Concluding Thoughts

DURING A VISIT TO THE FORMER Soviet Union in 1992, a Russian told one of the authors, "We know what doesn't work; now we are trying to figure out what will work." The Russians are not alone. Much of the world is searching for economic prescriptions that work.

As we have indicated throughout this book, both basic economics and the North American experience provide insight into this issue. Basic economics indicates that private ownership, freedom of exchange, competitive markets, and monetary stability are the cornerstones of economic prosperity. When these cornerstones are present, individuals will be able "to reap what they sow," productive energy will be released, and wealth will be created. This is the recipe that generated our material progress. To the degree that we depart from it, we will cease to experience growth and prosperity.

Moreover, it is a recipe that will work around the world. Countries that adopt sound policies will prosper while those that fail to do so will stagnate. With regard to this point, the experiences of Argentina, Venezuela, Japan, and Hong Kong are instructive. As Exhibit 7 illustrates, in 1960 the per capita incomes of Japan and Hong Kong were only two-thirds to three-fourths as large as those of Argentina and Venezuela. By 1990, however, the situation was dramatically different. Adjusted for inflation, the 1990 per capita incomes of Argentina and Venezuela were only slightly greater than their 1960 level. The economies of these countries stagnated during the 1960-1990 period. In contrast, the inflation-adjusted per capita incomes of Japan and Hong Kong increased by more than fivefold during the same period. By 1990, the per capita incomes of Japan and Hong Kong were approximately three times greater than those of Argentina and Venezuela.

These data reveal a great deal about economic prosperity. First, they illustrate that natural resource abundance is neither a necessary nor a sufficient condition for economic prosperity. Japan has few natural resources and it imports almost all of its industrial energy supply. Hong Kong has practically no raw materials, very little fertile soil, and no domestic sources of energy. Yet both are prosperous. In contrast, Venezuela is one of the most oil-rich countries in the world, while Argentina has a great deal of fertile land and an abundance of other natural resources. Natural resources can help promote economic prosperity, but clearly they are not the key. If they were, Japan and Hong Kong would be poor, while Argentina and Venezuela would be rich.

Second, Exhibit 7 illustrates the limitations of advanced technology as a source of economic growth. Clearly, improvements in technology have dramatically enhanced our ability to produce goods during the last 250 years. The substitution of power-driven machines for human labour, the development of miracle grains, fertilizers, new sources of energy, and improvements in transportation and communication have transformed the way of life in North America, Europe, Oceania, and Japan. Less-developed countries, however, can borrow and emulate the proven technologies of the developed countries. This should make it easier for them to grow and prosper. If technology were the primary factor limiting the creation of wealth, the economic well being of people in less-developed nations would be improving rapidly. Unfortunately, this is not the case.

Why did the economies of Japan and Hong Kong grow rapidly, while Argentina and Venezuela stagnated? Clearly, differences in economic organization are an important part of the answer. Our analysis indicates that securely defined property rights, low taxes, monetary stability, and reliance on markets are keys to economic progress. In general, Japan and Hong Kong followed this course during 1960-1990. In contrast, countries that restrict business and trade, impose high taxes, fix interest rates and other prices, and follow an inflationary monetary policy discourage productive activity and retard the efficient use of resources. In general, this has been the course followed by Argentina, Venezuela, and most of the other less-developed countries in recent decades.

Sound economic organization is the key to economic prosperity. Countries that adopt policies that encourage the creation of wealth will prosper, while those that fail to do so will continue to stagnate. This is true for both wealthy industrial nations and poor developing countries. The future prosperity of both is directly related to the soundness of their economic organization. This is the central message of modern economics.


Suggested Additional Readings

Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain (Cambridge: Harvard University Press, 1985).

Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1980).

Nathan Rosenberg and L.E. Birdzell Jr., How the West Grew Rich (New York: Basic Books, 1986).