the age of turbulence adventures in a new world phần 6 pdf

Clearly, a society with such attitudes will give prises far greater freedom to compete than a society that perceives com-petitive business as unethical or unsettling.. First, com-petitio

phasize personal initiative: "The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security

is so powerful a principle, that it is alone, and without any assistance pable of carrying on the society to wealth and prosperity" He concluded that to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way" Competition was

ca-a key fca-actor becca-ause it motivca-ated eca-ach person to become more productive, often through specialization and division of labor And the greater the pro-ductivity, the greater the prosperity

This led Smith to his most famous turn of phrase: individuals who compete for private gain, he wrote, act as if "led by an invisible hand" to promote the public good The metaphor of the invisible hand, of course, captured the world's imagination—possibly because it seems to impute a godlike benevolence and omniscience to the market, whose workings are in reality as impersonal as natural selection, which Darwin came along and described more than half a century later The expression "invisible hand" does not seem to have been very important to Smith; in all his writings, he used it only three times The effect it describes, however, is something he discerns at every level of society, from the great flows of goods and com-modities between nations to everyday neighborhood transactions: "It is not from the benevolence of the butcher, the brewer, or the baker, that we ex-pect our dinner, but from their regard to their own interest."

Smith's insight into the importance of self-interest was all the more revolutionary in that, throughout history in many cultures, acting in one's self-interest—indeed, seeking to accumulate wealth—had been perceived

as unseemly and even illegal Yet in Smith's view, if government simply provides stability and freedom and otherwise stays out of the way, personal initiative will see to the common good Or as he put it in a 1755 lecture:

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administra-tion of justice: all the rest being brought about by the natural course of things."

Smith succeeded in drawing broad inferences about the nature of

com-mercial organization and institutions based on remarkably little empirical

evidence—unlike economists today he didn't have access to reams of ernment and industrial data Yet over time, the numbers would bear him out Throughout much of the civilized world, free-market activity first cre-ated levels of sustenance adequate to enable the population to grow and later—much later—created enough prosperity to foster a general rise in living standards and an increase in life expectancy The latter developments opened the possibility for individuals in developed countries to establish long-term personal goals Such a luxury had been remote to all but a sliver

gov-of earlier generations

Capitalism also made change a way of life For most of recorded tory people lived in societies that were static and predictable A young twelfth-century peasant could look forward to tilling the same plot of his landlord's soil until disease, famine, natural disaster, or violence ended his life And that end often came quickly Life expectancy at birth was, on aver-age, twenty-five years, about the same as it had been for the previous mil-lennium Moreover, the peasant could expect that his children and their children would till the same plot Perhaps such a rigidly programmed life conferred the sense of security that comes from utter predictability, but it left little to individual enterprise

his-To be sure, improved agricultural techniques and the expansion of trade beyond the largely self-sufficient feudal manor increased the division

of labor, raised living standards, and allowed populations to expand in the sixteenth and seventeenth centuries But the pace of growth was glacial In the seventeenth century, the great mass of people still were engaged in the same productive practices as their forebears many generations earlier

Smith held that working smarter, not merely harder, was the way to

wealth In the opening paragraphs of The Wealth of Nations, he underscored

the crucial role played by the expansion of labor productivity An essential determinant of a nation's standard of living, he said, was "the skill, dexter-ity, and judgment with which labor is generally applied." This flew in the face of earlier theories, such as the mercantilist precept that a nation's wealth was measured in troves of gold bullion, or the Physiocrat tenet that value derived from the land "Whatever be the soil, climate, or extent of territory of any particular nation," Smith wrote, "the abundance or scanti-

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ness of its annual supply" must depend upon "the productive powers of labor." Two centuries of economic thought later, little has been added to those insights

With the help of Smith and his immediate successors, mercantilism was gradually dismantled and economic freedom spread widely In Britain, this process reached its finale with the 1846 repeal of the Corn Laws, a set

of tariffs that for many years had blocked imports of grain, keeping grain prices and therefore landowners' rents artificially high—and elevating, of course, the price paid by industrial wage earners for a loaf of bread The ac-ceptance of Smith's economics was, by then, prompting the reorganization

of commercial life in much of the "civilized" world

Yet Smith's reputation and influence eroded as industrialization spread

He was no hero to many who struggled during the nineteenth and twentieth centuries against what they saw as the barbarism and injustice that accom-panied laissez-faire market economies Robert Owen, a successful British factory owner, believed that laissez-faire capitalism by its very nature could lead only to poverty and disease He founded the Utopian movement, which advocated, in Owen's phrase, "villages of cooperation." In 1826, his adher-ents set up New Harmony, Indiana Ironically, strife among the residents brought New Harmony to collapse within two years But Owen's charisma continued to draw large followings among those struggling to eke out a liv-ing in appalling working environments

Karl Marx was dismissive of Owen and his Utopians but was no devotee

of Smith's While Smith's intellectual rigor attracted him—in Marx's view, Smith and other so-called classical economists had accurately described the origins and workings of capitalism—Marx thought Smith had missed the main point, that capitalism was but a step Marx saw it as a historical stage

in an inevitable progression to the revolution of the proletariat and the umph of communism His followers eventually took a substantial segment

tri-of the world's population out tri-of capitalism's way—for a while

Unlike Marx, the Fabian socialists of the late nineteenth century were not looking for revolution The group named itself after the ancient Roman general Fabius, who held off Hannibal's invading army with a military strat-egy of attrition rather than all-out confrontation Similarly, the Fabians aimed not to destroy capitalism but to constrain it Government, they be-

lieved, should actively safeguard public welfare from the harsh tiveness of the marketplace They advocated protectionism in trade and the

The Fabians laid the groundwork for modern social democracy and their influence on the world would end up being at least as powerful as that

of Marx While capitalism succeeded brilliantly in delivering higher and higher standards of living for workers throughout the nineteenth and twen-tieth centuries, it was the tempering effect of Fabian socialism that many argued would make market economies politically palatable and keep com-munism from spreading Fabians took part in founding Britain's Labour Party They also had a profound influence on British colonies as the colonies gained independence: in India in 1947, Jawaharlal Nehru drew on Fabian principles to set economic policy for one-fifth of the world's population

theo-ries was at a low ebb And for much of the cold war, economies on both sides of the iron curtain remained either heavily regulated or centrally planned "Laissez-faire" was practically a term of opprobrium; the most prominent advocates of free-market capitalism were iconoclasts like Ayn Rand and Milton Friedman The pendulum of economic thinking began to swing in Smith's favor in the late sixties, just as I began my public career The comeback has been long and slow, particularly in his native land A U.S economist looking for Smith's grave in an Edinburgh churchyard in

2000 reported having to clear away beer cans and debris to read the worn inscription on the stone:

HERE ARE DEPOSITED THE REMAINS OF ADAM SMITH

A U T H O R OF THE THEORY OF M O R A L SENTIMENTS

AND W E A L T H OF N A T I O N S

Yet Scotland, too, has come around to according Smith the kind of honor he deserves The way to the grave is now marked by a newly installed

stone that quotes from The Wealth of Nations, and a college near Kirkcaldy

has been renamed after Smith A ten-foot-tall bronze statue of him is planned for Edinburgh's Royal Mile Appropriately it is being paid for with

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private funding And, on a personal note, in late 2004 I was delighted to cept a request from my good friend Gordon Brown, Britain's longtime chancellor of the exchequer and now prime minister, to deliver the first Adam Smith Memorial Lecture in Kirkcaldy That a leader of Britain's La-bour Party, whose roots in Fabian socialism are such a far cry from the te-nets espoused by Smith, would sponsor such an occasion is indeed a measure of change As I will discuss, Britain has endeavored to join some of the tenets of the Fabians with market capitalism—a pattern that repeats it-self to a greater or lesser extent throughout the trading world

ac-THE MODES OF

CAPITALISM

room at IMF headquarters, I could hear the chanting and shouts

of the antiglobalization dissidents on the street It was April

2000, and somewhere between ten thousand and thirty thousand students, church group members, unionists, and environmentalists had converged on Washington to protest the spring meeting of the World Bank and the Inter-national Monetary Fund While we finance ministers and central bankers in the room couldn't make out the words of the chants, it wasn't hard to un-derstand the gist They were protesting what they viewed as the depreda-tions of increased global trade, particularly the oppression and exploitation

of the poor in developing countries I was, and am, saddened by such events, since were the protesters to succeed in destroying global trade, those most harmed would be hundreds of millions of the world's poor, the very people

in whose name the protesters had chosen to speak

While central planning may no longer be a credible form of economic organization, it is clear that the intellectual battle for its rival—free-market capitalism and globalization—is far from won For twelve generations, capi-

talism has achieved one advance after another, as standards and quality of living have risen at an unprecedented rate over large parts of the globe Poverty has been dramatically reduced and life expectancy has more than doubled The rise in material well-being—a tenfold increase in real per capita income over two centuries—has enabled the earth to support a six-fold increase in population Yet, for many capitalism still seems difficult to accept, much less fully embrace

The problem is that the dynamic that defines capitalism, that of giving market competition, clashes with the human desire for stability and certainty Even more important, a large segment of society feels a growing sense of injustice about the allocation of capitalism's rewards Competi-tion, capitalism's greatest force, creates anxiety in all of us One major source of it is the chronic fear of job loss Another, more deeply felt angst stems from competition's perpetual disturbance of the status quo and style

unfor-of living, good or bad, from which most people derive comfort I am sure the American steel manufacturers I advised in the 1950s would have been quite happy if Japanese steelmakers hadn't improved their quality and pro-ductivity so markedly Conversely, I doubt that IBM was thrilled to see computerized word processors upstage the venerable Selectric typewriter

Capitalism creates a tug-of-war within each of us We are alternately the aggressive entrepreneur and the couch potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes While competition is essential to economic progress, I can't say I always personally enjoy the process I never thought kindly of rival

firms seeking to lure clients from Townsend-Greenspan But to compete, I

had to improve I had to offer a better service I had to become more ductive In the end, of course, I was better off for it So were my clients, and

pro-I suspect so were my competitors as well Down deep that is probably the message of capitalism: "creative destruction"—the scrapping of old tech-nologies and old ways of doing things for the new—is the only way to in-crease productivity and therefore the only way to raise average living standards on a sustained basis Finding gold or oil or other natural wealth, history tells us, does not do that

There is no denying capitalism's record Market economies have ceeded over the centuries by thoroughly weeding out the inefficient and

suc-poorly equipped, and by granting rewards to those who anticipate sumer demand and meet it with the most efficient use of labor and capital resources Newer technologies increasingly drive this unforgiving capitalist process on a global scale To the extent that governments "protect" portions

con-of their populations from what they perceive as harsh competitive sures, they achieve a lower overall material standard of living for their

pres-people

Regrettably, economic growth cannot produce lasting contentment or happiness Were that the case, the tenfold increase in world real per capita GDP over the past two centuries would have fostered a euphoric rise in human contentment The evidence suggests that rising incomes do raise happiness, but only up to a point and only for a time Beyond the point at which basic needs are met, happiness is a relative state that, over the long run, is largely detached from economic growth The evidence shows it is determined mainly by how we view our lives and accomplishments rela-tive to those of our peers As prosperity spreads, or perhaps even as a result

of its spread, many people fear competition and change that threaten their sense of status, which is critical to their self-esteem Happiness de-pends far more on how people's incomes compare with those of their per-ceived peers, or even those of their role models, than on how they are doing

in any absolute material sense When graduate students at Harvard were asked a while back whether they would be happier with $50,000 a year

if their peers earned half that, or $100,000 if their peers earned double that, the majority chose the lower salary When I first saw the story, I chuck-led and started to brush it off But it struck a chord that unearthed a long-dormant memory of a fascinating 1947 study by Dorothy Brady and Rose Friedman

Brady and Friedman presented data showing that the share of income that an American family spent on consumer goods and services was largely determined not by the level of family income but by its level relative to the nation's average family income Thus, their study suggests that a family with the nation's average income in 2000 would be expected to spend the same proportion of its income as a family with average family income

in 1900, even though in inflation-adjusted terms the 1900 income was only

a small fraction of that of 2000.1 reproduced and updated their calculations

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and confirmed their conclusion.* Consumer behavior has not changed much over the last century and a quarter

The data made clear that how much people spent or saved was mined not by the level of their real purchasing power, but by their pecking order on the income scale, their income relative to that of others.+ What is all the more remarkable about this finding is that it held even in the latter part of the nineteenth century, when households spent much more of their income on food than they did in 2004.*

deter-None of this would have surprised Thorstein Veblen, the American

economist who in his book The Theory of the Leisure Class, written in 1899,

famously gave the world the expression "conspicuous consumption." He noted that an individual's purchase of goods and services is tied to what used to be called "keeping up with the Joneses." If Katie had an iPod, Lisa had to have one too I always thought Veblen carried his analysis to an ex-treme, but there is little doubt that he identified a very important element

of the way people behave As the data show, we are all competitively tive to what our peers earn and spend They may be friends, but they are also seen as rivals in the pecking order Individuals are demonstrably hap-pier and less stressed as their incomes rise with a rising national economy, and rich people, surveys show, are generally happier than those lower down the income scale But human psychology being what it is, the initial eupho-

sensi-*Sample surveys of U.S c o n s u m e r i n c o m e and outlays have b e e n published periodically by t h e U.S D e p a r t m e n t of Labor and its predecessors since 1 8 8 8 1 collected data from seven surveys from 1888 to 2 0 0 4 T h e raw survey data appeared to have no consistent p a t t e r n until I exhib- ited each i n c o m e bracket's ratio of spending to i n c o m e against each particular year's average family income T h e n , as in Brady and Friedman, for all seven surveys, t h e ratio of spending to

i n c o m e for those households w i t h a third of t h e nation's average i n c o m e concentrates around 1.3 (their spending exceeds i n c o m e by 30 p e r c e n t ) T h e s p e n d i n g / i n c o m e ratio t h e n falls even-

tually to a b o u t 0.8 at d o u b l e t h e average i n c o m e level

t A n alternate way to reach t h e same conclusion is to observe t h a t t h e r e is no discernible

long-t e r m long-t r e n d in long-t h e nalong-tion's household saving ralong-te Yelong-t all surveys show long-t h e saving ralong-te is higher for u p p e r - i n c o m e households t h a n for lower-income households For b o t h s t a t e m e n t s to be

t r u e (and if t h e distribution of incomes does n o t veer outside its historical range), households

at any given dollar i n c o m e level m u s t be saving less as t h e aggregate incomes rise w i t h time

The e x t e n t of t h e d o w n w a r d creep in saving m u s t be directly related to t h e g r o w t h rate of

aver-age household income

t F o o d , of course, is a very useful proxy for t h e subsistence level, w h i c h s h o u l d n ' t be tied to

w h e r e a family stood in t h e i n c o m e pecking order

ria of a higher standard of living soon wears off as the newly affluent adjust

to their better status in life The new level is quickly perceived as "normal." Any gain in human contentment is transitory*

People's conflicted reactions to capitalism have spawned a variety of modes of capitalist practice in the postwar years, from highly regulated to lightly constrained While each individual has an opinion, there is a visible tendency for much of a society to coalesce around a common point of view, which often differs measurably from the choices of other societies This, I sense, results from the need of people to belong to groups defined by reli-gion, culture, and history, which, in turn, is fostered by an innate need of people for leaders: of the family, the tribe, the village, the nation It is a uni-versal trait that probably reflects the imperative for people to make choices

to govern their day-by-day behavior Most people, much of the time, feel adequate to the task and seek guidance from religious direction, the recom-mendations of family members, and the pronouncements of presidents Almost all human organizations reflect this need for hierarchy The shared views of any society, in practice, are views embraced by its leadership

in-If happiness were tied solely to material well-being, I suspect, all forms

of capitalism would converge to the American model, which has been the

most dynamic and productive But it is also the one that creates the most stress, especially in the job market As noted in chapter 8, some four hun-

dred thousand people in the United States lose their jobs every week, and

another six hundred thousand change or leave jobs voluntarily Average job tenure for Americans is 6.6 years, well short of the 10.6 years for Germans and 12.2 years for Japanese Market-based societies, which today means virtually all, have had to choose where on the spectrum they wish to reside between two extremes that could be symbolized by two points on the map: frenetic but highly productive Silicon Valley at the one end and un-changing Venice at the other

For each society, the choice, in effect the trade-off between material

*Fortunately, this psychology also works in reverse Sharp financial adversity brings d e e p d e pression But people n o t otherwise psychologically incapacitated r e b o u n d w i t h time Their smile returns

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wealth and lack of stress, appears to rest on its history and the culture it has spawned By culture, I mean the shared values of members of a society that are inculcated at an early age and that pervade all aspects of living

Some aspects of a nation's culture end up visibly affecting the GDP Positive attitudes toward business success, for example, a deeply cultural response, have in the course of generations been an important springboard

to material well-being Clearly, a society with such attitudes will give prises far greater freedom to compete than a society that perceives com-petitive business as unethical or unsettling In my experience, even many of those who acknowledge the advantages to material well-being of competi-tive capitalism are conflicted for two somewhat related reasons First, com-petition and risk taking cause stress, which most people wish to avoid; second, many feel deep-seated ambivalence toward the accumulation of wealth On the one hand, wealth is a much-sought-after means of flaunting status (Veblen would understand) But that view is opposed by the well-nurtured belief best captured by the biblical injunction "it is easier for

enter-a center-amel to go through the eye of enter-a needle thenter-an for enter-a rich menter-an to enter the kingdom of God." The ambivalence toward accumulation of material wealth has a long cultural history that pervades society to this day It has had a profound influence on the development of the welfare state and the social safety net that is at its core It is argued that unconstrained risk taking increases the concentration of income and wealth The purpose of the wel-fare state is to lessen that income and wealth concentration, which it does largely through legislation that, via regulation, constrains risk taking and, via taxation, reduces the pecuniary rewards that may result from taking risks

Although the roots of socialism are secular, its political thrust parallels many religious prescriptions for a civil society, seeking to assuage the an-guish of the poor The pursuit of wealth has been deemed unethical, if not immoral, since long before the emergence of the welfare state

This antimaterialist ethic has always been a low-intensity suppressant

to the acceptance of dynamic competition and the unfettered institutions

of capitalism Many of the business titans of nineteenth-century American industry were conflicted about the morality of holding on to material gains from their ventures and gave away much of their wealth To this day, a resi-due of guilt about wealth accumulation exists under the surface of our

market culture, but the degree of ambivalence toward wealth tion and attitudes toward risk taking differ widely across the globe Take the United States and France, for example, both of whose most fundamental values are rooted in the Enlightenment A recent poll shows that 71 per-cent of Americans agree that the free-market system is the best economic system available Only 36 percent of the French agree Another poll indi-cates that three-fourths of young French men and women aspire to a job in government Few young Americans express that preference

accumula-Such numbers speak to a remarkable difference in risk tolerance The French are far less inclined to suffer the competitive pressures of a free market and overwhelmingly seek the security of a government job, despite the widespread evidence that risk taking is essential for economic growth

I can't say the greater the risk taking, the greater the rate of growth ously, reckless gambling rarely pays off in the end The risk taking I have in mind is the rationally calculated kind of most business judgments It has to

Obvi-be the case that restraint on freedom of action, the essence of government regulation of business, or heavy taxation of successful ventures must sup-press the willingness of market participants to act To me, the degree of willingness to take risks is, in the end, the major defining characteristic that separates countries into the various modes of capitalism Whether different degrees of risk aversion stem from an ethical antipathy toward wealth ac-cumulation or the stress of competitive battle does not affect the conse-quences They are both captured in the choice of legal inhibitions imposed

on competition that dilute laissez-faire capitalism, an important purpose of the welfare state

But there are other, less fundamental suppressants of competitive havior as well Most politically prominent is the inclination of many societ-ies to protect "national treasures" from the winds of creative destruction, or worse, foreign ownership That is a dangerous restraint on international competition and another issue that differentiates one culture from another

be-In 2006, for example, French officials blocked an Italian firm's attempt to buy Suez Company, a large Paris-based utility manager, by promoting the merger of Suez and Gaz de France Both Spain and Italy have made simi-larly protectionist moves

The United States is scarcely innocent of such behavior For example,

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in June 2005, China National Offshore Oil Corporation ( C N O O C ) , a sidiary of China's third-largest oil company, made a bid to buy Unocal, an American oil company, for $18.5 billion in cash This topped an earlier

sub-$16.5 billion cash-and-stock offer from Chevron Chevron cried foul, ing the bid represented unfair competition from a government-controlled company U.S lawmakers complained that "China's governmental pursuit

say-of world energy resources" represented a strategic threat By August cal opposition rose to such a pitch that C N O O C withdrew its bid, saying the controversy had produced "a level of uncertainty that presents an unac-ceptable risk." Chevron got the deal, at the expense of a valuable U.S asset: our reputation for nondiscriminatory international fair dealing, particularly our pledge to treat foreign corporations the same as domestic ones for reg-ulatory purposes

politi-Just three months later, an Arab corporation named Dubai Ports World bought a company that managed container terminals on the U.S East and Gulf coasts The deal touched off more protest in Congress, as legislators from both parties claimed that Arab management of U.S ports would un-dermine antiterrorism efforts and hurt national security Finally, in March

2006, under pressure, Dubai Ports World announced it would transfer agement of the ports to an unnamed U.S company It had never been shown that there was any meaningful threat to U.S national security

man-More broadly, a nation's depth of reverence for tradition and its efforts, however misguided, to protect it are rooted in the need of people to have

an immutable environment, one to which they have become accustomed and that brings them joy and pride

Although I am a strong advocate of "in with the new, out with the old," I am not an advocate of tearing down the U.S Capitol and replacing it with a more modern, efficient office building However, no matter what one's depth of feeling is on such issues, to the extent that creative destruc-tion is restrained to preserve icons, some improvement in material stan-dards of living is forgone

Of course, there are other disturbing and counterproductive examples

of government intervention in a country's competitive markets When a government's leaders routinely seek out private-sector individuals or busi-nesses and, in exchange for political support, bestow favors on them, the

society is said to be in the grip of "crony capitalism." Particularly ing was Indonesia under Suharto in the last third of the twentieth century, Russia immediately following the collapse of the Soviet Union, and Mexico during its many years under the PRI (the Institutional Revolutionary Party) The favors generally take the form of monopoly access to certain markets, preferred access to sales of government assets, or special access to those in political power Such actions distort the effective use of capital, and, ac-cordingly, lower standards of living

appall-Then there is the broader issue of corruption of which crony capitalism

is but a part In general, corruption tends to exist whenever governments have favors to extend, or something to sell If there were unobstructed, free flow of goods and people across national boundaries, customs and immigration officials, for example, would have nothing to sell Indeed, their jobs would not exist This was largely the case in the United States before World War I It is difficult for a twenty-first-century American to comprehend the extent to which government was separated from business

in those early years The little corruption that existed drew large newspaper headlines There were questionable transactions relating to the construc-tion of canals in the early 1800s Similarly, the building of the transconti-nental railroad, with its huge land-grant subsidies, engendered much duplicitous activity, leading to the Union Pacific-Credit Mobilier scandal of

1872 As infrequent as they were, such scandals are what people remember

of that period

Despite the heavy involvement of government in business since the 1930s, a number of countries have achieved high ratings for staying free of corruption, even though their civil servants have potentially sellable discre-tion in fulfilling their regulatory roles Particularly impressive have been Finland, Sweden, Denmark, Iceland, Switzerland, New Zealand, and Singa-pore Culture obviously also plays a role in a society's level of corruption

My longtime good friend Jim Wolfensohn, as president of the World Bank from 1995 to 2005, fashioned the bank's policies to constrain corruption in the developing world I always thought this was a critical contribution to world development

There is no direct measure of the impact of cultural mores on

eco-nomic activity But a joint venture of the Heritage Foundation and the Wall

275

Street Journal has in recent years combined statistics from the IMF, the

Econ-omist Intelligence Unit, and the World Bank to calculate the Index of Economic Freedom for 161 countries The index combines, among other considerations, the estimated strength and enforcement of property rights, the ease of starting and closing a business, the stability of the currency, the state of labor practices, openness to investment and international trade, freedom from corruption, and the share of the nation's output appropri-ated for public purposes There is, of course, a good deal of subjectivity in placing numbers on such qualitative attributes But, as best I can judge, their evaluations drawn from the data do seem to square with my more ca-sual observations

The index for 2007 lists the United States as the most "free" of the larger economies; ironically Hong Kong, now a part of undemocratic China,

is also at the top of the list It is perhaps not a coincidence that the top seven economies (Hong Kong, Singapore, Australia, the United States, the United Kingdom, New Zealand, and Ireland) all have roots in Britain—the home of Adam Smith and the British Enlightenment But Britishness obvi-ously does not convey a permanent imprint Zimbabwe, a former British colony (as Southern Rhodesia), ranks almost dead last

The greater the economic freedom, the greater the scope for business risk and its reward, profit, and thus the greater the inclination to take risk Societies that comprise risk takers form governments whose rules foster economically productive risk taking: property rights, open trade, and open opportunities They have laws that offer few regulatory benefits that gov-ernment officials can sell or exchange for cash or political favors The index

measures a country's degree of conscious effort to restrict competitive

mar-kets The rankings are thus not necessarily a measure of economic "success,"

as each nation, over the long run through its policies and laws, chooses the degree of economic freedom it wants.* For example, Germany, which ranks number nineteen overall, has opted to maintain a large welfare state that requires a substantial diversion of economic output Also, German labor markets are quite restrictive; discharging employees is very expensive Yet

*In some instances, however, political impediments have prevented governments from creating

or abolishing institutions to better reflect the cultural choices of their constituents

at the same time, Germany ranks among the highest in terms of the dom of its people to open and close businesses, property-rights protection, and the overall rule of law France (number forty-five) and Italy (number sixty) have profiles that are similarly mixed

free-The ultimate test of the usefulness of such a scoring process is whether

it correlates with economic performance And it does The correlation ficient of 157 countries between their "Economic Freedom Score" and the log of their per capita incomes is 0.65, impressive for such a motley body

coef-of data.*

Thus, we are left with a critical question: Granted that open tive markets foster economic growth, is there an optimum trade-off be-tween economic performance and the competitive stress it imposes on the one hand, and the civility that, for example, the continental Europeans and many others espouse? Many Europeans contemptuously brand America's economic regime "cowboy capitalism." Highly competitive free markets are viewed as obsessively materialistic and largely lacking in meaningful cul-tural values This marked difference between the United States and conti-nental Europe on support for competitive markets was captured most clearly for me several years ago in a soliloquy attributed to former conser-vative French prime minister Edouard Bahadur He asked, "What is the market? It is the law of the jungle, the law of nature And what is civiliza-tion? It is the struggle against nature." While acknowledging the ability of competition to promote growth, many such observers nonetheless remain concerned that economic actors, to achieve that growth, are required to behave in a manner governed by the law of the jungle These observers then choose lesser growth for more civility, or at least they think so

competi-But is there a simple trade-off between civil conduct, as defined by

those who find raw competitive behavior deplorable, and the quality of material life most nonetheless seek? It is not obvious from a longer-term perspective that such a trade-off exists in any meaningful sense During the past century, for example, competitive-market-driven economic growth in the United States created resources far in excess of those required to main-

*In calculating t h e index, all t e n e l e m e n t s are given equal weight Allowing t h e weights to change on t h e basis of time-series correlations w o u l d increase t h e degree of correlation

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tain subsistence That surplus, even in the most aggressively competitive economies, has been in large measure employed to improve the quality of life along many dimensions To cite a short list: (1) greater longevity owing first to the widespread development of clean, potable water and later to rapid advances in medical technology; (2) a universal system of education that enabled greatly increased social mobility; (3) vastly improved condi-tions of work; and (4) the ability to enhance our environment by setting aside natural resources in national parks rather than having to employ them

to sustain a minimum level of subsistence.* At a fundamental level, cans have used the substantial increases in wealth generated by our market-driven economy to purchase what many would view as greater civility

Ameri-Clearly, not all activities undertaken in markets are civil Many, though legal, are decidedly unsavory Violation of law and breaches of trust do un-dermine the efficiency of markets But the discipline of the marketplace in the United States, for one, is sufficiently rooted in a rule of law to limit these aberrations It is instructive that despite the egregious breaches of trust by some of America's business and financial leaders in recent decades, productivity growth, an important metric of corporate efficiency, between

1995 and 2002 accelerated I will have more to say on corporate nance in chapter 23

gover-What can history tell us about the stability of economic cultures over the generations? What does it suggest about culture's impact on future out-comes? Today, America's culture is much changed from what it was at our founding, though it remains rooted in the values of our Founding Fathers As unfettered as today's American capitalism may appear, it is a pale image of the capitalism of our earlier years We probably came as close as we will ever come to pure capitalism in the decades before our Civil War Following a largely, but not wholly, laissez-faire policy toward business and business practice, the federal government provided little or no safety net for aspiring capitalists in the race for wealth creation If you failed, as many did, you were expected to pick yourself up and start from scratch, often in the rap-idly growing settlements of America's frontier Decades later Herbert Spen-

*The tragedy of t h e d e n u d i n g of Brazil's A m a z o n rain forests is t h a t t h e inhabitants of t h e gion need to c u t d o w n trees to survive

re-cer, a follower of Charles Darwin; coined the phrase "survival of the fittest/'

a philosophy of competition that captured much of the prevailing ethos of early America FDR's New Deal was still a century in the future

In my early twenties, I was drawn to this image of a rough-and-tumble capitalist society based, I fantasized, largely on merit I did not dwell on the glaring constitutional contradiction of slavery and its treatment of people

as property Notwithstanding some restraint on business practices passed into law under populist prodding in the late nineteenth century the U.S economy through the 1920s retained much of the laissez-faire glow of early-nineteenth-century America

To be sure, the years of the New Deal produced a vast constraining web of new government regulations on previously unfettered competition, much of which remains in place to this day Some of the rougher edges of creative destruction were legislated away Congress enacted the Employ-ment Act of 1946, which formalized many of the ad hoc initiatives of the 1930s It committed the U.S government to organize its policies to ensure employment for "those able and willing to seek work." This was scarcely a Marxist rallying cry, but it was a distinct change from the role of govern-ment in economic affairs that had existed before Roosevelt's New Deal It established the Council of Economic Advisors, which I was to chair twenty-eight years later The new commitment to a permanent presence of govern-ment in economic affairs distinctly downgraded the role of markets

Nonetheless, assisted by the wave of deregulation since the mid-1970s, today's U.S economy remains the most competitive large economy in the world, and American culture still exhibits much of the risk taking and taste for adventure of the country's earlier years More than a century after Fred-erick Jackson Turner declared in 1893 that the frontier was closed, Ameri-cans reveled in stories of the exploits of the free-spirited cowboys who, following the Civil War, manned the cattle drives up the Chisholm Trail from Texas to the rail depots of Kansas

The cultural changes in America are noticeable, to be sure, but rather narrow in the context of more than two millennia of recorded human his-tory characterized by tectonic changes in institutions Moreover, I believe the United States is sufficiently culturally stable to expect little change over the next generation or two I say this even though ongoing immigra-

2 79

tion from Latin America will alter the cultural composition of our society

But these are people who have chosen to leave their home countries, a

seeming rejection of much of the populist culture that has so inhibited Latin American economic growth That was also the case with the open immigration at the turn of the last century Those immigrants were success-fully absorbed in our nation's "melting pot."

In the less pressing period after World War II, but before globalization took hold, governments were able to construct social safety nets and engage

in other policies to shelter citizens from the gale of creative destruction In the United States, major expansions of Social Security, unemployment insurance, worker-safety legislation, and, of course, Medicare headed a much longer list Most industrialized nations did likewise The share of U.S G D P accounted for by government social benefits rose from 3.4 per-cent in 1947 to 8.1 percent in 1975 (and has since drifted higher) Even though such safety-net initiatives were often recognized as adding substan-tial costs to labor and product markets, thereby reducing their flexibility, policymakers did not judge them as meaningful impediments to economic growth Pent-up demand from the Depression and World War II drove world G D P forward

In economies not broadly subject to international trade, competition was not as punishing to the less efficient as it is today, and there is clearly a significant segment of society that looks back at such circumstances with nostalgia In today's global competitive markets, maintaining the kind of safety net that evolved in an earlier day is proving increasingly problematic, notably in most continental European countries, where high unemploy-ment appears chronic Governments of all persuasions may still choose to help people acquire the skills they need to utilize new technologies And they generally try to support the incomes of those who have been less able

to adapt But technology and international competition are extracting a high price for the more intrusive forms of intervention that impair market incentives to work, save, invest, and innovate In India, for example, direct foreign investment inflows are clearly being inhibited by a still oppressive degree of regulation

The European governments that emerged out of World War II, ing their collectivist bias, legislated far larger safety nets than did the U.S

reflect-I was sandwiched between Hillary Clinton and Tipper Gore as President Bill Clinton presented his deficit-cutting package to a joint session of Congress on February 17,

1993 While the political theater of the seating made me slightly uncomfortable,

I enjoyed the company, and more important, I applauded the president's focus on

deficit r e d u c t i o n Luke Frazza/AFP/Getty Images

ABOVE: Ron Sachs/CNP/Corbis; BELOW: Official White House Photograph

Courtesy of Denis Reggie

successful e c o n o m i c p o l i c i e s Courtesy of the U.S Department of the Treasury

As America's economy became

more and more integrated with the

world's during my tenure as Fed

chairman, I became increasingly

involved in aid for other countries

in economic crisis Magazine cover

hyperbole aside, Treasury Secretary

Robert Rubin, Deputy Treasury

Secretary Lawrence Summers, and I

had an unusually fruitful and

harmonious working relationship;

I greatly respect them both

Time Magazine/Time Life Pictures/

Getty Images

briefcase indicator, in which cameras would follow me on the mornings of FOMC meetings as I arrived at the Fed If my briefcase was thin, one theory went, then my mind was untroubled and the economy was well But if it was stuffed full, a rate

h i k e l o o m e d Courtesy of CNBC

Andrea and I checked in on the Fed's Y2K crisis management team on our way home from the Clinton White House's "Millennium Dinner" on New Year's Eve, December 31, 1999

to Fed chairmen speaking in public as well as to physicians

Photograph by David Burnett/Contact Press Images

after our first meeting, on December 18, 2000, at Washington's Madison Hotel

Cynthia Johnson/Time Life Pictures/Getty Images

I was sworn in as Fed chairman for the fifth and final time on June 19, 2004, by Vice President Cheney at Gerald Ford's Colorado home

France's now-president Nicolas Sarkozy (second from left) and Great Britain's now-prime minister Gordon Brown (back row, far right) Courtesy ofBanca d'ltalia

A band of protesters hoped to disrupt the World Bank/IMF annual meeting in Washington on April 17, 2000 Ironically, the intensity of such public protests has

2005, I received an honorary degree from the University of Edinburgh in the ence of my friend, then-chancellor of the exchequer Gordon Brown

pres-ABOVE: A? Images/David Cheskin; BELOW: Christopher Furlong/Getty Images