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Wealth from wreckage?

| Wednesday, Jan. 27, 2010

This month's horrendous earthquake in Haiti brings to mind the economic question of greatest importance to Adam Smith: What causes wealth• What conditions best encourage economic growth and widespread prosperity• Why are the Haitians and North Koreans so poor while Americans and South Koreans are so rich?

The general answer is easy: private property rights and freedom of contract. When everyone enjoys the right to acquire, own, use and exchange property rights voluntarily, free markets result. And free markets, in turn, promote an ever-finer specialization of labor and increasingly complex commercial and industrial arrangements. The consequence is widespread and growing prosperity.

And we know now -- in the aftermath of the appalling carnage and destitution spawned by 20th-century socialism -- that a necessary condition for prosperity is that government be reasonably limited. People create wealth only if they are free.

Imagine a skyscraper; call it the Prosperity Tower. Now imagine, hanging next to this skyscraper, a giant wrecking ball. It starts to swing. The wrecking ball pounds the skyscraper. The building is probably sturdy enough to remain standing and functional if it suffers only one or a few hits. But if the wrecking ball keeps swinging relentlessly, the Prosperity Tower eventually collapses.

From the rubble, enterprising and energetic people -- entrepreneurs, financiers, architects, construction workers -- begin rebuilding the Prosperity Tower. They complete a few floors when the wrecking ball again starts to swing. It destroys the nascent building.

Hoping against hope, these or other energetic and enterprising people again undertake a rebuilding effort. As before, they complete the early stages of the construction and then the wrecking ball again swings into its awful action, demolishing the fruits of their efforts.

Eventually, the mere threat of a swinging wrecking ball will discourage anyone from attempting to rebuild the Prosperity Tower. Even if the wrecking ball itself currently hangs idle, its history of swinging into action whenever the Prosperity Tower begins to reach skyward ensures against the tower's construction.

Government too often works like a wrecking ball. Taxation robs producers of the fruits of their efforts and regulation substitutes the centrally imposed and politically inspired commands of the few for the decentralized, richly textured and voluntary plans of the many. Economic prosperity is battered. Too much such battering turns the Prosperity Tower into ruins.

For prosperity, freedom is necessary but not sufficient. For a skyscraper to reach to the heavens, not only must its skyward path remain free of swinging wrecking balls; also, individuals must possess the creativity, trust and gumption necessary to build the tower. No matter how minimal the threat of swinging wrecking balls, a skyscraper will not arise without positive and creative actions by individuals.

Entrepreneurs must envision the use and possibility of the skyscraper; architects must design it; investors must see its promise, as well as see the trustworthiness of the builders; suppliers must produce and make available reliable amounts of millions of different building materials; contractors, subcontractors and hundreds of construction workers must each contribute their own unique skills and their individual initiatives toward the project.

The amount of creativity, cooperation and effort required to build a skyscraper is so vast as to be beyond description. Yet each fragment of this creativity, cooperation and effort is contributed by an individual -- an individual who could choose to refuse to contribute. If too many individuals make this choice, no skyscraper will be built.

The necessity of creative individual human actions is often overlooked in the Western industrialized world. I've heard too many of my fellow economists blithely predict that pro-freedom changes in the constitutions and statutes of places such as the former Soviet Union and Haiti will quickly create prosperity.

But when the wrecking ball stops swinging, the Prosperity Tower doesn't automatically arise as a force of nature. Prosperity requires also a culture and a set of norms that promote commerce, enterprise and industry.

It's true that such culture and norms are likely to emerge when freedom reigns, but in places where people have long been unfree, the culture and norms necessary for economic growth do not materialize instantaneously with pro-freedom changes in the constitution and statute books. Such cultural change takes time.

People long unfree do not immediately learn those intricate norms and rules necessary for civilization -- for example, the norm of recognizing that strangers who speak different languages and who worship different gods are nonetheless people with whom mutually advantageous trade is possible.

Without such norms and rules, and without the desire for material gain, merely stopping the wrecking ball of government intervention from swinging will not cause the Prosperity Tower to arise.

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