Indy Telecom & Industrial Media

A Capitalist’s Apology: Free Markets, Freedom, and Development — published on the World Poverty & Human Rights Online website as part of my WPHR class this Spring.

The published HTML version can be found on the site and a PDF version is also available for those interested.

(Cross posted from my International Relations blog.)

Scott Sumner over at The Money Illusion talks about the best prediction of the past twenty years. He makes the case that Francis Fukuyama’s 1989 prediction that the victory of democracy backed capitalism is pretty much a forgone conclusion is the most impressive of them all.

1. The world has gotten much more peaceful. I recall reading that the last couple years were the most peaceful in all of human history (and pre-history for that matter.) Perhaps someone can find the article.

2. The world has gotten much more democratic. The number of democratic countries has soared at the fastest rate in history, by far.

3. The world has gotten much more market-oriented. There has been a huge wave of privatization and deregulation of prices and market access. And this trend extends far beyond the formerly communist countries.

So the obvious choice for most successful prediction is Francis Fukuyama’s 1989 claim that “history was ending,” that the great ideological battle between democratic capitalism and other isms was essentially over, and that henceforth the world would become gradually more democratic, peaceful, and market-oriented.

While it is an interesting idea, I am unsure that this is necessarily the case, for a variety of reasons. Just like economic booms and busts, political systems also go through periods of maturity. Right now, with aging populations in the west and rising populations across the world, looming food and water shortages and several nations (including nuclear-capable ones) hurting economically, we are at the perfect cusp for war.

Professor Sumner’s argument for China, while interesting, is also questionable:

I get very annoyed when I see people say “the Chinese case proves that economic development doesn’t inevitably lead to political liberalization.” There are so many problems with this sort of statement that one hardly knows were to begin. China has seen incredible political liberalization since 1978, indeed even some progress since 1998. But what about western-style democracy? To answer that question, consider the list above. I would argue that China most resembles Thailand. Both have similar per capita GDPs, both have a huge split between the urban elite and the rural poor. My hunch is that consciously or subconsciously, the urban residents of China are not thrilled by the idea of a pure democracy that would effectively turn the country over to the rural poor. But wait a few decades, when China goes from being 60%-70% rural, to 60%-70% urban, and from mostly poor to mostly middle-income, and from mostly undereducated to mostly educated. Then let’s see how Fukuyama’s thesis holds up.

The perfect anti-thesis of this is India, where despite the educated elite feeling thus, democracy succeeded. But no, more fundamentally, my argument is that democracy by its very nature will squash minorities. His example with the Christians of Lebanon highlights this — would a Christian in Jordan want a liberal western-educated ruling monarchy, or would they prefer a democracy where the majority pretty much consider them mortal enemies? And unless the minority has critical mass, democracy as a system will seek homogeneity, which sooner or later begins to resemble a socialist structure (at least socio-economically).

In this regard, I do not think we’ve ever really seen a “democratic” system evolve through to completion.  And until we do, it is too early to say whether Fukuyama is right, or just plain mad. After all, most of Fukuyama’s statements are normative at best — isn’t it the hallmark of science and rigor to at least aspire to be positive?

Two great pieces by the wonderful folks at PIMCO -

•  Hairy Lips Sink Ships by Bill Gross
  
• Saving Capitalistic Banking From Itself by Paul McCulley

(via Paul Kedrosky)

The Economist has a rather insightful article on capitalism. I especially liked this concluding quote -

Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.