Foreword

Economics is full of surprises. Its foundations might at first glance seem counterintuitive, but they have proved themselves true, again and again in practice. People in countries where citizens and their governments understand economics have higher standards of living and more personal liberty than do people who have the misfortune to live in countries where these principles are ignored or misunderstood.

Dr. George Ayittey understands these principles, and Applied Economics for Africa shows exactly how ignoring them has contributed to the struggles Africa faces today. This book demonstrates that the key to Africa’s development lies in building upon “its own indigenous heritage of participatory democracy based upon consensus (under the chiefs), free village markets, and free enterprise.”

A key institution for good is “the market”—a physical or virtual location where people voluntarily meet to buy and sell goods . . . as occurred for centuries in Africa’s history. The great eighteenth-century British economist (and early opponent of colonialism) Adam Smith discovered an astonishing property of markets in which buyers and sellers are freely able to pursue their interests: such markets produce outcomes that benefit not only buyers and sellers (their only intention) but also other participants in the market (not their intention). Smith’s finding of “beneficial unintended consequences of self-interested individual behavior” illustrates one of Milton Friedman’s favorite “laws”: the “law of unintended consequences.” Smith nicknamed the force that produced these good unintended consequences the “invisible hand.”

Forces powering Adam Smith’s invisible hand are competition and prices. Competition limits market power. It makes producers who charge prices that are too high vulnerable to new entrants, who are free to charge lower prices and thereby take business away from higher priced and less-efficient producers. Prices are signals that direct profit-seeking producers to where goods can be sold at a profit, and away from where they would be sold at a loss. Freedom to enter or leave markets induces producers to produce things consumers want and reallocate resources away from what they don’t want.

Magic and mystery seem to suffuse a market economy because the answer to “Who planned those good outcomes produced by a free-market economy?” is “Nobody.” Instead, good outcomes emerge from an entirely decentralized system in which the only restraints on self-interest are that buyers have to find sellers willing to sell to them and sellers have to find buyers willing to buy. I confess: it took me a long time to appreciate fully the subtlety, beauty, and widespread ramifications of the invisible hand.

A term sometimes used in place of “free-market economies” is “capitalist mode of production,” a term that was extensively employed by mid-nineteenth century economists Karl Marx and Friedrich Engels—later termed “capitalism.” The term is peculiar because of its potentially misleading emphasis on one factor of production—physical and financial capital—leading us to neglect equally important roles played by other necessary factors such as labor, land, and education or “human capital.” Marx and Engels thought they had detected a fatal flaw that would lead the market system to collapse after a gigantic financial crisis. Sooner or later they believed a new situation would arise in which markets would vanish entirely because scarcity would end and goods could be distributed solely according to “need.” Followers of Marx and Engels called the economic system they thought would succeed market economies, “communism.” They said little about how communism or socialism would operate, being preoccupied with analyzing what they said were fatal defects of market economies.

It’s important to be careful with words—the totalitarian “communism” enforced by Lenin, Stalin, and Mao did not resemble at all the pleasant form of “communism” that Marx and Engels had anticipated. The Lenin–Stalin–Mao system was a “planned command economy” in which an all-powerful central planner told everyone in the economy what to produce, where to work, and how much to consume. In the Stalin–Mao system, liberties of the market were to be replaced by subservience of individuals to a wise central planner.

When Lenin and Stalin implemented their form of communism, they promised it would eliminate instability and make people better off in terms of the goods and services they would receive from the state; that promise was not fulfilled. In exchange for the physical repression needed to enforce commands, citizens of twentieth-century communist economies in Russia and China got widespread poverty, punctuated by episodes of mass starvation.

Meanwhile, market economies in the United States, Western Europe, and other parts of the world prospered. All their social and economic classes became wealthier. This belied Marx and Engels’s prediction that market economies were fated to collapse.

By the late 1970s, after the death of dictator Mao Zedong, life-long communists in China with a practical bent noticed the failure of Marx and Engels’s prediction and how Stalin and Mao’s brand of communism had impoverished China. Thus, near the start of the “opening up” of China in the early 1980s, its leader, Deng Xiaoping, asked his economic advisors: 1) Why did capitalism not fail? 2) What is the current situation in China? and 3) Where should China go?

Judging from the government decisions that he presided over, Deng likely received these answers: 1. Marx and Engels were dead wrong, maybe partly because leaders of market economies figured out how to tame financial crises and allow markets to work their magic, as Adam Smith said. 2. China is an impoverished, backward economy. 3. Learn from what Western economies did: allow free markets and individuals freedom to choose their occupations and goods they buy and sell.

Those answers are what must have led Deng and his colleagues to create “communism with Chinese characteristics.” They made clear that they meant a large and increasing role for free markets and international trade of goods and ideas.

A similar story can also be told about India, which had taken a less drastic form of socialism, but which had a state-dominated economy, with many nationalized industries and a complex system of bureaucratic permissions. The system known as the “License Raj” kept India poor for four decades. In 1991, measures were taken by a democratically elected government to free entrepreneurs and businesses from controls, to eliminate most licensing requirements, and to open the country to foreign trade and investment. The results were impressive, as new industries were founded and millions of people left poverty behind to join the middle classes.

Other countries that had been kept in poverty by socialist controls have joined the trend toward freer markets—such as the formerly communist countries of Eastern Europe, Cambodia, and Vietnam—at varying rates, but all with noticeably positive outcomes.

The book you hold in your hands is Africa’s economic story. It too has an abundance of failed socialist policies, but with the rise of what Dr. Ayittey has termed the “Cheetah Generation”—young entrepreneurs with vision to apply the principles in this book—the promise of a brighter future has never been stronger. Dr. Ayittey artfully uses examples familiar to African readers to explain with remarkable clarity the useful tools of economics to understand the complex reality around us.

This is a powerful introduction to the practice of market economics. The theory is intellectually beautiful, all the more so because it has proved so useful around the world. May it prove so in Africa as well.

Thomas J. Sargent Professor of Economics and Business at New York University Nobel Prize Laureate in Economic Sciences