Adam Smith’s 300th birthday: the market economy as the only effective tool to fight poverty (Part 3)
20 June 2023
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11 November 2024
…continued from Part 2.
This article is based on a lecture Dr Zitelmann gave at the German Bundestag on 12 June.
Smith has been proved right
Smith predicted that only an expansion of markets could lead to increased prosperity – and this is precisely what has happened since the end of socialist planned economies. In China alone, the introduction of private property and market reforms have reduced the number of people living in extreme poverty from 88 percent in 1981 to less than one percent today. When I asked free-market economist Weiying Zhang of Peking University how relevant Smith was for China, he replied: “China’s rapid economic development over the past four decades is a victory of Adam Smith’s concept of the market.” Contrary to prevailing interpretations in the West, economic growth and declining poverty in China was not “because of the state, but in spite of the state,” explained Weiying Zhang, and was caused by the introduction of private property.
Another recent example of the superiority of the market economy is Vietnam.[1] From a country that, before the launch of the Doi Moi free-market reforms in the late 1980s, was unable to produce enough rice to feed its own population, it has become one of the world’s largest rice exporters – and a major electronics exporter.
With a per-capita GDP of US$98, Vietnam was the poorest country in the world in 1990, behind Somalia (US$130) and Sierra Leone (US$163). Before the economic reforms began, every bad harvest led to hunger, and Vietnam relied on support from the UN’s World Food Programme and financial assistance from the Soviet Union and other Eastern Bloc countries. As late as 1993, 79.7 percent of the Vietnamese population were living in poverty. By 2006, the rate had fallen to 50.6 percent. Today, it is only five percent.[2]
Vietnam is now one of the most dynamic countries in the world, with a vibrant economy that creates great opportunities for hardworking people and entrepreneurs.
The fact that economic growth – and not, say, redistribution or rule by government edict – points the way out of poverty has been confirmed time and again in recent decades. In 1989, Poland was one of the poorest countries in Europe. The average Pole earned less than US$50 a month – which wasn’t even equivalent in value to one-tenth of what people in the Federal Republic of Germany were earning. Even taking into account differences in purchasing power, in 1989 a Pole earned less than one-third as much as a West German. Poles were poorer than an average citizen of Gabon, Ukraine, or Suriname. Poland’s income lagged behind even its communist peers: its GDP per capita amounted to only half of the level of income in Czechoslovakia.[3]
In 2017, the economist Marcin Piatkowski published a book, Europe’s Growth Champion, in which he takes stock of 25 years of Polish reforms: “Yet, twenty-five years later it is Poland that has become the unrivalled leader of transition and Europe’s and the world’s growth champion. Since the beginning of post-communist transition in 1989, Poland’s economy has grown more than in any other country of Europe. Poland’s GDP per capita increased almost two-and-a-half times, beating all other post-communist states as well as the euro-zone.”[4]
According to data from the World Bank, GDP per capita in 1989 was 30.1 percent of the corresponding figure in the U.S. and had risen to 48.4 percent of the U.S. level by 2016. Such gains made themselves felt in people’s lives. The income of Poles grew from about USD 10,300 in 1990, adjusted for purchasing power, to almost USD 27,000 in 2017.[i] In comparison with the EU-15, the income of Poles was less than one-third in 1989 and had risen to almost two-thirds in 2015.
Distrust of the state
While Karl Marx believed that the condition of the poor could only be improved by abolishing private property, Smith believed in the power of the market. He was not an advocate of a libertarian utopia without the state – he believed that governments had important functions to fulfill. Nevertheless, in 1755, two decades before The Wealth of Nations appeared, he warned in a lecture:
“Man is generally considered by statesmen and projectors as the materials of a sort of political mechanics. Projectors disturb nature in the course of her operations in human affairs; and it requires no more than to let her alone, and give her fair play in the pursuit of her ends, that she may establish her own designs… All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”[5]
These were indeed prophetic words. The biggest mistake planners have always made was clinging to the illusion that you can plan an economic order on paper. They believe that an author, sat at a desk, can fashion an ideal economic order and that all that remains is to convince enough politicians to implement this new economic order in practice.
Hayek later called this approach “constructivism,” saying, “The idea of rational people sitting down together to consider how to remake the world is perhaps the most characteristic outcome of those design theories.”[6] According to Hayek, the anti-rationalist insight into historical events that Smith shared with other Scottish Enlightenment thinkers such as David Hume and Adam Ferguson “enabled them for the first time to comprehend how institutions and morals, language and law, have evolved by a process of cumulative growth and that it is only with and within this framework that human reason has grown and can successfully operate.”[7]
In the manner of an economic historian, Smith described economic development rather than outlining an ideal system.
Planned economics is enjoying yet another revival. Climate protection advocates and anti-capitalists are demanding that capitalism be abolished and replaced with a planned economy. Otherwise, they claim, humanity has no chance of survival.
In Germany, a book called Das Ende des Kapitalismus (The End of Capitalism) is a bestseller and its author, Ulrike Hermann, has become a regular guest on all the talk shows. She openly promotes a planned economy, although this has already failed once in Germany – just like everywhere else it has been tried. In a planned economy, companies do not necessarily have to be nationalised, as under classical socialism: they can be allowed to remain in private hands, but it is the state that specifies precisely what and how much is produced.
There would be no more flights and no more private motor vehicles. The state would determine almost every facet of daily life – for example, there would no longer be any single-family houses and no one would be allowed to own a second home. New construction would be banned because it is harmful to the environment. Instead, existing land would be distributed “fairly,” with the state deciding how much space is appropriate for each individual. And the consumption of meat would only be allowed as an exception because meat production is harmful to the climate.[8]
In general, people should not eat so much: 2,500 calories a day are enough, says Herrmann, who proposes a daily intake of 500 grams of fruit and vegetables, 232 grams of whole meal cereals or rice, 13 grams of eggs, and 7 grams of pork. “At first glance, this menu may seem a bit meagre, but Germans would be much healthier if they changed their eating habits,” reassures this critic of capitalism.[9] And since people would be equal, they would also be happy: “Rationing sounds unpleasant. But perhaps life would even be more pleasant than it is today, because justice makes people happy.”[10]
To be continued…
Dr Rainer Zitelmann is the author of The Power of Capitalism.
______
[1] For more on Vietnam, see Zitelmann, Der Aufstieg des Drachen.
[2] Zitelmann, Der Aufstieg des Drachen, 96.
[3] Zitelmann, Der Aufstieg des Drachen, 43.
[4] Piatkowski, 127.
[5] Smith, quoted in Smith, Essays on Philosophical Subjects, 322.
[6] Hayek, The Constitution of Liberty, 113.
[7] Hayek, The Constitution of Liberty, 112.
[8] Hermann, 250.
[9] Hermann, 261.
[10] Hermann, 253.
[i] Piatkowski, 114–115.
This article is based on a lecture Dr Zitelmann gave at the German Bundestag on 12 June.
Smith has been proved right
Smith predicted that only an expansion of markets could lead to increased prosperity – and this is precisely what has happened since the end of socialist planned economies. In China alone, the introduction of private property and market reforms have reduced the number of people living in extreme poverty from 88 percent in 1981 to less than one percent today. When I asked free-market economist Weiying Zhang of Peking University how relevant Smith was for China, he replied: “China’s rapid economic development over the past four decades is a victory of Adam Smith’s concept of the market.” Contrary to prevailing interpretations in the West, economic growth and declining poverty in China was not “because of the state, but in spite of the state,” explained Weiying Zhang, and was caused by the introduction of private property.
Another recent example of the superiority of the market economy is Vietnam.[1] From a country that, before the launch of the Doi Moi free-market reforms in the late 1980s, was unable to produce enough rice to feed its own population, it has become one of the world’s largest rice exporters – and a major electronics exporter.
With a per-capita GDP of US$98, Vietnam was the poorest country in the world in 1990, behind Somalia (US$130) and Sierra Leone (US$163). Before the economic reforms began, every bad harvest led to hunger, and Vietnam relied on support from the UN’s World Food Programme and financial assistance from the Soviet Union and other Eastern Bloc countries. As late as 1993, 79.7 percent of the Vietnamese population were living in poverty. By 2006, the rate had fallen to 50.6 percent. Today, it is only five percent.[2]
Vietnam is now one of the most dynamic countries in the world, with a vibrant economy that creates great opportunities for hardworking people and entrepreneurs.
The fact that economic growth – and not, say, redistribution or rule by government edict – points the way out of poverty has been confirmed time and again in recent decades. In 1989, Poland was one of the poorest countries in Europe. The average Pole earned less than US$50 a month – which wasn’t even equivalent in value to one-tenth of what people in the Federal Republic of Germany were earning. Even taking into account differences in purchasing power, in 1989 a Pole earned less than one-third as much as a West German. Poles were poorer than an average citizen of Gabon, Ukraine, or Suriname. Poland’s income lagged behind even its communist peers: its GDP per capita amounted to only half of the level of income in Czechoslovakia.[3]
In 2017, the economist Marcin Piatkowski published a book, Europe’s Growth Champion, in which he takes stock of 25 years of Polish reforms: “Yet, twenty-five years later it is Poland that has become the unrivalled leader of transition and Europe’s and the world’s growth champion. Since the beginning of post-communist transition in 1989, Poland’s economy has grown more than in any other country of Europe. Poland’s GDP per capita increased almost two-and-a-half times, beating all other post-communist states as well as the euro-zone.”[4]
According to data from the World Bank, GDP per capita in 1989 was 30.1 percent of the corresponding figure in the U.S. and had risen to 48.4 percent of the U.S. level by 2016. Such gains made themselves felt in people’s lives. The income of Poles grew from about USD 10,300 in 1990, adjusted for purchasing power, to almost USD 27,000 in 2017.[i] In comparison with the EU-15, the income of Poles was less than one-third in 1989 and had risen to almost two-thirds in 2015.
Distrust of the state
While Karl Marx believed that the condition of the poor could only be improved by abolishing private property, Smith believed in the power of the market. He was not an advocate of a libertarian utopia without the state – he believed that governments had important functions to fulfill. Nevertheless, in 1755, two decades before The Wealth of Nations appeared, he warned in a lecture:
“Man is generally considered by statesmen and projectors as the materials of a sort of political mechanics. Projectors disturb nature in the course of her operations in human affairs; and it requires no more than to let her alone, and give her fair play in the pursuit of her ends, that she may establish her own designs… All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”[5]
These were indeed prophetic words. The biggest mistake planners have always made was clinging to the illusion that you can plan an economic order on paper. They believe that an author, sat at a desk, can fashion an ideal economic order and that all that remains is to convince enough politicians to implement this new economic order in practice.
Hayek later called this approach “constructivism,” saying, “The idea of rational people sitting down together to consider how to remake the world is perhaps the most characteristic outcome of those design theories.”[6] According to Hayek, the anti-rationalist insight into historical events that Smith shared with other Scottish Enlightenment thinkers such as David Hume and Adam Ferguson “enabled them for the first time to comprehend how institutions and morals, language and law, have evolved by a process of cumulative growth and that it is only with and within this framework that human reason has grown and can successfully operate.”[7]
In the manner of an economic historian, Smith described economic development rather than outlining an ideal system.
Planned economics is enjoying yet another revival. Climate protection advocates and anti-capitalists are demanding that capitalism be abolished and replaced with a planned economy. Otherwise, they claim, humanity has no chance of survival.
In Germany, a book called Das Ende des Kapitalismus (The End of Capitalism) is a bestseller and its author, Ulrike Hermann, has become a regular guest on all the talk shows. She openly promotes a planned economy, although this has already failed once in Germany – just like everywhere else it has been tried. In a planned economy, companies do not necessarily have to be nationalised, as under classical socialism: they can be allowed to remain in private hands, but it is the state that specifies precisely what and how much is produced.
There would be no more flights and no more private motor vehicles. The state would determine almost every facet of daily life – for example, there would no longer be any single-family houses and no one would be allowed to own a second home. New construction would be banned because it is harmful to the environment. Instead, existing land would be distributed “fairly,” with the state deciding how much space is appropriate for each individual. And the consumption of meat would only be allowed as an exception because meat production is harmful to the climate.[8]
In general, people should not eat so much: 2,500 calories a day are enough, says Herrmann, who proposes a daily intake of 500 grams of fruit and vegetables, 232 grams of whole meal cereals or rice, 13 grams of eggs, and 7 grams of pork. “At first glance, this menu may seem a bit meagre, but Germans would be much healthier if they changed their eating habits,” reassures this critic of capitalism.[9] And since people would be equal, they would also be happy: “Rationing sounds unpleasant. But perhaps life would even be more pleasant than it is today, because justice makes people happy.”[10]
To be continued…
Dr Rainer Zitelmann is the author of The Power of Capitalism.
______
[1] For more on Vietnam, see Zitelmann, Der Aufstieg des Drachen.
[2] Zitelmann, Der Aufstieg des Drachen, 96.
[3] Zitelmann, Der Aufstieg des Drachen, 43.
[4] Piatkowski, 127.
[5] Smith, quoted in Smith, Essays on Philosophical Subjects, 322.
[6] Hayek, The Constitution of Liberty, 113.
[7] Hayek, The Constitution of Liberty, 112.
[8] Hermann, 250.
[9] Hermann, 261.
[10] Hermann, 253.
[i] Piatkowski, 114–115.
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