Had Julius Caesar met George Washington in 1760, he would not have experienced much of a cultural shock. Both belonged to a small class of elites who enjoyed the fruits of slave labor and land rents. For most people, barely anything had changed in terms of standards of living or life expectancy during the 1,800 years separating the Roman statesman from the leader of the American Revolution. However, in the past 250 years, the world has changed beyond recognition, and not just for a small fragment of landed aristocracy. In the West, real incomes have increased by a factor of 15 or more, and more recently, the rest have started to catch up.
Nobel Prize-winning economist Robert Lucas famously noted that “once one starts to think about [economic growth], it is difficult to think about anything else.” How do we explain prosperity? It was with this question in mind that J.P. Floru, a researcher at the Adam Smith Institute in London, councillor in Westminster and a former city lawyer, wrote his most recent book, Heavens on Earth.
Mr. Floru’s ambitions are not scholarly. Rather, he wants to provide a timely, policy-relevant manifesto to steer the West from its current path of sluggish growth and persistent unemployment.
Through eight well-documented and highly readable case studies, ranging from the English Industrial Revolution, through Germany’s postwar reconstruction, to the stories of Hong Kong and Singapore, Mr. Floru’s book reaffirms the insights of Adam Smith and other classical economists who argued that the rule of law and a small unobtrusive state were essential pillars of economic growth.
When discussing 18th century England in Chapter 3, Mr. Floru provides both an account of the institutional foundations of growth and of the role played by ideas — most prominently, by those of classical economists who advocated free trade and limited, constitutional government. Far from trying to present a monocausal theory of economic success, he acknowledges the role played by cultural norms and by the fact that commerce and trade had become “fashionable” during the era.
The story of Germany’s Wirtschaftswunder, presented in Chapter 2, makes for a bracing read. Germany, destroyed by the Nazi regime, war and under Allied occupation, was an unlikely candidate for an economic success story. Two elements played a critical role in turning things around.
First, geopolitics. The Morgenthau Plan, which envisaged a partitioning of Germany and an “industrial disarmament” of the country, was quickly abandoned in favor of an approach that would quickly restore normal life and economic activity. Second, ideas. The German economic miracle would have never occurred, argues Mr. Floru, if it weren’t for Ludwig Erhard, an economist who had thought deeply about post-Nazi German economy at a time when scarcely anyone else did, and later made the case to the occupational authorities that Germany needed market liberalization and tax cuts instead of the creeping rise of the state, which characterized the post-Depression era in the Anglo-Saxon world.
Mr. Floru also revisits the cases of China (Chapter 5) and Chile (Chapter 6). These reveal what is probably the most attractive feature of the book; namely, its willingness to embrace the institutional and political reality. Mr. Floru readily recognizes human rights violations, lack of democracy and untold human suffering associated with unsavory regimes around the world. He does not try to provide excuses for them or endorse them, but is able to see clearly which policies produced good economic outcomes and which did not. On China — where he draws heavily from Ronald Coase and Ning Wang’s excellent book How China Became Capitalist, published just last year — he quotes P.J. O’Rourke, who once called China’s success “the miracle of the zero baseline, as everything looks good if you start from nothing.”
The book also talks about the postwar experience of the United States and reforms undertaken by various governments of New Zealand, which set its ailing economy on an upward trajectory. A common lesson emerges from all these disparate case studies: Free markets create wealth and lift the poor out of poverty.
According to Mr. Floru, a clear pattern emerges from the various successful reform programs around the world. Successful reforms are quick, radical and all-encompassing. They circumvent or paralyze the interest groups who would oppose them. Moreover, Mr. Floru shows, a concern for the less well-off needs to be a priority for free-market reformers — and also an important selling point for pro-market reforms.
True, the book would have presented a more compelling case for free markets if it directly engaged with the more difficult, murkier cases. South Korea, for instance, is often singled out as a success story driven by active industrial policy and crony relationships between government, banking sector and big business. Why was it so economically successful?
And conversely, Mr. Floru does not discuss countries that have engaged in ambitious pro-market reforms and have not yet been rewarded by German or Singaporean standards of living. Think of Rwanda, virtually corruption-free, with a government committed to free markets, low taxes and sound monetary policy, where growth seems to be held back by the country’s landlocked position, by its generally awful neighbors and by a lack of viable energy sources.
By focusing on these more difficult growth stories, the book would be able to counter more effectively the increasingly influential claims made by the likes of Dani Rodrik, who argues that active industrial policies, protectionism and heavy-handed government interference are necessary components of economic success. However that may be, Heavens on Earth provides a timely and well-written refresher on what truly drives economic growth. Policymakers on both sides of the Atlantic should read it, quickly.
