Freedom and the Ultimate Resource

by Don Boudreaux on January 15, 2008

in Foreign Aid, Property Rights, Standard of Living

The Wall Street Journal‘s Mary Anastasia O’Grady summarizes the findings of the latest – the 14th – Heritage Foundation / The Wall Street Journal Index of Economic Freedom.  Here are the opening paragraphs of Ms. O’Grady’s summary:

Are the world’s impoverished masses destined to live
lives of permanent misery unless rich countries transfer wealth for
spending on education and infrastructure?

You might think so if your gurus on development
economics earn their bread and butter "lending" at the World Bank.
Education and infrastructure "investment" are two of the Bank’s
favorite development themes.

Yet the evidence is piling up that neither government
nor multilateral spending on education and infrastructure are key to
development. To move out of poverty, countries instead need fast
growth; and to get that they need to unleash the animal spirits of
entrepreneurs.

….

The Index also reports that the freest 20% of the world’s economies
have twice the per capita income of those in the second quintile and
five times that of the least-free 20%. In other words, freedom and
prosperity are highly correlated.

As Julian Simon taught us, the ultimate resource is the free human mind.  A land rich in petroleum, arable land, and iron ore and other minerals is useless to a society of humans incapable of rational thought and intolerant of change.  Nor would such a land of potential plenty realize its potential if its inhabitants are restrained by tyranny or by widely shared misconceptions that individual enterprise, innovation, profit, and the pursuit of worldly pleasures are degrading or sinful.

But unleash people from the countless foolish and rent-seeking constraints imposed by government and from constraints imposed by their own superstitions and they will create resources.  They will flourish and prosper, not only materially but also culturally and intellectually.  A free people can and will build a dynamically prosperous society in even relatively barren and inhospitable places such as New England, Arizona, and Hong Kong.  An unfree people will languish in poverty even in lush paradises such as much of Central and South America and in lands teeming with ‘natural’ resources such as Congo and Russia.

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{ 14 comments }

Chris Meisenzahl January 15, 2008 at 8:03 am

Great WSJ story, thanks!

Martin Brock January 15, 2008 at 9:29 am

The sentiments expressed are valid enough. Less developed nations nonetheless benefit from extensions of credit by more developed nations. If we extend too much credit, we can't expect a positive yield, but extending too much credit can result in faster growth regardless.

For example, suppose a population is illiterate. None of the people know how to read or write. Half of the people are incapable of learning, because they are severely dyslexic, but diagnosing this dyslexia is very costly. I have widgets designed to teach reading. I can distribute these devices throughout the population at lower cost. I can expect able people with the widgets to learn to read in two years and then to pay me the cost of one widget plus 10% interest, but I can't expect any return from the others.

In this scenario, I can't extend credit for widgets profitably, but I can teach every able person to read by extending credit unprofitably.

Jason January 15, 2008 at 10:24 am

I completely agree, but I wish O'Grady had put more of an overt emphasis on private property rights. I believe many people think of civil liberties only and completely neglect and even reject economic freedoms (obviously not the author or most WSJ/Cafe readers). Even worse, they may support bogus "freedoms" such as economic self-sufficiency (minimize trade) and human "dignity" (prop up burdensome bureaucracy, control competition).

MT January 15, 2008 at 10:31 am

Is there any sort of successor to Julian Simon who is out there today, extending his work to address current circumstances?

Peter Huber's The Bottomless Well comes to mind.

My malthusian friends keep asserting that it's different now, resources are finite, demand from China and India are becoming so big that we are in fact running out of resources. I'd buy them a Simon book if I ever thought they'd actually consider his ideas.

Martin Brock January 15, 2008 at 1:35 pm

Jason: "Even worse, they may support bogus "freedoms" such as economic self-sufficiency (minimize trade) and human "dignity" (prop up burdensome bureaucracy, control competition)."

Like the global patent monopolies and Treasury notes we call "private property". We'll trade with you "freely" if you'll respect our statutory monopolies; otherwise, you can be self-sufficient.

Francesca January 15, 2008 at 2:41 pm

MT:"Is there any sort of successor to Julian Simon who is out there today, extending his work to address current circumstances?"

I'd suggest that Indur Goklany's book, The Improving State of the World, takes some of Julian Simon's themes and adapts them to today's issues.

But Simon's writings,e.g., The Ultimate Resource, are seminal and are, in my view, still extremely relevant.

mark seery January 15, 2008 at 8:55 pm

"Nor would such a land of potential plenty realize its potential if its inhabitants are restrained by tyranny.."

I've seen a number of people assert recently that China is the counter example. Yes some degree of economic freedom, but less than developed countries in terms of personal freedom. Therefore some are saying China is the example which proves personal freedom is not needed.

I'm of the mind the practice of economic freedom is of course a personal freedom of types, but moreover it will lead to greater personal freedoms; though in a timeframe that is hard to predict. That is to say freedom is a journey more than a destination; especially considering there are few perfectly free societes and a number of them do quite well, so it is a relative measure at best.

Wondering what other people think. Is China the example that demonstrates that freedom is not a necessary condition, or not?

Colin January 15, 2008 at 9:14 pm

This post reminds me of two experiences, which I had a few years ago and one I had a few months ago.

The Summer after graduating high school I was a Marxist and in August I was visiting my grandparents in Southern Orange County. They live in a large home in an upscale area and while I was lounging in the hot tub, chatting with some other teens about the expensive electronics and apparel that we all had purchased on our parents' dime. I looked out at the lights along on the hills and was glad that I was in such a fine community. The next day my family went a few blocks over to Laguna Beach, had a fine meal and saw the Pageant of the Masters show. What should have been enjoyable was tainted with guilt on my part, especially that all of this fine living was taking place just an hour's drive from the poverty of Mexico.

I assumed that most of this prosperity, juxtaposed to such poverty, was a result of historically wrongs on the part of the West. At that time, I was unconsciously a believer in the zero sum fallacy.

Thankfully a few years and many economics courses latter I was closer to home in another fine community in Southern California. It was Summer and my friends and I hiked up a large hill that stood over one of the many dry valleys that make up coastal Southern California.

I could see the 101 freeway moving along the valley, the lights of the homes of about a million. This place is one of the wealthiest communities on Earth and is nestled in a dray and rocky valley and this is the case for many communities in the region. This all drove home the point that land is trivial and that the human mind and a society that is built to exploit the strengths of the human is the one that will grow wealthy.

I had already had enough school to be rid of the zero-sum fallacy and to understand the importance of human capital but that summer night, seeing the hills and lights served to drive home the point that wealth is created by man and it is created by humans in some of the more uninviting places of the planet.

The sight of lights being strung along a the hills a beautiful august night in Southern California also brought me back to that night in Orange County and I realized that while thankfully I had rid myself of such nobly intentioned foolishness, far too many people continue to believe in these soft hearted but destructive misconceptions about the world, humanity and the creation of wealth.

Gil January 15, 2008 at 10:21 pm

That an interesting point M. Seery. Theoretically maximum economic freedom and low personal freedom would make a society far more wealthier than one with mediocre economic freedom and plenty of personal freedom. It's like a bloke who was free to eat as much junk food as he liked as a kid versus someone who was only allowed to eat varied healthful meals. Considering it's all about production and output the Chinses method of wealth creation would be one of the better ones.

Evan January 16, 2008 at 12:16 am

We should bear in mind that entrepreneurship and real innovation require a sort of free-thinking and willingness to defy convention that is rather difficult to achieve in a country with very limited personal and social freedoms. Those qualities would still be found in some individuals, but it seems reasonable that they would be significantly rarer.

Gil January 16, 2008 at 12:29 am

Chinses?! :(

Lee Kelly January 16, 2008 at 5:31 am

The Chinese have been playing catch up, importing technology and innovation, rather than creating it. The economy is without borders, and so the performance of a single political authority should not be taken out of context. The global economy is the economy, and isolated national examples can be very misleading unless handled carefully and critically.

For example, how would the coercivised healthcare systems of europe be performing if the United States did not exist? The majority of pressure to innovate and lower costs comes from the United States, despite itself having a highly regulated healthcare system. In the absence of such hubs of entrepreneurship, where would european healthcare be?

The majority of nation to nation comparisons suffer from this problem, especially in the media, where there is little or not recognition that the problem exists.

I guess that the crusoe economics counterexample would be the following. Two men on an island. The first is thoughtful and innovative, and the second thoughtless and unimaginative. However, the second enjoys a standard of living almost as good as the first, and without investing the same effort, because he simply copies everything the first man does.

The fallacy would be for the first man to survey this situation, and conclude that he should copy the second man. Afterall, the second man enjoys a standard of living almost as good as the first, but with considerably less effort. That would be the rational thing to do, right?

Deane January 16, 2008 at 5:48 am

Any thoughts on the Heritage/WSJ Index and the Fraser institute one? there's a large discrepancy in the rankings for countries. My understanding is the Heritage report is more subjective analaysis whereas the Fraser one is based on soley data analysis.

Does anyone have thoughts on the approaches?

I'd prefer heritage i think, because i think just analyzing the data wouldn't give the accurate picture on what's actually happening on the ground.

in Much of the "developing world" the actual law and its enforcement are two very different things.

mark seery January 16, 2008 at 10:19 am

"I guess that the crusoe economics counterexample would be the following…."

Thanks Lee Kelly, appreciate your thoughts….

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