Nobel economist has no idea where economic growth comes from

July 24, 2012
Vilnius, Lithuania

Paul Krugman, one of America’s most decorated faux-scientists, recently told an audience that what’s happening in the world right now is “dramatically, painfully a confirmation that a broadly demand-side Keynesian view of the world is appropriate…”

The intellectual dishonesty which oozes from this statement is astounding.

Apparently on Planet Krugman, the Keynesian ideals of ‘spend your way out of recession’ and ‘conjure money out of thin air like there’s no tomorrow’ are sound tactics.

(Granted, this is the same guy who wrote on Friday that President Obama ‘always bends over backward to declare his support for free enterprise’….)

Here on Earth where the rest of us live, the numbers clearly demonstrate that such tactics are merely the failed principles of central planning.

Five years into the financial crisis, tens of millions of people are still without work. Prices around the world are becoming uncomfortably high. And entire nations are going bankrupt.

Yet with every dismal jobs report or news release showing a decline in production and economic activity, politicians scurry about to announce a new ‘plan for growth’: more legislation, more spending… something to put the economy back on track.

Fact is, there is no great mystery to economic growth; it really takes just one thing: freedom.

I had a meeting late last week with a partner in a Lithuanian venture capital firm who told me stories about his experiences during the Soviet days going from one failed state-owned enterprise to the next.

It was the quintessential example of “we pretended to work, they pretended to pay us.”

Right before the Soviet Union collapsed, he was ‘working’ for another state-owned company in the Soviet Socialist Republic of Lithuania… and upon independence, the first thing he did was immediately start a new business.

This was something he was never able to do during the Soviet days, and in time, his business thrived.

As he explained to me, all it took was the economic freedom for him to be able to start a business and use his talents to compete in the marketplace.

These places– Estonia and Lithuania in particular– are essentially devoid of natural resources. They’re tiny countries without oil or gold deposits.

And yet they’ve been able to achieve very high living standards simply because their governments got out of the way, especially compared to the rest of Europe.

It’s the same story in places like Hong Kong and Singapore… not to mention the multitude of examples throughout history.

Venice, for example, introduced something called the commenda in the 10th century; this was a sort of limited partnership in which one person (the commendator) was the passive investor in the arrangement, and the other (the tractator) was the trader who would go overseas and try to make a fortune.

When the commenda expired, the tractator would return home with a full accounting of the trip and split the profits in the way that was designated in the contract.

A lot of people became very wealthy through this system… and by extension, Venice became the richest place in Europe.

It didn’t happen because of government regulation, currency inflation, or spending intitatives. People prospered because the government got out of the way; they had the economic freedom to work hard and succeed from their own sweat, not handouts.

Of course, after a few hundred years, Venice managed to screw it up.

By the 13th century, a political elite had formed. They began to heavily regulate trade, nationalize some routes, impose heavy taxes on merchants, and even introduce a police force to do their bidding.

Devoid of the economic freedom they once had, Venice shrank into a shell of its former self.

This is, by far, one of the most important lessons from history: freedom and prosperity are inextricably linked. Free societies prosper… and as freedom declines, so does prosperity.

And it’s a very slippery slope: the more prosperity declines, the more politicians try to regulate the economy through wage controls, price controls, capital controls, etc. And the more they regulate the economy, the faster prosperity declines.