We covered the social changes of the postwar world, so we’ve laid the groundwork for which the economic pie turns out to be much bigger than anyone anticipated.
First and foremost, realize that supergrowth was far from an inevitable or even likely outcome in 1945. You see a desire for more government, as people looked back fondly at how well FDR marshaled American resources for the war and returned the country to prosperity. It seemed unlikely that government could ever do worse than the market when hippies could slap any pro-market advocates with the Great Depression. Europe in particular still wished for strong government, and it was only the Marshall Plan that guaranteed a return to free-market capitalism and democracy.
No matter what people say, the Marshall Plan at bare bones was a hard currency exchange for Europe to clear up trade bottlenecks during reconstruction when governments were scarce on cash. It helped Europe avoid the Argentine trap of economic nationalism, militant urban class desires, and financial instability. Its heart was a neoliberal, market-driven solution of halting inflation, keeping economies flush with cash, and stabilizing the financial system. This demanded political concessions, denying workers higher (“fair”) wages, forcing higher taxes for a smaller social net, and in the short term, a less than equal distribution of wealth. It worked brilliantly but that’s not to say governments were happy with it; on the contrary, France would complain for the next thirty years about America butting into their affairs. It was America and Marshall Plan administrators who would begin to wed Europe into a trading bloc with a unified currency, thinking that forming them into an imperfect union would minimize the chances of another world war.
What emerges from this is unheard of inequality. By 1990, the difference between the First World and everyone else is mind-boggling. For instance, South Korea’s GDP per capita was ten times the size of North Korea’s, Taiwan’s was twenty times China’s, Philippines’ was five times the size of Vietnam’s, Austria’s was six times the size of Hungary’s, and Mexico’s was nine times the size of Cuba’s. Everywhere capitalism made people wildly richer and more productive than communism, even in countries that were worse off in 1950.
So the question is why? Why was the Eastern bloc so poor?
The answer is incentives. The Soviet Union and its satellites consistently maintained more factories than the First World, but their planning commissions were exponentially larger and less efficient. The United States today has something like 17 billion different products that it manufactures, distributes, and serves to the American people – you can only imagine what a nightmare it would be to plan directives that guide US businesses. In the case of contradictions, lower level managers would make decisions, but they were guided solely by production goals, not by performance incentives. So there was a tremendous amount of waste, as factories produced tractor components that didn’t fit with other parts or houses that didn’t have space for utilities. Intervention was often hasty and made things worse, as planners almost never had accurate information to work with. It worked with specialized programs, like the military-industrial complex or the space program, where planners could clearly identify a fault and send any underperformers to Siberia. But it singularly failed when it came to consumer goods.
So then what are the advantages of the market?
-it imposes a reality check on organizations – produce well and at sufficient quantity, or brace for the loss
-it imposes the reality check on every line of business – is this what consumers want?
-flexibility – business face changes with consumer or production trends
-politics – consumers can voice complaints (for example, pollution, which got much cleaner in the US but remained infamously filthy in the USSR and China)
What marks a market-oriented country and what policies work best?
-more developed financial system (i.e. Hong Kong v India)
-high savings rate (i.e. Korea)
-low tariff on foreign capital goods (i.e. Taiwan v China)
-”realistic” exchange rate (i.e. Japan/Germany getting lucky, Korea’s managed float)
-government subsidies to export manufacturers (i.e. East Asia)
-health care (i.e. Asia v Islam)
How you know a country is doing well:
-profits from a well-educated and skilled labor force
-non-corrupt and honest government (for example, Bush’s smooth transition to Obama)
Taken as groups, you can easily see trends that differentiate rich from poor. The conclusion is one that Adam Smith and Karl Marx would have agreed: market economies grow prosperous when built in favor of the business class. When governments intervene to shift resources and profits away from entrepreneurial and productive groups and shift it to others (i.e. consumers, bureaucrats, poor rice farmers), then economic development and growth will suffer. A government that takes a long-term view of its citizens’ best interests and invests to make them healthier and educated will do better than one that tries to buy or force prosperity on them.
A good example of a poor country is JFK when he visited Indonesia in 1960. He had Congressional approval to help the country invest in schools, factories, hospitals, and a large regional bank for development. Indonesia’s president Sukarno politely refused, telling JFK that development took too long but that his country would prosper if the United States would kindly conquer and transfer some of their troublesome island neighbors to them. Indonesia today remains among the poorest nations in Southeast Asia.