purposes.
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 undermine
antiterrorism efforts and hurt national security. Finally, in March
2006, under pressure, Dubai Ports World announced it would transfer management
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.
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 destruction
is restrained to preserve icons, some improvement in material standards
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 businesses
and, in exchange for political support, bestow favors on them, the
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society is said to be in the grip of "crony capitalism." Particularly appalling
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, accordingly,
lower standards of living.
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 construction
of canals in the early 1800s. Similarly, the building of the transcontinental
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 discretion
in fulfilling their regulatory roles. Particularly impressive have been
Finland, Sweden, Denmark, Iceland, Switzerland, New Zealand, and Singapore.
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 economic
activity. But a joint venture of the Heritage Foundation and the Wall
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THE AGE OF TURBULENCE
Street Journal has in recent years combined statistics from the IMF, the Economist
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 appropriated
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 casual
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 obviously
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 government
officials can sell or exchange for cash or political favors. The index
measures a country's degree of conscious effort to restrict competitive markets.
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.
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THE MODES OF CAPITALISM
at the same time, Germany ranks among the highest in terms of the freedom
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.
The ultimate test of the usefulness of such a scoring process is whether
it correlates with economic performance. And it does. The correlation coefficient
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
of data.*
Thus, we are left with a critical question: Granted that open competitive
markets foster economic growth, is there an optimum trade-off between
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 cultural
values. This marked difference between the United States and continental
Europe on support for competitive markets was captured most
clearly for me several years ago in a soliloquy attributed to former conservative
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 civilization?
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.
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 the index, all ten elements are given equal weight. Allowing the weights to
change on the basis of time-series correlations would increase the 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 conditions
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, Americans
have used the substantial increases in wealth generated by our market-
driven economy to purchase what many would view as greater civility.
Clearly, not all activities undertaken in markets are civil. Many, though
legal, are decidedly unsavory. Violation of law and breaches of trust do undermine
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 governance
in chapter 23.
What can history tell us about the stability of economic cultures over
the generations? What does it suggest about culture's impact on future outcomes?
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 rapidly
growing settlements of America's frontier. Decades later Herbert Spen
*The tragedy of the denuding of Brazil's Amazon rain forests is that the inhabitants of the region
need to cut down trees to survive.
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THE MODES OF CAPITALISM
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 Employment
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 government
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 government
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 Frederick
Jackson Turner declared in 1893 that the frontier was closed, Americans
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 history
characterized by tectonic changes in institutions. Moreover, I believe
