The Causes Of Economic Growth

There is an old Dylan song in which JFK asks the singer:

"My dear Bob, what does it take to make the country grow?"

And Dylan answers:

"My dear John - Brigitte Bardot, Anita Ekberg, Sophia Loren... country'll grow."

To an economist like me, Dylan answered well. There is NOTHING that a politician like JFK can do to "make a country grow." Economic growth does not occur because of governments - but despite them. Economic growth occurs when individual enterprises flourish, when Capital is accumulated and invested, when more goods and services are produced and consumed, when science becomes technology, and, thus, productivity increases, thereby raising wages, which further fuels consumption... and so on and on, in an endless virtuous cycle. None of these have anything whatsoever to do with The State.

Of course, the study of economic history suggests reasons why some areas have prospered more than others - as, for example, England during the so-called "industrial revolution." What the history suggests is that this was no sudden "revolution"; that it was gradual progress; and that the most important factors behind it were the laws - the laws that protected Property and Contract. It is these that led to the accumulation of Capital.

Two other contributory factors need to be mentioned. First and foremost - Liberty. In England, constitutional liberty dates back to the Magna Carta (1215 AD) in which a specific clause granted the City of London and all other boroughs the "freedom to trade by land and sea." The City of London is possessed of an even older institution, its free corporation with its Lord Mayor, which was established around 1185 AD. Tradition has it that the King of England cannot march his army through the City of London without the permission of the Lord Mayor. It is the Lord Mayor who upholds the Civic Sword within the City. It is these merchants, possessed of Liberty, who accumulated the Capital necessary to launch many global enterprises long before modern capitalism - like the Honourable East India Company, whose merchant ships sailed into Surat harbour around the year 1605. And there were other great companies as well - the Virginia Company, the Levant Company, the Muscovy Company, the Trader Adventures, and many more. I have an essay on this "One Square Mile of Liberty" in my latest book, which you can read here.

As far as modern times are concerned, the most important factor behind capitalism in England during the "industrial revolution", going on till about 1905, when both Queen Victoria and Gladstone were gone, was the enormous prestige that the ideas of the great classical liberal political economists commanded. Since government rests on public opinion, and since public opinion had been entirely won over on the side of what Adam Smith called the "System of Natural Liberty," all the numerous controls over economic activity that characterized the preceding era of "mercantilism" were speedily demolished. Liberty! Cobden and Bright led a working-class movement demanding free trade in the 1830s - and Bastiat in France was hugely inspired.

From about 1850, other ideas started dominating the public mind - like socialism and democracy. But these have not helped economies grow. These have only consumed Capital and stifled enterprise. Without these, the world would have seen far higher growth.

Max Weber's influential thesis that the Protestant work ethic is the reason behind modern capitalism does not stand in the face of the evidence. Modern capitalism in Hong Kong, for example, had nothing to do with Protestantism - and everything to do with Liberty and Property and Contract. Ditto for Singapore, or the various emirates of the Middle East. Capitalism is human nature - and has nothing to do with religion. It used to be said that India was poor because of the anti-materialist religions of the people - but today, it is quite clear that these religions present no obstacle to enterprise. Murray Rothbard's history of economic thought also details the huge advances made in capitalism, in pre-Protestant, Catholic times.

So here is the real secret: it is the Rule of Law. That is, when the rulers - the State or the King - are UNDER the law themselves, and when Property and Contract are protected, and Liberty Under Law prevails for all.

Liberty! Property! Contract! That is all it takes to make a country grow.