Category Archives: Liberty

Economic Freedom of the World: We’re #18!

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Lynne Kiesling

This year’s Economic Freedom of the World report is released today, and the US has dropped to #18, its lowest ranking ever. From the press release:

The United States, long considered a champion of economic freedom among large industrial nations, dropped to its lowest position ever in to the Fraser Institute’s annual Economic Freedom of the World report. This year, the U.S. plunged to 18th, a sharp decline from the second overall position it held in 2000. Much of this decline is a result of high spending on the part of the U.S. government.

Hong Kong again topped the rankings, followed by Singapore, New Zealand, and
Switzerland. Australia and Canada tied for fifth overall among the144 countries and
territories in the Economic Freedom of the World: 2012 Annual Report. “The United States, like many nations, embraced heavy-handed regulation and extensive over-spending in response to the global recession and debt crises. Consequently, its level of economic freedom has dropped,” said Fred McMahon, Fraser Institute vice-president of international policy research.

The report’s authors, James Gwartney, Robert Lawson, and Joshua Hall, have a column in today’s Philadelphia Enquirer summarizing the results of their research, and why economic freedom is such an essential input for prosperity:

Economic freedom means people are free to choose, trade, compete, invest, and have the fruits of their labor protected against aggressors within a legal framework of equal treatment and minimal interference from government. The link between economic freedom and long-term prosperity is overwhelming: freer economies invest more, grow more rapidly, and achieve higher income levels than those that are less free.

The United States, long considered a bastion of economic freedom, has become less free during the past decade. This decline is across the board. Increases in government spending, record deficits, violation of property rights, more onerous regulation of business, and wars on terrorism and drugs have all contributed to the erosion of economic freedom in America.

Sobering, right? But where’s their data?

During the past decade, the U.S. rating fell nearly a full point on our 0-to-10 point scale, from 8.65 in 2000 to 7.70 in 2010. While it is difficult to pinpoint all the reasons for this decline, the increased use of eminent domain, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the bailout of automobile companies have all clearly weakened private property and the rule of law tradition of the United States.

Our empirical work indicates that a one-point change in a country’s EFW rating is associated with a 1.0 to 1.5 percentage point change in the long-term annual growth rate, all else equal. It is worth noting that U.S. growth averaged 2.3 percent in the 1980s and 2.2 percent during the 1990s, but it fell to an annual rate of only 0.7 percent during 2000-2010. Without a reversal of undermining economic freedom, the future economic growth of the United States will be weak for many years to come.

Which suggests that in an election year, our political candidates will focus on the connection between economic freedom and the conditions for prosperity? OK, maybe not.

During this election season, the two major political parties will attempt to convince voters that their policies are dramatically different. But the EFW data indicate that the U.S. decline in economic freedom began during the presidency of George W. Bush and has continued under President Obama. Subsidies, grants, and other forms of political favoritism directed toward well-organized interests providing large political contributions have become the primary business of both parties, undermining economic freedom and retarding economic growth.

Unless American voters and the politicians they elect reverse course, our future will be one of stagnation, dependency, broken promises, and increased political corruption.

Some Friday morning links

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Lynne Kiesling

Some arguments and ideas catching my eye this morning:

At their Why Nations Fail blog this morning, Daron Acemoglu and James Robinson point out that central planning predates Marxist ideology historically, and is an instrument that political elites use to control and “extract resources from society”.

At the Huffington Post, economist Ben Powell points out how government regulations like zoning stifle civil society institutions, such as giving a small number of free lunches to those in need of a meal. Think about that the next time someone tells you that “government is just us working together to achieve a desirable objective”. No; see the remark above from Acemoglu and Robinson.

Tim Kane and Glenn Hubbard have a new blog called Balance of Economics, in advance of their forthcoming book of the same name. The focus: “We’ll explore topics such as power accounting, the role of political institutions, and the lessons history has for the current American institutional model.” Should be a good read; added to my RSS reader!

One of my favorite political philosophers, Jason Brennan, writes a very clear argument for why Paul Ryan should not be considered, as I saw in the comment thread on a CNN post earlier today “an Ayn Rand fanboy”. Jason argues that despite Ryan’s rhetorical posturing and invocation of minimal-state arguments from Rand, or Hayek, or others in the umbrella of small-state small-l-liberalism, his actions show him to be a much more standard neoconservative: “Rand would regard our current government as an unjust, rights-violating, bloated monstrosity. It is a monster Paul Ryan helped create. Ryan may admire Ayn Rand. He may quote F. A. Hayek in interviews. Yet his voting record is right out of the neocon playbook.” On the same topic and theme earlier this week, Conor Friedersdorf says that we should “stop calling Paul Ryan a Randian“. The other good thing about both of these arguments is that their authors represent Rand’s ideas in an informed manner, unlike many other arguments I’ve read since Ryan’s selection.

I don’t link to Conor Friedersdorf nearly as much as would reflect my appreciation and respect for his writing. (I attribute that to my attempt to minimize discussion of politics here, but if politicians insist on intruding even further into economic activity, well, …) On Wednesday he wrote a good argument for why liberals need to start holding Obama responsible for his policies, particularly his acceleration of the Bush-era subversion of civil liberties and increase in executive power. From the progressive portion of the political spectrum, Glenn Greenwald has been making this argument for some time, most recently with reference to the U.S. government’s lethal drone strikes in Pakistan and the refusal of those in the west to condemn these strikes. Just today comes news of a drone strike last night in Pakistan, the fifth this week, that killed 18 people, some of whom are likely to be innocent “non-combatants”. Another worthwhile read on this issue is an essay from actor John Cusack that was published this week, and is a thoughtful piece of writing. The link also includes notes from a conversation between Cusack and constitutional law professor Jonathan Turley, and shows concern from a progressive perspective about the “gutting of the Constitution”. This is a conversation that I think we have to have, if we are going to move beyond the fear-based policies that are eroding the social institutions in which we, as individuals and in our voluntary community associations, are trying to thrive. And that’s the connection back to economics; as I’ve argued before, the erosion of civil liberties has moral and economic consequences, and makes us less well off … which circles us back to the Acemoglu and Robinson point at the top of this post.

How to contribute to society

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Michael Giberson

My title is too general; there are many ways to contribute to society and I’m just addressing one of them. But trust me, it is a good one.

A few weeks ago President Obama made his now memorable “you didn’t build that” remark. Most of the resulting political exchange has been pretty thoughtless, amounting to little more than “boo for your guy” or “hooray for our guy. Extremely rare have been the thoughtful reactions.

Here are two of the best.

Virginia Postrel, writing for Bloomberg: “The Bad History Behind ’You Didn’t Build That’“

Postrel finds Deirdre McCloskey’s work on bourgeois virtues to be the appropriate foundation for a reply. The reason the world has progressed from living on an average of $3/day in 1800 to about $30/day world wide today (and much higher in many parts of the world) is the great change in attitude toward innovation in markets and the development of related virtues. The problem with “you didn’t build that,” in Postrel’s view, is in its reactionary anti-entrepreneur tone.

Of course she explains it much better than I’ve just summarized it, so go read the thing.

David Bier, at the Skeptical Libertarian, “Cooperation is what markets are for, not governments“

At this point in his presidency, the statist subtext to President Obama’s remarks is clear. But his values–rather than his conclusions–are right on. Although he overstated the case, his essential point is what free market advocates have argued for years—that prosperity depends not just on individual initiative, but cooperation and exchange. Conceding these values to a president who has led the charge against these very ideals pigeonholes conservatives and libertarians into a clichéd version of individualism in which cooperation plays a secondary, rather than primary, role in markets.

Cooperation and working together is not part of the market—it is the market. The market is millions, even billions, of individuals associating, trading, and contracting. In the classic essay “I, Pencil,” Leonard Read argues that “no single person on the face of this earth knows how to make [a pencil].” It is a collaborative effort of millions of people—loggers, miners, truckers, even coffee producers. “There isn’t a single person in all these millions,” Read continues, “including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how.”

There is more to Bier’s piece, too, that this short clip. I particularly like Bier’s focus on, in effect, scolding those free market advocates who let themselves be pushed into defending a caricature of the rugged individualist as capitalist hero.  Cooperation should be seen and defended as part of the core of libertarian social progress.

Should ice-making be a regulated utility?

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Michael Giberson

Lynne’s post on early commerce in ice reminded me that ice making has made other appearances in economic history. For example, some U.S. states once required a state license to make and sell ice.

The question of the reasonableness of such licensing requirements reached the Supreme Court in 1932 in New State Ice Co. v. Liebmann. The New State Ice Co. had secured a license from the Oklahoma Corporate Commission to operate an ice-making plant in Oklahoma City. Subsequently Liebmann built his own ice-making plant in the city and began to operate without a state license. New State Ice sued to enjoin Liebmann from operating without a license.

At the time Oklahoma state law said: “the manufacture, sale and distribution of ice is a public business; that no one shall be permitted to manufacture, sell or distribute ice within the state without first having secured a license for that purpose from the commission; that whoever shall engage in such business without obtaining the license shall be guilty of a misdemeanor, punishable by fine not to exceed $25, each day’s violation constituting a separate offense, and that by general order of the commission, a fine not to exceed $500 may be imposed for each violation.”

The court said:

Stated succinctly, a private corporation here seeks to prevent a competitor from entering the business of making and selling ice. It claims to be endowed with state authority to achieve this exclusion. There is no question now before us of any regulation by the state to protect the consuming public either with respect to conditions of manufacture and distribution or to insure purity of product or to prevent extortion. The control here asserted does not protect against monopoly, but tends to foster it. The aim is not to encourage competition, but to prevent it; not to regulate the business, but to preclude persons from engaging in it….

The court affirmed a lower court ruling against the state law:

The principle is imbedded in our constitutional system that there are certain essentials of liberty with which the state is not entitled to dispense … This principle has been applied by this court in many cases. [Citations omitted.] In the case last cited the theory of experimentation in censorship was not permitted to interfere with the fundamental doctrine of the freedom of the press. The opportunity to apply one’s labor and skill in an ordinary occupation with proper regard for all reasonable regulations is no less entitled to protection.

Justice Brandies dissented from the majority, saying “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country,” and “Denial of the right to experiment may be fraught with serious consequences to the Nation.”

While I’m a big supporter of the idea of social and economic experimentation, notice here that Oklahoma’s “experiment” with regulating the ice industry was itself a “denial of the right to experiment” by private businesses. Such denials, too, may be fraught with serious consequences.

Manners, morality, coordination, and order

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Lynne Kiesling

Sarah’s post here on manners (including her Freeman essay and Matt Zwolinski’s BHL post) and Mike’s observations on them open up a great discussion about the importance of seemingly superficial informal norms for enabling us to live together and generate civil society. Mike’s absolutely right that the road to anarchy is paved with good manners, and that how we live together in society is through a web of institutions. Those institutions need not be formal, and they need not include what we identify as a “state”, and yet it’s possible to live together harmoniously. Anarchy is the absence of a state, not the absence of institutions or of order.

I want to riff off of one of Mike’s insights; in a comment on Sarah’s manners post he observes that “… morality, too, is a spontaneous order kind of system with many rules, and yet it is a mistake to insist that every action conform to every rule of morality in every case, …” I associate this idea first and foremost with David Hume, who argues that our morality arises from our sentiments, not from our reason. While sentiments can be shared and common across humans who live in different environments and cultures (thus leading to the consistent moral treatment of murder, for example, across different societies), they can also differ in some dimensions, so Hume makes an ethical subjectivist argument.

Hume’s argument leads to a couple of insights that I think are related to Mike’s and Sarah’s posts. Hume’s empiricism and ethical subjectivism clearly influenced his friend Adam Smith, who made related arguments in The Theory of Moral Sentiments. Smith combined two important empirical observations about humans that affect how we live together and form civil society — our behavior is grounded in our desire for sympathy (fellow feeling with others) and mutual sympathy (that feeling, right back atcha), which induces us to reflect on our behavior, and we are all individuals (I’m not. — Sssssh) who are diverse and heterogeneous in our desires and plans for how to thrive. How do we reconcile those different, and potentially conflicting, individual desires and plans with our desires for sympathy and mutual sympathy? We reflect on our behavior and our inner spectator judges and evaluates our behavior for how well it comports with generating sympathy and mutual sympathy. This is the internal process that disciplines our actions as we strive to maximize our well-being. Here’s the important point, though: it’s a process of coordination, of harmonization, not of a uniformity in which we all behave exactly the same way. We don’t have to all behave the same way or do the same things, or as Mike says, take actions that all conform to all moral rules in every way. But if we share a core set of moral rules that enable us to coordinate our actions and plans (don’t steal, don’t cheat, don’t murder, honor your contracts, honor your promises), even though we are all different, then we will best be able to thrive economically and sentimentally (I mean that in the Humean/Smithian sense, not the modern sense).

The other important thing that Mike’s point raises and that Hume and Smith lead to is the idea that moral rules can evolve and change over time as our environments and sentiments change. This is where, in my mind, Hayek picks up from Hume and Smith. Moral rules adapt and evolve over time, and those that have emerged over time as evolutionary robust (in the sense that they enable us to live together and thrive economically and sentimentally in civil society) become  more codified and more formal. Those that do not stand the test of time as our sentiments change erode, or are removed through conflict (violent or nonviolent). This institutional evolution model is one way to think about women’s suffrage, the civil rights movement, the evolution toward codification of same-sex marriage, and so on.

Even seemingly superficial actions such as adherence to a core set of manners contribute to this coordination, this harmonization. Good manners are a decentralized system for coordination and harmonization across people with diverse goals and interests. But our sentiments evolve over time, so good manners in 1811 in Regency England and good manners in 21st century US have some similarities and some differences. Even so, they enable us to coordinate and harmonize to mutual benefit.

The road to anarchy is paved with good manners

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Michael Giberson

Sarah’s essay on reading and sympathy, explicated a bit in her post here at KP on manners, and Matt Zwolinski’s near contemporaneous remarks on the same topic, recalled to me one of my favorite ideas: the road to anarchy is paved with good manners.

I mean “anarchy” in a good way, of course: “anarchy” as an absence of an overbearing political authority with monopoly access to the means and legitimate use of coercion in society. We only get to that happy political utopia, at least in my way of thinking, after we learn to live together peaceably. We get the withering away of the state when people begin to wonder why we’re spending so much to protect us against problems that no longer occur, or at least when people wonder why we’re spending on government provision when private, cooperative, decentralized methods seem to be so much more effective.

Manners, and even those stylized practices called etiquette, are properly seen as a kind of extension of the moral rules that help us to live together properly (check out Zwolinski’s post for more on this idea, and I second Zwolinski’s recommendation of the interview with Karen Stohl, author of the philosophical treatise On Manners).  Seen in this fashion – manners as a means of social cooperation – it becomes clear that manners can help us live in anarchy. Manners are obviously a proper subject of study by the political economist.

The study of the political economy of manners and etiquette, then, seem a part of and a nice complement to the research in anarchy that has been emerging from the George Mason University economics department, much of it connected to Peter Boettke. GMU has produced a steady stream of work over the last decade or so looking at areas where economic order has emerged outside of or in spite of state-enforced laws. Included in this grouping would be Peter Leeson’s work on piracy, David Skarbek’s work on prison gangs, Nicholas Snow’s work on rum runners, and perhaps Chris Coyne’s work on post-war reconstruction. Boettke has written on anarchy in a variety of places, including “Anarchism as a Progressive Research Program in Political Economy” and “Anarchism and Austrian Economics.”

As Boettke’s argues in “Anarchism as a Progressive Research Program…”, there has been much research on constitutions and other efforts to impose from above the ideal institutional tool for constraining government, but less study of the emergence of social rules from below. In his words (p. 211):

Instead of designing ideal institutional settings that we can exogenously impose on the system and thus provide the ‘correct’ institutional environment within which commerce and manufacturing can flourish, we have to examine the endogenous creation of the rules by social participants themselves. The science and art of association is one of self-governance and not necessarily one of constitutional craftsmanship. And herein lies the contribution that the contemporary research on anarchism can make to modern political economy.

In the effort to understanding self-governance, Boettke would also point to the work of the late Vincent Ostrom on citizenship and democracy and Richard Wagner’s work on political economy and fiscal sociology. As Boettke’s post notes, Richard Ebeling’s appreciation of Vincent Ostrom’s work also highlights these issues. (I’ve just picked up Ostrom’s The Meaning of Democracy and the Vulnerability of Democracies on Ebeling’s recommendation.)

In studying manners as a tool for promoting anarchy, we will surely see that some kinds of rules likely aid decentralized social orders (respect for other people’s opinions) and other manners likely interfere (unquestioned respect for authority).  Some kinds of manners are better for anarchists than others. Which ones are which, which manners promote social progress? Until the study of the political economy of manners gets underway in earnest, it is hard to know.

Graduate students of the world, a mostly uncharted territory awaits your exploration. My bet is that you’ll find the trail to El Dorado, the path to utopia, the road to Shangri-La, the way to anarchy paved with good manners.

We Miss Manners

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Sarah Skwire

So Matt Zwolinski and I had a fun moment last week when we more or less simultaneously published on more or less the same topic. This either means that Matt and I need to get out more, or it means that we’re on to something. I’m going for the latter explanation. And all available evidence suggests that Matt will agree with me.

And even if he doesn’t agree with me, I know he’ll be polite about it. Matt and I both have civility on our minds.

In the current issue of The Freeman, in a piece called Reading Each Other I argue that the humanities are a useful educational tool for practicing the skill of sympathy that is a vital underpinning for the civil society. “When we’re practiced in sympathy, it is easier for us to notice “what is not seen.” When we have tried, over and over again, to put ourselves into others’ places and to see the world from where they are standing, we’re better people, living in a more civil world. …Because our children have read, and have had read to them, stories that help them think about the perils of greed, or the importance of kindness, or the dangers of drinking from bottles marked “Drink me”  they will grow up to be more considerate and more careful of themselves and others.

And over at BHL, Matt has a post called “Libertarianism and Good Manners” that argues that, “It is a mistake, first of all, to think about rules regarding the location of forks as paradigmatic of manners and etiquette. It is a mistake, too, to suppose that there is no important distinction to be made between the rules of etiquette and the principles of manners. And it is a mistake for libertarians, especially, to disdain all this business as the stuff of authoritarian busy-bodies.” Matt also, intriguingly, suggests thinking of manners as a kind of spontaneous order–an approach I like a great deal.

Why the confluence of topics? Well, there are a lot of reasons to be irritated right now. It’s hot. There’s a drought. The power is out all over the place. The government has gone and done something stupid again. It’s only July 2nd, and people are already setting off fireworks late at night and waking the kids up. That means it’s a good time to think about civility and manners. It’s a good time to take a deep breath and remind ourselves to ask “What would Miss Manners do?”

“Free Market Fairness” and self-authorship

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Lynne Kiesling

[NOTE: The following is an economist's musings about philosophy, so if my philosopher friends can flesh out my argument and identify errors I'd be grateful. Also, this post is meant for you if you are interested in electricity regulation, so don't just mark it as read because it's philosophy ;-) ! --LK]

Although I have not yet finished John Tomasi’s Free Market Fairness, I am very much enjoying the conversation about it in progress at the symposium on it at Bleeding Heart Libertarians. John’s project is laudable — rediscover and synthesize common ethical ground between the two dominant branches of classical liberal thought. Roughly speaking, the bifurcation into what John labels “libertarianism” and “high liberalism” arose out of John Stuart Mill’s argument for the treatment of economic liberty as less essential than other civil liberties. Mill’s argument is that “… in the sphere of liberty are activities that primarily concern only the individual, …” (Tomasi p. 29), while the other sphere, that of coercion, addresses activities that affect other people. Mill categorizes exchange and commerce as inherently social due to its “you need two to tango” essence, and thus places it in the realm of coercion and not of liberty. More substantively, as John goes on to explore, Mill did not think that exchange and commerce could “contribute to individuality” (Tomasi p. 30) or to the moral foundations of personhood in the way that other civil liberties do, such as speech, assembly, and so on.

Thus the two branches of thought bifurcate from the classical liberalism tree trunk: modern libertarianism, which prioritizes property rights and economic liberty as foundational to all other civil liberties (e.g., Rothbard), and high liberalism, which picks up Mill’s moral demotion of economic liberty and builds upon it to justify a substantial government apparatus for regulation and intervention in the private economic decisions of individuals, with the stated objective of designing a social system that will generate benefit particularly for the least advantaged in society (Rawls’ operationalization of the maximin principle). John’s book probes ways to find commonalities in these two branches. In part his argument is a reinvigoration of the original tree trunk — classical liberalism, with which in the 20th century (i.e., after the bifurcation) he identifies Hayek. Classical liberalism neither prioritizes nor demotes economic liberty, embodying the principle that there is only liberty, and that its manifestation in various aspects of human action and interaction should be treated as moral equals. John notes (p. 24) that

… classical liberals see these wide-ranging economic liberties as being especially weighty compared to other social values. … But classical liberals do not treat economic liberties as moral absolutes or as in any way more basic than the other fundamental rights and liberties.

In particular, in all of the realms of liberty the presumption should be toward respecting individual liberty, but recognizing from a consequentialist perspective that there may be net benefits from allowing some coercion, such as taxation and wealth transfer to provide resources for a social safety net (a policy that, for example, Hayek advocated).

But I want to focus on one specific insight in John’s book that will stick with me and change how I think about individual liberty and economic regulation: self-authorship (The specific semantics here may be common in philosophy, but they are new and exciting to me). Embodying a definition from Rawls, John defines self-authorship as (p. 40)

… the capacity to develop and act upon a life plan (whether that plan be individual, collective, or otherwise shared). People are life agents and their agency matters. As responsible self-authors, they have the capacity to realistically assess the options before them and, in light of that assessment, to set standards for a life of a sort that each deems worth living.

The flip side of self-authorship is the individual’s recognition that others are themselves responsible self-authors, and that each of us has a duty to respect that self-authorship to the greatest extent possible when designing social systems that will necessarily involve some degree of coercion. One way we can use this concept of self-authorship is as a way to interpret Mill’s original argument; to me, it looks like Mill was arguing that economic activity such as commerce and exchange does not fall within the realm of activity relevant to self-authorship. However, classical liberals argue, and John is arguing here, that economic activity is just as essential a dimension of self-authorship as speech, association, political representation, and other dimensions arising out of our core civil liberties. Consider how much of our moral capacity to act upon a plan as a responsible agent takes form and meaning through our work and consumption decisions. I see self-authorship as one essential strand that can synthesize across these two post-Mill branches, but such a synthesis requires some common ground agreement on the extent to which economic activity is important for self-authorship. I expect John will develop this in the chapters I haven’t gotten to yet.

Why should you care about this issue of civil liberties, economic liberty, and self-authorship if you are reading KP because you are interested in electricity regulation and technology? Regulation as implemented in electricity interferes with self-authorship for individuals in a range of roles, consumer and innovator in particular. One consequence of acting on self-authorship is innovation and technological change, which is a manifestation of human creativity and thus intimately connected to self-authorship. Furthermore, look back at John’s definition of self-authorship. Economic regulation of retail electricity markets removes individual agency in consumption choices, in production choices, and in innovation choices. By preferencing an increasingly obsolete engineering-driven top-down model of vertically-integrated infrastructure financing and retail service provision, regulation demotes individual agency and treats it as unimportant. Especially if you come to electricity from an engineering and/or a rate-making perspective you may not think often about the ethical foundations of the regulatory system we inhabit; here’s one ethical aspect of it that I think is worthy of your consideration. Technological change has made choice more feasible and potentially attractive to some consumers, and environmental concerns make consumer choice and awareness of fuel use implications more important. Thus a dimension of economic activity — the production and consumption of electricity services and the innovations interacting with those services — that used to be treated as a commodity/infrastructure transaction does have aspects of self-authorship to it that traditional economic regulation constrains. There are ethical implications of regulation.

Ironically, actually, one justification often offered for this regulatory system is to maintain uniform treatment of residential customers in a way that will ensure that prices stay low and stable for “vulnerable” consumers such as elderly and low-income consumers; this justification sounds Rawlsian. But it also does constrain the self-authorship of other consumers, producers, and innovators in ways that may make them worse off, and moreover, if those others were allowed choice and freedom of expression through their technology and energy consumption decisions, they may bring about a world in which new products and services actually drive down costs or create unanticipated value that could benefit those vulnerable consumers. Is that tradeoff worth it, ethically or economically?

I’m only a few chapters in, and I’m sure that the rest of the work will be just as thought-provoking and insightful.

Adam Smith opposes “shock therapy” for developing and transitioning economies

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Michael Giberson

“Get the prices right!” was the rallying cry of some economists in the aftermath of the break up of the Soviet Union. Don’t plan the transition, stop planning and let markets sort it out. Similar advice goes out to developing economies around the world. Don’t ease your way to liberalization, throw open the gates!

In a paper just published in The European Journal of the History of Economic Thought, Maria Pia Paganelli considers what advice Adam Smith might offer: “Economies in Transition and in Development: a Possible Warning from Adam Smith.” (Alternate link). Here is a hint, Smith wouldn’t focus on “getting the prices right.”

Paganelli writes (and I’m skipping a lot of good stuff to get directly to the Smithian advice, so do read the whole thing):

Smith offers one explicit policy prescription: avoid rent-seeking, if you can.

The legislature, were it possible that its deliberations could be always directed, not by the clamourous importunity of partial interests, but by an extensive view of the general good, ought upon this very account, perhaps, to be particularly careful neither to establish any new monopolies of this kind, nor to extend further those which are already established. Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder. (WN IV.ii.44: 471–2)

Smith’s advice sounds like some contemporary advice. Acemoglu (2008) claims, in fact, that:

Every policy intervention creates winners and losers. The winners not only gain economically, but also become politically powerful. These politically powerful groups can then become a barrier against further progress. This is well illustrated by the experience of import substitution, which supported nascent industrial groups in many developing economies. In most cases, the subsidized conglomerates were highly inefficient and became a formidable obstacle to further reform.

His advice: ‘Refrain from policies that will create new and potentially dangerous political constituencies’ (p. 5).

But how can it be possible to refrain? How can it be possible for the legislature to not be directed by ‘the clamourous importunity of partial interests’? Smith appeals to the legislator, claiming that he should not fall for the flattery of the self-interested merchants but should preserve the natural system of liberty out of reverence toward its beauty. But our civic spirit is generally weak (TMS IV.1.11). So how can it be strengthened? Additionally, if a ‘regular administration of justice’ is needed for commerce to flourish, how do we get this ‘justice of government’, which is so deeply missing in most transitioning and developing countries?

One can infer at least two suggestions from Smith’s work. One is to avoid situations that may generate rent-seeking opportunities, as we just saw. The other is to develop a strong sense of moral respect for rules, for institutions and for the public good. Both of these prescriptions collapse into only one: the gradual introduction of commerce. A gradual opening of the large wealth offered by international trade restrains rent-seeking opportunities and is likely to develop sound institutions and a strong moral sense that leads to respect for them. Smith indeed tells us that a just set of institutions and a public spirit do not come from any human wisdom, plan or design. They are not something that can be imposed from above or from the outside. They are something that comes, gradually, with commerce. Only commerce, when very gradually introduced, can ignite what no army or wisdom is able to start (WN III.iv.10: 418, WN V.i.g. 24–25: 803).

Smith claims indeed that it is from the gradual introduction of commerce that we generate both a strong set of institutions and the conditions that develop a strong moral sense, which would be fertile ground for prosperity.