking about a social safety net, which doesn't ban people from starting private versions of whatever public institutions are in place. I'm talking about a country in which most industries are monopolized by government-controlled businesses and private competitors are banned outright. That's communism.
Anyway, every country that has ever liberalized its market experienced a drastic improvement in quality of life. Usually, modern technologies enter these nations long before the transition to capitalism. But they don't become affordable until the markets are freed.
Technology doesn't solve all problems by itself. Instead, its potential is unlocked when good policies are put in place. If technology was the key to everything, it wouldn't matter what kinds of laws were enacted. It wouldn't matter if we had a free market or a socialist one. A democracy or a dictatorship.
If a society has bad policies, it will have difficulty producing affordable goods and services regardless of the tools it has access to.
Take China for example. For over a thousand years, it had a tradition of closed markets. It was involved with the Silk Road for a time, but that was a far cry from the types of reforms advocated by Adam Smith. International trade, especially when controlled by the government, is not the same as free trade. Western Europe adopted capitalism in the 1780s. But it took the protectionist and traditional Chinese nearly 200 years longer. During those centuries, its economy stagnated, even though the nation had access to industrial technology. China could not make the products of the Industrial Revolution affordable and plentiful until it freed its markets. It finally did so in the late 1970s. That's when its economy boomed—immediately after capitalism.
Figure 10 shows the GDP per capita of Western Europe and China from 1820 to the present. If the discovery of fossil fuels and industrial technology were the primary causes of economic growth, then China's GDP should have taken off at the same time Europe's did. But that didn't happen. (Note that Europe's economic growth began sooner than 1820, but that's as far back as this graph goes.)
Figure 10
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Source: Angus Maddison. Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD. University of Groningen.
The difference between North and South Korea is another example. And unlike China and Europe, they're next to each other.
North Korea is an impoverished country compared to its southern neighbor. That's because North Korea's economic system is based on communism. It doesn't let people acquire property or start businesses. It doesn't permit free trade. Everyone works for the government, and the state is the only producer of goods and services. Without competing firms, there's no incentive to create better products at lower costs to keep customers happy. There's no incentive to invent new things for the same reason. Citizens can't vote with their money for the most innovative and efficient companies. That's why North Korea's standard of living is so low and why most things aren't affordable there.
By contrast, South Korea has free markets and is friendly to international trade. It welcomes foreign investors and allows its companies to relocate overseas. There are many competing businesses, and citizens are free to vote with their money. They buy from the most efficient, innovative firms—those that produce the best goods at the lowest prices. That's why things are more affordable in South Korea, why there's more innovation, and why it's wealthier than its northern neighbor.
Free markets and trade are essential for prosperity. Preventing people from owning businesses and forcing them to buy goods from the government is oppressive and anti-democratic. It's not surprising that such societies are so much poorer.
When North Korea adopts capitalism, its GDP will skyrocket, and so will the living standards of its people. We've seen this again, and again, and again, and again, each time a country embraces open markets.
