The current economic crisis afflicting the world (not just the United States) makes this an excellent moment to read and reflect on William Bernstein's superbly argued thesis about the nature of prosperity.
Using historical, economic and sociological analyses and case studies, Bernstein develops a persuasive case for four primary factors contributing to economic growth:
1) Respect for property rights and the rule of law;
2) Efficient capital markets;
3) Respect for scientific rationalism; and
4) Effective networks of transport and communication.
Bernstein argues that natural resources, per se, are not the secret to a nation's economic success and that prosperity does more to engender democracy than democracy does to engender prosperity.
In synthesis, his argument places the burden of economic growth on institutional factors in a given national economy, not on ideals and not on mother lodes of minerals, even gold, silver and oil.
In the 17th century, for example, Spain destroyed its imperial stature by relying far too heavily on Latin American gold and silver while allowing other nations, notably Holland and Great Britain, to become the world's leading banking nations (and thereby capturing much of Spain's booty from the New World.) Further, Spain came late to the rule of law in the sense of placing the law in the hands of an independent judiciary, which in turn would protect the patent and copy rights of innovative scientific thinkers. The mentality of the Spanish, and their former colonies, is sometimes described as "rentier," meaning that the economic game is one of exploitation of resources more than the development of economic systems--principally market systems that are open, fairly regulated, and efficient.
That the rentier mentality is a dead end can be illustrated fairly easily. Switzerland, with no natural resources to speak of, is a wealthy nation. Nigeria, with fabulous oil reserves, is not. The same applies to Mexico, Venezuela, Iraq and Iran.
Western Europe, Japan, and the United States, Canada, Australia and a handful of lesser nations and regions possess Bernstein's critical four factors in abundance and sufficient natural resources to make them astonishingly wealthy in historical terms. Curiously, wealth at the European/US level is generated at a fairly constant rate of 2% growth per year, including peaks and valleys. That's not an overwhelming figure. Higher growth rates do manifest themselves at certain points in a given nation's evolution, but the tendency is to settle around the 2% rate.
Judging by Bernstein's criteria, where have the U.S. and other advanced economies gone wrong in the last two or three years? It would seem that we've stumbled in two areas:
First, our regulatory regimes vis-a-vis financial systems has been negligent to the point of making "rule of law" fairly meaningless. The results we face today make it clear that it should not be "legal" to lend money to home buyers or credit card users who manifestly cannot pay the loans back and then, having bundled the loans, resell them to third parties, who end up holding the [empty] bag.
Second, we have permitted our regulatory negligence to generate not just bad loans but bad capital markets, undermining confidence in these vital economic systems.
As Bernstein points out again and again, it is impossible to succeed economically without all four institutional factors functioning well. Remove one leg from the chair and it wobbles badly. Remove two legs and it collapses entirely.
Bernstein's concluding chapters are fascinating examinations of a fundamental question: does prosperity guarantee, or generate, happiness? His answer is somewhat mixed. On the whole, the developed nations and the world at large are better housed, medicated, and fed than they were 500 years ago. But a true sense of well-being requires more than material inputs. It's important to survive; it's also important to have the opportunity to express oneself in a condition of relative freedom, and freedom, in turn, is essential for scientific rationalism to flourish and technological advances to occur.
In comparing US and European prosperity, Bernstein finds that the US cycles about 30% of its Gross Domestic Product through government agencies. In Europe the figure approaches 50%. Some Europeans do seem more content as a result of this, but there is a trade-off in economic growth, where Europe lags the US slightly. So Americans have more opportunity to grow and keep their economy for themselves while Europeans probably have a greater sense of security that their fundamental health, housing, and employment needs will be met by governments that take a large share of the economic pie.
One of the benefits of a crisis is that we are forced to reexamine our premises and behavior and try to understand complex realities that we have hitherto not come to terms with. Bernstein does everyone a great service by placing today's problems in a sweeping historical and theoretical context. This is the book of a polymath and, unbelievably enough, an M.D. polymath at that.
Causes Robert Earle Supports
World Wildlife Fund