If you want better politics or a stronger economy, you should concentrate on reforming the rules by which political and economic struggles are waged. Make sure everyone can vote; make sure everyone can bring new products to market. Whatever people choose under those fair rules will by definition be the best result. Abraham Lincoln or Warren Harding, Shakespeare or Penthouse —in a fair system whatever people choose will be right. The government's role, according to this outlook, is not to tell people how they should pursue happiness or grow rich. Rather, its role is that of referee—making sure no one cheats or bends the rules of "fair play," whether by voter fraud in the political realm or monopoly in the economic.
In the late twentieth century the clearest practical illustration of this policy has been the U. The government is actively involved—but only to guard the process, not to steer the results. It runs elaborate sting operations to try to prevent corporate officials from trading on inside information. It requires corporations to publish detailed financial reports every quarter, so that all investors will have the same information to work from. It exposes pension-fund managers to punishment if they do not invest their assets where the dividends are greatest.
These are all ways of ensuring that the market will "get prices right," as economists say, so that investments will flow to the best possible uses. Beyond that it is up to the market to decide where the money goes. Short-term loans to cover the budget deficits in Mexico or the United States? Long-term investments in cold-fusion experimentation? The market will automatically assign each prospect the right price. If fusion engines really would revolutionize the world, then investors will voluntarily risk their money there.
The German view is more paternalistic.
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People might not automatically choose the best society or the best use of their money. The state, therefore, must be concerned with both the process and the result. Expressing an Asian variant of the German view, the sociologist Ronald Dore has written that the Japanese—"like all good Confucianists"—believe that "you cannot get a decent, moral society, not even an efficient society, simply out of the mechanisms of the market powered by the motivational fuel of self-interest.
The Anglo-American view focuses on how individuals fare as consumers and on how the whole world fares as a trading system.
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But it does not really care about the intermediate levels between one specific human being and all five billion—that is, about communities and nations. This criticism may seem strange, considering that Adam Smith called his mighty work The Wealth of Nations. It is true that Smith was more of a national-defense enthusiast than most people who now invoke his name. For example, he said that the art of war was the "noblest" of the arts, and he approved various tariffs that would keep defense-related industries strong—which in those days meant sailcloth making.
He also said that since defense "is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England. Still, the assumption behind the Anglo-American model is that if you take care of the individuals, the communities and nations will take care of themselves. Some communities will suffer, as dying industries and inefficient producers go down, but other communities will rise. And as for nations as a whole, outside the narrow field of national defense they are not presumed to have economic interests.
There is no general "American" or "British" economic interest beyond the welfare of the individual consumers who happen to live in America or Britain. The German view is more concerned with the welfare, indeed sovereignty, of people in groups—in communities, in nations. This is its most obvious link with the Asian economic strategies of today. Friedrich List fulminated against the "cosmopolitan theorists," like Adam Smith, who ignored the fact that people lived in nations and that their welfare depended to some degree on how their neighbors fared.
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In the real world happiness depends on more than how much money you take home. If the people around you are also comfortable though, ideally, not as comfortable as you , you are happier and safer than if they are desperate. This, in brief, is the case that today's Japanese make against the American economy: American managers and professionals live more opulently than their counterparts in Japan, but they have to guard themselves, physically and morally, against the down-and-out people with whom they share the country.
In the German view, the answer to this predicament is to pay explicit attention to the welfare of the nation. If a consumer has to pay 10 percent more for a product made by his neighbors than for one from overseas, it will be worse for him in the short run. But in the long run, and in the broadest definitions of well-being, he might be better off. Economic policies, in the German view, will be good or bad depending on whether they take into account this national economic interest. Which leads to. By far the most uplifting part of the Anglo-American view is the idea that everyone can prosper at once.
Before Adam Smith, the Spanish and Portuguese mercantilists viewed world trade as a kind of battle. What I won, you lost. Adam Smith and David Ricardo demonstrated that you and I could win at the same time. If I bought your wine and you bought my wool, we would both have more of what we wanted, for the same amount of work.
The result would be the economist's classic "positive sum" interaction. Your well-being and my well-being added together would be greater than they were before our trade. The Germans had a more tragic, or "zero sum"-like, conception of how nations dealt with each other.
Some won; others lost. Economic power often led to political power, which in turn let one nation tell others what to do. Since the Second World War, American politicians have often said that their trading goal is a "level playing field" for competition around the world.
An AI is playing Pictionary to figure out how the world works
This very image implies a horizontal relationship among nations, in which they all good-naturedly joust as more or less equal rivals. The same spirit and logic run through List's arguments. Trade is not just a game. Over the long sweep of history some nations lose independence and control of their destiny if they fall behind in trade. Therefore nations must think about it strategically, not just as a matter of where they can buy the cheapest shirt this week.
By now the Anglo-American view has taken on a moral tone that was embryonic when Adam Smith wrote his book. If a country disagrees with the Anglo-American axioms, it doesn't just disagree: it is a "cheater. America "cheats" with its price supports for sugar-beet growers and its various other restrictions on trade. Malaysia "cheated" by requiring foreign investors to take on local partners. And on and on. If the rules of the trading system aren't protected from such cheating, the whole system might collapse and bring back the Great Depression.
In the German view, economics is not a matter of right or wrong, or cheating or playing fair. It is merely a matter of strong or weak. The gods of trade will help those who help themselves. No code of honor will defend the weak, as today's Latin Americans and Africans can attest.
It Isn’t Easy To Understand How The World Works
If a nation decides to help itself—by protecting its own industries, by discriminating against foreign products—then that is a decision, not a sin. WHY bring the Germans into it? Because they had a lasting effect—outside the Anglo-American bloc. With the arrival of Commodore Matthew Perry and his American warships in , the Japanese realized that the Western world had far outstripped them in both commercial and military technology. Throughout the rest of Asia were examples of what happened to countries that were weaker than the Europeans or the Americans: they turned into colonies.
Through the rest of the nineteenth century Japan's leaders devoted themselves to modernizing the country, so that it would no longer be vulnerable. During the decades of sustained creativity known as the Meiji era, from to , Japanese scholars, industrialists, and administrators carefully studied Western theories about how economies grew.
In the writings of List and other continental theorists they found a set of prescriptions more persuasive than the laissez-faire teachings of Adam Smith. The most important part of the German-Asian argument is its near invisibility in the English-speaking world, especially the United States. The problem is not that Americans don't accept the German analysis: in many ways it is flawed. The problem is that they don't know that it exists. For instance, a popular dictionary of economics, edited by American and British economists and published in , has a long explanation of the Laffer curve but no mention of List.
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Some "real" economists are not quite so closed-minded. Since at least the early s economists at several American universities have, in essence, rediscovered Friedrich List. But not at all universities. Wade previously had been teaching in Korea, and there he had found plenty of copies of List's works in every campus bookstore.
When Wade finally obtained the book, he found that it had last been checked out in They have examined more and more failures in the Anglo-American model. They have found more and more evidence that "cheating," in the form of protectionism, can increase a nation's wealth. But very little of this news has trickled down to the realms where economics is usually discussed—newspaper editorials, TV talk shows, and the other forms of punditry that define reasonable and unreasonable ideas.
When Americans talk about wealth, poverty, and their nation's place in the world, they often act as if Adam Smith's theories were the only theories still in play. After the World Bank's meeting in Bangkok in an editorial writer for The Wall Street Journal proclaimed that "with a few sickly exceptions, such as the decaying Communist holdouts of China and Vietnam, it seems that the ideas of Adam Smith, of Alfred Marshall, of Milton Friedman, have triumphed.
We are all capitalists now. This is true only if we accept the most vulgar and imprecise statement of what being a capitalist means.
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The economies that have grown most impressively over the past generation—from Germany to Thailand to Korea to Japan all certainly believe in competition.