The Secret of Swiss Prosperity

Dr. Russell is Professor of Management, School of Business Administration, University of Wisconsin at La Crosse.

Here’s an approach to securing student participation in class discussions. At the beginning of the very first class (even before the housekeeping chores), I ask a seemingly simple question. “What makes Switzerland prosperous?”

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* If you the reader would like to participate in this serious game, then at this point please give your own appraisal of the basic cause of Swiss prosperity. I can’t guarantee that my answer is correct, but I’m confident that your answer and mine will vary in several particulars. So place your bets and come on along.

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Almost all of us agree quite quickly that we’d rather invest in a prosperous nation than in a non-prosperous one. Sometimes a particularly sharp Student will say, “No, the best procedure is to invest in a nation that’s not yet prosperous but shows every sign of becoming so.” To him (it’s frequently a “her,” of course), I award another A and say, “Agreed, but what criteria are you going to use to decide which countries are most likely to become prosperous?”

It’s still the same question. And intelligent businessmen want to understand the basic issue behind it before they expand abroad in any capacity. Otherwise they’ll never maximize their long-range profits, and they may even lose their entire investment.

Size?

The first obstacle the students (and, I’m convinced, most businessmen) have to overcome is the ingrained conviction that prosperity is somehow determined by size. That’s one of the reasons I use Switzerland as an example. Why we even have counties in Texas that are about the size of Switzerland! And Russia and Brazil and China (fairly large nations) aren’t exactly noted for prosperity.

Finally, the students are willing to admit (albeit reluctantly) that size is no guarantee of prosperity. And obviously, small nations can be prosperous. I don’t dare tell them that if a correlation exists between size and prosperity, it’s more likely to be negative than positive, e. g., subsistence-level Japan with its empire, and prosperous Japan without it. The possibility of that correlation would be just too much to ask them to consider. But I can quickly think of several small nations that lost their empires after World War II, with a resulting increase in prosperity. For example, tiny Holland without its vast empire is now more prosperous than ever.

Resources and People?

After size, resources seems to be the most popular answer as the cause of prosperity; for everybody knows that nations with vast amounts of natural resources are automatically richer and more prosperous than re-source-poor nations. That’s why those European nations went into the “empire business” in the first place, i.e., to get all those natural resources.

I’ve never yet found a student who immediately said, “The resource-argument is false, totally false.” But it is. Just look around.

With the temporary exception of a few (not most) of the oil-rich nations, you can’t find anything that even looks like a positive correlation between prosperity and resources. While resources may (or may not) be available in prosperous nations, that’s not what caused it. Then I take them back to resource-poor Switzerland-which by now, some of the students wish didn’t exist. It seems to disprove most everything they’ve always believed about the cause of prosperity.

About the only natural resource Switzerland has is snow for skiers—and then it melts into running water that can be used to generate a little electricity, but is really used mostly to fill those lovely lakes you can sail boats on and fish in. No, natural resources in Switzerland are not in any way related to Swiss prosperity.

And while we’re looking at that conventional resource-argument, don’t forget the enormous natural resources in Zaire in Africa. And remember the subsistence-level of living of those one million or so Indians who inhabited our own vast and re-source-laden land when Columbus arrived on the scene. Actually, when I look at Venezuela, Colombia, and similar poverty-ridden countries, I’m almost tempted to conclude there’s an inverse relationship between resources and prosperity, i.e., the more they’ve got, the less prosperous they seem to be. At any rate, there’s no correlation between prosperity and the natural resources that exist within a nation.

Then how about people? It’s obvious that if you don’t have people, you can’t have prosperity. Well, if “people” is the answer, we can know for sure that China and India are the most prosperous nations in the world; for along with a lot of resources, they’ve also got a lot of people. The entire country of Switzerland doesn’t have even as many people as Chicago.

No, there’s no relationship between the size of the population (be it large, small, or in between) and prosperity. None whatever. China, with its enormous population, could quickly become as prosperous as Switzerland (probably more so) if its leaders only knew what causes prosperity. But since they don’t, it won’t.

Education and Effort?

Well, perhaps it’s due to education, e.g., the high literacy rate in Switzerland. But that answer begs the question. How did Switzerland become prosperous enough to be able to take all those people out of the work force and put them in school for so many years? Education (as contrasted with mass training) is the result of prosperity, not its cause. The British laws against child labor didn’t take those kids out of the factories and put them in schools. Prosperity did it. And that’s why it’s so vital to our future (individually and as a nation) that we understand what causes prosperity.

Don’t forget that Russia is forever bragging that the literacy rate there is higher (much higher) than in the United States. Perhaps so, but that only proves that literacy is not the cause of prosperity. Admittedly, it could be that the Russians have deliberately decided to continue an existence-level standard of living in order to devote resources to more education. Probably not. But even if it’s so, their inability to understand what really causes prosperity will only mean they’ll continue to be the most literate people the world has ever known with such an unbeliev ably low level of material existence.

But back to the Swiss. Perhaps they just work harder than other people. Maybe that explains their high standard of living. No, they don’t work harder, not really. True, one of their national heroes, John Calvin, told them that’s what God wanted them to do. And while I lived there for two years, I observed that they do work hard. But they don’t work any harder or longer than, for example, the Indians I observed cutting cane in Guatemala. Anyway, the more prosperous the Swiss become, the less they work. That’s to be expected. In fact, that’s why most of us work in the first place. We want to become prosperous so we can work less and enjoy more. No, hard work doesn’t necessarily bring prosperity; there just isn’t any positive correlation, individually or collectively.

Agriculture?

Well, perhaps it’s because the Swiss have big farms with rich soil to grow those delicious vegetables and to provide pastures for cows to be milked to make that famous cheese. Everybody knows that prosperity is based on agriculture. I hear it everywhere, especially in the farming areas here in Wisconsin where I teach. And it’s simply not so. That’s an old fallacy that came to prominence again when the farming areas of East Germany were separated from West Germany. With the loss of their farmlands, surely the West Germans would starve, and the East Germans would grow fat. The reverse happened. The agricultural capacity of a nation is not necessarily related to its prosperity.

As my old professor in Geneva, Wilhelm Ropke, said, “It’s simply astounding that almost nobody seems to understand why it worked out the way it did in Germany. The East German leaders are totally baffled when they must go again to the West German leaders and beg for some more food. They simply have no comprehension at all concerning the cause of the abundant supply of food in West Germany.”

Anyway, there are no big farms in Switzerland. And the few they’ve got are poor and mostly located on the sides of steep mountains. People have actually fallen out of them and been killed. Literally. So stay out of those Swiss farms, especially the vineyards; they’re dangerous.

Form of Government?

Eventually, some student is sure to suggest that Switzerland’s prosperity is due to its democratic form of government. Close, but no A for the semester—not yet, at any rate. We’ve first got to understand how the Swiss form of government is totally different from any other form of government in the world today; then perhaps we can see the relationship of government to the basic cause of prosperity.

The essential difference between Swiss democracy and the other democracies around the world is well-illustrated by this true story. I asked a Swiss fellow-student, “Who’s the president of Switzerland?” He thought awhile and then said, “I don’t know. It doesn’t make any difference anyway. So we just don’t pay much attention. I think,” he concluded, “they sort of take turns.”

Then I discovered a startling fact. The Swiss constitution for its national government is somewhat like the Articles of Confederation of the original 13 American states—except that the Swiss national government doesn’t have nearly as much power as did our old Continental Congress.

The tiny nation of Switzerland is composed of 25 “federated states”-and in many respects, each state operates much like an independent country. Talk about states’ rights! The states operate as a unit for the armed forces, communications, foreign relations, tunnels and bridges, and other “common problems.” Otherwise they protect their languages and ethnic cantons with a fierceness you wouldn’t believe. You are free to move from one canton to another if you wish to do so. And you can conduct unrestricted business in all of them. But don’t you dare mess around with the different cultures, languages, religions, and ethnic groupings. They’re convinced (rightly, I suspect) that if Switzerland ever becomes an integrated nation with a common language, they would soon lose their prosperity and disappear into a neighboring country.

Thus it’s true that the Swiss form of government does indeed have something to do with their prosperity. But that’s still not the basic reason for their high level of living. Anyway, that restricted (almost nonexistent) Swiss form of national government is not what my students have in mind when they say “democratic.” In fact, they’re thinking that prosperity comes from a strong central government—that permits lots of voting, of course.

Right to Vote?

For some unfortunate reason, “democratic” seems to be equated totally with voting in the United States. That’s too bad, really; for it pulls us over into the age-old concept that “might (the majority) makes right.” At the end of that seductive road is death itself. And you’re still dead forever, even if it’s the will of the majority.

So while sometimes there seems to be a relationship between right-to-vote and high-level-of- living, it’s too tenuous to depend on. They vote in India, for example—in truly free elections in every sense of the word, just as in the United States. In fact, I once discussed democracy with the prime minister of India who succeeded Indira Gandhi because his party got more votes than her party. That prime minister truly believed in democracy, and would willingly die for it if necessary.

India also has people, resources, and one of the largest educational systems in the world. But they haven’t the vaguest idea what causes prosperity. Until they find out, they’re doomed to their low (and decreasing) level of living. Making their educational system even more universal, as they are continuing to do, is more likely to decrease prosperity than to increase it. In any case, there’s no positive correlation. If you recommend that your company build its factories in India, you surely must be mad at your bosses and are trying to get even.

There’s voting in Chile, Peru, Argentina, Mexico, and in almost all the new African nations. It’s a real popular pastime. Hitler made good use of it. Stalin enjoyed voting, and he insisted that everyone else should vote, too. In at least one country in the democratic Western World, they’ll fine you (democratically, of course) if you don’t vote.

When I was in school in Switzerland in the late 1950s, women couldn’t vote. We Americans chided our Swiss fellow-students about that. They (including the women students) simply couldn’t understand why that seemed to perturb us. As they said, “The women’s vote would not in any way change anything. It’s not really an issue. But even so, we’ll eventually get around to changing the law to give the vote to women—if for no other reason than to prevent any more pointless arguments with our friends.” They changed the law. Women now vote. And Switzerland is still precisely what it was.

No, if you mean that the right to vote in truly free elections will lead any nation to prosperity, you’re in for a shock. There’s no fixed correlation between voting and prosperity. In truth, most of the world’s people (including us here in the United States) are using our votes to endorse measures that will surely decrease prosperity. In England, the world’s oldest democracy, the people voted to nationalize mines, railways, banks, and anything else their leaders called to their attention. That didn’t exactly increase prosperity there.

Here’s an all-important caveat, however—an explanation to prevent any possible misinterpretation. It’s absolutely vital that we preserve the right to vote in the United States. While it doesn’t cause or preserve prosperity, it definitely does preserve our right to change officials. Thus it’s the mainspring of the most precious ideal of all—human freedom; for our own leaders will surely destroy us if we leave them in power long enough. The right to vote “western style” is a sort of insurance against total tyranny. And that’s worth a high price, including even a decrease in our standard of material living if necessary. When all is said and done, it’s even worth dying for.

Capital Formation?

Finally the students arrive at the answer they just know I’ve been waiting for. “Capital formation!” they shout, and wait for the expected shower of A’s. I truly hate to disappoint them again, but I must. Capital is not the answer to prosperity, not really; capital formation is the automatic result of something else, which is the real cause of prosperity.

The Russians, for example, have more capital (machines and such) than you can find in Switzerland—measure it any way you like. And the Western World keeps sending vast amounts of additional capital to Russia, as we’ve been doing steadily since the early 1930s. And, of course, the Russians themselves produce vast numbers of machines of various kinds. The fact that their material level of living (prosperity) is actually decreasing is not really the fault of all those machines. It just doesn’t seem to be related to it one way or the other. That enormous ac cumulation of capital throughout the country is of almost no value to the Russian people in raising their level of living. They’re in much the same position the Japanese were in 1940. The Russians use that capital mostly to maintain their empire, while the people continue to stand in line for something to eat.

That’s one of the sights that most impresses our students when they go to Russia under our “Russian Seminar” program—the long lines of people waiting patiently to get some food, or shoes, or any other desirable good.

Increasingly we are encountering the same sort of lines here in the United States. And they occur here for precisely the same reason they appear in Russia, i.e., governmental interferences in the market place. For example, the evening TV newscasts are forever featuring long lines of Americans who actually camp out overnight to get first shot at government-subsidized interest rates, government-created jobs, government disbursements of food, and so on. And as these governmental interferences increase “to help the people,” the lines will grow longer—and the “stuff’ up front will grow shorter.

Why Work and Save?

No, we’ll never solve the secret of prosperity until we understand why people save their money and devote it to capital formation in the first place. That’s the key to prosperity; not capital formation itself but what causes you and me to create it and to use it to produce whatever it is we choose to produce and for whatever reason we choose to do it.

No one “works and saves” because the country is large or has resources or votes or because of any of the other half-truthed fallacies we hear everywhere. You and I work and save (form capital) for one simple reason. We expect to gain individually by doing it, to have more later on by using less of what we produce today. And if that expectation is absent for any reason, we cease saving and just consume whatever we’ve got, a sort of hand-to-mouth existence.

Of course, there is one other reason people produce and “save”—and that is because brute force is applied against them by whatever type of government happens to be in power. But while compulsion does indeed produce capital formation, it’s not exactly the best way to encourage creative thinking and effort. Anyway, it’s seldom the type of capital that’s designed to meet consumer demands.

Finally the students give up. They claim they’ve covered every possible cause of prosperity. “So what’s the answer?” they ask. There’s an excellent reason for their wanting to hear what I think is the cause of Swiss prosperity. They can then hand back the “correct” (i.e., the instructor’s) answer on the test they’re sure will be coming along shortly. That’s known as “student realism,” and they’ve developed it to a fine point over a period of four years or so.

But they never get such a test from me. No student is ever held responsible for my particular viewpoints and prejudices. My tests in “policy and opinion courses” consist of research and term papers, plus prepared tests supplied by the authors of the texts themselves. And even on the papers, I’m generally more interested in their grammar, spelling, and composition than anything else. (For good writing will prove valuable, no matter what careers they follow.) You see, when all is said and done, I don’t know the answer any more than they do. The best I can do is to tell them what I think, and why I think it.

Actually, the students are already familiar with the secret. They’re always a bit disappointed when it doesn’t turn out to be mysterious and complicated—with a formula to memorize and a model to help them get the answer. The answer (as I see it) is so well known and obvious and simple that no student ever seems to bother to say it and to spell it out a bit.

The Cause of Prosperity

The cause of prosperity in Switzerland (or anywhere else) is the competitive free market economy. It always leads to prosperity. Always. All the other supporting causes necessarily flow from it and are caused by it.

For example, there can be no free market if the government restricts it with wage and price controls, tariffs against competition, subsidies to various groups, and so on. Thus a government with strictly limited powers is an automatic result of the free market economy.

In a free market economy, there’s also private ownership of all resources and all means of production and distribution. True, it’s possible to have a form of private ownership under a dictator—Hitler, for example. But it’s impossible to have a free market economy under dictatorship. When a group of producers are controlled or enslaved (or even exterminated), only a madman could refer to it as an economy wherein all peaceful persons can produce whatever they wish to produce.

When the market economy exists, the government automatically assumes the position of “night watchman.” The government then becomes merely an organization (a mechanism) we use to preserve the peace, to keep out robbers (both foreign and domestic), and to make sure there’s no organized effort to disrupt the workings of a free people, freely trading with each other on mutually acceptable terms.

In a competitive market economy, there’ll be all the prosperity there can be. Any restrictions imposed upon it, i.e., imposed against peaceful you and me, will automatically result in less prosperity than could be. If the nation happens to be large and to have an abundance of natural resources, fine—but they’re not in any way necessary for prosperity.

For example, Switzerland is a poor nation when the customary “size and resource” criteria are used. But the Swiss actually have the largest possible market—the entire world with all its natural resources and skills. The exceedingly high standard of living enjoyed by the Swiss is based on trade—not so much in Switzerland as through Switzerland and all over the world. They invite you to send your capital to Switzerland. They’ll keep it safe for you; they won’t even tell anyone you sent it. And they’ll supply you with the world’s best managers of capital—for a reasonable fee, of course. They’ll invest it for you throughout the world, including a large portion of it right back here in the United States.

That’s the secret of Swiss prosperity—the free market economy, backed up by the resulting strictly-limited government, private ownership, tax and banking laws favorable to capital accumulation, good financial managers, and trade all over the world with anyone (under any form of government) who wants to trade. They learned long ago that prosperity can’t really be created; it just seems to show up automatically when and where there’s a favorable climate for it.