You can only understand life backward, but it has to be lived forward. 

—Søren Kierkegaard 

In 1798 Thomas Malthus published his famous Essay on the Principle of Population. Prosperity at an individual level is elusive, he argued. Countries may grow. Yet, whenever economic growth occurs, people just have more children. Life for most individuals remains miserable—at the mere subsistence level.  

Malthus based his argument on the data and observations available to him at the time. He was right about the past—as modern studies based on the best available data suggest.¹Max Roser, “The Economy Before Economic Growth: The Malthusian trap” in Economic Growth, 2013, accessed October 2022, https://ourworldindata.org/economic-growth#the-economy-before-​economic-growth-the-malthusian-trap. Hundreds of years of evidence turned out to be anything but a solid basis for predicting the future or shaping policy. 

Today, with twenty-twenty hindsight, we know that the nineteenth century ushered in an era of rising individual prosperity, which accelerated in the twentieth century. The number of people in extreme poverty is now lower in absolute terms than 200 years ago, even though global population expanded from around 1 billion in 1800 to some 8 billion today. Global fertility rates are just above the replacement level, at which the world’s total population would remain stable.²Max Roser, “Fertility Rate”, 2014, accessed October 2022,https://our​world​indata.org/fertility-rate#the-global-decline-of-the-fertility-​rate-​since-1950. 

We live in unprecedented times. Gone are stable systems like ancient Egypt, which saw little structural change for three thousand years.³Samuel Finer, The History of Government, vol. 1 (Oxford: Oxford University Press, 1997). At the same time the belief that humans can shape “God-given” society has emerged as prosperity rose.⁴Albert O. Hirschman, “Rival Interpretations of Market Society: Civilizing, Destructive, or Feeble?,” Journal of Economic Literature 20, no. 4 (December 1982). Massive social experiments have been conducted with ostensible failures and successes—witness the attempts at central economic planning or the spread of democratic mechanisms for decision making. Currently, not a day goes by without someone suggesting to “re-imagine capitalism.” 

The best we can do to understand what is happening, and to inform policy, is to dive into the mechanisms that underlie economic development and discuss how they might change. This essay delves into the role of freedom—and its “twin,” cooperation—in generating prosperity. In doing so, cooperation and the pursuit of freedom are discussed as means to an end: prosperity.  

Sources of prosperity  

Resources and ideas

Prosperity is based on a supportive natural environment including land, minerals, and a propitious climate.⁵Jared Diamond, Guns, Germs and Steel (New York and London: W. W. Norton, 1997). Faced with their environment humans can just exploit it or make more of it. Ideas, and the ability to apply them, are the key.  

Ideas create new things, building blocks so to speak. These can then be combined into ever new inventions.⁶Paul Romer, “Ideas and Things: The Concept of Production is Being Retooled,” The Economist, September 11, 1993. An example is the modern computer. It rests on prior inventions such as the calculating machine, symbolic logic, the punch card, Audion tubes, and the binary system.⁷Peter F. Drucker, “The Discipline of Innovation,” Harvard Business Review 63 (May–June 1985), 67–73. The more building blocks are generated, the more experiments are possible. With more potential experiments, the possibilities for failing also increase. For example, 100,000 types of airplanes were flown in the 1920s and 1930s; of these, only about 100 survived to form the basis of modern aviation.⁸Freeman Dyson, Imagined Worlds (Cambridge, MA: Harvard University Press). Failures may lead to new learning, and successes often surprise.  

Freedom to compete 

Coming up with new ideas and applying them requires freedom to think, experiment, and create businesses. Freedom to enter a market allows new products and services to emerge. Underperforming businesses exit the market when failure, including bankruptcies, is allowed: “freedom to fail.” The combination creates strong incentives to generate new ideas and adopt good ones. These freedoms are the essence of competitive markets,⁹The term “competitive market” refers to real-life working (or workable) competition, not the idealized textbook model of “perfect competition.” making them powerful engines of innovation, and of the spread and realization of new ideas.  

Competitive markets clearly have a role in generating prosperity but remain vulnerable to vested interests. As Adam Smith put it: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”¹⁰Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776. When vested interests protect their own achievements, new ideas are stifled. An eminent historian of the knowledge economy quotes an apposite example—a guild ordinance from eighteenth-century Prussia: “No artisan shall conceive, invent or use anything new.”¹¹Joel Mokyr, The Gifts of Athena: Historical Origins of the Knowledge Economy (Princeton: Princeton University Press, 2002). For prosperity to advance, there need to be social and political mechanisms that allow the new to emerge in the face of resistance from the old, hence the importance of rules such as pro-competition policies and mechanisms to replace people in government.  

When markets are not kept competitive within a particular jurisdiction, prosperity may still advance through competition between jurisdictions. The origin of the industrial revolution is a case in point. Around the year 1500 AD, China was the most technologically advanced society.¹²Joseph Needham et al., Science and Civilisation in China. 7 vols. (Cambridge: Cambridge University Press, 1954–) Yet, the industrial revolution made headway in Europe. Arguably, it was the very fractious nature of Europe—with hundreds of kingdoms, principalities, and cities—that enabled this. When a new idea confronted resistance, the innovator had options to migrate to another place where the new idea was welcomed or at least tolerated.¹³Eric Jones, The European Miracle: Environments, Economies, and Geopolitics in the History of Europe and Asia (Cambridge and New York: Cambridge University Press). It can be argued that the inability to reestablish a large empire after the fall of Rome gave Europe a leg up compared to China, where periods of internal strife were overcome by central authority.¹⁴Walter Scheidel, Escape from Rome: The Failure of Empire and the Road to Prosperity (Princeton: Princeton University Press, 2019). In retrospect, wars among rivals in Europe also ended up enhancing economic prospects, notwithstanding the destruction they brought. War favors those with better military technology and better economic performance, which allow war to be financed and supported. Viewed from today, over the long run, that is what “war has been good for” (Ian Morris, War: What Is it Good For?, (London: Profile Books, 2014)). Yet, war is hardly a palatable policy and may not achieve its aims for hundreds of years—as in Europe after the fall of Rome. 

Cooperation: The twin of freedom

Openness to new ways is key for prosperity. Equally important is the ability to cooperate, however messy this may be. Even invention itself is rarely a solitary process. It thrives on discussion, sharing information and joint experimentation. The modern term “innovation cluster” captures part of this reality. The industrial revolution already featured such clusters in England. In eighteenth-century Birmingham inventors James Watt and Matthew Boulton (steam engine), Erasmus Darwin (physician and grandfather of Charles), Benjamin Franklin (bifocal glasses) and Josiah Wedgwood (pottery) were part of the “Lunar Men,” so named because they met on evenings when the moon shone them the way to meetings where they discussed their ideas.¹⁵Jenny Uglow, The Lunar Men: Five Friends Whose Curiosity Changed the World (New York: Farrar, Straus and Giroux, 2002).  

Solving information and commitment problems

To cooperate, people need to exchange information and make promises. Information and promises must be credible. Humans have developed ways to solve these information and commitment problems even under most challenging circumstances, albeit at a cost. Gambetta discusses the ways in which criminals try to ascertain that a prospective partner in crime is a genuine criminal and not a police informant.¹⁶Diego Gambetta, Codes of the Underworld: How Criminals Communicate (Princeton: Princeton University Press, 2009). They may, for example, use a long prison record as a sign that the partner is a real criminal. Then follows the problem of how to make sure a bona fide criminal actually follows through on their promises, for example, by getting “dirt” on someone as a form of blackmail to enforce agreements. 

Informal markets are plagued by similar challenges. Investors need to trust that the land, building, and machinery they invest in will be theirs. Traders need to trust information about product quality and promises of delivery. Moneylenders need to trust promises of repayment. Repeated interaction among the concerned parties underpins a key mechanism for overcoming these information and commitment problems. 

Reputational mechanisms and trust

Repeated interaction provides an incentive to maintain a useful reputation. In essence a reputational mechanism revolves around a promise. Information then needs to flow to assess whether the promise is kept.¹⁷“Transparency” has value in sustaining reputational mechanisms. Yet transparency cannot solve problems when goals conflict or sanctions are not working. In case it is not, there needs to be a punishment, often an out-casting mechanism or sanction, or the threat of violence in more extreme cases. Traders in and around the Mediterranean, or among Hanseatic cities in northern Europe, used agents in various ports and cities to report on whether promises about prices, quantities, and quality were being kept. If not, traders or cities would be cast out from the trading relationship. Extending the interest in maintaining reputation, more formal mechanisms developed in time, for example, lex mercatoria—the law of trade or contracting. Reputational mechanisms pervade all collaborative arrangements to varying degrees, whether in organizations or the market.¹⁸John McMillan, Reinventing the Bazaar: A Natural History of Markets (New York and London: W. W. Norton, 2002).  

The limits of laissez-faire

Highly informal arrangements—with nothing more than reputational mechanisms to support cooperation—are the closest thing to true laissez-faire economic policy. Informal moneylending illustrates the limits of such approaches. Borrowers from moneylenders have an incentive to pay back if they expect to borrow again in the future. Moneylenders in turn deal with people they know and whom they expect to deal with again. To manage repayment risk the amounts they lend are small, repayment frequent, and charges high on account of the costs of conducting the business. The result? It is hard to pool savings and borrow large amounts. Maturities of loans are very short term. Default rates are kept low. Risk sharing—like in venture capital, where a few successful projects cover the default of most—is near impossible.¹⁹Interestingly, microfinance uses similar approaches to those of moneylenders, but with the added twist of some form of group lending that mainly serves to reduce transaction costs. Abhijit V. Banerjee and Esther Duflo, Poor Economics (New York: PublicAffairs, 2012).  

In the absence of formal property rights and contracting law, businesses remain small and ephemeral.²⁰Peter Reuter, Disorganized Crime: The Economics of the Visible Hand (Cambridge, MA: The MIT Press, 1983) Subsistence entrepreneurs and families benefit, but transformational investment is scarce to nonexistent. This was the predominant landscape that Malthus’s analysis reflected. 

Rules, rules, rules: The rise of institutions

The first firm with more than 1,000 employees was founded in 1760, the Soho Manufactory in Birmingham, England. This was extraordinary for an era in which even the largest firms only employed a few hundred laborers.²¹Alfred D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Belknap Press of Harvard University Press, 1977). Today however, organizations with more than 100,000 employees can be successfully managed. 

Firms and markets require cooperation. Specialization, the division of labor that Adam Smith highlighted as a source of prosperity, needs firms to contract and trade. Trading and contracting are needed to bring products and services to customers. Today, expanding markets allow trades across the globe between people and firms who barely know each other. People invest trillions of dollars in ventures they do not know about, much less fully understand, for example when they save for retirement. Cooperation may usefully go together with rivalry in competitive markets. Agreeing to play by the rules is a form of cooperation that makes freedom to compete most productive. 

Cities are the setting for almost all innovations and most economic activity. In the words of economist Ed Glaeser, “The geographic proximity created by cities allows ideas to travel more rapidly . . . and ideas are what lies behind economic growth.”²²Edward L. Glaeser, “Are Cities Dying?,” Journal of Economic Perspectives 12, no.2 (spring 1998), 139–60. City management in turn requires cooperation to provide the platform on which interaction between individuals and businesses thrives. 

For all of this to happen, trust in information and promises needed to be strengthened beyond simple reputational mechanisms. This took the form of new and ever more sophisticated rules expressed in laws and regulations. New concepts were invented, for example, legal persons without physical existence like the limited liability company.²³Yuval Noah Harari, Sapiens: A Brief History of Humankind (New York: HarperCollins, 2015). Central authorities made those rules and enforced them. They established property rights, contracting systems and information systems, such as cadasters or credit bureaus, underpinned by the enforcement powers of the state. In the words of the historian of government, Jean Dunbabin, “What distinguishes modern government from personal control is its unremitting character. To be governed is to be subjected to the regular pressure of an authority operating to fixed rules . . . In the full sense of the word, it is arguable that nobody was governed before the later 19th century . . .”.²⁴Samuel Finer, The History of Government, vol. 1 (Oxford: Oxford University Press, 1997), 70. 

“Hayek and the Swiss President”

Some narratives about the sources of prosperity emphasize the role of competitive markets and their superiority over central planning. From this perspective progress can be seen as moving from “Karl Marx to Friedrich Hayek”—from central planning to free markets. Taking a longer view, the more fundamental shift may be characterized as moving from “Louis XIV to today’s President of Switzerland.” The former is to have said “l’état c’est moi” (I am the state)—a ruler above the rules, whereas hardly anybody knows the latter by name. The post-holder changes yearly, making them the epitome of modern rulers who are themselves subject to rules.  

It has thus become commonplace to attribute the prosperity of modern times to the underlying “institutions” or “rules of the game.”²⁵Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (New York: Crown Business, 2012). Nations with better institutions became more prosperous—see, for example, South Korea vs. North Korea. The likelihood of being poor in 1870 was mostly a function of the social class someone was born into. By 2000 it was overwhelmingly a function of the country where one was born.²⁶Branko Milanovic, Global Income Inequality by the Numbers: In History and Now, Policy Research Working Paper no. 6259 (Washington, DC: World Bank, November 2012), https://openknowledge.worldbank.org/handle/10986/12117. 

Making and enforcing rules: Authority

Rules must be made and improved from time to time. Rulemaking and enforcement require the exercise of authority, but they also need to command an adequate degree of legitimacy—that is, they must be buttressed by a form of ethics. Without some degree of consensus about what is legitimate, rules are hard to make and difficult to enforce.²⁷Barrington Moore, Jr., Injustice: The Social Bases of Obedience and Revolt, (London: Routledge, 1978). 

Those exercising authority are easily tempted to abuse their power, which raises the age-old issue of “who guards the guardians?” Therefore, it is desirable to have mechanisms to check powers and allow for change when needed. This is the economic case for checks and balances through the rule of law and accountability to an electorate. Voters with the ability to replace underperforming people in power can, in principle, improve rulemaking and enforcement without just relying on “palace coups.” 

However, societal consensus about ethics or rules cannot simply emerge from “democratic” aggregation of individual views without recourse to some “higher” authority. Nobel Prize-winning economist Kenneth Arrow has shown that there is no way of aggregating disparate individual preferences without resort to some form of discretionary authority.²⁸The “Condorcet paradox” illustrates the issue: Three people have preferences over three alternatives, A, B and C. Person 1 prefers A over B over C, person 2 prefers B over C over A, and person 3 prefers C over A over B. At the individual level the preferences are clearly ordered. At the community level two people prefer A over B, two B over C and two prefer C over A. If one were to use majority voting and put up A vs. B for vote in the first round, then proposition A wins. If one then has A face C, C becomes the overall winner. But if one starts by voting on A and C first, C wins. In the subsequent contest of C vs. B, B is the winner. The result depends on the choice of voting system, which itself requires the exercise of discretionary authority. Kenneth Arrow, “A Difficulty in the Concept of Social Welfare,” Journal of Political Economy 58, no. 4 (1950), 328–46.  

Whatever rules reign, they are by nature incomplete as it is impossible to foresee all possible contingencies. Loopholes are inevitable. Application requires a dose of discretionary authority. Principles can help guide the exercise of discretion. “Principles have no loopholes,” as the saying goes. Yet, principles need interpretation. 

There is also no obvious path to clear-cut agreement on principles of justice, nor on which rules are “best.” For example, utilitarian, libertarian, and communitarian conceptions of justice all command some ethical power. At the same time, each one is incomplete and may conflict with the others.²⁹Michael J. Sandel, Justice: What’s the Right Thing to Do? (New York: Farrar, Straus and Giroux, 2009). Tragic choices arise that cannot be satisfactorily solved, such as when it becomes inevitable to trade off one life against another.³⁰Guido Calabresi and Philip Bobbitt, Tragic Choices (New York: W. W. Norton, 1978).  

As Yuval Noah Harari puts it: “Much of history revolves around this question: how does one convince millions of people to believe particular stories about gods, or nations, or limited liability companies?”³¹Harari, Sapiens. None of these entities can be “touched” like physical ones. Yet, they can be powerful in aligning human behavior. These stories by necessity include some mechanism to exercise discretionary power—by priesthoods, governments, or company managers. 

The conundrum thus becomes: Prosperity needs freedoms. It also requires cooperation, and that requires authority that constrains freedoms. That authority is expressed not only in rules but also in discretionary authority.³²Mokyr labels this a “tension between openness and cohesion,” (The Gifts of Athena). Managers of firms, government officials, police commanders: they all need some level of authority. And while that authority can be limited, the very checks in place to do so require some degree of discretionary authority.  

The dark side 

Freedom and authority both are powerful forces that together can render societies prosperous. The discussion so far dwelled on the good they can do. Yet, there are dark sides exemplified by several narratives. The following stories are examples of core narratives. 

Dark stories: Freedom

One type of story equates freedom with being unshackled from rules. Yet, “no rules” means freedom for those with power at the expense of the downtrodden. The result is a “game of thrones” rather than a prosperous society. Places like today’s Haiti or the eastern part of the Democratic Republic of the Congo feature such politics. Prosperity remains a vain hope as multiple “roving bandits” exploit farmers, businesses, and merchants.³³Mancur Olson, “Dictatorship, Democracy, and Development,” The American Political Science Review 87, no. 3 (September 1993), 567–76. Property is insecure. Investment is vulnerable to theft. The results of productive effort are “taxed” away. When each bandit tries to extract as much as possible from people, they kill the proverbial goose that could lay the golden eggs.  

Another type of story may be told in more prosperous societies. Even with some sensible rules, freedom can favor the powerful. Unshackled markets wreak destruction on jobs and businesses. Some of this may be “creative destruction,” leading eventually to greater prosperity, but quite possibly with a very long lag and with misery for many—as in the industrial revolution.³⁴Carl Benedikt Frey, The Technology Trap: Capital, Labor, and Power in the Age of Automation (Princeton: Princeton University Press, 2019). Inequality may rise excessively. The winners end up fortifying their position by tilting political power in their favor, for example, through election campaign finance. Prosperity remains the privilege of the few. Benefits may not “trickle down” to the many. Even when democratic elections prevail, the “tyranny of the majority” may run roughshod over many citizens’ well-being.  

When rules protect the freedom of people against excessive power, yet another dark story emerges. The classic version was told by Plato over 2,000 years ago. Where all people are free to contract, to elect their government, and live their lives as they wish, society may become ungovernable. As each citizen asserts their version of freedom and their demands for change, people clash. As Plato put it: “These and other kindred characteristics are proper to democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequals alike.”³⁵Plato, Republic 558c. Meeting disparate demands is fraught with problems. NIMBYism (a form of opposition to some new development, “not in my back yard”) paralyzes investment. Some groups of people hold values that are at odds with social cohesion. Plato argues that this creates fertile ground for populists, who are able to dupe citizens, exploit their unrealistic wishes, and promise a path out of disorder. As a result, populists set free societies on a path to tyranny. 

Dark stories: Authority

There is also no lack of stories about the dark side of exercising authority. At the extreme, totalitarian rulers may suppress sensible approaches to innovation and expertise. Stalin’s rule provides ample examples, this one concerning a major construction project and a senior engineer named Peter Palchinsky: “The building of the White Sea Canal [. . .] was a nightmare. It not only ignored the engineering principles of Palchinsky and his colleagues but it was also an obscene violation of human rights.”³⁶Loren Graham, The Ghost of the Executed Engineer: Technology and the Fall of the Soviet Union (Cambridge, MA: Harvard University Press, 1993). Almost all workers were political prisoners and more than two hundred thousand died during construction. The canal failed to live up to its specifications from the beginning: it would freeze for half the year, and water levels were too low in the dry summers. For political—rather than technical—reasons, Palchinsky was executed in 1929. After World War II, the entire canal was rebuilt, running parallel to the first one.  

North Korea remains a prime case of a centralized authority suppressing markets, and with them the engine of prosperity that propelled neighboring South Korea to high-income living standards within little more than a generation. Venezuela’s income levels nosedived as market forces were suppressed in the years following the Chávez regime. 

Authoritarian rulers can do much better than fragile societies like Somalia (especially areas “ruled” from Mogadishu). In Mancur Olson’s terminology they can behave like “stationary bandits,” preventing the bleeding of the land by “roving bandits.”³⁷Olson, “Dictatorship, Democracy, and Development.” The ruler provides basic security of property and contracts and may make use of market forces. This increases overall prosperity and allows the ruler to skim off far greater wealth than any roving bandit might. The downside is that merit-based approaches become limited as the ruling elite fears outsiders that may gain too much power. The outcomes of market forces may not be acceptable to the ruling elite. 

The ruling elites may exploit their position for private gain. Such corrupt behavior is often the reward for buttressing the regime. Rules are violated with a degree of impunity. At the same time rules put in place ostensibly to constrain bad behavior may in fact provide a lever for abuse. If one can accuse someone of rule-breaking, it is easier to blackmail him for corrupt purposes or to eliminate political rivals. As Laozi put it in the sixth century BC: “The more laws and restrictions there are, the poorer people become . . . The more rules and regulations, the more thieves, and robbers.”³⁸Laozi, Tao Te Ching 57.  

Even the most successful autocrat faces succession problems. Setting up a merit-based process to find successors risks taking power out of the hands of rulers’ confidants. Rulers often look to family members to succeed them. These may or not be competent. Strife among the ruling elites following the death or incapacity of the autocrat risks undermining political stability and prosperity.  

Blueprints for prosperity? 

There is some truth in all of these narratives, as well as variants thereof, and they are not mutually exclusive. For societies to prosper, freedoms are needed as are rules and some measure of discretionary authority. Each element of the equation also has potential downsides. Studies of the causes of prosperity use international comparisons as well as case studies to assess what mix of freedom and authority works best. 

Capitalism, alone

Few hard-and-fast lessons emerge from existing studies of the causes of prosperity. There is no engineering manual for building and operating a prosperous society. Yet some broad patterns appear, one of the primary ones being that central planning and heavy-handed suppression of competitive markets have not worked in the past. As Branko Milanovic puts it, today there is “capitalism, alone.”³⁹Branko Milanovic, Capitalism, Alone: The Future of the System That Rules the World (Cambridge, MA: Harvard University Press, 2019). The main issue is—with markets and competition embedded in prospering societies in some fashion—how democratic or authoritarian those societies are.  

Sound rules

Well-functioning markets are based on rules including adequate clarity about property rights and contracting systems. A hypothetical laissez-faire regime where all is left to unconstrained private interaction is no recipe for success. What matters is which rules are best, and the details of their implementation.  

Practical policy may often be best framed as “making rules disappear.” Just as with the complex technology and programming embodied in smartphones or computers, the challenge is to make that complexity disappear through well-designed user interfaces. Scandinavian economies are rarely accused of an excess of laissez-faire. Yet, they provide many examples of functional rules that are relatively easy for businesses to use.⁴⁰The World Bank’s former Doing Business report provides ample examples. World Bank, “Business Enabling Environment (BEE),” accessed February 6, 2023, https://www.worldbank.org/en/programs/business-enabling-environment/doing-business-legacy. 

Competitive disciplines

Several countries, for example Japan and South Korea, developed fast while using significant government direction of the economy, or “industrial policy.” What transpires from analysis of the “East Asian miracle” is the importance of market-type discipline in the background.⁴¹A World Bank report analyzed the experiences of Japan, the “Asian Tigers” (Hong Kong, Singapore, South Korea, and Taiwan), as well as Indonesia, Malaysia, and Thailand. World Bank, The East Asian Miracle, (Oxford: Oxford University Press, 1993). The political miracle was that government support in the form of tax, trade, and financing advantages was effectively tied to success in international markets. Governments thus relied on forms of contests.⁴²Joseph E. Stiglitz, “Some Lessons from the East Asian Miracle,” The World Bank Research Observer 11, no. 2 (August 1996), 151–77. Contests are also a feature of research support: for example, in the United States, the “challenges” promoted by the Defense Advanced Research Project Agency (DARPA). Much modern technology, including the internet and Global Positioning System (GPS), is the result of US government-sponsored efforts to enhance military capability.⁴³Mariana Mazzucato, The Entrepreneurial State: Debunking public vs. private sector myths (London: Anthem Press, 2013).  

Democracy or autocracy?

Most of today’s rich countries feature extensive use of competitive markets and democratic systems of government.⁴⁴Resource rich economies such as petrostates may achieve high incomes with authoritarian governance. It is less clear to what extent democracy is a cause of prosperity or a result. For example, the democratic regimes in Japan, South Korea, and Taiwan were arguably instituted by elites that were confident in their own future, with that confidence based in part on the economic success they had achieved.⁴⁵Dan Slater and Joseph Wong, From Development to Democracy: The Transformations of Modern Asia (Princeton: Princeton University Press, 2022).  

For developing economies, existing studies suggest that economic growth in democratic countries may be less variable in the short run than in autocracies and somewhat higher in the long run, mostly due to less-severe setbacks. Many autocracies have suffered from the dark side of discretionary power. Yet, several have yielded spectacular advances in prosperity, not least China. Autocracies with some level of checks and balances and processes for succession—for example, in the form of an effective ruling party—may approximate the performance of democratic systems.⁴⁶Kunal Sen, Lant Pritchett, Sabyasachi Kar, and Selim Raihan, Democracy Versus Dictatorship? The Political Determinants of Growth Episodes (working paper RWP17-009, Harvard Kennedy School Research, December 2016). 

Multiple social and political systems can underpin a measure of rising prosperity for developing economies. The variety is exemplified by such diverse cases as Bangladesh, Botswana, Cambodia, Chile, India, Mauritius, Uruguay, Singapore, Rwanda, and Vietnam.⁴⁷Cambodia and Rwanda are still very poor. Yet, they are among the few states that made major strides after genocides and starting from conditions of abject poverty. In a sense, it is encouraging that multiple pathways to prosperity can work. It suggests that the way to prosperity is somewhat robust, since it is often able to accommodate country peculiarities.  

The China factor

So far, development models of the democratic type (cue Denmark) or the more authoritarian type (cue Singapore) provide the main beacons for aspiring economies. China is now asserting its approach as a model, just as it is changing it. 

China has combined autocracy with astonishing economic success, lifting hundreds of millions of people out of poverty in record time. China’s performance since 1978 was heavily driven by an expanding and significant role for competitive markets, both domestically and in international trade and foreign investment—at least until a few years ago.⁴⁸Nicholas R. Lardy, Markets over Mao: The Rise of Private Business in China (Washington, DC: Peterson Institute for International Economics, 2014). Competition may also be behind the relatively improved productivity performance of state-owned firms up to 2012.⁴⁹Chang-Tai Hsieh and Zheng (Michael) Song, “Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China” Brookings Papers on Economic Activity 46, no.1 (spring 2015), 295–366. 

China is now asserting greater powers for the state in the economy. The Communist Party is exercising oversight over private firms through party committees that are taking on greater roles in companies’ management. State-owned enterprises are more widely favored again. Productivity growth is suffering.⁵⁰Nicholas R. Lardy, The State Strikes Back: The End of Economic Reform in China (Washington, DC: Peterson Institute for International Economics, 2019).  

Up to now, market forces continue to exert some discipline. Competition has even been introduced in the electricity sector in several provinces among state-owned generation companies, notably in Guangdong.⁵¹Guangdong Provincial Energy Administration, “Implementation Plan for the Electric Power Spot Market in the South (Starting from Guangdong) (Draft for Comments),” December 17, 2021, http://drc.gd.gov.cn/gdsnyj/gkmlpt/content/3/3721/post_3721364.html#3590. At the same time new technologies, including artificial intelligence, may enlarge the scope for centralized decisions and control.  

China’s economic performance may well stall. After all, effective competition rests on acceptance of market outcomes. Greater discretionary intervention by political authorities may undermine this. Yet, China may just succeed in composing a new form of centrally managed economy with elements of competition and contests. It seems unlikely, based on the historical record, but it might not be wise to rule out such an outcome. 

Shifting sands: New challenges from prosperity 

Prosperity is a good thing. It means freedom from material want. It goes together with better health and higher life expectancy, as well as more education. Surveys suggest it also allows people to be happier.⁵²Angus Deaton, The Great Escape: Health, Wealth, and the Origins of Inequality (Princeton: Princeton University Press, 2015). Prosperity arguably provides glue that holds societies together and promotes peace.⁵³Benjamin M. Friedman, “The Moral Consequences of Economic Growth,” Society 43 (January/February 2006), 15–22.  

Yet, prosperity can also bring its own problems. A key concern is that economic growth will at some point run into some form of resource constraint. Currently the big concern is the stress on the earth’s ecosphere and the concomitant worry about climate change. Worryingly, countries are arguably confronted with the need to devise ever more intricate rules while the domestic and global political basis to choose and adopt good rules is eroding. Consider first the need for rules. 

The rise of non-competitive sectors

Sectors of the economy where competition provides opportunities and the incentives to perform, tend to see higher productivity growth than other parts of the economy. When production becomes more efficient, the share of such sectors in an economy can easily shrink as countries become more prosperous. This has been the case for agriculture. Where once more than half the population was needed to produce food, only a few percent of people are required today. Manufacturing’s share of total economic activity is shrinking in many advanced economies, precisely because it takes relatively fewer resources to produce what is demanded than in sectors where productivity is more stagnant, like in healthcare or education. The relative scope for competitive markets may thus shrink. This means more reliance on sectors relying more heavily on non-market mechanisms of production. In this sense more prosperity goes together with a relative increase in rules and discretionary authority.  

Coping with greater complexity

Prosperity goes together with rising complexity and new coordination problems. To some degree greater complexity strengthens the case for market forces, yet with greater challenges for competition policy. Interface problems between government and private enterprise are becoming more intricate.  

For example, modern infrastructure is required. Much of this needs to be regulated in some fashion due to inevitable market power issues. Even where competitive markets can play a role, intricate market design by government is a must, for example, in electricity markets.⁵⁴Peter Cramton, “Electricity Market Design,” Oxford Review of Economic Policy 33, no. 4 (winter 2017), 589–612. Government investment is important too, notably for road infrastructure.  

New products and services are stacked on top of others, like the information and entertainment services that are made possible by preexisting technology platforms. Supply chains become more complex. They rely on coordination between private as well as government players, for example, in port service provision or access regulation for all sorts of platforms—telecommunication networks or financial payment systems, for instance.⁵⁵Jean Tirole, Economics for the Common Good (Princeton: Princeton University Press, 2017).

More and more people are dealing with each other, directly and indirectly, over vast distances and with limited in-person interaction. Coping with the arising information and commitment problems requires more intricate rules for consumer protection. Some, such as food safety regulations, are relatively widely accepted. Others, like access to internet infrastructure, remain hotly debated. Global challenges, notably climate change policies, become more acute and bring in a host of new rule-making challenges, notably how de facto to “price” the cost of greenhouse gas emissions. 

Centrifugal forces

While the need for good rules rises, growing prosperity unleashes centrifugal forces that may make agreements more elusive. As individuals become richer, they can afford to pursue personal beliefs and desires that go beyond taking care of the basics such as food, shelter, and safety.⁵⁶Abraham Maslow, “A Theory of Human Motivation,” Psychological Review 50, no. 4 (1943), 370–96, https://doi.org/10.1037/h0054346. Whether they seek entertainment, political activism or other pursuits that hold meaning for them, people with time on their hands—backed by resources—make the world a more colorful, but also disparate, even polarized place. Rising incomes may help hold societies together, but governability issues may also increase. Revolutions happen when rising classes seek change: Witness the French bourgeoisie in the eighteenth century. Terror groups like al-Qaeda recruit from relatively better-off households.⁵⁷Alan B. Krueger and Jitka Malečková, “Education, Poverty and Terrorism: Is There a Causal Connection?,” Journal of Economic Perspectives 17, no. 4 (fall 2003), 119–144.  

The era of globalization after World War II ironically also saw the creation of many nation states—mostly because of decolonization and the dissolution of the Soviet Union—making international agreements more complex. As countries get richer and more powerful, they may feel more confident in asserting their national interests. Mutually beneficial economic interdependence may align interests. Yet, the very success of economic development may make it harder to agree on rules as states can more easily afford to hold on to their own positions. Even determined economic problem cases like North Korea can do so. The United Nations may not become more united by achieving official, desirable development goals.  

What will the future bring? Basic scenarios 

Today, a new experiment in constructing a prosperous society is unfolding in China. A key theme is further strengthening of authority via the ruling party, including more restraints on private firms and markets. The direction reflects in part an attempt to curb the excesses resulting from unchecked freedom, such as excessive inequality. It also reflects fears of internal turmoil and beliefs that the more individualistic, liberal societies are destined to fray.⁵⁸For example, as set out by the Chinese Communist Party’s “chief ideo-logue,” Wang Huning, a member of the Politburo Standing Committee at the time of writing. Wang Huning, America against America, (n.p., n.p., 1991). The vast social experiment can be seen as guarding particularly against the dark side of freedom. 

The liberal model recognizes the need for authority such as an effective state but emphasizes checks and balances on authority through the rule of law and accountability through democratic elections.⁵⁹Francis Fukuyama, The Origins of Political Order (New York: Farrar, Straus and Giroux, 2011). It sees markets with private firms as part of the solution. Overall, it is more concerned about the dark side of authority.  

The coming decades will shed light on how the balance between the bright and dark sides of different models plays out—what mix is more conducive to propelling prosperity as the world evolves. Four basic outcomes over this time frame are imaginable. Evolution may affirm the superiority of the liberal model. Or it may just show the superiority of the Chinese experiment and other authoritarian approaches. It may also lead to continued rivalry among multiple viable models. Finally, a dystopian outcome may come to pass with both models fraying under their own internal contradictions—with the dark sides of the respective models overpowering the bright sides in both cases. The fate of Malthus’s predictions should give us pause before completely ruling out any of the outcomes.  

And the moral of the story is? 

Unsurprisingly, freedom and cooperation are both needed to achieve prosperity. Cooperation requires the exercise of authority that constrains freedom. Authority may be exercised based on rules or discretionary decisions. Some scope for discretionary authority is unavoidable. Effective implementation of authority is needed, including an effective state. Any good mix of freedom and authority needs to command an adequate level of legitimacy to be sustainable, based on a sufficiently widely shared system of beliefs that provides the glue holding society together. The system needs to be flexible enough to cope with evolving challenges that result in part from the very success of the system. The issue is thus not “freedom or authority” but concocting a good mix thereof in the face of the challenges of the times.  

Michael Klein is a professor at the Frankfurt School of Finance and Management (Germany) and a senior adjunct professor at the School of Advanced International Studies at Johns Hopkins University.

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