Thursday, September 01, 2005

August's Lost Legacy Prize Winner

In a path breaking article, “The Data of Development”, by P. Boettke, on the “Austrian Economics” Blog (a must for a visit:; bookmark it for consistently good, clear articles on economics from an Austrian perspective – the closest modern perspective to Adam Smith – though not always pure ‘Smithian’).

Why are some countries rich and others poor? This vexing question has preoccupied the best minds in economics since at least Adam Smith's An Inquiry Into the Nature and Causes of the Wealth of Nations. In the late 19th century, Max Weber asked why capitalism had developed in Europe and failed to take root in China, and in the early 20th century Joseph Schumpeter sought to understand how entrepreneurial innovation fueled the wealth of nations. From Smith to Schumpeter questions of economic development were asked without reference to the aggregate data of national income accounting.”

That is a good start to the article which addresses themes that often perplexed me as a young economist brought up during the years of the high-tide of Keynesian macro-economics.

“Armed with Keynesian theory and the statistical tool-kit of refined measurement and control, Keynesian policies could guide government in the effort to correct the flaws of the capitalist system and manage the economic system appropriately so that stability and prosperity could be experienced.”

And this is the problem with Keynesian economics – its sets out to correct the ‘flaws of capitalism’ with the in-built flaws of bureaucratic interventions that are self-contradictory. By maintaining, for example, aggregate demand to maintain full employment, it weakened the working of the economy. Workers employed in loss making activities (it doesn’t matter if this was the fault of the bosses, of whose fault it was – industries rise and fall as part of a modern economy) they have no incentive to change their ways rapidly, and they can also behave with reckless disregard for the effects of their behaviour because the prospect of unemployment is not real if they know that the government will always pump in the state sponsored demand sufficient to maintain aggregate employment. This was the fatal flaw in the income policies foisted on the economy by the Labour Government advised by Balogh, Kaldor, et al.

To show they are serious, the article describes a programme they are about to undertake that will conduct in a Smithian manner a study of what actually causes entrepreneurial performance in Africa (and inhibits it). There is more likely to be a real increase in economic welfare from such studies – as a practical guide to adopting policies that work on the ground – than from working out at the aggregate level how to financially bankroll wasteful governments whose performance at any level – even if honest and corruption free – is lamentable and endemic.

“Rather than study statistical aggregates, the focus here will be in on-the-ground study of how entrepreneurs are erasing the devastating problems of poverty in some of the poorest regions of the world. The eradication of poverty will not come from international aid agencies and the decisions by western leaders on how best to redistribute wealth world-wide, but through the entrepreneurial spirit of Africans themselves. Given the freedom to realize the gains from trade, individuals will strive to improve their lot in life and the lives of their children, etc.”

Congratulations to Austrian Economics. Winners of this month’s prize for the best contribution in the spirit of the true Legacy of Adam Smith.

PS A close runner-up also came from Austrian Economists: "Best Smithian Analysis for a Long Time".


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