Economists have been talking for decades about why some countries get wealthy, and some do not. It was the subject of Adam Smith’s famous book, The Inquiry Into the Nature and Causes of the Wealth of Nations. I suggest that the secret could be expressed in four words: Low Taxes, Stable Money. I call this the Magic Formula.
The reason for this is simple. The primary way that countries have become wealthy is via capitalism. Capitalism works best with stable money and low taxes.
If taxes are too high, and money is too unstable, capitalism – the incredibly complex arrangement of relationships that allow humans to cooperate together in vast networks of investment, production and trade, via the market system – becomes impaired, or collapses completely.
Recent books like Why Nations Fail, by Daron Acemoglu and James Robinson, take up this fascinating subject for our own age. In general, they tend to focus on a menagerie of what I would call secondary factors, while missing the foundational importance of the Magic Formula.
If you don’t have the Magic Formula, you might maintain a decent standard of living. Many European countries maintain a high standard of living today, despite rather high taxes. But, they didn’t become wealthy this way. If you look back into the history of Germany or Japan, or the United States, you typically find a period when the Magic Formula is in full effect. Most of the gains are made during these eras.
Read More at Forbes . By Nathan Lewis.