One of the most intriguing statistics in economic history is that in 1914 Argentina was richer than Germany. Its GDP per head was 92% of the average of 16 developed economies. In 2014, its income per capita was 43% of those same 16 economies. Why? “There is a lot of ruin in a nation,” said Adam Smith. But not an unlimited amount. Economies can shrug off a great deal of poor governance, but Argentina breached the limit. Dictatorships, a poor education system and statist, populist policymaking were fertile ground for hyperinflation in the 1990s and recent debt crises.
What about the developed world?
Before we smugly dismiss Argentina as an irredeemable mess, however, we should ask what Adam Smith might make of the club of rich countries these days. I don’t think he’d be very impressed. Capitalism is struggling because it has been undermined by poor governance. Take the US. An ill-advised revamp of competition law in the 1980s led to four decades of megamergers.
The result, says economist Jonathan Tepper, is no competition. The US has only four major airlines, three principal cereal-makers, and two beer groups (controlling 90% of the market). Duopolies and oligopolies raise the cost of goods and keep salaries low, as the big brands have scant competition for labour. The rise of regulation has been key, too. Big firms can cope with the cost of compliance, small ones can’t. Enterprise suffers as fewer small firms thrive; income and wealth inequality increase.
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Or take central banks, which have also exacerbated wealth inequality in the past 25 years by blowing up asset bubbles, often with printed money, every time markets have slid. So house prices are now too high, prompting governments to stoke demand yet further with schemes such as Help to Buy. Keeping interest rates low or below zero encouraged speculation and prolonged the lives of unviable companies, or “zombies”. These absorb capital that would be better spent on new projects (resources are inefficiently allocated) and dent overall productivity. In normal times, they would be swept away to make way for new blood: the process of “creative destruction”.
Rise of the zombies
Andrzej Rzonca, a former member of Poland’s Monetary Policy Council, notes in the Financial Times that around 10% of US firms are zombies. In Europe, “ultra-low interest rates – through zombification and resulting misallocation – lowered productivity, slowing GDP growth by up to 3% in the years following the financial crash”. The upshot? “The saving grace of capitalism, its often cruel efficiency, is steadily being lost,” says Bloomberg columnist John Authers. As more and more people come to feel the system isn’t working for them, they may be more inclined to give the cruel inefficiency of socialism a go. Then there would be even more ruin in the nation.
Speaking of Adam Smith, Merryn’s Edinburgh Fringe show takes place at Panmure House, where he once lived. It runs from 25 to 28 August. Guests include MoneyWeek favourites Russell Napier, Hugh Hendry, James Ferguson and Edward Chancellor. Book your tickets here.
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