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Cargo Cult Capitalism

February 5th, 2009 by Bill Brown · 16 Comments · Foreign Affairs

In December, I visited Ethiopia to pick up my newly-adopted son (proud father link, if you’ll bear with me) and I was struck by the prevalence of commerce throughout the capital city, Addis Ababa. Ethiopia is known as a Third World country with widespread poverty; with a per-capita income of $780, there are few countries in the world poorer than it. But everywhere I looked there were entrepreneurs of every stripe selling goods, services, and capital goods. I struggled to understand this seeming paradox of highly-visible capitalism in one of the poorest nations.

To be sure, I could readily identify a slew of factors that were holding the country back. The infrastructure was terrible: 15% of the roads are paved (and “paved” is being generous in my experience); Internet access is dialup and expensive; and seemingly no one accepted credit cards in payment. The government, while not particularly onerous (11.6% of GDP), is bloated and meddlesome. Lastly, our adoption agency host regaled us with stories from Ethiopia’s 14-year affair with Communism under the Derg. They nationalized business and land, ravaging both and basically preparing the country to suffer mightily when a severe drought hit in the eighties. But each of these seemed inadequate to me, important but insufficient as an explanation.

Hernando de Soto’s book, The Mystery of Capital, was a revelation. Its distinction between the formal and informal economies helped me to see that the buzz of activity was self-limiting. By taking place outside of the legal framework—and thus beyond legal protections—capital formation in the market was stillborn. Enterprises cannot get too large lest they attract the attention of the government. They are hobbled because they cannot realize the economics of scale possible with growth.

Individuals too fare worse, according to de Soto, under regimes that make formalization difficult to impossible. Acquiring title to land requires navigating a byzantine network of regulations and red tape, so people “illegally” subdivide land or substitute their own proof of ownership documents in lieu of transferring title. Squatters put up entire subdivisions of rickety housing—they cannot afford to put up anything more permanent since they could be evicted at any time by the government—that doesn’t officially exist. This makes it difficult to obtain utilities, get insurance, or even provide directions. Without proof of legal possession, the primary vehicle for entrepreneurial lending, the mortgage, is closed off as well.

De Soto looks to the West for answers about how to orchestrate the move to formality, but notes that the civilized world has been “happy to take their system for producing capital entirely for granted and to leave its history undocumented.” In his search for the path to capitalism, legal scholars and bureaucrats he consulted could not help him understand how America had consolidated its myriad formal and informal property arrangements to get to where it is now.

That brought the point home for me. Everyone I spoke with in Ethiopia had asked me about America and whether it was just like the in the movies. They wanted to know about our economy and how much they could expect to make. I patiently answered their questions and tried to be as helpful as I could. Throughout the Third World, governments have tried to re-create the United States or reproduce the Asian “miracle” without success. Like the cargo cults of the postwar Pacific islands, they see the power of productivity and our great wealth primarily as a problem of mimicry. They don’t understand that there’s more going on than just the superficial transactions of a market economy.

The globalization crowd doesn’t either. They channel enormous quantities of money as foreign aid into these countries, including and especially Ethiopia, to set up the institutions and enact the programs that will bring on American capitalism with an indigenous face. But it never works (for reasons we’ll examine shortly), leaving the nations with the cruft and detritus of yet another failed government reform program. The United Nations crew goes off to construct new theories and the cycle repeats.

By our recent actions in re-embracing Keynesian economics, it’s becoming increasingly clear that most in American government are no better off than the Ethiopians or the global meddlers in getting why capitalism works and the foundation on which it rests. De Soto correctly notes that the United States used to look a lot like the Third World does today, with informal property arrangements and countless silos of title records. But even for him, having studied the mechanics of capitalism in considerable depth, the most productive social system ever conceived is just an implementation detail:

I am not a die-hard capitalist. I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value. (228)

Capitalism succeeds and arose because it is the only system based on the nature of man: that he must act in his self-interest if he is to survive and thrive. No legislation can change that: force a man to act against his self-interest and you are requiring him to act towards his own destruction. The institutions of capitalism reflect and enshrine this incontrovertible fact through the mechanism of individual rights—life, liberty, and property. Alloy them with requirements to “help the poor” or “equalize opportunity” and don’t be surprised when the planes never come and the food crates don’t materialize.

16 Comments so far ↓

  • EdMcGon

    Good post Bill. *thumbs up*

    I always find the contrast between America and third world nations to be a great argument against liberal American politicians who cry about helping the poor here. What poor?

    There is no one in America who lacks opportunity. I’ve even seen critically disabled people lead successful lives. There are plenty of people who lack motivation, unless they are getting a government handout.

    No, for the true “poor” of the world, one has to look at places like Ethiopia. Ironically, the problems there are similar to the problems here: poor government, which makes poor people.

  • Burgess Laughlin

    Thank you for this exceptional article. It is vivid and focused. You have involved your own personal values in an account that has very wide implications. Having read the article, I have had a vicarious trip to Ethiopia. And back in the USA, I will look around me with a new perspective.

    One question that you might someday want to address as needed in your future writing is this contentious one: What is “capitalism”? Its attackers have their own “definitions.” Even its defenders, however, do not seem to operate with the same concept (and therefore definition) in mind.

    A formal, but concise definition might help readers capture capitalism’s many implications.

    My own definition (inferred from that of philosopher Ayn Rand) is that capitalism is a political system (the genus) that has one purpose only (the differentia), the protection of individual rights (especially the rights to life, liberty, and property) from aggression and fraud.

    One consequence of capitalism is a free market, but a market is only part of a society.

    Individuals do engage in actions outside the marketplace. Those actions too are covered by capitalism as a rights-protecting political system. Examples are (1) choosing a certain color of paint for one’s house, even if one’s neighbors (and their political representatives) don’t like the color; and (2) choosing sexual partners and practices with any consenting adult, regardless of religionists’ dictates.

  • rob sama

    DeSoto’s book is probably the most important book on capitalism written by a non-Objectivist since Ayn Rand. It should be required reading for everybody. For what it’s worth, I saw exactly the same thing you describe in Ethiopia in my trip to Brazil.

  • L-C

    Good article, Bill. This also highlights why Capitalist economy cannot be transplanted into socialism and milked indefinately, as if it were a complete package of its own, any more than a piece of uranium plopped into a marsh provides electricity to its native inhabitants.

    Burgess: such actions are only implicitly “covered” by Laissez-faire Capitalism. The only rights that need to be enumerated are those of life, liberty and property. Everything else is subsumed by these. Thus an LFC constitution would not treat freedom of religion, speech, sexuality etc., since such specifics only serve to weaken the idea that freedom is freedom, and that men live by right and not by permission.

    Most likely, though, you were simply referring to Capitalism as the political system of liberty, as contrasted with the view that it’s all about the money. No implications from my part. I’m picky about legal technicalities since law, more than anything, must be a flawless reflection of a complete philosophy.

  • Kim

    OK–I know you just posted a very insightful article about capitalism, but I am just overwhelmed by that adorable picture! Congratulations.

  • Katrina

    Must be a girl thing, because I had the same reaction as Kim. Your son is so cute and clearly very happy, and this is coming from someone who generally can’t stand kids, even in pictures. Congrats on that and also on a really great article.

  • Bill Brown

    Burgess: Your definition is fair. If you want more vicarious vacationing, I’ve made public 210 of the photos we took while there.

    rob sama: I would recommend De Soto’s book with the “but” I mentioned in the entry. I’m going to move on next to Easterly’s The White Man’s Burden, which recently won a Hayek Award.

    Kim and Katrina: thank you very much! We couldn’t have asked for a more delightful baby to adopt. The best news is that his happiness and cuteness fit right in with the rest of the Browns.

  • Bill Brown

    L-C: That’s an excellent implication, one that De Soto covers by including the former Communist countries in the Third World appellation.

  • Galileo Blogs

    I was heavily influenced by Hernando de Soto’s earlier book, The Other Path, published in 1989, where he empirically validates the role of property rights in creating wealth. He noted the same paradox, of so many hard-working people, yet who were so poor. One example particularly struck me. In Peru in the 1980s, a legal house — one with proper title — sold for ten times a house of similar quality that was squatted, i.e., it had no legal title but had existed for many years in an informal shantytown. There was little difference in the basic quality of the house (often, the informal settlements had solidly built brick structures). Rather, the difference was having legal title, which allowed the owner to mortgage or sell the house to raise capital, and he had much less risk of it being confiscated. The legal perquisites of ownership made the house so much more valuable (or, conversely, the illegal house worth so much less).

    De Soto cares for the poor, but through honest observation he learned that only a true capitalism based on secure property rights can enable their hard work to actually result in a rising standard of living.

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  • Amy

    What a fascinating and insightful post. This is a great argument against anarchists who think that everything can be done through private mechanisms. Government is, indeed, necessary. The rule of law is necessary. Private proerty rights, regulated (in the proper sense of the term) by the government, are necessary.

  • Amy

    And what a beautiful child! Congratulations, again.

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  • Lawrence J. Kramer

    I wandered over here after Googling “Cargo cult capitalism,” a phrase I wanted to use as the title of a blog post. I figured someone else must have thought of it, too, and voilá.

    Ironically, my definition of the term is 180 degrees from yours. I think the libertarians who are waiting for good old yankee ingenuity to restore the economy are the cargo cultists. And I worry about anyone so eager to dump on compassion as some sort of character flaw.

    The Chinese have opened the mother of all Wal-Marts on the edge of USA Town, and we’re running over there to buy cheap rope to hang our own workers and merchants. When I complain that maybe we need to protect ourselves from cheap labor, I get this religious cant about how we’ll think up something better for them to do because American workers are the most productive in the world, as if that were a trait of the workers and not a consequence of machines doing all the work. They just need to hang in a bit longer.

    Sometimes, man’s best interest is served by cooperation in life’s prisoners’ dilemma. That takes coordination by government. Otherwise, we get the tragedy of the commons, as we each assume the worst about our neighbors’ powers of restraint, based, of course, on our assessment of “human nature.” Libertarians have no tool in their bag for that circumstance, so the wish it off into the cornfield like Billy Moomy on the old Twilight Zone.

    Then, they tell us to wait for the Great American Capitalist, who will invent anti-gravity, employ 20,000,000 Americans to make hovercraft, and keep the formula in a safe where the Chinese cannot get it. I mean, that’s what we’ve always done, right? And our ship will surely come in.