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The richer we get, the more markets we need

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Jason Lee / Reuters

(Read caption) A woman rides a tricycle carrying her child in front of apartment blocks in Beijing, April 18, 2011. China's economy is playing catch up, writes guest blogger Tim Worstall.

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There's an idea out there I regard as pernicious. Roughly stated, it's that the economy is now so complex that we've got to guide it. Plan it, let the Wise Men in Whitehall decide where investment should go, get them to pick winners to the benefit of us all. Brink Lindsey has a paper out which argues against this case. Worth reading in full but here's the nub of the argument.

We can regard economic growth as coming in two forms. There's catch up growth, such as what China is doing now and Japan did 50 years ago. What to do is largely known, for there are the examples of the richer, more advanced, economies that can be followed. To an extent it's as simple as pulling people out of low productivity agriculture and into high productivity industry, raising the education levels and increasing participation in the formal economy. But the important point is, in Lindsey's view, that it is at least feasible for a government to work this out and to manage the process. Clearly not all do for not all have followed this path but it is at least possible that some will.

However, once a place has got rich the problem changes. Catch up growth is no longer possible, for there's no one to catch up with. The economy has arrived at the technological frontier so there's no one to copy. Any further growth is going to come from innovation, new ways of doing things, rather than mobilising extant resources to simply do more. At which point governments can't do that planning and directing thing.

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