Why are some countries poor and others are not? Many people have asked that questions and multiple theories exist. Unfortunately, the most false explanations are dominating the intellectual discussion. For some time, a fashionable answers has been that the wealthy countries are wealthy because they have exploited the poor countries.
This answer is not just fundamentally false, but it is also dangerous. That is because no good solutions can come out of this false narrative. At the heart of it is a total misunderstanding of what wealth is and how it is possible for someone to be wealthy.
Naturally, humans are poor. We all decent from hunter gatherer cave men. These people lived a very simple life owning almost nothing. As a consequence their lives were brutish and short. From this very primitive state, we have evolved to live in modern, climate controlled homes, with the ability to travel and communicate across the whole planet, and with access to an abundance of food and entertainment.
That was quite a journey. Our lives today are so different from the stone ages that if we were to meet our ancestors today, we would more likely see them as some kind of different species rather than relatives. So, how did we get here? It should be clear that the answer cannot possibly be that we got here through the redistribution of wealth. Non of the nice houses and electronic toys, or even the food we eat, already existed in the stone ages. All of it was created afterwards.
The reason why we are wealthy today is production and not redistribution. Buildings and infrastructure needed to be build; food needed to be grown and transported into the supermarkets. All the useful tools like cars, computers etc, also needed to be first invented and then produced.
Some people might argue that we had to produce something in the past, but now that we have achieved the wealth the main question is how we can justly distribute the existing wealth.
That, however, would be to misunderstand the nature of wealth. To create wealth is not a one time and done. In order to enjoy wealth it needs to be consumed. And once consumed it is usually gone. For example, I can produce apples by planting apple trees. But once the apples are produced they won’t exist forever. I can only eat an apple once before I have to grow a new one. Food therefore constantly needs to be reproduced in order for us to have enough food in the future. Preventing hunger is not simply a question of how to redistribute the food that exists at every given moment.
The same is true for every other item of wealth. We all buy a new phone every few years; frequently exchange our furniture and beddings throughout our lives; and we certainly don’t drive the same car through a lifetime. If a car really is driven for many decades, it needs to go through extensive and frequent repairs.
One of the most sturdy forms of wealth is the houses we live in. But even those need to be constantly maintained. The most robustly build house will become unusable within years if nothing is ever fixed or renovated. Anyone who has ever owned a property knows that keeping a building in good condition can be quite time and resource consuming.
One of the worst economic fallacies that people hold is that wealth is simply something that exists. To the contrary, wealth is something very fragile. Wealth needs to be maintained through constant production. Once that production stops, wealth will disappear and our standard of living will drop rather quickly.
If that is understood, then it should be clear that the solution to poverty is not wealth distribution, but more production. If some people don’t have enough of something – in other words, if they are poor – we need to find a way to produce the things they need in a resource saving way. Therefore, the key question to reduce poverty is to figure out under which circumstances production can take place most efficiently.
Everyone who has looked deeply and unbiased into this subject will have to conclude that the only way to produce wealth efficiently is through free markets. We need to leave the producers alone to produce and not burden them with an avalanche of regulations and high taxes that will make their production unprofitable.
Understanding this, it should be clear that countries calling for foreign aid or even reparations for past exploitation are not doing themselves a favour. First of all, it is a fallacy that former colonial powers like Britain or France became wealthy by exploiting their colonies. Yes, sure, some people did get rich on exploiting colonies. But the nations as a whole who were running the empires did not profit. In fact, empires usually end because the empire bankrupts the host country. That was certainly true for the British empire and it is true for the currently crumbling US empire as well.
If it were true that the rich countries got rich because they exploited others then how did my home country Germany become one of the richest countries in the world after World War 2? The country was destroyed, with many of its major cities turned into rubble. In addition, the Nazi thugs had systematically murdered millions of Germany’s most educated and productive citizens. Germany did not have any colonies to exploit. It wasn’t even particularly resource rich.
The reason for Germany’s rise after WW2 was due to the fact that it was not just her cities that were flattened. The state bureaucracy was also reset. Thanks to people like Ludwig Erhard, West Germany started the period after the war with a relatively small state. There weren’t many regulations and taxes that were in the way of entrepreneurs to start producing wealth. With no obstacles in the way, German entrepreneurs could charge ahead and produce as much wealth as they wanted. As a consequence, Germany became a major industrial powerhouse by the 1960th.
Germany is not just an interesting example, because I happen to know the place very well. It is also interesting, because it was split into two after the war. Only the free market orientated west of Germany experienced the described economic miracle. East Germany, on the other hand was not so lucky. That part of the country was trapped under an authoritarian government whose key governing ideology was that the government and not the free market had to allocate resources. As a result, the eastern part of Germany stayed bitterly poor.
Another reason to take Germany as a case study in what makes nations rich or poor is that Germans are currently in the process of finding out that wealth indeed disappears after it is consumed. Far from being a free market oriented country, Germany is now governed by a green communist ideology that is trying to centrally plan every aspect of the economy. As a consequence, the standard of living of ordinary Germans is currently in free fall, and the country as a whole is falling apart.
Nothing works in Germany any more. When I was a kid, one could tune a clock according to when the trains arrived. Now one is lucky if a train arrives at all. And even if a train arrives, it is increasingly unsafe to use one, due to an explosion of crime. The same is true for almost every other aspect of Germany society today. Absolutely nothing works.
The fact that nothing works in Germany any more is a consequence of a government unceasingly stopping people from producing things that are actually needed. Instead, valuable resources are ideologically allocated to projects that destroy wealth. Once the production of wealth stops, one stops being wealthy, it is as simple as that. And like many countries before Germany, the Germans are currently finding out that it is not only possible but very easy to go from being wealthy to being poor.
This should be a lesson for other countries. Many poor countries seems to believe that the solution to their poverty is to go to rich countries and beg them for money. Whatever the rational behind it, this is never going to do any good. Not only is it impossible for the richer countries to drag the poorly managed countries with them without them ending up poor as well. The real problem is that this mindset is preventing the real solutions to poverty.
If a country is poor, it is not poor because it is an ex colony of another country. It is poor, because it is badly managed right now. Its leaders, and maybe even its society, is interfering too much with the people who want to produce wealth. No functioning rule of law with strong property rights and too many regulations and taxes are the reason why some countries are poor.
The only solution to poverty is to value wealth producers and to leave them alone. Societies who support and protect their wealth producers will become rich. Societies who fail to do so will not only stay poor but will also become poor if they had been rich in the past. The solution to most, if not all, of our problems is not more government evolvement, but liberty.