Thoughts on economics and liberty

There is only way to increase wealth: free the market

Creating huge amounts of wealth is not rocket science but policy makers across the world prefer to live in their interventionist delusions, inveigled by quack economists (particularly Keynesians) . The simple lesson of economics: that people should be left free to trade, compete, and innovate, is the hardest lesson for interventionist policy makers to imbibe.

Here's some common sense evidence about that mega-welfare state Sweden, that landed on its nose some time ago, and has finally been rescued (figuratively) by Adam Smith (of The Wealth of Nations fame). This is an extract from an excellent article in The Economist, entitled, "Smart work: Faster productivity growth will be an important part of rich economies’ revival" (7 Oct  2010). Note that I disagree with the last few paragraphs of this report from The Economist – where it suggests a range of interventions that governments might consider. In my view the government must step out of the way. That's its only job (and mandate). No intervention except to regulate for accountability and justice.

The world is at a cross-roads. Those nations that do not deregulate to the bare minimum, and focus purely on what a government should do, will lose out quite badly to those that do. This means the welfare state, in particular, must go. Of course there are challenges facing the overly regulated welfare states of the West in moving towards this desirable goal (for that see this). Tightening of the belt needs to be accompanied by some longer term considerations.

(On a related topic, here's a very interesting article from the same issue of The EconomistThe other demographic dividend: Emerging markets are teeming with young entrepreneurs)


Smart work: Faster productivity growth will be an important part of rich economies’ revival

"In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.

"Sweden’s retailers put in a particularly impressive performance. In 1990, McKinsey found, they were 5% less productive than America’s, mainly because a thicket of regulations ensured that stores were much smaller and competition less intense. Local laws restricted access to land for large stores, existing retailers colluded on prices and incumbent chains pressed suppliers to boycott cheaper competitors. But in 1992 the laws were changed to weaken municipal land-use restrictions, and Swedish entry into the EU and the creation of a new competition authority raised competitive pressures. Large stores and vertically integrated chains rapidly gained market share. By 2005 Sweden’s retail productivity was 14% higher than America’s.

"The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels.

"All this suggests that for many rich countries the quickest route to faster productivity growth will be to use the crisis to deregulate the service sector."

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3 thoughts on “There is only way to increase wealth: free the market
  1. Ravi

    What is your opinion about the recent G20 draft where poor countries are given the option to ditch free market in favour of a more rounded approach that puts “resilient growth” at the heart of development strategy.

    The recent FT article argues that “there is no single formula for development success” and stresses rich and poor countries should work as “partners” to foster enduring growth. The agreement is termed the “Seoul consensus for shared growth”, an attempt to supplant the Washington consensus of the late 1980s that recommended free market solutions to lift countries out of poverty.,dwp_uuid=60a3db68-b177-11dd-b97a-0000779fd18c.html#axzz14wfswpRf

  2. Sanjeev Sabhlok

    Thanks, Ravi.

    I disagree with its confused message. Free markets ARE underpinned by infrastructure and good governance. Else they can't exist. This is a confusing and social democratic intervention and will cause those countries that adopt it much grief, given the penchant of politicians and bureaucrats to expand their empires in each of these areas and bring in the most interventionist approaches possible.



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