Johan Norberg’s Plan to Save the World Through Capitalism

Yet Hansen’s article claims that that “capitalism has... devastated the planet and has failed to improve human well-being at scale.”

Failed to improve human well-being at scale? Is Hansen kidding? We’ve experienced a two-and-a-half century economic superboom that started with almost universal extreme deprivation and that has, thus far, made half the world’s population middle class.³

(Norberg correctly credits free markets and free trade – the building blocks of capitalism – for this astonishing change.)

Capitalism has had an even better run recently, with the globalization of prosperity. By 1980, the United

There’s nothing in the philosophy behind The Capitalist Manifesto that isn’t in Milton Friedman’s Capitalism and Freedom, written more than 60 years ago. This isn’t a complaint; the tried principles are always true. The specifics of Norberg’s book are, of course, much more in tune with today’s realities, but the underlying ideas are the same.

For that matter, they’re the same as those in Adam Smith’s eighteenth-century masterpieces, The Wealth of Nations and The Theory of Moral Sentiments. Readers seeking to deepen their knowledge of the thinking behind a free society should read the latter – Smith was anything but amoral, and he did not only care about money.

Norberg makes the usual arguments for a global free market, borrowed from Smith, Friedman, and many others. Because you know them already or can look them up, I’ll add my own (also borrowed):

• Market economies are the best way to allocate resources efficiently because, as Friedrich Hayek said, they push decision-making out from the center to the endpoints where the information is.
• The supply-demand-price mechanism gathers and communicates information about what needs to be produced in a way that no central authority can mimic.
• Capitalism is morally better than other systems because it requires only voluntary effort and exchange. Any other system relies on coercion.

Norberg uses the example of coffee to describe the communication aspect of the price system. Channeling Leonard Read, who wrote “I, Pencil” in 1958 to show how the price system induces people from all over the world to cooperate (mostly unknowingly) to make a writing implement that no single individual knows how to make, Norberg does the same thing for coffee:

I can’t make a cup of coffee; neither can you. In fact, no one can make a cup of coffee. Those invigorating drops are the result of lots of people’s knowledge, skill and hard work that no single person can undertake...

...a helpful (if unoriginal) story that Norberg then fills in with several pages of detail. But, at least for those familiar with Read’s pencil, Norberg hits a truer note with a thought from Frédéric Bastiat:

One day in the middle of the 19th century, a young Frenchman from the countryside [Bastiat] visited Paris. It fascinated him that millions of people there slept peacefully even though they would die within a few days if transports from all over the country did not continue to flow to the big city... How could it be that this huge marketplace was filled every morning with almost exactly the number of goods that the inhabitants needed...? What...is the secret and ingenious power that governs this complicated system...? ...That power is nothing but prices and the profit motive.

Yes, we depend on prices and the profit motive for our literal survival. Without them, the commissar would occasionally get it right, but eventually we’d be eating like North Koreans.

Is economic freedom on the wane?

The twenty-first century has been a rough ride for freedom, both economic and political. Authoritarian governments have gained at the expense of full democracies, and even in

politically free countries the intrusion of governments into the economy grows and grows.

Why the backsliding? Because freedom is hard. You have to figure out what actions are in your best interest, and do them. These decisions may not work out. In free markets there are winners and losers; nobody wants to be a loser, so some people prefer a system where you don’t have to play the game.

In contrast, being told what to do is easy. The Old Testament had something to say about that. David Mamet explains:⁶

The Jews were led through the Sea of Reeds and, in the desert, complained, and wished to return to Egypt and slavery. Life in Egypt was by no means perfect; its only attraction was the absence of the necessity of choice. But it made all people equal. No slave need choose between good and evil, morality and immorality...

...nor, it must be said, did they need to find a way to eat. Slaves are fed.

Thus the current revival of interest in authoritarianism. But freedom is not only a necessity for the soul – it enriches the wallet. The pie is so much bigger in a free-market world that even the losers live much better than the typical “non-loser” citizen in a centrally planned economy.

Despite some recent setbacks, the struggle for freedom is gradually, and haltingly, being won. According to the Fraser Institute, a Canadian free-market think tank, economic freedom reached its all-time high in 2016, with only a modest fall-off afterward, as shown in Exhibit 1; the big boost came between 1985 and 2000.

Exhibit 1

But the recent decline is alarming. That’s not because of its size, which is small – it only takes us back to 2011 levels – but because of the dramatic collapse of freedom in a few strategically important places: Venezuela, Hong Kong (ouch) and, briefly but destructively, Sri Lanka. The citizens of these countries deserve better.

Is China a paper tiger?

Fortunately for us investors, Norberg does more than just cheer for capitalism. In filling in his thesis, he provides a few (not enough) insights that, if correct, can help long-term investors think more clearly about the future.

Most notably, he calls China a “paper tiger,” hinting that maybe we’ve overinvested in it, and also that we’re too afraid of it. As evidence of China’s weakness, he cites

[some] researchers [who] disassembled an iPhone 7 that sold for $649. They observed that the manufacturing cost of just over $237 (which looks like $237 of...imports [from China to the U.S.]) in the data tables mostly consists of components that have previously been imported to China, such as American, Japanese, Korean and Taiwanese microprocessors, memory chips, and displays. But some are, of course, Chinese labour and parts. How much? Just under $8.50 – not much more than an hourly US minimum wage. The “biggest winner” receives only 1.3 percent of what you pay for an iPhone.

Most of the rest goes to developed-country workers in various trades and professions. “Reshoring” iPhone manufacturing would not help the U.S. because the increase in the cost of iPhones would swamp any extra income the reshoring would generate for American workers.

This analysis is correct and clever. But I disagree with Norberg on the larger question of China’s role. If the Chinese contribution to the world economy were as puny as its contribution to the dollar value of an iPhone, the standard of living in China would be a fraction of what it is. China’s PPP GDP per capita – a measure used by economists to compare living standards across countries and across time – is almost one-third that of the United States and half that of moderately prosperous Portugal. You can’t get there by sewing T-shirts and making toys. China’s manufacturing ability, and now its services and information industries, are formidable.

I don’t think China is a paper tiger. Under less-than-ideal conditions – a veneer of Communist ideology, a horrible history, and very limited freedoms even today – the Chinese people have created for themselves an economy that is the envy of developing countries everywhere. China’s newfound prosperity is real, as anyone who has visited the country in the 1980s and then again recently will tell you. (Although their movements will be monitored, foreign visitors can go almost anywhere they want in China – they are not seeing Potemkin villages.)

If Norberg is correct and China’s influence really is declining, however, we should be very concerned about its aggressive behavior in the military sphere. Authoritarian governments often make up for their shortcomings by picking fights. And China is a major nuclear power with the world’s largest army.

The environment and climate change

But hasn’t capitalism been the driving force behind increasing CO2 concentration in the atmosphere, leading to global warming?

Yes and no. The driving force is people wanting to use energy and the things you can produce with it – food, manufactured goods, transportation – to better their lives, and capitalism has provided them a way to do that. In the poorest countries, an adequate supply of energy is the difference between a miserable life and a dignified one. Norberg recalls:

A few years ago, I visited a small, poor village in the Atlas mountains in Morocco. I got to spend time with a friendly family who lived...close to nature. From the outside, it looked like a simple but good life... But when I asked the father about their lives, he gave a long list of everything they...desperately longed for: a water pump [with which to] water the crops, a refrigerator to store food, and lighting so kids could read in the evening. He wanted to be able to charge a telephone to keep in touch with the outside world... All these needs could be summed up in a single wish: that the power lines would finally reach all the way to their little village.

That is not the worst of it. “Without electricity and gas,” Norberg continues, “the family cooked and warmed itself in the same way as 3 billion other people do: by burning solid fuel indoors...” Burning wood and dung (yes, dung) indoors results in the death of about two million people annually from respiratory diseases.

Do we really want to take energy away from these people? No – advocates of “degrowth,” that is, producing and consuming less to limit fossil fuel usage, have not thought this through. The hoped-for energy transition will take money – boatloads of it – and only a rich society can muster the needed resources.

Again, capitalism is what produces rich societies. In Norberg’s words, degrowth “would be the worst thing we could do for the world – and for the planet... Poverty is one of the most expensive ways to save the planet, even apart from its effect on the poor themselves.”

As my friend and frequent co-author Stephen Sexauer has said, “To get green, get rich.”

Was 1950s America a worker’s paradise?

We hear, with increasing frequency, that the United States was better off when we didn’t trade much with the rest of the world. Americans had more choices when they enjoyed the full range of job opportunities, from coal mining (oops) to automobile manufacturing, that have since flowed to the developing world now that trade is freer. The 1950s and 1960s are said to be the peak of our remembered prosperity.

How much of this story is true? Many economists and writers, not just Norberg, have noted that factory work in the U.S. in the 1950s was often irregular, ill-paid, and brutal. Norberg writes, “As a steelworker in Pennsylvania warned his children, ‘come in this place, you don’t know if you’re coming out. And if you do, you might be missing an arm, or eye, or leg.’” (Of course, this was capitalism too – it’s not all desk work and committee meetings.) A lucky few, mostly working for big corporations, had steady work at union wages but that was the exception, not the rule, and even these workers, when asked, said they were doing it so their kids wouldn’t have to.

What’s more, union wages in Detroit factories in 1953 averaged $1.30 an hour. That’s $15.21 in today’s money. Some golden age.

Norberg powerfully proves the point that, as the curmudgeonly columnist Franklin P. Adams joked a century ago, “Nothing is more responsible for the good old days than a bad memory.” Yet Norberg’s summary of his section on labor markets contains a weird misstatement: “The whole narrative of the lost golden age of factories is based on a single American city [Detroit] in a single year [1953] during the very peculiar time after World War II, when Europe’s industry lay in ruins.”

But good factory jobs really did exist in most cities and lasted more than a year. I can vouch for it; I grew up in Cleveland near the General Electric and Parker Hannifin plants, and many of the workers there, who were my neighbors, had jobs that lasted for years and owned their own modest homes.

Whatever the actual conditions were – and, obviously, they differed for each person – these folk memories always contain a grain of truth. Factory jobs were a big step up from the workers’ – or their fathers’ – farm jobs. Moreover, we probably enjoyed more social peace when everyone in town, from the factory owner to the janitor, sent their kids to the same comprehensive high school where they all had to learn to get along. (Black Americans would be justified in disputing this claim, however.)

But I agree with Norberg that this memory of “shared prosperity” – ironically, now a Communist Chinese slogan – grows rosier with the passage of time, as memories tend to do, and that the reality was closer to what Norberg describes. We don’t want it back.

Who lost the right-wingers?

Traditionally, in the U.S., Europe, and Western offshoots, the political right has been pro-capitalist. But no more – at least, not consistently. Norberg is dismayed that many of his onetime right-leaning allies have taken up protectionism and isolationism, which are patently anti-capitalist. And he takes abuse from the left too:

Twenty years ago free trade was considered bad because we exploited them; now it is considered bad because they exploit us. Twenty years ago, capitalism was wrong because supposedly it made the world’s poor poorer. Now it is wrong because it makes the poor richer.⁷

Joakim Book (a good name for a book reviewer) concludes: “These days, Norberg is as likely to be called a woke, globalist leftie as he was a crazy, right-wing, capitalist lunatic in the 2000s. Frustrated, Norberg remarks that he’s not the one who changed.”

The meaning of life?

Bravely or foolishly, Norberg titles his last chapter (other than a brief epilogue) “The Meaning of Life.” In it, he defends capitalism from what he calls “the last line of defence against free markets”: the charge that it overlooks, or cheapens, or destroys the things that matter most.

In this meandering chapter, Norberg discusses the connection between money and happiness, the naïveté of communitarian anti-capitalism, and the fatuousness of “post-liberal” writer Patrick Deneen’s reactionary social vision. Norberg’s defense is quirky and I find it a little

unsatisfying, so let me offer mine, which arrives at the same place as Norberg’s but by a different path.

Capitalism is an economic system, not a comprehensive philosophy of life, although it’s consistent with the Enlightenment ideal of individual self-sovereignty. The purpose of an economic system is to allocate scarce resources to unlimited wants and needs, but the fruit of such a system is money, ideally in the hands of the people who produce those resources. Thus, we can think of capitalism as providing a way for people to make money.

And, in a zinger that should have been printed on the book cover, Norberg writes that “the best thing about having money is that you can think about things other than money.”

This comment recalls John Adams a quarter of a millennium earlier:

My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce and agriculture in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.

That’s a pretty good statement of the meaning of life. And that’s why Norberg had the gall to say, in the book’s subtitle, that global free markets will save the world. You can’t actually save the world, which is a collection of flawed human beings pursuing goals that are often beyond our reach, but as Tyler Cowen says in the subhead of his mega-popular economics blog, Marginal Revolution, we can take “small steps toward a much better world.”

And a world organized around the classically liberal principles set forth in Norberg’s manifesto would, indeed, be a much better world.

Laurence B. Siegel is the Gary P. Brinson Director of Research at the CFA Institute Research Foundation, economist and futurist at Vintage Quants LLC, and the author of Fewer, Richer, Greener: Prospects for Humanity in an Age of Abundance and Unknown Knowns: On Economics, Investing, Progress, and Folly. Two more books are in progress. Larry is available for speaking engagements on these topics and may be reached at [email protected]. His website is http://www.larrysiegel.org.

¹ Plus Jesse Kelly’s 2023 book, The Anti-Communist Manifesto, if you want to count that.

² Mein Kampf is a close competitor, but its impact was not as widespread as that of The Communist Manifesto, adherence to which tyrannized one-third of the world’s population for much of the twentieth century, and which still strongly influences the government of China (population 1.4 billion, 18 percent of the world population).

³ As described by Brookings, the World Bank defines the global middle class as consisting of people who can consume $11 to $110 per day, per person, measured in 2017 U.S. dollars. That’s a very wide range, with no natural intuition as to how well a person lives on that amount of money, so the World Bank describes it thus:

Those in the middle class...can...buy consumer durables like motorcycles, refrigerators, or washing machines. They can afford to go to movies or indulge in other forms of entertainment. They may take vacations. And they are reasonably confident that they and their family can weather an economic shock...without falling back into extreme poverty.

⁴ The World Bank’s 2017 definition of extreme poverty, inflated to 2024 prices.

⁵ It’s been said that while the Chinese government describes its system as socialism with Chinese characteristics, it’s really “capitalism with capitalist characteristics.” (In the comments of this article, for example.) More seriously, Weijian Shan, a Hong Kong private equity manager, has made the case that this perception is correct.. Under the leadership of Xi Jinping, China has been backsliding, but from a much richer starting point than the country has experienced at any time in its history.

⁶ Mamet, David. 2011. The Secret Knowledge, New York: Sentinel (Penguin), p. 51.

⁷ Perhaps because making the poor richer causes them to contribute more to global warming? I am guessing at what Norberg means; he didn’t spell it out.

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