THE ECONOMIC MENTALITY OF NATIONS

• Published in: The Cato journal Vol. 41; no. 3; pp. 657 - 689
• Main Authors: Czeglédi, Pál, Lips, Brad, Newland, Carlos
• Format: Journal Article
• Language: English
• Published: Washington Cato Institute 01.10.2021
• Subjects: Accumulation; Attitudes; Beliefs; Capital formation; Consumers; Culture; Decentralization; Economic activity; Economic development; Economic growth; Economies of scale; Free markets; Historians; Human capital; Income redistribution; International trade; Labor unions; Natural resources; Politics; Prices; Production factors; Proximity; Society; Technology; Wealth
• ISSN: 0273-3072; 1943-3468
• DOI: 10.36009/CJ.41.3.10

Two hundred forty-five years after the publication of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, economists continue to debate the causes of disparities in wealth among the countries of the world. Some scholars focus on the role of climate, natural resources, proximity to markets, or access to technology. Others study human capital, capital accumulation, the use of comparative advantages and economies of scale, and institutional and legal frameworks. We believe that another factor must be considered as well: the economic attitudes and causal beliefs (henceforth, "mentality") of the population. While a growing body of research shows a clear association between economic growth and the institutions of economic freedom, those institutions can be quite fragile if the population does not have a clear understanding of what makes a country prosperous. To measure popular attitudes toward economic values, we have created the Global Index of Economic Mentality (GIEM).Everyone has ideas and assumptions about how an economic system works best. At one extreme are those who think that the market should operate in a decentralized manner and that the free action of economic agents maximizes the generation of goods and services and promotes growth. In their opinion, individuals are motivated by the benefits they expect from their activities and therefore try to produce goods and services that consumers want. The role of the government is to provide a set of rules that facilitate competition and exchange, thus ensuring that the factors of production are used efficiently. In that framework, there is limited room for state action, either through the creation of public companies or through controls on voluntary exchanges, whether affecting prices, the quality or characteristics of goods, or outright prohibitions. Advocates of that philosophy also believe in the benefits of international trade, in order to profit from comparative advantages across borders. That perspective is not necessarily incompatible with the acceptance of certain income redistribution mechanisms, although attention is paid to ensuring that they do not generate inefficiency or incentives for opportunistic behavior. That set of beliefs can be defined as a free market mentality.