March 31, 2023 Reading Time: 4 minutes

No one knows who John Cowperthwaite is. No one who is not a classical liberal that is. Among that small subset of the population, Cowperthwaite is an unsung hero. As the civil servant who essentially directed the economic policy of Hong Kong after World War II, when it was a British colony, his indefatigable commitment to liberal ideas is seen as the reason why Hong Kong prospered.

Cowperthwaite was an odd duck. A Scot trained in the classics, he took what was essentially a crash course in economics that allowed him to secure a lofty position in the British colonial service. During that crash course, he was deeply influenced by a now-forgotten fellow Scot, James Nisbet, whose claim to fame as an economist had been to write a terse free market critique of John Maynard Keynes’ End of Laissez-Faire that was unambiguously titled A Case for Laissez-Faire. When Cowperthwaite arrived in Hong Kong after the war, he openly ridiculed Keynesian ideas, the idea of the mixed economy, central planning, and even the collection of government statistics about the economy. As it was a colony, Cowperthwaite was immunized from political pressures usually present in liberal democracies. He thus felt no qualms about saying exactly what he thought and doing exactly what followed from those thoughts.

In the end, Hong Kong kept taxes low, imposed few regulations on businesses, intervened only moderately in labor markets, and placed little-to-no tariffs and duties on the import of foreign goods. Among all the countries within the same income range, Hong Kong had by far the smallest government of them all (generally less than 5 percent of the economy, when north of 20 percent was the norm). 

Milton Friedman, who labelled Hong Kong “an almost laboratory experiment in what happens when government is limited to its proper functions and leaves people free to pursue their own objectives,” considered that Cowperthwaite never got the credit for making Hong Kong one of the richest places on Earth.

The problem with that story of unsung intellectual heroism and immensely desirable outcomes is that there are details that strike discordant notes. For example, similar Asian economies such as South Korea, Taiwan, Japan, and Singapore enjoyed economic growth that matched that of Hong Kong, despite having far larger governments, noticeably higher tariffs, weaker property rights, and stricter regulations. Simultaneously, some historians have argued that Cowperthwaite somewhat overstated his classical-liberal credentials, and that he did intervene recurrently in the economy, notably with regards to housing policy.

In a recent work with Jamie Pavlik and Yang Zhou, I dove deeper into that matter by asking two questions. First, did Cowperthwaite really keep the government under control? Second, did his policies really stimulate growth? To answer both questions, we exploit Cowperthwaite’s retirement in 1971. Our premise is that he was so unique that, upon his departure in 1971, Hong Kong became like other Asian economies or former British colonies. As such, the post-1971 period can be used to create a “counterfactual” Hong Kong (based on the experiences of these other Asian economies and former British colonies) which can then be extended pre-1971 and compared with actual data. Any differences between the “counterfactual” and the “actual” can thus be assigned to Cowperthwaite’s policies.

What do we find? Cowperthwaite did indeed keep the size of government down. Had it not been for him, Hong Kong’s government would have been bigger in 1971 by somewhere between 20 and 25 percent of what it actually was. When we use economic growth instead of the size of government, however, we find that Hong Kong did not perform better or worse than other economies. It performed as well as everybody else did, even though it had a massively smaller government. 

How can these results be explained? We point out that there is a simple explanation that resides in Hong Kong’s unique land market. Unlike other Asian economies and former British colonies, the entire land supply of Hong Kong is controlled by the government. The government occasionally sells some plots in auctions to obtain revenues. Because it controls the supply and how much it lets on the market, however, the government essentially controls the price, which causes housing prices and rents to be quite high. This government monopoly control increases the price of one input (land) for forms which does slow down economic growth. This is a major intervention in the economy. Because there is no “spending” associated, however, it does not appear in measures of the “size” of government.

Absent this policy, it is likely that growth would have been faster in Hong Kong. At no point during his tenure did Cowperthwaite discuss the idea of liberalizing the land supply. In fact, there are some signs that he went mildly in the other direction. This means that Cowperthwaite may not be that hero that some wished him to be.

In a weird way, however, these results only tighten the case for free markets. The government’s uniquely tight grip on the land supply was a major drag on development. The word “uniquely” is crucial here – no other governments imposed such a large drag on their economies. With an exceptionally small government and very few regulations, however, Hong Kong was able to match other emerging economies. Imagine a counterfactual world in which South Korea, Japan, Taiwan, or Singapore had kept their own land policies, but had adopted all the other policies that Hong Kong did. How much richer would they be today? Or, even better, what if Hong Kong had also liberalized its approach to land supply? How much richer would it be today? This nuance, while it may dampen any classical liberal’s affection for John Cowperthwaite, should only reinforce one’s commitment to the principles of a free society as instruments of development and progress. 

Vincent Geloso

Vincent Geloso

Vincent Geloso, senior fellow at AIER, is an assistant professor of economics at George Mason University. He obtained a PhD in Economic History from the London School of Economics.

Follow him on Twitter @VincentGeloso

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