In Defense of Global Capitalism

Johan Norberg

• Publisher: Cato Institute
• Year: 2003
• Print ISBN: 9781933995441
• eBook ISBN: 9781933995441
• Topic: Politics & International Relations
• Subtopic: Globalisation
• Index: Politics & International Relations

From Seattle to Genoa to Johannesburg, people march in the streets protesting global capitalism. They denounce Nike and McDonald's, the World Bank and the World Trade Organization. Who would defend global capitalism?

A young writer from Sweden, who started on the anarchist left and then came to understand the world better. Johan Norberg has traveled to Vietnam, Africa, and other hot spots in the battle over globalization. He has become a passionate defender of the globalization that is lifting poor countries out of poverty. In Defense of Global Capitalism is the first book to rebut, systematically and thoroughly, the claims of the anti-globalization movement. With facts, statistics, and graphs, Norberg shows why capitalism is in the process of creating a better world. The book is written in a conversational style with an emphasis on liberal values and the opportunities and freedom that globalization brings to the world's poor.

In Defense of Global Capitalism shows that the diffusion of capitalism in the past few decades has lowered poverty rates and created opportunities for individuals all over the world. Living standards and life expectancy have risen substantially. There is more food, more education, and more democratization, less inequality and less oppression of women. Norberg takes on the tough issues-economic growth, freedom vs. equality, free trade and fair trade, international debt, child labor, cultural imperialism-and concludes that free-market capitalism is the best route out of global poverty.

II
. . . and it’s no coincidence!

That’s capitalism for you!

The growth of world prosperity is not a ‘‘miracle’’ or any of the other mystifying terms we customarily apply to countries that have succeeded economically and socially. Schools are not built, nor are incomes generated, by sheer luck, like a bolt from the blue. These things happen when people begin to think along new lines and work hard to bring their ideas to fruition. But people do that everywhere, and there is no reason why certain people in certain places during certain periods in history should be intrinsically smarter or more capable than others. What makes the difference is whether the environment permits and encourages ideas and work, or instead puts obstacles in their way. That depends on whether people are free to explore their way ahead, to own property, to invest for the long term, to conclude private agreements, and to trade with others. In short, it depends on whether or not the countries have capitalism. In the affluent world we have had capitalism in one form or another for a couple of centuries. That is how the countries of the West became ‘‘the affluent world.’’ Capitalism has given people both the liberty and the incentive to create, produce, and trade, thereby generating prosperity.

During the past two decades, this system has spread throughout the world via the process termed globalization. The communist dictatorships in the East and the military dictatorships of the Third World collapsed, and the walls they had raised against ideas, people, and goods collapsed with them. Instead, we have seen the dissemination and widespread acceptance of the idea that creativity cannot be centralized, that it can only be encouraged by entitling citizens to decide for themselves, to create, to think, to work.

Capitalism means that no one is subject to arbitrary coercion by others. Because we have the option of simply refraining from signing a contract or doing a business deal if we prefer some other solution, the only way of getting rich in a free market is by giving people something they want, something they will pay for of their own free will. Both parties to a free exchange have to feel that they benefit from it; otherwise there won’t be any deal. Economics, then, is not a zero-sum game. The bigger a person’s income in a market economy, the more that person has done to offer people what they want. Bill Gates and Madonna earn millions, but they don’t steal that money; they earn it by offering software and music that a lot of people think are worth paying for. In this sense, they are essentially our servants. Firms and individuals struggle to develop better goods and more efficient ways of providing for our needs. The alternative is for the government to take our resources and then decide which types of behavior to encourage. The only question is why the government knows what we want and what we consider important in our lives better than we ourselves do.

Prices and profits in a market economy serve as a signaling system by which the worker, the entrepreneur, and the investor can navigate. Those who want to earn good wages or make a good profit have to seek out those parts of the economy where they can best cater to other people’s demands. Excessive taxes and handouts pervert these signals and incentives completely. Price controls are destructive because they directly distort the necessary price signals. If the government puts a ceiling on prices—if it imposes a lower price than the market would have, as it does for apartment rentals in New York—a shortage will result. People will hang onto the apartments they have, even if they don’t need them for the moment and even if someone else would be willing to pay more for the use of that same apartment. Denied the ability to charge higher rents, landlords find it less worthwhile to invest in the purchase of new buildings, and housing companies stop new construction. Result: housing shortage. If instead the government sets a price floor—that is, deliberately bids up the price of a good higher than the market would have, as many governments do for agricultural products—a surplus will result. When the EU pays more for foodstuffs than the market, more people than necessary will go into farming, resulting in surplus production and wasted resources.

Capitalism also requires people to be allowed to retain the resources they earn and create. If you exert yourself and invest for the long term, but someone else appropriates most of the profit, the odds are that you’ll give up. Protection of ownership lies at the very heart of a capitalist economy. Ownership means not only that people are entitled to the fruits of their labors, but also that they are free to use their resources without having to ask the authorities first. Capitalism allows people to explore the economic frontier for themselves.

That is not to say that any given person in the market will necessarily be smarter than a bureaucrat. But market participants are in direct touch with their own particular corner of the market, and by responding to price fluctuations, they have direct feedback on supply and demand. Central planners can never collect all this information from all fields, nor are they nearly as motivated to be guided by it. Even if any one person in the market is no smarter than a bureaucrat, a million people together certainly are! Their million different attempts at determining the best uses of resources are generally wiser than a single, centralized solution. If the government decides that all resources are to be committed to a certain kind of collective farming and this fails, the whole of society will be economically affected and, in the worst case scenario, will starve. If, instead, one group of people attempts the same type of farming, they alone will suffer the adverse effects if the enterprise fails, and surpluses elsewhere in the market mean that those effects won’t be as dire as starvation. A society needs this kind of experimentation and innovation to develop, but at the same time the risks of experimentation have to be limited so that the whole society will not be jeopardized by a few people’s mistakes. Therein lies the virtue of individual decisionmaking and individual responsibility.

Personal responsibility, no less than personal freedom, is essential to capitalism. A politician or bureaucrat handling huge sums of money for infrastructure investment or a campaign to host the next Olympics is not under the same pressure to make rational decisions as entrepreneurs and investors are. If things go wrong and expenditure exceeds income, it isn’t the politician who foots the bill.

People who own their property act on a long-term basis because they know that they will reap the rewards (and bear the costs) of their actions. This is the core of a capitalist economy—people saving part of what they already have in order to create more value for the future. We do the same thing, create ‘‘human capital,’’ when we devote some of our time and energy today to getting a good education that will increase our earning potential in the long run. In the economy, this means that instead of living from hand to mouth we set aside part of what we have and are rewarded with interest or profits by whoever can use the money more efficiently than we can ourselves. Saving and investment elevate the economy to progressively higher levels as they finance new machinery and organizational structures to make the work-force more productive.

Organization is important because people can produce far more through voluntary cooperation than they could by doing everything single-handed. It may take a single craftsman a week to produce a chair, but if he is especially skilled at constructing the wooden frame, and if he joins forces with someone who can paint and someone else who’s good at sewing chair cushions, together they may be able to turn out one chair a day. With modern machinery, another product of specialization and cooperation, they can make a hundred chairs a day, which augments the value of their labor.

Technical progress enabled new machines to manufacture old types of goods less expensively, placing new inventions and goods at people’s disposal. As a result of this continuous improvement of productivity through the division of labor and technical advancement, one hour’s labor today is worth about 25 times more than it was in the mid-19th century. Employees, consequently, now receive about 25 times as much as they did then, in the form of better pay, better working conditions, and shorter working hours. When a person’s labor grows more valuable, more firms want to buy it. In order to get it, they then have to raise wages and improve the work environment. If, instead, wages increase more rapidly than productivity, through legislation or union contracts, then jobs will have to be eliminated, because the workers’ input is not worth what the employer is forced to pay for it. In this case, the ‘‘surplus’’ created by the price floor in wages comes in the form of unemployment.

Politicians can create the appearance of rising wages by accelerating inflation, which is precisely what Swedish politicians did for a long time. Because each dollar is then worth less, however, those increases are entirely chimerical. Growth and productivity alone are capable of raising real wages in the long run.

All political and economic systems need rules, and this includes even the most liberal capitalism, which presupposes rules about legitimate ownership, the writing of contracts, the resolution of disputes, and many other matters. Those rules are a necessary framework required for markets to operate smoothly. But there are also rules that prevent the market economy from working—detailed regulations specifying the uses people can make of their property and making it difficult to start up a certain kind of activity, owing to the need for licenses and permits or to restrictive rules on pricing and business transactions. Those regulations mainly serve to give more power over the economy to public authorities who are not themselves a part of it and who have not risked their own money. They add up to a heavy burden on the creators of our prosperity. Just at the federal level, American entrepreneurs have to keep track of more than 134,000 pages of regulations, with 4,167 new rules issued by the various regulatory agencies in 2002 alone. Little wonder, then, that more people do not translate their good ideas into entrepreneurial activity.¹

Such rules are also harmful in another way. When regulation raises barriers to necessary activity, a large portion of a firm’s time—time that could otherwise be devoted to production—ends up being spent either complying with or circumventing the rules. If this proves too burdensome, people join the informal economy instead, thereby depriving themselves of legal protection for their business dealings. Many firms will use their resources—resources that could otherwise have been used for investment—to coax politicians into adapting the rules to their needs. Many will be tempted to take shortcuts, and bureaucrats will oblige in return for generous bribes, especially in poor countries where salaries are low and regulatory systems more or less chaotic. The easiest way of corrupting a nation through and through is to demand that citizens get bureaucratic permission for production, for imports, for exports, for investments. As the Chinese philosopher Lao Tzu declared more than two and a half millennia ago, ‘‘The more laws are promulgated, the more numerous thieves and bandits become.’’

If the goal is to have impartial rules and incorruptible officials, there is no better means than substantial deregulation. Amartya Sen argues that the struggle against corruption would be a perfectly good reason for developing countries to deregulate their economies even if no other economic benefits would accrue from doing so.²

Growth—a blessing

All experience indicates that it is in liberal regimes that wealth is created and development is sustained. Politics and economics are not exact sciences: we cannot perform laboratory experiments in order to ascertain which systems work and which do not. But the conflict between capitalism and central planning gives us something close. History provides us with several instances of similar populations, with similar preconditions and sharing the same language and norms, subjected to two different systems, one a market economy and the other a centrally controlled command economy. With Germany divided into capitalist West and communist East, people talked of an ‘‘economic miracle’’ in the Western part, while the East fell further and further behind. The same thing happened with capitalist South Korea and communist North Korea. The former was numbered among the Asian tigers, convincing the world that ‘‘developing’’ countries can actually develop. Whereas in the 1960s it was poorer than Angola, today, with the world’s thirteenth largest economy, South Korea is almost as affluent as a Western European country. The North Korean economy, by contrast, underwent a total collapse, and the country is now afflicted with mass starvation. One can also see the difference between Taiwan, a market economy that experienced one of the swiftest economic developments in history, and communist mainland China, which suffered starvation and misery until it saw fit to start opening up its markets.³

The same comparison can be made all over the world. The greater the degree of economic liberalism in a country, the better that country’s chances of attaining higher prosperity, faster growth, a higher standard of living, and higher average life expectancy. People in the economically freest countries are nearly 10 times as rich as those in the least free, and they are living more than 20 years longer!

The economic development of the past two centuries has no counterpart in the period prior to the breakthrough of the market economy in the 19th century. Historically, the human condition has been one of destitution, with people surviving from one day to the next. Most medieval Europeans were chronically undernourished, owned only one article of clothing, and worked in houses which were so filthy and vermin-ridden that, in the words of one historian, ‘‘From a health point of view the only thing to be said in their favour was that they burnt down very easily!’’⁵ After the 16th century, when different parts of the world very slowly and tentatively began trading with each other, we do find examples of growth, but that growth was extremely marginal.

Poverty in the 18th century was much the same on every continent. According to the best estimates, which are still highly uncertain, Europe was only 20 percent wealthier than the rest of the world. Then, in about 1820, Europe began moving further ahead as a result of the Industrial Revolution. But poverty remained appalling. Per capita income in the very richest European countries was the equivalent of $1,000–$1,500 annually—less than in present-day Bolivia or Kazakhstan. Even if all incomes had been perfectly equally distributed, that amount would still have been insufficient for more than a state of abject misery, with neither clean water nor daily bread and with little more than one garment per person. Almost the entire world population lived at a level of poverty scarcely to be seen anywhere today: only the very poorest countries—Mali, Zambia, and Nigeria, for example—come anywhere near it. During the 200 years since then, per capita incomes have multiplied several times over, worldwide. Global growth during the 320 years between 1500 and 1820 has been estimated at a mere 30th of what the world has experienced since then.⁶ Over the course of the last two centuries, incomes in Europe have risen more than tenfold. Asia has also picked up speed during the past half-century and, with the path to prosperity already known, has grown still faster. Living standards today are eight times higher in Japan and six times higher in China than they were in 1950.

Increased investment and the urge to devise better, more efficient solutions to old problems enable us to produce more, and growth accelerates. This acceleration generates new ideas and machinery, enabling the work-force to produce more. GDP, or gross domestic product, is a measure of the value of all goods and services produced in a country. Dividing that by the number of inhabitants in a country gives us GDP per capita (‘‘per head’’), which serves as a rough measure of that country’s wealth. Growth—the production of more goods and services—may not strike everyone as the most exciting thing on earth, and certain radical circles have even come to disdain it, branding those who do care about it as ‘‘economistic’’ or ‘‘growth fanatics.’’ That may be partly a healthy reaction to an excessive focus on high GDP as an end in itself, but growth, quite simply, means that production grows, and prosperity and opportunities grow with it. In the affluent world, growth may allow societies to save, to consume more, to invest in welfare, or to enjoy more leisure time. In the developing countries, it can mean the difference between life and death, development and stagnation, for it is growth that makes wider access to healthy foods and pure drinking water possible.⁷

For everyday life in India, growth since the 1980s has meant mud huts being replaced by brick buildings and muddy paths being paved. Electricity has become available to everyone, and the dark alleys now have streetlights. The alleys no longer reek of garbage, and hotbeds of infection are removed by proper drainage. The poor can afford clothing and footwear. As the clearest example of what growth implies, Indian women no longer wash their saris one half at a time. This was once necessary because most women possessed only one sari and thus had to wash it while still wearing it.

Growth also means opportunities and power for people. It means that, instead of resorting to the local usurer and getting into debt for a lifetime, the ordinary Indian can turn to a bank. People can look for jobs in different places, with different entrepreneurs, which emancipates the poor from the power of life and death that the village landlord once had over them. Although India has democratic elections, they do not make all that much difference so long as the poor are completely at the mercy of the local elite because they still have to vote as they are told. Parents in poor parts of the world do not send their children out to work because they like doing it, but because they need the money to feed the family. Growth gives them better incomes and improves the return on education, which means they can send their children to school instead. That also gives the individual greater opportunity within the family. A law against wife beating can be ineffective if the woman is economically dependent on her husband for survival, because in that case she will neither report him nor leave him. When the economy grows and more production materializes, the woman has a chance of getting a job away from home. She becomes less dependent on the husband’s caprices.

It is sometimes argued that growth only benefits the rich, while the poor lag behind. This is a curious notion. Why should poor people benefit less than others from society growing richer? Two World Bank economists, ...

Table of contents

• Preface
• I Every day in every way . . .
• II . . . and it’s no coincidence!
• III Free trade is fair trade
• IV The development of the developing countries
• V Race to the top
• VI Irrational, international capital?
• VII Liberalize, don’t standardize
• NOTES