Hong Kong’s Growth Was Due to Cowperthwaite’s “Positive Noninterventionism”

In Free to Choose, Milton Friedman compared Hong Kong’s free market, with India’s state control of the economy.  The dynamism and growth of Hong Kong was a stark contrast to the inertia and stagnation of India.  In the decades since Free to Choose, India has become more free and, alas, Hong Kong less free:   

(p. A14) . . . it was sadly unsurprising to see Hong Kong’s current leader, Donald Tsang, last month declare the death of the policy on which the territory’s prosperity was built.

The really amazing phenomenon is that, for half a century, his predecessors resisted the temptation to tax and meddle.  Though a colony of socialist Britain, Hong Kong followed a laissez-faire capitalist policy, thanks largely to a British civil servant, John Cowperthwaite.  Assigned to handle Hong Kong’s financial affairs in 1945, he rose through the ranks to become the territory’s financial secretary from 1961-71.  Cowperthwaite, who died on Jan. 21 this year, was so famously laissez-faire that he refused to collect economic statistics for fear this would only give government officials an excuse for more meddling.  His successor, Sir Philip Haddon-Cave, coined the term "positive noninterventionism" to describe Cowperthwaite’s approach.

The results of his policy were remarkable.  At the end of World War II, Hong Kong was a dirt-poor island with a per-capita income about one-quarter that of Britain’s.  By 1997, when sovereignty was transferred to China, its per-capita income was roughly equal to that of the departing colonial power, even though Britain had experienced sizable growth over the same period.  That was a striking demonstration of the productivity of freedom, of what people can do when they are left free to pursue their own interests.

 

For the full commentary, see: 

MILTON FRIEDMAN.  "Hong Kong Wrong."  Wall Street Journal  (Fri., October 6, 2006):  A14.

(Note:  ellipsis added.)

 

Mellon Allowed Great Innovation By Restraining Intrusive Government

(p. W4) Though scarcely known today, Andrew W. Mellon was a colossus in late 19th-century and early 20th-century America.  He would come to play a major role in the management of the American economy, but first he built one of the country’s great fortunes, one that would rank him today with Bill Gates and Warren Buffett.  He is now the subject of a comprehensive, if slightly grudging, biography by David Cannadine, the distinguished British historian.

Mellon is not associated with any single industry, in the way that Andrew Carnegie and John D. Rockefeller are.  He was a venture and equity-fund capitalist, one of the first to function on a major scale.  He and his younger brother, Dick, took over their father’s Pittsburgh-based investment and coal-mining business and expanded it into many fields, including copper, oil,  petrochemicals and aluminum (Alcoa).

No banker was as gimlet-eyed; Mr. Cannadine shows Mellon shrewdly and coldly calculating every investment prospect.  Yet few venture capitalists were as daring.  In the 1890s, when Rockefeller was ruthlessly monopolizing the petroleum industry, Mellon didn’t flinch from setting up a competing refinery.  When Mellon finally sold out to Rockefeller, he did so at a considerable profit.  Several years later he came back to oil and eventually built Gulf into an industry giant.

Original Supply-Sider

But Mellon was more than an entrepreneurial industrialist.  In his mid-60s he became a famous — and infamous — public servant, performing as Treasury secretary under three presidents, from 1921 to 1932.  He was the original supply-sider, pushing tax cuts under Presidents Harding and Coolidge.  He argued that the high tax rates left over from World War I were depressing economic activity; that lower rates would turn the economy around; that high-income earners would end up paying more and that low-income earners would be removed from the tax roles entirely.

His program was a fantastic success.  The top rate was cut to 25% from 77%.  The rich did indeed pay more, while low- and middle-income earners saw their tax bills shrink to nothing or next to nothing.  The economy boomed.  The U.S. outstripped more heavily taxed nations, such as Britain and France.  Mellon also pushed painstakingly for the creation of an international monetary system to replace the one shattered by World War I.  The big challenge was huge Allied war debts to the U.S. and onerous German reparations.  Mellon negotiated the easiest terms that were politically possible so that trade and economies could revive.

We sometimes forget just how dynamic the 1920s were in America.  The automobile became a commonplace item for working Americans; labor-saving devices, such as the washing machine, grew ever more common as well; movies and radio provided mass entertainment as never before (an experimental television broadcast was carried out in 1927); and stock ownership widened to include more members of the middle class.

It was a time of great innovation and inventiveness, and in a sense Mellon presided over it all by allowing it to happen without intrusive government policies.

 

For the full review, see:

STEVE FORBES.  "BOOKS; The Man Who Made the Twenties Roar."  The Wall Street Journal    (Fri., October 6, 2006):  W4.

 

Reference for the book:

David Cannadine.  MELLON.  Knopf, 2006.  779 pages, $35

 

 MellonBK.jpg  Source of book image:  online version of the WSJ article cited above.

 

Italy Suffers from a “Growing Spirit of Cynicism and Escapism”

  Source of book image:  http://ec3.images-amazon.com/images/P/0767914392.01._SS500_SCLZZZZZZZ_V57219494_.jpg

 

As anyone can attest who has lived in Italy even briefly, its domestic life can be gracious and sweet.  The question is whether this way of life can survive the many urgent challenges enumerated by Mr. Severgnini:  an abysmal fertility rate, crushing pension obligations, marginal economic growth, a sclerotic legal system, the flight abroad of the most creative young minds, and a growing spirit of cynicism and escapism.

 

For the full review, see:

FRANCIS X. ROCCA.  "BOOKS; An Italian Challenge; Keeping la dolce vita as modernity spreads."  The Wall Street Journal  (Sat., September 9, 2006):  P8.

 

The reference to the book:

Beppe Severgnini.  La Bella Figura. Broadway, 2006.  217 pages, $23.95.

In the Prague of Rudolf II, “Anything Seemed Possible”

  Source of book image:  http://ec3.images-amazon.com/images/P/0802715516.01._SS500_SCLZZZZZZZ_V61383943_.jpg

 

Ambassadors, nobles and church magnates routinely visited Prague Castle during Rudolf’s reign (1576-1612); so did astronomers and astrologists, alchemists, philosophers, charlatans and anyone else with something marvelous to relate.  Bureaucratic busybodies might wait months for an audience with the emperor, but his doors flew open for those with esoteric knowledge.

. . .

Prague Castle was the perfect emblem of Rudolf’s scattered interests.  It contained one of the greatest painting collections in Europe — including works by Durer, Arcimboldo, Titian and Veronese.  Its inventory also included Egyptian mummies, stuffed exotic birds, unicorn horns, whale teeth, bezoars (gall stones taken from the stomach of animals, thought to be antidotes to poison), the nails of Noah’s ark and one dried and preserved dragon.

If a visitor to the castle wandered into its library, he might well come across such dodgy works as "Arcana arcanissima," "De Alchemiae difficultatibus" and "Mysterium cosmographicum," many dedicated to the monarch by their grateful authors.  Yet if the visitor climbed to the top of the castle’s so-called Bishop’s Tower on a starry night, he might encounter the great astronomers Tycho Brahe and Johannes Kepler charting the sky.  Clearly, it was a magical moment in the history of Western civilization, when anything seemed possible.  Mr. Marshall brings it all wonderfully to life.

 

For the full review, see: 

STUART FERGUSON.  "BOOKS; Sense and Sorcery in Prague; Ready for the Renaissance; but not quite prepared to give up the unicorn."  The Wall Street Journal  (Sat., September 9, 2006):  P9.

(Note:  ellipsis added.) 

 

The book reference is: 

Peter Marshall.  The Magic Circle of Rudolf II.  Walker, 2006.  276 pages, $24.95.

 

Equatorial Guinea’s Kleptocracy: More on Why Africa is Poor

KristofNick.jpg  Nicholas D. Kristof.  Source of image:  online verison of the NYT commentary cited below.

 

The founding president of this country was a witch doctor who murdered tens of thousands, put enemies’ heads on pikes, denounced education and spread land mines on the road out of his country to prevent people from fleeing.  This was then so vile a place that an American diplomat stabbed another to death here in 1971 and claimed in his trial that he had been driven insane partly by the screams of all the people being tortured.

When the president was finally ousted in 1979, he ran off into the bush with $60 million packed in suitcases.  But he was pursued, and in a shootout, the nation’s entire foreign exchange reserves burned up.

. . .

Equatorial Guinea traditionally has been Africa’s poster boy for bad governance.  Even after the old witch doctor was ousted, the kleptocracy continued under Teodoro Obiang, the current president.  A new book about the country, “The Wonga Coup,” notes that in 2004 President Obiang bought a Boeing 737, one of six personal planes, for $55 million, and outfitted it with a king-sized bed and gold-plated fittings in the extra-large bathroom.

Schools and clinics are needy, but Forbes lists President Obiang as the world’s eighth richest ruler, with a net worth of $600 million.  Just last year, “The Wonga Coup” says, the president’s son spent the equivalent of a third of his country’s entire education budget on a vacation home in South Africa and three cars — two Bentleys and a Lamborghini.

 

For the full commentary, see:

NICHOLAS D. KRISTOF.  "Optimism and Africa."  The New York Times  (Tues., October 3, 2006):  A27.

(Note:  ellipsis added.)

 

The book mentioned in the commentary is: 

Roberts, Adam.  The Wonga Coup: Guns, Thugs and a Ruthless Determination to Create Mayhem in an Oil-Rich Corner of Africa.  PublicAffairs, 2006.

 

    Source of book image:  http://images.amazon.com/images/P/1586483714.01._SS500_SCLZZZZZZZ_V65100719_.jpg

In Egypt: The Authorities Versus the Entrepreneur


  Cairo entrepreneur serves good food to willing customers.  Source of image:  online version of the NYT article quoted and cited below.


In The Other Path, Hernando de Soto wrote about how governments in much of the world make it nearly impossible for the poor to legally get a start as entrepreneurs.  Here is a perfect example of de Soto’s point:


CAIRO, Oct. 2 — With his cart tucked beneath a highway overpass, just beside the railroad tracks and behind a parked taxi, Farouk Salem darted his eyes back and forth nervously as he awaited customers.

On most days, except during Ramadan, the sun has barely risen and worshipers are shuffling out of the nearby mosque after morning prayers as the first customers make their way to Mr. Salem.  A few quick flicks of a ladle, the shaking of a bottle or two, and breakfast is ready.

Mr. Salem sells ful, the fava bean stew that is a staple of Egyptian cuisine, as a cheap, hearty breakfast for just 20 cents.  But he is an unlicensed street vendor, one of the many hundreds of thousands of Egyptians who make their living in what economists here describe as Egypt’s informal work force:  selling, delivering, cooking, cleaning, serving, ferrying, shoeshining, anything that will provide income.

Dr. Rashad Abdou, a professor of economics at Cairo University, estimated that the informal sector might account for as much as 60 percent of Egypt’s economy.

“As long as I keep a low profile, they don’t bother me,” Mr. Salem said on a recent day, as his brother worked behind the parked metal cart, dishing out bowls of ful.  The police have forced him to move many times and have even confiscated his cart.  But it is hard to keep a really low profile when the food is good and the prices are cheap.

As the sun began to heat up the morning air, customers showed up in a steady stream, some still in their pajamas.

“It’s good,” said Muhammad Abbadi.  “It’s clean.  And the most important thing is it’s cheap.  We are poor.  You see how poor we are in Egypt.”

. . .

“If the authorities want to chase me away, they will do it,” he says, his face tight and nervous.  “If they want to put me in prison, they can.  If they want to take my cart away, they can.”

He walked over to get some more bread as Muhammad kept ladling.

 

For the full story, see:

MICHAEL SLACKMAN.  "CAIRO JOURNAL; A Hand on the Ladle, and an Eye Out for the Law."  The New York Times (Tues., October 3, 2006):  A4.

(Note: ellipses added.)

 

CairoFulFavaBeanStew.jpg  Ful is a fava bean stew that is popular in Cairo.  Source of image:  online version of the NYT article cited above.

 

The reference to the de Soto book is: 

Soto, Hernando de. The Other Path: The Invisible Revolution in the Third World. 1st ed: HarperCollins, 1989.

 

Laptops Update Read and Friedman’s “I, Pencil” Story

  Source of graphic:  scanned from p. B1 of NYT article cited below.

 

Leonard Read in his classic "I, Pencil" told the story of how the various compenents of a mere pencil came from different suppliers the world over.  People who did not know each other, and might not like each other if they met, but who were brought together in productive co-operation through the power of the market.  Milton Friedman frequently presented his own verison of this story.  The cover of my 1980 edition of Free to Choose has a picture of Friedman holding a pencil as if in the middle of this story.  And there is a short video-clip of Friedman telling the story.

A similar story could be told with many other products, and several sources have presented the raw materials in print to tell the story for laptop computers.  (By "raw materials" I mean that they list the diversity of sources of the inputs; but usually without drawing all the lessons that Reed and Friedman drew.)  One source is a chapter in Thomas Friedman’s The World is Flat

Two other sources are articles that appeared within a few days of each other in The New York Times and The Wall Street Journal

The reference to The New York Times article is:

DAVID BARBOZA.  "An Unknown Giant Flexes Its Muscles; Amid Talk of Deal With I.B.M., Lenovo of China Sheds Some Obscurity."  The New York Times (Sat., December 4, 2004):  B1 & B3.

The reference to The Wall Street Journal article is:

Jason Dean and Pui-Wing Tam.  "The Laptop Trail; The Modern PC Is a Model Of Hyperefficient Production And Geopolitical Sensitivities."   The Wall Street Journal  (Thurs., June 9, 2005):  B1 & B8. 

 

  Source of graphic:  scanned from p. B1 of WSJ article cited above.

 

Sulfa: First Antibiotic Was Pursued for Profit

  Source of the book image:  http://ec1.images-amazon.com/images/P/1400082137.01._SS500_SCLZZZZZZZ_V52133117_.jpg

 

Economists have debated whether patents mainly provide incentives, or obstacles, to innovation.  In the story of the development of sulfa, the first powerful antibiotic, the desire for profit, through patents, was one motive that drove an important part of the development process; this, even though, in the end, sulfa turned out not to be patentable:

(p. P9) Mr. Hager follows a group of doctors into postwar German industry — specifically into the dye conglomerate IG Farben.  These men, having witnessed horrible deaths by infection on the battlefield, picked up on Ehrlich’s hypothesis by trying to synthesize a dye that specifically stained and killed bacteria.  Led by the physician-scientist Gerhard Domagk, they brought German know-how, regimentation and industry to the enterprise.

Year after year the team infected mice with streptococci, the bacteria responsible for so many deadly infections in humans.  The researchers then treated the mice with various dyes but had to watch as thousands upon thousands of them died despite such treatment.  Nothing seemed to work.  The 1920s turned into the ’30s, and still Domagk and his team held to Ehrlich’s idea.  There was simply no better idea around.

Then one of the old hands at IG Farben mentioned that he could get dyes to stick to wool and to fade less by attaching molecular side-chains containing sulfur to them.  Maybe what worked for wool would work for bacteria by making the dye adhere to the bacteria long enough to kill it.

. . .

The IG Farben conglomerate expected huge profits from Prontosil.  But then French scientists at the Pasteur Institute in Paris dashed these dreams.  The German scientists — all of them Ehrlich disciples — thought that the power to cure infection rested in the dye, with the sulfa side-chain merely holding the killer dye to the bacteria.  The scientists at the Pasteur Institute, though, showed that the sulfa side-chain alone worked against infection just as well as the Prontosil compound.  In fact, the dye fraction of the compound was useless.  You could have Ehrlich’s magic bullet without Ehrlich’s big idea!  This bombshell rendered the German patents worthless.  The life-saver "drug" turned out to be a simple, unpatentable chemical available in bulk everywhere.

 

For the full review, see: 

PAUL MCHUGH.  "BOOKS; Medicine’s First Miracle Drug."  The Wall Street Journal  (Sat., September 30, 2006):  P9.

(Note: ellipsis added.)

 

The reference for the book is: 

Thomas Hager.  The Demon Under The Microscope.  Harmony, 340 pages, $24.95

“Work Alone”

  Source of book image:  http://www.mactime.ru/Environ/WebObjects/mactime.woa/2/wa/Main?textid=6114&level1=mactimes&wosid=b2qk07iEkIh6GoutH7IbVg

 

Many scholars interpret Schumpeter as believing that large firms would increasingly become the main source of innovation.  Scherer, Christensen, and many others, have provided plenty of reason to doubt this belief.  Here is another reason, from one of the innovators who helpted bring us the personal computer:

What emerges in "iWoz" is a chatty memoir full of surprises.  Yes, Mr. Wozniak cherishes workbench minutiae, such as his tips for connecting circuitry wires.  But he also sees this book as a chance to cut through cliché and explain himself to a larger audience.  He reveals a technology pioneer who is more charming and annoying — and whose life is more poignant — than we expected.

. . .

As Apple roared ahead, going public in 1980 and then becoming one of the 500 largest U.S. companies, Mr. Wozniak’s golden moment came to an end.  New products weren’t developed anymore by a brilliant prankster working with barely any sleep.  There were now teams, committees and market studies.

Mr. Wozniak by his own account didn’t like these changes, and he didn’t want to rise into senior management.  He hung on at Apple as a lone engineer — and he says he still collects a tiny paycheck from the company — but from the mid-1980s onward turned his attention to other things.

. . .

Fortunately, Mr. Wozniak finishes strong.  In his final chapter, he offers a bit of advice to gifted engineers:  "Work alone."  Big companies tend to stifle innovation, he explains.  It’s lonely and risky to work solo.  No matter.  "Man, it will be worth it in the end," he writes.  His life bears out the truth of that simple claim.

 

For the full review, see: 

GEORGE ANDERS.  "BOOKS; Technostalgia; Steve Wozniak looks back on the computer revolution and his role as Apple’s co-founder."  Wall Street Journal  (Sat., September 30, 2006):  P8.

(Note:  ellipses added.)

 

The reference to the book by Wozniak: 

Steve Wozniak, with Gina Smith.  iWoz  Norton, 2006.  313 pages, $25.95.

 

JobsWozniak1977.jpg  Steve Jobs at left, and Steve Wozniak at right, in San Francisco in 1977.  Source of photo:  online version of the WSJ article cited above.

“Crystal Fire” Gives Insights on Birth of the Transistor

  Source of book image:  http://www.etedeschi.ndirect.co.uk/homecompbiblio.htm

 

Crystal Fire is a well-written book which highlights many important aspects of the birth of computers.  Not a perfect book—I could have done with a few less details about personal information, like who liked to play bridge and poker, and whose mother was a frustrated artist, and the like.

On the good side, they note how transistors were originally designed to replace vacuum tubes.  The eventual main applications, as memory and processor chips in computers, only came later.  (Another application of Fubini’s Law.)

They have a nice discussion of how American science was applied, versus the pure theory of the Germans.  (E.g., to the Germans, some key phenomena leading to transistors, were dismissed as "dirt effects" (pp. 74 & 78).)  The whole episode is a good example of the claim (see Terence Kealey) that very good science can come out of ‘industrial’ labs. 

They also have a good example of serendipity, in the discussion of the strange chunk of silicon with unusual conductivity properties (circa p. 95).  Reading this episode, it occurred to me that one key enabler of serendipitous discoveries is a scientist or engineer who is carrying around a problem, to which the serendipitous discovery is a solution.  Buddhists need not apply—to carry around problems, you need to be dissatisfied–a milder version of what Tom Peters describes as ‘innovation coming from pissed-off people’  (see his Re-Imagine!)

 

Citation to the book:

Riordan, Michael, and Lillian Hoddeson.  Crystal Fire: The Birth of the Information Age, Sloan Technology Series: W. W. Norton & Company, 1997.

 

“Free to Choose” Turns Estonia into “Boomtown”

  Source of book image:  http://search.barnesandnoble.com/booksearch/imageviewer.asp?ean=9780156334600

 

If, like Mr. Laar, you are only going to read one book in economics, Milton Friedman’s Free to Choose, is not too bad a choice:

(p. A23) Philippe Benoit du Rey is not one of those gloomy Frenchmen who frets about the threat to Gallic civilization from McDonald’s and Microsoft.  He thinks international competition is good for his countrymen.  He’s confident France will flourish in a global economy — eventually.

But for now, he has left the Loire Valley for Tallinn, the capital of Estonia and the economic model for New Europe.  It’s a boomtown with a beautifully preserved medieval quarter along with new skyscrapers, gleaming malls and sprawling housing developments:  Prague meets Houston, except that Houston’s economy is cool by comparison.

Economists call Estonia the Baltic tiger, the sequel to the Celtic tiger as Europe’s success story, and its policies are more radical than Ireland’s.  On this year’s State of World Liberty Index, a ranking of countries by their economic and political freedom, Estonia is in first place, just ahead of Ireland and seven places ahead of the U.S. (North Korea comes in last at 159th.)

It transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated.  He was 32 years old and had read just one book on economics:  ”Free to Choose,” by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.

Laar was politically naïve enough to put the theories into practice.  Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs.  He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba).  He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

 

For the full commentary, see:

JOHN TIERNEY.  "New Europe’s Boomtown."  The New York Times  (Tues., September 5, 2006):  A23.