Progress from Poverty

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David Gordon
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How Nations Escape Poverty: Vietnam, Poland, and the Origins of Prosperity
by Rainer Zitelmann
Encounter Books, 2024; xiii + 212 pp.

Rainer Zitelmann has a well-deserved reputation as a defender of the free market; few, if any, can match his immense capacity for amassing relevant facts and using them effectively to support his arguments. This capacity is much in evidence in his latest book, How Nations Escape Poverty. They do so, Zitelmann says, by moving from socialism to capitalism, and in the book, he offers a powerful illustration of his thesis. After the Indochina War, Vietnam was one of the poorest countries in the world, but dramatic freemarket reforms have made this formerly socialist country prosperous. In like fashion, Communist Poland was among the poorest nations in Europe, but the path toward a free market has brought great improvement.

Zitelmann sets the stage for his account of Vietnam and Poland with a discussion of Adam Smith, who established the basic principle that enables us to determine how nations escape poverty. They can do so only if wages rise, and this is achieved through economic growth. If the economy is growing, people will not see themselves as engaged in a struggle with others over a fixed sum of resources. A growing economy permits most people to gain without trying to take resources from others. As Zitelmann puts it: “Continuous economic growth is the only way to raise wages; a stagnant economy leads to falling wages. . . . The ‘liberal reward of labour,’ Smith wrote, is ‘the effect of increasing wealth,’ and he repeatedly stressed that while ‘society is advancing to the further acquisition . . . the condition of the laboring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state.’”

According to Zitelmann, Smith realized that the “invisible hand” of the free market is the path of economic growth, but Zitelmann acknowledges that Murray Rothbard’s case against Smith is strong: “The libertarian American economist Murray N. Rothbard . . . minces no words in his vilification of Smith, arguing that he was by no means the advocate of free-market economics that he is commonly portrayed as being. In fact, Rothbard alleges that Smith’s erroneous labor theory of value makes him the forerunner of Karl Marx . . . he supported state-imposed caps on the rate of interest, heavy taxes on luxurious consumption, and extensive government intervention in the economy.” Zitelmann contends that though “much of this criticism is certainly justified,” nevertheless Smith had a “deep distrust of government intervention in the economy and [an] almost boundless faith in the ‘invisible hand’ that steers markets in the right direction.” (Incidentally, Zitelmann tells us that Smith used the phrase “invisible hand” only three times in all his works and that Joseph Schumpeter used the words “creative destruction” only twice in his own work.)

Before Zitelmann turns to Vietnam and Poland, he argues that the way to rescue nations from poverty does not lie in international development aid. Such programs are often based on what government bureaucrats, ignorant of local conditions, believe people really need, according to some blueprint they have concocted and take to be universally applicable. Further, and here Zitelmann reiterates the central point of the book, development aid programs encourage people to accept the false assumption that alleviating poverty requires seizing resources from others. Only if people break free from this assumption can they escape from the “poverty trap.” As Zitelmann explains: “The American economist Paul H. Rubin has shown that folk economics . . . are entirely focused on the question of the distribution of wealth, not on how that wealth is produced. . . . In pre-capitalist societies, the wealth of some was indeed often based on robbery and the exercise of power, i.e., the losses of others. However, the market system is not based on robbery and is not a zero-sum game. It is based on getting rich by satisfying the needs of as many consumers as possible. That is the logic of the market. And the economic growth characteristic of capitalist systems makes it possible for some people and whole nations to become richer, without this necessarily happening at the expense of other people, or nations, who would automatically become poorer, so to speak.”

Zitelmann has thus criticized international-aid bureaucrats for ignoring the local knowledge of those living in poor nations as well as the “zero-sum” thinking of these same local people. In doing so, he is consistent in applying his ideas: after all, almost everybody has both true and false beliefs.

Vietnam provides the most startling illustration of Zitelmann’s thesis. “With their victory over the Americans, this already proud country became even prouder, for they had defeated the greatest military superpower in history. But their pride suffered over the next ten years as the introduction of a socialist planned economy had a devastating effect on the entire country. Vietnam was the poorest country in the region. While Asian countries that took the capitalist path—for example, South Korea, Hong Kong, and Singapore—achieved incredible growth and escaped poverty, most people in Vietnam lived in bitter poverty, even ten years after the war had come to an end.”

Crucially, the Vietnamese Communist Party learned from its mistakes and instituted free-market reforms, of which the Doi Moi (Renewal) program of the Sixth Party Congress, held in December 1986, was the most important. Readers interested in the details of the program should consult the book, but a fundamental characteristic of these reforms, and of free-market reforms more generally, is that they simply allowed people to do what they had already done on their own: “As important and decisive as the reforms at the Sixth Party Congress had been, it should not be forgotten that they originated in spontaneous, grassroots developments in favor of a freer market, which were then sanctioned at the Party Congress.” Not only is the free market a spontaneous order, in Hayek’s sense; it works best if it originates from a spontaneous process.

As people strive to succeed in the free market, some will prove better able than others to satisfy consumers, and here we reach another key to success. How do people react to the inequalities in income and wealth that result from the process of satisfying consumers? If they demand that the government curtail them, redistributing the gains of the successful to others, market innovation will suffer a grievous blow. If, though, people welcome these inequalities and in particular admire billionaires, continued economic success becomes more likely; and on this score the Vietnamese people rank highly. Zitelmann, who is himself very wealthy, commissioned polls that show that the majority of Vietnamese “regard rich people who have made it on their own as role models” and oppose excessive taxation of them.

We see a similar pattern in Poland. After the country’s extraordinary losses in World War II, one would have expected a recovery, but the imposition of central planning prevented this from occurring. “After World War II, Poland was one of the poorest countries in Europe. . . . If anything, such poor countries should grow faster. Here is another comparison: the southern European countries of Spain, Portugal and Greece, which were as poor as Poland in 1950, grew at twice the rate.” Despite the Polish economy’s wretched record, the Communist Party resisted reform until revolts and strikes forced their hand. Here too readers interested in the details will need to read the book, but those interested in Austrian economics will find one point of great importance. Zitelmann holds that the ideas of the economist Leszek Balcerowicz, which were adopted by the Polish government in 1990, were vital to the success of the Polish free-market reforms, and Balcerowicz accepted the views of Mises and Hayek on socialism. Balcerowicz said that when he studied in the United States in the 1970s, he was “struck by the naiveté of the ‘socialist side’ represented by Oskar Lange et al., and the reasonableness of the ‘antisocialist’ camp, represented by Ludwig von Mises and Friedrich August von Hayek. [He] fully shared von Mises’s ironic prediction that the effective reform of socialism entails a return to capitalism.” As in Vietnam, market reforms in Poland proved successful.

Zitelmann magnificently illustrates a point often made by Mises and Rothbard. Guided by the insights of praxeology, the economist can understand the past in a way that his less theoretically enlightened colleagues are incapable of.