Capitol Ideas: The Law of the Land
Bethell, Tom
"Capitol Ideas: The Law of the Land" by Tom Bethell The Law of the Land Rule of law as a precondition of economic growth....
...The Statistical Abstract of the United States claimed in the same year that per capita...
...The legal enforcement of contract is also critical...
...As late as 1989, when the Berlin Wall was falling, Paul Samuelson wrote in his famous textbook (13th edition) that "measured Soviet real GNP has grown more rapidly over the long run than have most of the major market economies...
...Yasir Arafat legitimized his authoritarian rule with an election for which he did not have to campaign, and was rewarded with a shower of foreign-aid dollars...
...Property rights can be sliced away incrementally by the state...
...Journalists, policy-makers and the academy have barely begun to come to grips with the wealth of new data in these studies...
...Capital markets are global, technology is easily transferred from one place to another...
...Theorists in the 195o's and 196o's then tried to patch things up by positing technological change that occurred "in an unexplained manner"-an obviously unsatisfactory way of explaining something...
...One suggestion is that economics for a long time "neglected the study of growth...
...Throughout the entire postwar period, theories of economic growth have been devoid of political and legal institutions...
...The belief was particularly in fashion just as the colonial empires were breaking up...
...Here we have a president sued for sexual harassment who is the beneficiary of a "gender gap...
...That is why it is important to consider tax rates and government share of GNP...
...Last January, the 44 In the 1970's, Robert Barro said, 'no one mentioned property rights all' in the context of economic growth...
...CAPITOL I D E A S by Tom Bethell The Law of the Land Rule of law as a precondition of economic growth...
...I'd vote for that...
...In fact, the gap between the richest and poorest countries is now wider than at any time in history-a "puzzle," the magazine added...
...But economists took that base for granted without analyzing it, and then made the mistake of imagining that their own field was more selfcontained and self-sufficient than it really was...
...The Voting Rights Act strictly forbids any educational qualification...
...its restrictions on trade unions, and its willingness to suspend economic liberties "if a citizen opposes government policy," accounted for its lower Freedom House standing...
...democracy only ambiguously so...
...This should make us wonder about everything else these sources tell us...
...For years, most of the economics profession believed that the growth rate of the Soviet Union and other collectivist economies was more rapid than that of free-market economies...
...A collateral finding of its study is that foreign aid is not helpful (to the recipients...
...Barro told me that when he was at graduate school in the 1970's "no one mentioned property rights at all" in the context of economic growth...
...Using data from a wide variety of countries, Barro checked to see empirically which variables were well correlated with growth and found that one of the best measures was the "rule of law" index...
...The data about Soviet economic growth was calculated by the CIA, and now appears to have been "off" by a factor of ten...
...Heritage aims to publish annual versions...
...The antecedent and more fundamental error was that Western policymakers and academics had concluded that central planning produced a more rapid growth than capitalism...
...The most detailed and exhaustive study, Economic Freedom of the World, 1975-1995, was carried out by the Fraser Institute of Vancouver, and published earlier this year...
...19 The American Spectator . August r 9 9 6...
...In 1987, America's leading economics textbook (by Campbell McConnell) claimed that "the Soviet growth rate has generally exceeded that of the United States in the post World War II period as a whole...
...Omitting the United Arab Emirates (where high oil revenues and low population have generated inflated figures), Hong Kong in 1994 also had the second highest gross domestic product per capita in the world...
...Did they know something we have forgotten...
...Farmers know that soil must be prepared before seed can be sown, and the framers of the U.S...
...It ranked economic freedom in 103 countries and found a strong correlation between freedom and economic growth...
...And how about a requirement that only taxpayers should be allowed to vote...
...If the government can capture for itself a large share of our earnings, economic freedom is curtailed to that extent...
...Tom BETHELL is a media fellow at the Hoover Institution and TAS's Washington correspondent...
...The Fraser criteria are surely preferable here...
...The State Department is beginning to realize that elections may be necessary but they are not sufficient...
...It involved the efforts of institutes from eleven countries and some forty-five economists, including Milton Friedman, Douglass North, and Gary Becker...
...One of the most interesting findings is that Hong Kong came out top of the list in both the Fraser and Heritage studies...
...Daniel Patrick Moynihan has raised questions about this peculiar episode, but those who swallowed the numbers whole seem content to forget the whole embarrassment...
...Voting without constitutional restrictions and secure property rights merely politicizes life and puts everything up for grabs, including people's savings...
...The finding is a dramatic one, because the country is on the verge of being taken over by Communists...
...Maybe they will keep hands off...
...Douglass North pointed to the absence of legal institutions in neoclassical economic theory, and when he won the Nobel Prize (in 1993) it was a sign of things to come...
...Constitution knew that the structure of government was not adequately described by voting...
...Low inflation and low government consumption were also well correlated with growth...
...He politely noted the "modeling deficiency" of earlier theories based on the arguments of Ricardo and Malthus...
...Trade union activity itself curtails economic liberty, and it's not clear that the freedom to denounce the government with impunity really is an economic liberty...
...South Korea, twelfth in the Fraser study, was rated "mostly not free" (below Ivory Coast, India, and Mexico) by Freedom House...
...What may be the leading economy in the world will soon be at the mercy of the worst form of government...
...From Azerbaijan to Benin, from Serbia to Sudan, tyrants galore have learned how to get themselves elected...
...International Country Risk Guide (Syracuse, N.Y...
...In reality the theory was an unacknowledged "superstructure," erected on the particular political and legal foundations of eighteenth-century Britain...
...the Heritage Foundation has conducted a similar study, with similar conclusions...
...To that extent they believed that growth was something that could be achieved by force...
...I n May, the Economist published a cover story entitled "The Mystery of Economic Growth," pointing out that real growth still has not occurred in most parts of the world...
...They would not have thought so in eighteenth-century England...
...Japan's score ranged from seven to two, depending on the expert...
...It's amazing that economists have only recently appreciated this key point...
...Singapore's low tax rates and small share of GNP consumed by the government explained its high Fraser rating...
...There were property qualifications, and of course welfare recipients and (dare I say it) women were not allowed to vote at all...
...The Soviet Union was already doing fine without these bourgeois institutions...
...This has been shown since 1991 in Russia, where inflation has destroyed the value of the ruble and wiped out the savings of pensioners...
...And the underlying neoclassical theory affected a fine neutrality between the merits of state control and private property...
...If property is being restored, the prestige of democracy as the universal cure-all is declining...
...policymakers have done much harm with their simplistic catechism of democracy...
...Freedom House in New York also carried out a World Survey o f Economic Freedom, 1995-96, finding that the twenty-seven countries it rated as "free," with 17 percent 18 August 1996 • The American Spectator of the world's population, produced 81 percent of the total world output...
...probably an impartially applied literacy test should be restored...
...Robert Barro of Harvard recently investigated "The Determinants of Economic Growth" for lectures at the London School of Economics...
...The Soviet Union abolished it, and it is now being restored to its rightful place at the foundations of economic analysis...
...Twothirds of the world's population live in "not" or "mostly not" free economies, and they produce only 13 percent of the world's goods...
...A11 that is now changing...
...As for American voting today, it has all but run amok with provisions for the recipient classes to register in welfare offices and the refusal of several states even to ask voters for identification...
...Economics is largely about the exchange of goods, and contract is the legal institution that facilitates exchange...
...Now it's a big topic...
...And a good thing, too...
...Sometimes I think that economists have shied away from admitting that the law is more fundamental than "the economy," and of course Marx denied it...
...Many of the newly emerging nations in the postwar period adopted statist policies at our recommendation...
...So what is the problem...
...Singapore came in second in both the Fraser and Heritage studies, but much lower in Freedom House's (only "partly free," below Ghana and Uruguay...
...GNP in East Germany was higher than in West Germany...
...That is not really true, however...
...A11 of the studies stress the importance of securely held private property...
...The Soviet Union having collapsed, theory is running hard to catch up with practice...
...hence their nostalgia for Communism...
...suited to the eighteenth century, maybe, but no longer needed in the modem world...
...Most economists now realize that performance depends not just on abstract "inputs" ("capital," "labor") but on a definite political structure that establishes economic liberty...
...Backward economies would grow more rapidly than mature ones -the Law of Diminishing Returns would see to that...
...What we have forgotten is that the advanced economies of Western Europe and the U.S...
...also publishes indices for international investors, assessing the effectiveness of law enforcement, the respect for contract, and the general security of property rights in different countries...
...if not, the theory that growth is directly proportional to economic freedom will be put to a dramatic test...
...became advanced because the rule of law was established before the franchise was expanded...
...The great difficulty is that devising an index is partly subjective...
...A few years earlier, the same reference work (published by the Commerce Department) found that East Germany, per capita, was more prosperous than Japan...
...Now it's a big topic.' Economist asked a panel of experts to rate twenty countries on a scale of one (collectivist) to ten (free...
...For a long time, no thought was given to property and the rule of law, which were considered irrelevant...
...Economic theory as understood until recently has suggested that growth depends on two things that are readily available everywhere: capital and advanced technology...
...More recently, a number of institutes have begun to undertake the task of establishing an index of economic freedom, and measuring the degree of it in different countries...
Vol. 29 • August 1996 • No. 8
