John Wenders teaches economics at the University of Idaho.
There is an important lesson to be learned from the Hong Kong economic miracle, the destiny of which is now in the hands of China. Too bad most commentators have missed it completely.
The lesson is simple. This small patch of rocky land, devastated by war and Japanese occupation, in a mere 50 years rose to the top of the world’s economic heap. Common sense would say that the path it followed should be carefully studied and imitated. Instead what we have is an endless parade of politicians blasting China for not choosing to institute a democratic government after its long-awaited takeover. What these people have missed is that Hong Kong prospered precisely because there was no democracy there.
Hong Kong was ruled from London as a colony. Fortunately, and in contrast to other British colonies like Kenya and India, where socialist policies were followed, Hong Kong had an enlightened administration. It installed a strong legal framework that kept the government out of the economy. That constitution-like framework emphasized private-property rights and freedom of contract much as did the original U.S. Constitution. In short, it drew a clear line between economy and state. And with no democratic political force bent on favoritism and redistribution, the economy was free to prosper, which is exactly what it did.
All this was pointed out last April when the Harvard Business School invited a prominent Hong Kong businessman, Philip Tose, to speak. After his speech, Mr. Tose was asked why he thought Hong Kong has prospered and India has languished. Mr. Tose replied, “One word: Democracy.”
The faculty, of course, was aghast, and scrambled to disassociate itself from Mr. Tose’s questioning of the democracy icon. The dean of the faculty, Kim B. Clark, issued a statement declaring the businessman’s remarks as “totally at odds with my own views and those of the Harvard Business School faculty.”
That response is typical, not only of Harvard’s faculty, where such a view is to be expected, but with both the public at large and politicians in general. Few are willing to even consider the logic of democracy. It has become a slogan that forecloses analysis. Don’t freedom and democracy go hand in hand?
Democracy vs. Freedom
The unpopular answer, of course, is no. Freedom and democracy are different. In words attributed to Scottish historian Alexander Tytler: “A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury.” Democracy evolves into kleptocracy. A majority bullying a minority is just as bad as a dictator, communist or otherwise, doing so. Democracy is two coyotes and a lamb voting on what to have for lunch.
That was one of Mr. Tose’s points. He noted that India’s democratic socialism was largely driven by a big majority that paid no taxes and used the election process to punish those who did. In India, with a population of 900 million, only 12 million pay any taxes, and only 12,000 of those pay above the base rate. There you have representation without taxation.
But in a larger sense, the blind worshiping of democracy misses the real issue. Democracy addresses how affairs in the public sector will be conducted. On the other hand, freedom is concerned with the relationship among people in the private sector. Freedom means that individuals may choose how to interact on a voluntary basis outside the purview of the state. In short, democracy means you have a right to vote in the public sector; freedom means you, alone, have the right to determine the terms of your interactions with others in the private sector.
The proposals for the governance of Hong Kong, as well as reform in eastern Europe, have focused on democracy in the public sector to the neglect of the more important question: how should human activities be divided between the public and private sectors? One can envision a country with an authoritarian, but very small, public sector in which freedom is much greater than in a country with a democratic, but very large, public sector. This is the essence of the difference between Hong Kong and India. The former was governed in an enlightened, even if authoritarian, way; the latter by democratic socialism. Which turned out better is obvious to all but the collectivists who worship democracy.
The Constitutional Solution
The key is a constitution, like the United States once had, that draws a firm line between the public and private sectors, and between democracy and freedom. More importantly, the role of a proper constitution is to protect freedom from democracy and the individual from the majority.
Some freedoms are civil, such as speech, religion, and association. The First Amendment to the U.S. Constitution takes the regulation of speech and press out of the public sector. If left to a democratic political process, free speech would be severely restricted by lawmakers. Invasions of free speech, such as the recent attempt by Congress and President Clinton to regulate the Internet, are constantly being struck down by the courts, and many more are prevented by these precedents. The Constitution protects free speech from democracy.
In the economic sphere, freedom means that individuals have a right to own, buy, and sell property on their own terms in free markets. That is known as the freedom to make contracts. In the past century, there has been everywhere a steady invasion of market activity by the political process. Even in capitalist countries, such as the United States, the public sector has continually expanded. Once economic activity becomes part of the public sector and is addressed by the political process, it immediately becomes subject to capture by those—often a tiny minority—who can effectively manipulate the process to their own ends.
In many ways, that political invasion of the marketplace throttles free speech as well, as witnessed by the successful efforts of the newspaper trade groups, normally staunch defenders of free speech, to prevent competition from telephone companies. The former publisher of my local newspaper once made a pilgrimage to Washington to lobby against allowing telephone companies to sell electronic yellow pages. He also railed against proposed first-class postage increases, arguing that the additional revenues should be instead raised from junk-mail advertisers—one of his competitors for advertising revenues.
Democracy Is Not Economic Reform
Democracy is not touted only for Hong Kong. The popular notion is that the economic collapse of communism in eastern Europe and the old Soviet Union signals the need for democratic reform of the political process. On the contrary, proper reform can only be achieved by removing economic matters from the political process.
Unless the size of the public sectors in those countries are shrunk considerably, little will have changed. The only difference will be that people have the right to vote on how the public sector restricts their freedoms. Similarly, if the new governors of Hong Kong expand the public sector, even by democratic means, freedom and prosperity will be eroded.
The lessons of the past are clear, if Hong Kong and the former communist countries choose to look. Wherever economies are heavily regulated—eastern Europe, the former Soviet republics, China, North Korea, India, most of Africa and South America—socialist or not, they have been outstripped by their market-oriented counterparts—western Europe, Japan, South Korea, Taiwan, Singapore, Chile, the United States, the Commonwealth nations, and, yes, Hong Kong.
The constitutional bases for a market economy are very simple: property rights must be vested in individuals or voluntary associations of individuals. Those rights, like our freedom of speech and religion, must be well defined and tenaciously defended against encroachment from the public sector. Titles to property and services must be freely transferable and protected by laws based on the freedom to make contracts.
The objection to separating the public and private sectors is that markets do not always work ideally. Yet the same people who thus condemn the marketplace want to scrap it for a politically directed system that is demonstrably worse. Rational choices can only be made by weighing the benefits and costs of alternatives. Only people can know their alternatives, and only people who directly bear the consequences of their choices will weigh them properly. Filtering choices through complex political and bureaucratic processes assures that the alternatives will be neither known nor weighed. Markets are certainly not perfect. They are just better than the alternatives, as events in eastern Europe and elsewhere have shown.
In our own economy the dangers of public encroachments on the private sector are usually encountered more subtly. Here, we have produced a massive public sector by tolerating small encroachments without addressing the larger issue. If nothing else, the history of Hong Kong and eastern Europe (and other countries) should stimulate us to rethink the drift of piecemeal democratic encroachments on our own freedoms.
There is a difference between democracy and freedom. Freedom is not measured by the ability to vote. It is measured by the breadth of those things on which we do not vote. Freedom must be protected from democracy. A good constitution will do that.
Hong Kong has had no constitution. The constraints on the government depended on enlightened administrators appointed from London. But to depend on enlightened men is risky; men can just as easily be collectivist meddlers. What Hong Kong needs is a rule of enlightened law—a constitution—not men, enlightened or otherwise. If China is serious about continuing the economic prosperity of Hong Kong, and possibly even extending it to the mainland, its first order of business should be to draw up a constitution that guarantees private property and the freedom to make contracts, and to turn a deaf ear to those who clamor for democracy.