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The Common Thread to Progress

Mises Daily: Tuesday, October 05, 2010 by

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President Obama addressing the United Nations

On September 23 President Obama addressed the United Nations on the Israeli-Palestinian Conflict. In this speech the president spelled out a general principle upon which all social progress depends: "Human progress lies in open economies, open societies, and open governments. To put it simply: democracy, more than any other form of government, delivers for our citizens." For Obama, progress has come from insistence upon democratic change.

Entrepreneurs seem to play a role in progress too, but the key issue is still good government — they need to be able to "start a business without paying a bribe" and "reckless risk-taking" should not be rewarded. And Obama equates good government with democratic government.

Obama goes so far as to claim that "the common thread of progress is the principle that government is accountable to its citizens." Curiously, Obama cites the examples of Korea and India. Korea paints a clear picture contrasting the open and successful South and the closed and failing North.

The problem with this example is that South Korea had a military dictatorship during the early years of its recovery from the Korean War. India has a longer history with democracy than South Korea, but a weaker economic record. Obama also stresses that India escaped British colonialism. The postcolonial democratic government of India has a well-established record of smothering entrepreneurship. South Korea outperformed India and North Korea because its government rejected socialism, not because it came to be a democracy.

The record of British colonialism in postwar Hong Kong is quite different. The British colonial authorities stood by and watched while entrepreneurs made Hong Kong prosperous. The West German economy also developed rapidly while under the control of foreign occupiers. After West Germany became democratic, its citizens voted for politicians who expanded government regulation and social programs, and its economic performance deteriorated. If Obama wanted to cite an example of postcolonial self-determined success, he should have mentioned the United States. However, even in this case we are talking about a constitutional republic that did not extend the franchise to most adults until 1920.

This is not the first time that Obama has asserted that progress derives from good government. In a 2006 speech Obama claimed that Kenya's failure is its inability "to create a government that is transparent and accountable. One that serves its people and is free from corruption." Of course, one can easily find bad examples of colonial and autocratic government. But the point here is that the historical record of both democratic and nondemocratic government is mixed. Historically speaking, most countries have lacked freedom and prosperity, and movements toward self-rule and democracies have not always been economically successful.

The real common thread to progress is free enterprise. Progress and prosperity have followed movement toward freer markets and trade, less governmental regulation, lower public spending and taxes, and more secure property rights. When there has been greater reliance on regulation through market competition and when each person has been permitted self-determination in terms of spending privately earned income, progress and prosperity have followed.

This is not simply the matter of a few anecdotes. Economic-freedom indexes reveal the correlation between free enterprise and economic progress. Furthermore, economic theory explains why we should expect freedom to deliver progress. As Joseph Schumpeter put it, capitalism allows for entrepreneurial creative destruction, for new innovative products and practices that destroy older and inferior alternatives. More generally, capitalism is a system where humans are able to perceive and act upon opportunities to better their condition.

"The real common thread to progress is free enterprise. Progress and prosperity have followed movement toward freer markets and trade, less governmental regulation, lower public spending and taxes, and more secure property rights."

Obama might have a point in equating progress with good government if he defined good government as limited government, rather than as accountable and democratic government. However, it is all too obvious that Obama does not favor limited government and free markets. Obama also seems to suffer from the misconception that democratic competition is efficient.

"We will support a free and open Internet," he states, "so individuals have the information to make up their own minds." The fact of the matter is that voters have little incentive to be informed about politics. One vote never changes the outcome of a national election. Even if one person could vote to make public policy more efficient, the benefits of this change would be divided among all citizens. The Internet will not change the basic voter incentives in democracy.

Obama is equally naive about special interests. He has also insisted that campaign finance reform is necessary to make American democracy work for "the people." Common sense dictates that there are higher costs to organizing larger groups. Narrow and geographically concentrated special interests have a huge cost advantage in organizing to lobby any government. Restrictions on campaign spending do limit the ability to fund speech, and special interests will always find loopholes in campaign-finance-reform laws.

The fact of the matter is that politicians are not systematically smarter than special-interest-group members; they will not systematically outmaneuver those who want to organize to influence the use of governmental power. Furthermore, politicians want special-interest money. Obama is not only unaware of the issue of the relative costs of organizing special and general interests, he also expects wolves to guard the henhouse.

Some democratic nations have been prosperous and relatively free. However, democracy is obviously not a panacea. The results of governmental regulation of the financial sector and the housing market over the past decade are simply the latest examples of government failure.

History proves that the free-enterprise system has worked in the past. Theory indicates that this system will continue to work in the future — provided that we reject Obama's false conception of how to achieve progress.