Two or Three? How many cheers for capitalism?

Peter Leeson evaluates the evidence for capitalism as a development strategy:

My findings are straightforward. The two cheers for capitalism view is wrong. Although many relationships in the social sciences are unclear, capitalism’s relationship to development is not one of them. Unless one is ashamed of unprecedented increases in income, rising life expectancy, greater education, and more political freedom, there’s no reason to be a milquetoast defender of capitalism. This is what sprawling free markets have meant for countries that became more capitalist over the last quarter century. On the other side, there’s no evidence that countries that eschewed the global trend toward freer markets and embraced substantially greater state control performed better on any of these indicators. On the contrary, they performed demonstrably worse. I also find that the two cheers for capitalism variant that desires markets, but “within reason,” is wrong. There is no evidence for a Lorenz curve-type relationship between capitalism and development. Rather, this relationship is linear. Maximal capitalism begets maximal development.

The paper has an educational and entertaining section on the theory of why capitalism works. The soapbox effect gets in the way of the meat of the paper, especially its position early in the text, but I do think it is a very worthwhile section for students. Later parts of the paper are even better. Here, for example, is a nice summary of why exploring income covers most other issues of interest:

Income is highly and positively correlated with pretty much every positive development indicator one can think of (for example, access to a clean water source), and highly and negatively correlated with pretty much every negative development indicator one can think of (for example, infant mortality). There are exceptions. But this strong tendency militates against depicting many of these relationships. Once the relationship between capitalism and income is established, for most purposes it becomes redundant to examine the relationship between capitalism and improved access to a clean water source, infant mortality, and so on. If the reader wishes to verify this for herself, she is encouraged to plot the data and see.

At bottom, this paper uses measures of economic freedom to show correlations with substantive progress. You have to admire Leeson's persistence and share his frustration with the ideology that manifests in the American university mindset which refuses to acknowledge the third cheer.

Comments

[Jacob]

I would be playing into Leeson's hand if I called him dogmatic or criticized him for lack of nuance, so instead I will just cut straight to the point. This paper has done nothing to persuade me away from my "two cheers"-type view.

In short, my view is that it is far more likely that causality is flipped: wealth begets freedom, rather than the other way around. Note that this is entirely consistent with the data (flip the x and y axes if you like).

I am fully prepared to admit that this probably depends on which component of the Freedom Index we are talking about. Specifically:
1) Size of government. I find it highly likely that a rapid decrease in the size of government would, instead of leading to more freedom and wealth, would lead to more crime (decreased property rights) and a large drop in productivity in the short term. As such, this is probably better done as a slow process.
4) Freedom to trade internationally. With no trade barriers, it seems doubtful that domestic industry could ever develop. Far better to be somewhat protectionist, and then open up as your firms start to be able to compete (and export).

The implication of this model would be that there is an appropriate level of freedom for each country, and that this level is monotonically increasing in wealth. Naturally, wealthier countries can afford to invest more in health and education, and people whose basic needs are met care more about rights, so the other metrics follow. There is no Lorenz-type curve at work here: it's not that the highest levels of freedom are worse, it's that a country can have a level of freedom that, from the point of view of growth, can be too high for its own income level.

Perhaps Leeson's paper is worthwhile as a response to those who believe in "two cheers" as he presents it, but he would do well to, much as he seems to hate it, add a little nuance.

[Publius]

I have a question concerning the correlation of income with the other quality of life indicators. How does this marry with Charles Kenny's work: http://charleskenny.blogs.com/weblog/income_and_quality_of_life/ ?

His basic argument is that many quality of life indicators (e.g., infant mortality, life span, etc.) are driven by exogenous developments, while income is largely endogenous. For example, despite all of Haiti's problems, including falling income per capita, people are still living longer, more educated lives.

I think the rub lies in that Kenny is looking at changes in QoL and income for the most part, rather than absolutes, but I do think it's worth mentioning.

If anything, Kenny's points tack on an additional point for capitalism -- it has been the technological breakthroughs of modern capitalism that have allowed the world's poorest to live longer on less.

Not only has capitalism increased the income of many people, but it has made living, and living well, much much cheaper.

[clothing lockers]

I will surely email this to my friend.

Regards