THE BEAR'S
LAIR Malign power of bad
ideas By Martin Hutchinson
According to economic historian Angus
Maddison, Latin America had six among the world's
30 richest economies in 1900. Today the
continent's richest country, by purchasing power
parity gross domestic product (GDP) per capita, is
Argentina, at No55, according to the International
Monetary Fund.
Yet the continent is not
short of natural resources, not overpopulated, and
avoided the catastrophic carnage of World Wars I
and II. The Mexican author Enrique Krauze's
Redeemers - Ideas and Power in Latin
America suggests strongly that the continent's
sad decline was due to the power of bad ideas.
Latin America's economic management during
the 19th century was mixed, with considerable
outbreaks of turbulence, but at the
top end it wasn't bad at
all. The continent's best leaders, like Mexico's
Porfirio Diaz (president, 1876-80, 1884-1911) and
Argentina's Domingo Sarmiento (president 1868-74)
and Julio Roca (president 1880-86 and 1898-1904),
were equivocal about democracy but whole-hearted
in their support for free markets and foreign
investment to develop their economies.
The
economic results were obvious and highly
beneficial. Argentina, from the Maddison tables
had in 1870 a GDP of US$1,311 in 1990 dollars, 50%
above the world average or 63% of the Western
European average. By 1900 Argentina's GDP per
capita had increased to $2,756, 213% of the world
average and fully 90% of the European average.
Little wonder that so many Italians immigrated to
Argentina around the turn of the 20th century:
Argentina was 54% richer.
Mexico was
poorer overall, but showed the same effect. In
1870, Mexico's GDP per capita was only $674, 23%
below the world average, and it had declined by
15% since 1820. By the last year of Diaz's rule in
1910 it was $1,694, 14% above the world average.
Diaz could justifiably claim to have brought the
country fully into the industrialized world
economy.
The extraordinary progress of
Latin America in the 19th century was arrested in
the 20th. By 2003, Argentina's GDP per capita had
risen from $2,756 to $7,666, but that had caused a
decline from 113% above the world average to only
18% above it. In terms of Western Europe,
Argentina had declined from 90% of Western
European living standards to 37%; 54% richer than
Italy in 1900, Argentina in 2003 was 60% poorer.
Overall, Mexico's relative decline was
less catastrophic, from 18% above the world
average in 1910 to only 9% above it in 2003 -
reflecting the relatively better government
provided by 75 years of "instiutionalized
revolution" compared to the chaos that was
Argentina.
Still, Mexico's failure to
achieve relative progress is more impressive when
you remember that the rest of the world suffered
through two world wars and the imposition of
communism over a third of the planet, whereas
Mexico enjoyed 90 years of peace and close
proximity to the world's richest economy.
The principal cause of the decline was the
flood of bad economic ideas inflicted on Latin
America by its intellectuals. In the 19th century
Latin American intellectuals had been relatively
benign forces, supporting liberalism or at worst
social democracy. In spite of US aggression
against Mexico in the 1840s, they also admired the
United States, regarding it as an example of the
democratic, prosperous free-market country to
which they aspired.
This all changed with
the Spanish-American War, and the effective US
annexation of Cuba and the Philippines. In this
respect, William Randolph Hearst and Theodore
Roosevelt, propagators of that war, have a lot to
answer for.
The war brought a pervasive
suspicion of US economic and military imperialism;
even Diaz in a 1908 interview for Pearson's
magazine said "it is useless to deny a distinct
feeling of distrust, a fear of territorial
absorption, which interferes with a closer union
of the American republics." With suspicion of the
United States came antipathy to the free market,
of which the US was thought the principal
exemplar.
Krauze gives chapter and verse
of how, in the aftermath of the Spanish-American
War, Latin America's intellectuals indulged in
wild fantasies of anti-Americanism, and came up
with an amazing variety of destructive
alternatives to the free market.
Uruguay's
Jose Enrique Rodo (1871-1917) postulated in his
1900 Ariel a radical opposition between
Latin-American and Anglo-Saxon cultures. Mexico's
Jose Vasconcelos (1882-1959), proposed both
socialism and fascism as means of liberating
Mexico from the capitalist, pro-American
porfirismo of Diaz, running for president
in 1929 on a radical socialist platform.
Finally, Peru's Jose Carlos Mariategui
(1894-1930) proposed that Marxism was not
sufficiently indigenous for Latin Americans;
instead they should return to the Inca economics
of communal property. While some subsequent Latin
American intellectuals like Manuel Vargas Llosa
have renounced Marxism and chosen to support the
free market, there are still plenty like Gabriel
Garcia Marquez who rejoice in their economic
Castroism.
Latin cultures take their
intellectuals more seriously than do Anglo-Saxons.
The dreary French Stalinist Jean-Paul Sartre, a
Monty Python sketch in Britain, is still taken
seriously in France.
The first effect of
this came in Mexico. When Diaz, contrary to his
previous indications, ran for re-election in 1910,
he was opposed by the wealthy liberal intellectual
Francisco Madero. Diaz, who retained huge rural
support from his economic successes, particularly
among the "mestizos" of mixed blood, won the
election June 26, 1910, by an electoral vote of
196 to 187, after which Madero claimed fraud and
on November 20 entered into armed rebellion
against the re-elected Diaz, being joined in March
1911 by hard-left guerilla forces under Pancho
Villa and Emilio Zapata.
Owing to his age,
Diaz, a highly successful general in his youth,
could not command the armed forces personally, so
after a succession of minor but widespread rebel
victories he resigned on May 25, 1911.
Madero, like the Russian Alexander
Kerensky six years later in similar circumstances,
proved ineffectual and was assassinated in
February 1913, after which the country descended
into civil war. Out of that war came the
"Institutional Revolution Party", built on
socialism and anti-Americanism, which made Mexico
a one-party state from 1929 to 2000. Diaz's
free-market, pro-foreign investment policies were
abandoned.
Mexico had sunk by 1940 from
16% above the global average GDP to 6% below it.
It then recovered during World War II and
thereafter, its relative GDP peaking at 48% above
global average GDP in 1981, before the
contradictions of PRI rule caused its decline to
10% above the world average in 2003, the last year
of Maddison data.
In Argentina, the change
came later, with largely free-market governments
(albeit some of them military) until 1943. Thus
Argentina, at 113% above of the global average GDP
per capita in 1913, had prospered from two world
wars to reach 136% above it in 1950, and had
indeed crept up in 1900-1950 from 90% to 99% of
Western European living standards. Only in the
latter half of the century did Argentina's
relative wealth decline, falling fairly steadily
to only 18% above world average GDP by 2003.
In country after country, the leftward
move of Latin American intellectuals after 1898
was followed by a leftward move in government
policies. In some countries, notably Chile
(initially forcibly) and Colombia (wholly
democratically) there has been something of a
reaction, and we can hope that those countries'
improvements in prosperity will provide a beacon
for others.
Nevertheless, the commodities
boom since 2003 has reinforced bad policy in
several countries, notably in Argentina but also
in Brazil, where the Workers Party now seems
entrenched. Only in Venezuela is there some hope
that spectacularly bad economic management could
lead to a reaction in the near future.
But
in Venezuela since 1970, economic results have
been even worse than elsewhere, with per capita
GDP declining in absolute terms by 8% from 1950 to
2003, from 253% above the world average to a mere
7% above it. Since Venezuela still has among the
world's largest oil reserves in the Orinoco tar
sands, this is a truly staggering performance.
Could it happen to the likes of the United
States and UK? Yes, it could, very easily. The
United States saw a relatively brief period of
huge economic underperformance under presidents
Hoover and Roosevelt in 1929-38, while Britain saw
a rather longer one in 1945-79 after the
depredations of the Attlee Labour government. Both
these downturns were caused by bad economic ideas,
imposed on a bipartisan basis.
Japan since
1990 is something of a counterexample, with bad
ideas not prominent although much recent
underperformance has been due to excessive
Keynesian deficit spending.
The mechanism
is however obvious. A strong intellectual current,
such as the fervor in 2005-09 over global warming,
can result in a series of bad policy choices that
get implemented by a government caught up in the
fervor, with a degree of bipartisan support. Once
implemented, those choices are very difficult to
reverse.
As in Mexico after Diaz the
intellectuals and the entire political system are
implicated in the bad ideas and foolish policies -
thus Diaz has been universally reviled since his
departure, in spite of his economic successes.
Intellectual change can take decades, is often
fiercely resisted by the intellectuals, and in the
meantime secular decline can set in. If the 21st
century turns out markedly less prosperous than
the second half of the 20th, this will be the
reason.
The solution is to ignore
intellectuals. As John Maynard Keynes said "Madmen
in authority, who hear voices in the air, are
distilling their frenzy from some academic
scribbler of a few years back."
The
Anglo-Saxon tradition of distrusting theoretical
constructs is nowhere more valuable than here.
Martin Hutchinson is the author
of Great Conservatives (Academica Press,
2005) - details can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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