Tying together yesterday’s post on the economy of Iceland with Thursday’s musings on the difficulty of promoting the rule of law, I thought I might lay down my general theory that I think the basic ideological debate between the partisans of the free market and the partisans of social democracy actually has relatively little to tell us about macroeconomic growth issues.
The biggest difference you see around the world is, by far, not one of government policy but of government efficacy. Less important than the differences in what the rules say, in other words, is the question of how the rules relate to the real world. In some places, you have highly-functioning states where the rule of law is effectively enforced. In other places, the formal state has almost no capacity, so in practice people are under the thumb of warlords or criminal gangs or what have you. Macroeconomic policy advice that’s perfectly reasonable for a large, resource-rich, ethnically diverse country like Canada is going to be completely useless in a large, resource-rich ethnically diverse country like Congo and that’s true no matter what your perspective on what Canada ought to do.
At the end of the day, even a very market-oriented state is being given an awful lot of powers. It has police, prisons, an army, navy, air force, along with a central bank, rules about broadcast media, where roads and airplanes go, some subsistence provision for the poor, etc. That all on its own is perfectly adequate power to ensure that if the state is administered incompetently, corruptly, or abusively that there’ll be all kinds of terrible consequences. Conversely, you see in Iceland or Denmark that when you do have a well-governed state all kinds of additional public services can be provided in a very helpful and constructive way. The main independent variable in the success (or lack thereof) of different kinds of polities, in other words, probably isn’t the policies so much as the presence or absence (or scope) of a certain quality of “good government” that we don’t understand much about.