Sunday, October 22, 2017

"One of the Most Dramatic Increases in the Standard of Living in the World, Ever"

My favorite economic policymaker is Ludwig Erhard, but not far behind is Sir John Cowperthwaite, who was the Financial Secretary of Hong Kong from 1961 to 1971.

He can be credited with managing Hong Kong as a free market colony, which allowed it to grow in spectacular fashion. The current Hong Kong Financial Secretary calls it,
one of the most dramatic increases in the standard of living in the world, ever.

The Cato Institute recently featured the below discussion with  Neil Monnery, author of Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong, with additional commentary by Paul Chan Mo-po, the current Financial Secretary of Hong Kong.

From the book's blurb:
At the end of the Second World War, Hong Kong lived up to its description as “the barren island.” It had few natural resources, its trade and infrastructure lay in tatters, its small manufacturing base had been destroyed and its income per capita was less than a quarter of its mother country, Britain. As a British colony it fell to a small number of civil servants to confront these difficult challenges, largely alone. But by the time of the handover of Hong Kong to China in 1997, it was one of the most prosperous nations on Earth. By 2015 its GDP per capita was over 40% higher than Britain's. How did that happen? Around the world, post-war governments were turning to industrial planning, Keynesian deficits and high inflation to stimulate their economies. How much did the civil servants in Hong Kong adopt from this emerging global consensus? Virtually nothing. They rejected the idea that governments should play an active role in industrial planning - instead believing in the ability of entrepreneurs to find the best opportunities. They rejected the idea of spending more than the government raised in taxes - instead aiming to keep a year's spending as a reserve. They rejected the idea of high taxes - instead keeping taxes low, believing that private investment would earn high returns, and expand the long-term tax base. This strategy was created and implemented by no more than a handful of men over a fifty-year period. Perhaps the most important of them all was John Cowperthwaite, who ran the trade and industry department after the war and then spent twenty years as deputy and then actual Financial Secretary before his retirement in 1971. He, more than anyone, shaped the economic policies of Hong Kong for the quarter century after the war and set the stage for a remarkable economic expansion. His resolve was tested constantly over his period in office, and it was only due to his determination, independence, and intellectual rigor that he was not diverted from the path in which he believed so strongly. This book examines the man behind the story, and the successful economic policies that he and others crafted with the people of Hong Kong.

It is noteworthy that during the financial secretary's comments he profusely sings high praises for free enterprise but reports that it appears that some national economic planning will be launched in Hong Kong by the government. Got that? Free enterprise is great it has increased our standard of living at a spectacular rate but it is time for some national economic planning to take place!

Finally, the last question at the event seemed to be misunderstood by Chan rather than linking morality and free markets, he suggests that there is an evolution that takes place toward more government intervention to improve society. He hailed the formation of an equality opportunity commission and the institution of a minimum wage.

There goes free enterprise. 



  1. They [Hong Kong Authorities] rejected the idea of high taxes - instead keeping taxes low, believing that private investment would earn high returns, and expand the long-term tax base.
    I'm sorry, Robert, but isn't that "Lafferism"?

    1. Lafferism assumes there is an is an ideal maximum revenue tax rate that is somewhere in the middle of the curve. The curve shows low revenues for tax rates lower than this ideal. We don't know if this peak is where we consider taxes low or high or anywhere else.

      An issue with the laffer curve is that the planners don't know where they are on it. So if they keep taxes "low" they could still be taxing above the ideal or below it.

      In HK apparently they simply practiced the idea that by taking less from the economy the wealth would instead grow the economy instead of the government.

    2. So you're saying the curve itself is legit, but the "sweet spot" is indeterminate? That's my belief, BTW. Too much tax results in "diminishing returns" for the Govt. Of course, I think ANY taxation is evil, so my "sweet spot" on the curve is that tiny spot right at the beginning where the value is ZERO!

  2. I did not 'say' the curve was legit. I explained it's premise, it's glaring faults, and why what was done in HK was not "Lafferism". I did not preach anything let alone a "sweet spot" of taxation. Thus it seems you want to create an argument out of nothing for the sake of arguing.

    Ideally taxation would be zero, but that's not going to happen any time soon. Too many people want things done for them paid for by their neighbors, too many want government jobs, and too many want to control what everyone else does.

  3. Isn't the important point here: "They rejected the idea of spending more than the government raised in taxes - instead aiming to keep a year's spending as a reserve." If you are going to lower tax rates and revenues, isn't it essential to also lower expenses? When has this been done where the Laffer Curve idea was promoted? This is not macro economics, but "household" economics.