The President should heed new Nobelists - importance of work of 1993 Nobel economists Robert Fogel and Douglas C. North - Column

0 Comments | Insight on the News, Nov 15, 1993 | by Mark Thornton

Why do some economies grow while others remain poor and undeveloped? The cause of prosperity is the most important question economic science can answer.

For grappling with that question through historical analysis - and providing provocative and persuasive answers - the Royal Swedish Academy of Sciences has awarded its economics prize to Robert Fogel of the University of Chicago and Douglas C. North of Washington University in St. Louis.

How did Americans achieve the highest standard of living on Earth? In The Economic Growth of the United States, 1790-1860, Professor North shows that the system of free-market prices and private property, not central management, made America wealthy in the first century after its founding. Free enterprise generates high standards of living through recliance entrepreneurship, growing levels of the division of labor and increased specialization. Market interdependencies create a cooperative network that extends over diverse regions.

And the growth in the antebellum period was astounding. Other historians have tried to explain it by crediting technological improvements, foreign capital or slavery. North said the cause was good old-fashioned entrepreneurship. In the days of an almost completely free-market economy, entrepreneurial Americans worked hard and exploited profit opportunities.

Southerners grew cotton, tobacco and rice. Southwestern entrepreneurs specialized in beef, sugar and cotton. Northwesterners cultivated wheat, corn and other foodstuffs, while Northeasterns concentrated on manufacturing, commerce and finance. Trade with Europe also expanded our ability to specialize. It was freedom, not a government plan, that made it all possible.

The academy lauded Fogel's work on the role of railroads in 19th century America. In The Union Pacific Railroad: A Case in Premature Enterprise, Fogel found that, while railroads lowered the cost of transportation, growth required a system of free exchange.

The Union Pacific Railroad is usually cited as a worthy public investment, but Fogel showed that it actually was a wasteful expenditure that benefited special interests. An intercontinental railroad would have been built through private enterprise when it became profitable to do so. Thus this railroad was "premature enterprise."

Historians and politicians in the past have wrongly believed that economic growth can be generated with a magic ingredient like railroads or other infrastructure spending. The International Monetary Fund tried to stimulate economic growth in Egypt by building dams. Mexico tried to create economic growth with steel mills. In the United States, we have built the Tennessee-Tombigbee waterways in Mississippi and Alabama, among many other thousands of projects of dubious merit.

Most of these plans have been failures. They rest on the fallacy that infrastructure alone generates prosperity. In fact, infrastructure is built to support growing prosperity.

Central planners in the Soviet Union spent immense resources erecting buildings, digging waterways, diverting rivers and putting up factories. But in the absence of real consumer demand and cost accounting, these projects only impoverished the country further.

The Clinton administration ignores the contributions of Fogel and North when it says the government can invest in the future with big tax-funded programs. These big projects waste resources when we should be freeing up the market so capitalists can do the hard work of wealth creation.

Capitalism has been the greatest engine of economic production ever discovered. America has been the primary beneficiary of this. And if we work to restore this system - and not embark on the far-flung schemes of Washington's economic planners - we can see that kind of growth again.

Mark Thomton is the O.P Alford III assistant professor of economics and coordinator of academic affairs for Ludwig von Mises Institute at Auburn University.