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World-Bank Schism

Mises Daily: Thursday, July 20, 2000 by

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In "Redrawing the Map" (New York Times, June 25th, Week in Review p. 5) Joseph Kahn discusses the World Bank's "World Development Report." The focus of the article is on the "schism [at the World Bank] over how to fight poverty" in the world's developing economies.

The first thing that came to mind when I read the article was Murray Rothbard's "How and How Not to Desocialize" (The Review of Austrian Economics, Vol 6, No. 1 (1992): 65-77). In his article (as the title indicates) Rothbard focuses primarily on the desocialization of Eastern Europe and the Soviet Union.

However, it is clear that Rothbard's framework is applicable on a much wider scale, serving as a guide for all economies in transition. To establish the applicability of Rothbard's transitional construct, we first review Kahn's article and then contrast Rothbard's guidelines for transition.

In the opening of his article, Kahn writes: "Free markets, growth and globalization have been the economists' mantra since the end of the cold war." As we will discuss below, the concept of a "free market" as Kahn uses it is indeed a liberal interpretation. The World Bank and IMF clearly support large-scale government involvement in the transition process.

As Kahn sees it, there are two distinct sides to the aforementioned "schism" at the World Bank. On one side is what Kahn labels the "the orthodox camp." This group includes Fed chairman Alan Greenspan, Treasury Secretary Lawrence Summers and Stanley Fisher (the No. 2 official at the IMF). Their "recipe often includes trade liberalization, independent central banks, more effective and less profligate governments, privatization of state assets, and investment in health and education."

On the other side of the "widening schism" is what Kahn labels the "experimentalists." Joseph Stiglitz and Ravi Kanbur (both resigned from the World Bank after clashing with Summers & IMF officials) fall into this group. The experimentalist "believes governments can set their own path and pace to the market." They hold that "the World Bank and IMF should tread lightly when their clients face a financial crises."

At this point, it makes logical sense to review Rothbard's recommendations for transition. While both the orthodox and experimental camps have something to offer, neither is radical enough. Rothbard makes a crucial point at the beginning of his article, one that the World Bank and IMF have unfortunately failed to consider - you cannot plan markets. He states that, "By their very nature, you can only set people free so that they can interact and exchange, and thereby develop markets themselves" (66). Both of the aforementioned camps overlook this vital insight as both encourage government involvement (i.e. planning) in the transition process to a market system.

Instead of simply listing the tenets of Rothbard's plan, his conclusion will do as he summarizes his transitional framework:

"The dimensions of the proffered Rothbard Plan for desocialization should now be clear: (1) Enormous and drastic reductions in taxes, government employment, and government spending. (2) Complete privatization of government assets: where possible to return them to the original expropriated owners or their heirs; failing that, granting shares to productive workers and peasants who had worked on these assets. (3) Honoring complete and secure property rights for all owners of private property. Since full property rights imply the complete freedom to make exchanges and transfer property rights, there must be no government interference in such exchanges. (4) Depriving the government of the power to create money, best done by a fundamental that at one and the same time liquidates the central bank and uses its gold to redeem its notes and deposits at a newly defined unit of gold weight of existing currencies. All this could and should be done in one day, although the monetary reform could be done in steps taking a few days" (76).

Some, even if they agree with Rothbard's framework, will disagree with the implementation of such measures. They will argue that government management is needed to ensure a "smooth transition." In addition to the critical point that markets cannot be planned, Rothbard offers further insight that bolsters his call for swift implementation:

"the free market is an interconnected web of lattice-work; it is made of innumerable parts which intricately mesh together through a network of producers and entrepreneurs exchanging property titles...Holding back, freeing only a few areas at a time, will only impose continuous distortions that will cripple the workings of the market and discredit it in the already fearful and suspicious public" (66).

A comparison of the two camps at the World Bank with Rothbard's transitional plan illustrates an even greater schism then that currently present in the World Bank. First, the term "free market" by Kahn demonstrates a strong misunderstanding of the concept. "Free" market implies an unimpeded and unconstrained marketplace. Government, by definition is coercive and impedes certain actions and activities via force. Logically, the concepts of a free market and government management (read: meddling) of the market are irreconcilable.

The "orthodox camp" although it calls for some privatization has the audacity to believe that they have it all figured out. They call for developing countries to follow their prescribed formula in attempting to manage the economy. On the other hand, the experimental camp prescribes that each government follows its own path. While this is better then prescribing a fixed "formula" (i.e. plan) as the orthodox camp does, it also potentially allows for further government planning in the transition process. The misunderstanding on both sides stems from the inability to grasp Rothbard's crucial point- "you cannot plan markets."

Economics has come a long way, but Kahn's article shows that it has a long way to go. Mises fought long and hard against centralized planning. It took several decades before the "mainstream" was able to admit that centralized planning couldn't work and that Mises was indeed right.

But instead of fully realizing the consequences of government meddling, the mainstream continues to cling to the utopia of a large-scale government that they believe is able to "manage" the economy. As developing economies transition from centralized planning to markets, it is unfortunate that those who have the biggest influence (Western Economists, World Bank and the IMF) propose measures that replace centralized economic planning with further government planning. The continued government involvement will undoubtedly delay the transition to a prosperous economic system.

Kahn begins his article by stating: "These days, it seems, only wild-eyed anarchists and third-world dictators believe capitalism is not the high road to a better world."

Unfortunately, he misses the mark. For it is the Western bureaucrats and World Bank/IMF officials that are "wild-eyed" and there was one anarcho-capitalist that uncompromisingly believed that free-markets, coupled with unyielding private property rights, are indeed the high road to not only a better world, but a truly just and free one.

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Christopher X. Coyne works at J.P. Morgon. Send him MAIL.