Economics, like politics, is an abstraction that can be better understood using a spherical model. Place Free Enterprise at the north pole (where you find the Freedom Zone on the political sphere model) and Controlled Economy at the south pole (where you find tyranny on the political sphere model). Again, you can separate hemispheres into individual or small group interest/responsibility (west) and larger group or community interest/responsibility (east). So the spherical model helps us see that political freedom coincides with economic freedom. And it is a hallmark of tyrannies that they, rather than the people who do the earning, control the economy, including money, goods, job and business decisions, and ownership. Nor is it possible to have political freedom without economic freedom. They go hand in hand.
In the southern west quadrant (anarchic tyranny), ownership means nothing; whoever is strong enough to take from you can come and take your property. In the southern east quadrant (statist tyranny), ownership again means nothing: the state (tyrant or group of tyrants) has power to take from you at will. To the basic worker trying to get along with the challenge of feeding, clothing, and sheltering himself and his family, the two sides of the lower hemisphere appear equally oppressive.
In the northern hemisphere, both sides, and particularly above that 45th parallel, decisions about what to do with the fruits of your labor are yours to make (with the exception of what is needed to pay for protection of property and sovereignty; note: the difference between west and east is, during the debate, that the west side defends individual or smaller group rights, and the east side points out that some income needs to be spent on defense for the good of all, including the individual).
The question for separating economic freedom (north) and economic tyranny (south) is always, “Who decides what will be done with the fruits of your labors?” Someone always makes these basic economic decisions. Should it be the person who did the work to make the profit, or should it be some far distant wielder of power?
The fact that this seems an easy question to me doesn’t change the fact that it seems to be a natural urge for many educated people to believe in controlled economies and eschew capitalism (maybe because they assume they will be among the elite controllers). So, apparently education, at least from the wrong sources, doesn’t necessarily coincide with common economic sense. Maybe we need to start with the basics.
What Is Wealth?
Wealth is not some mystical entity endowed by either government or birthright. Nor is it something that the haves enjoy by depriving the have nots of their fair share. Wealth, simply, represents the accumulation of the results of labor.
Money is a representative, or symbol, of wealth, to make it easier to exchange. Wealth is not created by government; in fact government is incapable of creating wealth and can only spend it. Government can, however, regulate (that is, make standard) monetary units by coining money, or printing money, each unit of which represents a result of labor that can be exchanged for the results of someone else’s labor.
Unfortunately, government often (illogically and illegally) prints money that it pretends represents the results of labor but doesn’t actually represent anything at all. When this happens, eventually the monetary units mean less, so it takes more of them to exchange for the same amount of tradable labor. This is called inflation.
Problems of the economy as a whole always result from interference in the exchange of labor. Always. This is true whether it’s a bank or the government messing with the unit of exchange. But for now, since it’s what we deal with in our day, let’s assume we’re dealing with the interference of government.
You’d think it wouldn’t be that hard, since the only assignments for government regarding money are to enforce property rights, safeguard the society from attack, and, if called upon, mint the monetary units while safeguarding the wealth. Stimulating the economy, managing unemployment, controlling interest rates, and any other measures government takes in the name of the economy’s health can only get in the way of natural economics (free enterprise) and will not help. But they are attempts of government to make up for the negative results of its interference, to make it look like government has this important role. But it doesn’t. And pretending to know all kinds of complicated, sophisticated economic theories doesn’t change the simple reality that money is a symbol of labor that has accomplished results that are tradable (valued by others in society).
In basic Econ classes, discussions usually start with very simple worlds, like Robinson Crusoe alone on an island. And then along comes Friday. Then maybe a few other natives, as they come to build an actual society. At first, whatever Crusoe has, it’s a matter of what he is able to obtain for himself. He fishes. He gathers. He hunts. He plants, irrigates, and harvests. And barring a catastrophic hurricane or some such disaster, he is free to enjoy the fruits of his labor. This is his wealth—the results of his capacity to recover from the shelterless, foodless situation he finds himself in right after a shipwreck. But his wealth is limited by his personal time, talents, and energies. It might be that, once he discovers another person on the island, Friday, they commiserate about their limitations. And somewhere along the way they discover differences in abilities. Crusoe is pretty good at farming, but fishing is tedious and frustrating, so he often goes without that protein source. Friday, on the other hand, finds fishing easy, but he’d sure like his garden to yield more veggies and rice to go with it.
An idea finally dawns on them. How would it be if Crusoe gave up fishing altogether and spent more of his time farming, expanding his garden to provide for the entire population of the two of them? And at the same time, instead of struggling to farm without success, Friday would spend even more hours fishing. Then he would trade his surplus fish for Crusoe’s surplus harvest. They try this, and it works so well, they both have more to eat than they had before, and they both have more spare time for climbing coconut palms or hunting—necessary tasks which neither one is particularly good at.
But this trade thing is working out so well that, when they meet a native who has no trouble at all shinnying up those palm trees, they make exchanges with him. And another native is very handy with a spear and can easily take down a wild boar, which is much too big to use up by himself before it spoils, so he’s glad for the exchange, and the others are very glad not to have to face those wild boars any more.
They specialize. They all work mostly at what they are best at. The result of their total labor is now considerably greater than the total would be without specialization. This leaves them all more actual wealth (results of labor) and even more time to enjoy the wealth.
What happens when a person’s skill isn’t as appreciated, or valued, as someone else’s? For example, the successful hunter of wild boars is greatly appreciated, because his work yields valuable meat, and his doing it saves the other islanders from having to risk their lives, which they appreciate. So they’re likely to give him a higher portion in exchange for his work than, say, the net mender, since they can all manage to mend nets in their leisure hours. That means the net mender might have to work better, or faster, or more productively per hour in order to earn what seems to come easy in fewer hours to the boar hunter.
Is this fair? The society has decided what it values: meat and not having to risk one’s own life above net mending one can easily do for oneself. No one says the net mender has to continue to do work that doesn’t seem valued as highly. He is free to develop a new skill, like gathering eggs from the cliff dwelling birds, or maybe using the boar skins to make leather sandals. He’s free to find some way to exchange his labor. This isn’t slavery.
It’s fair the same way we value the half hour a doctor spends doing surgery, following his years of study and skill development, more than we value a half hour of truck driving. It’s not that we don’t value the truck driver and the work he does; it’s that we aren’t willing to exchange as much of our labor for his work as for the doctor’s.
Who sets the price? Do Robinson Crusoe and friends need a government bureaucrat stepping into their little island world and passing edicts about what would be a fair exchange? No. The price is set by the worker willing to exchange his labor. If it isn’t worth it to Crusoe to exchange a basket of veggies for a mended net, he is free not to make the exchange. But if Friday, who needs nets for fishing, prefers to spend his time fishing without having to stop and mend his own nets, he can figure out what a fair exchange is and offer it to the net mender. If his offer of fish is too low, the net mender is free not to make the exchange with him, until a bargain can be reached with a number of fish that will satisfy him. The price is set, then, by the experts on what they value—those willing to make the exchange.
So, where does money come into it? When it becomes convenient for the laborers making the exchanges. It’s up to the society. If Crusoe wants more coconuts, but the palm tree climber doesn’t happen to want more veggies right now, but he would like more fish—and it turns out Friday wants more veggies, not coconuts, but he already checked with Crusoe, who didn’t need more fish. They can make a three-way deal. Bring in more if you want. But it gets more complicated to barter without some standard of exchange. Money, to symbolize that standard value, can be useful.
It’s also up to the society to decide what the symbol of exchange (money) will be. On this island, they might use clam shells, as some primitive societies have (bringing us the slang term “clams” for money). Some societies have used salt, which has some intrinsic value to everyone; that’s where the term salary came from. Early Central American societies used cacao beans, which were easy to carry, measure, and trade, and also useful for their own properties. These people also had incremental units based on a measure of grain; their units of gold and silver could always be exchanged for a measure of barley, so they had a standard value. More societies have used gold than any other single commodity as money. It’s usable as a decoration, because of its luster, and it’s easily malleable, making it easy to form into coins. It’s relatively rare, beautiful, and fairly heavy, which makes it natural as a representative of wealth. Silver, with many similar qualities, is next to gold in common use as money, most often used for smaller monetary units.
Gold and silver coins are the most stable forms of monetary value in world history. Societies that simply exchange gold and/or silver in their trade with one another almost never have inflation (although there may be some fluctuation based on availability of gold or silver). The only exception to gold’s value would be during times of famine, because you can’t eat gold. If Crusoe saved himself enough rice to last through a famine, he could safely exchange the rest of his surplus into clam shells, or gold. And that would even preserve his work, since his produce other than the rice is quickly perishable. In an ideal economy wealth would be represented by something that always exactly equals a standard amount of accumulated work-value.
Why do societies mostly use paper money? Convenience. That’s it. A twenty-dollar gold piece has a certain heft to it. Put $1000 in gold together, and it gets cumbersome to lug around. Or what if you want to use that $20 gold piece for a number of transactions, so it would really be easier to use smaller denominations, but carrying a pile of $20 worth of quarter dollar pieces can still be heavy and inconvenient, even though it’s not what most people would consider a lot of money. But if you have a paper certificate, which can be exchanged (at a bank or at a vendor or other money changer) for a designated amount of gold, that might make it a lot easier to carry around. The convenience is significant, and has made it worth doing for most modern societies. (The same idea applies to electronic transactions, like debit cards; the exchange is made based on the idea that an actual amount of legal tender is being exchanged, without the inconvenience of having the physical money in your wallet.)
But there are a couple of problems with paper money, both problems of dishonesty. One is counterfeiters: it may be possible to print money that looks like the official gold-backed certificate, and the counterfeiters would then spend this money as though it represented real wealth when it doesn’t. Eventually someone passes along the counterfeit certificate and it is recognized as a fraud. It isn’t accepted for exchange, which means that the person holding it at the time of discovery is defrauded the value listed on the counterfeit certificate. He has been robbed of that amount of wealth.
The other problem is when the government, bank, or other entity that offers the certificate in exchange for gold prints more than can be exchanged. If it becomes known that each certificate (dollar, for example) doesn’t actually represent the designated value in gold, then society will lose confidence in the dollar. It takes more dollars to convince someone that they should exchange the results of their work for what might not be a standard value—they might not be able to exchange it for the full value in gold.
Every time there has been economic failure (other than those related to natural disasters), it has been because of dishonesty relating to the money supply. People tend to make it complicated; they say, “Why don’t we make use of this wealth just sitting here? If we print more than we have to back it, but people don’t know it, then it’s just as if we really had that much money. And we can loan it out and collect interest, or spend on more goods than we would have been able to.” Leveraging.
Leveraging is what a bank does, or a savings and loan. It takes the money being held there and puts it to work, loaning it out at interest, so instead of just sitting there it grows. Bankers do this openly; the patron places his money there for safekeeping, with an agreement that the principle will earn interest. And the banker makes money by loaning out the principle and collecting the interest at a rate higher than he has promised to pay the patron. A lot of good things happen with this arrangement: people can buy houses before having to save up the entire price, farmers can buy seed and equipment prior to reaping the harvest, businessmen can buy raw materials to manufacture into finished products. People are able to use capital, with which they can create more wealth from their efforts.
But if every patron went to take his money out of the bank at the same time, there would be a problem. The money isn’t all there. It has been loaned out and awaits repayment. If people worry they might not be able to get their banked money, and they all go to get it at once, most of them will be out of luck. (Remember the scene where this happens in It’s a Wonderful Life.) This is called a run on the bank. It happens when the patrons lose confidence in the bank—which usually happens when the bank has been leveraging beyond a safely designated percentage, or has been habitually making bad high-risk loans that frequently don’t get repaid. Loss of confidence happens, not because the patrons don’t understand what banks do, but when banks fail to follow legal limits and safe lending practices—when they behave in a way that causes loss of trust.
Historically, banks have been able to print money certificates, but that duty has been changed to solely the federal government in the past century. Similar principles apply, but with even more trust needed. There is no agreement between US citizens and the government for the government to take an investment and loan it out with interest. Banking is not the business of government—spending money on protection is. So the only purpose for the government to mint the money is to protect the citizens’ wealth. It must do that without leveraging, because it has no way to return an investment with interest. So, absolutely every time the government prints money that does not represent actual wealth (i.e., labor that has been performed that is valued by the society), then the government causes loss of trust in the money. Any effort to boost the people’s confidence in the money supply would be absolutely unnecessary if the government were honestly only printing money that represented actual wealth.
There has never been a national recession or depression that wasn’t caused by interference with the money supply, or in other words dishonesty.
Capitalism is not an evil system of depriving the poor in order to enrich the already rich, as you may have been led to believe. It is a system of increasing productivity, and thereby increasing wealth.
Let’s look at Crusoe on his island again. Crusoe has some good ideas about farming. He understands that, with some tools, he can greatly increase the productivity of his bare hands. The first thing to do, then, is to spend some time making a plow. It’s not easy. Without ore and a forge, he has to make do with supplies at hand. He makes a plow out of coconut shell and some sturdy bamboo, which he has lashed together with the fiber he also uses for fishnets. It’s pretty crude, but it’s a lot more effective than digging with his hands. He is able to accomplish more. The plow he has made is capital.
Capital comes from surplus work. In addition to the farming he was doing by hand to subsist, he took extra time to work on this capital project. It wasn’t easy, but it was worth it. Because with that capital (i.e., extra time/work/wealth invested), he is able to produce more with his garden.
With the surplus he is able to produce with his plow, he finds himself with more time above and beyond what it takes to subsist, and he can use this time for more capital investment. He spends many spare hours gathering large sections of bamboo, which he connects together in a rickety but effective pipeline from the spring. He has invested in an irrigation system. The capital comes from his extra work, the actual building of equipment—which will greatly save his labor in the future so he can produce more.
Capital is always a representation of surplus work that is invested to find ways to produce more wealth. A society of hard workers without capital may remain as third-world agrarian subsistors for thousands of years. But bring in some capital investment for invention, and quite suddenly you have an industrial revolution.
Capital in and of itself is simply never evil. Capital might be considered always good. It represents work above and beyond what is essential followed by careful use of it toward a good idea, resulting in even more surplus. Those who hate capitalism are those who don’t produce it. They don’t have either the discipline or the drive to produce more than is necessary, and then to find ways to have that wealth work for them. They are jealous of those who have produced capital and use it. They insist it’s unfair that some have advantages that they don’t.
There are two ways to get capital. The original and best way is to work more than necessary while spending less than you’re making. That is what Crusoe does in the irrigation example.
Another way is by borrowing capital. Debt is, of course, spending money yet to be made on the assumption that it will be made. So debt means it’s going to take longer before those future earnings feel like wealth. But sometimes the expectation is that, with capital, so much more can be accomplished that the debt will be paid off and then some.
Suppose Friday wanted to do fishing from a boat, because he knows he would have access to more fish to catch out away from shore. But building a boat is a big capital investment. If he takes time out from his fishing to build a boat, he will be without food for maybe a month—not really an option. Or he could build the boat slowly, but in his spare time it would take him maybe a year to get it finished. But suppose another native already has a boat (he used it to try to leave the island once, but then decided he preferred the island as home, and the boat has sat unused since). The boat is capital for the other islander—his surplus.
Friday makes a deal with the boat owner: “You let me use the boat now, and I will make payments to you for the cost of the boat plus a percentage more, to compensate you for letting me use the boat before I could pay for it.” This deal is a loan, with the cost plus interest being returned. But it is also a use of the boat owner’s surplus. He is able to put his capital to work, to increase his own wealth, by investing in Friday’s plan. So loaning capital is one part of capitalism. There is some risk. Friday might be wrong about there being more fish out away from shore, so he might have a hard time repaying with interest. Or he might crash, causing the loss of investment, which would mean taking a very long time to repay the loan plus interest (and maybe defaulting and never being able to repay).
Another way Friday might make the deal is like this: “You could become part owner in my business. I will do all the work and all the fishing, but because I use your boat, I will give you an agreed on percentage of my profits.” Friday makes the boat owner an investor in his business. This arrangement is a partnership, but there are various other arrangements for a person with capital to put his money to work in someone else’s business. The stock market is a complicated mechanism, but it’s really just about finding ways people can take their capital (their surplus wealth) and put it into projects that they believe will help them make more wealth, benefiting both the owner of the capital and the user of the capital.
In this system, there is never a time when someone gets something for nothing. The capital investor has worked beyond necessity to earn the capital, and he tries carefully to place this wealth where it can do more wealth creation (and wealth is created by work, remember, so he is facilitating productive work). The entrepreneur who uses the capital does not receive it for free; he must use it to make a business productive enough to provide wealth for himself as well as the investor.
Capitalism Is Moral
Capitalism is purely moral. No one takes advantage of someone else’s work for free. Everyone is free to decide how they will use their time and energies to produce wealth for themselves.
So why do so many people refer to it as evil immoral capitalism? Because the outcome is unequal. The outcome is strictly and impartially fair, based on actual work and effort resulting in something society values. But it is unequal. The question, then, is whether it is a bad thing for there to be unequal outcomes. Those who believe capitalism—also referred to as free enterprise or free market economics—is evil are those who believe people should be guaranteed outcomes regardless of efforts toward those outcomes. This point of view is based, not on fairness, but on fear. Fear and jealousy.
Their assumption is, some people have lesser abilities than others, or fewer opportunities, so they will work just as hard and be unable to get the same results; this is unfair. But is it? Look at a doctor, for example. The doctor must have studied during high school to assure he could go to a good college. Then he spends four years, at his own expense, studying pre-med courses, and he must study hard enough to earn not just mid-range grades but excellent grades. Only top performers are accepted into med schools. So this has required hours and hours of studying that someone not preparing to be a doctor might not have had to do; others can go to parties and ball games, and take time reading for enjoyment and attending music concerts for entertainment—not that these are bad things; but they are good things that the med student may have had to forgo for many years. Following med school, there’s residency, followed quite possibly by more years of specialization. A non-med student might go out into the workplace at 22 and start repaying a relatively small school debt, and get on with enjoying life. But the med student might be studying—and accruing school debt in the range of $150-$200 thousand—well into his 30s. So, yes, there is an expectation that his sacrifice to gain this expertise will be repaid with sufficient to repay as well as to have a comfortable lifestyle. It isn’t guaranteed that he will make sufficient, but it is expected, if he indeed becomes a valued physician following his decade of preparation. Is it unfair for the doctor to receive a reward commensurate with how much a willing public values his expertise? No. Even when his expertise gives him a greater reward than a car repairman gets for his expertise? If the public so values it, then it is fair.
Let’s look at the car repairman example. Suppose someone’s natural abilities lead him into car repair, where he trains at a good school for that purpose, and works under the tutelage of another car repairman who is expert at his job. By the time this repairman is in his 30s, let’s say he has accumulated a fair amount of capital, in skill and knowledge as well as savings. He could risk this capital by opening his own car repair center, and eventually expanding so that he hires several workers under him. If he does very good work and builds an excellent reputation and follows a good business plan, he could be quite a successful entrepreneur. Possibly as successful as the doctor. They could live as neighbors in the same community.
In their case, even though their abilities are different, their investment into getting training and building value in themselves that the public will reward is similar, both in effort and time, and even in money.
Now, what about someone who just doesn’t have the aptitude for excellence in any particular field? What if someone gets Cs in most high school classes, even with a fair amount of effort? And they try for college, but getting through a few semesters at community college is painfully difficult and doesn’t seem to be a wise investment. So they get what job they can, working as a receptionist in an office. They start at $12,000 per year, with expected annual raises, and there are insurance benefits. So, it’s a living, but it’s never going to be what the doctor or entrepreneurial car repairman make. Is it fair?
The better question would be, would it be fair to force the public to pay more for a service than the value they receive for that service? Did the receptionist put in as much capital investment as the other two? No. Would she have gotten a similar result if she had? Probably not, since she didn’t have the capability even in high school to have taken one of those paths. So is it the public that is being unfair toward her? No. You might say it’s her genetics or her upbringing or her lack of opportunities. But it is not up to perfect strangers to solve those issues for her. The only fair thing the public can do is respond to the value she produces by being willing to pay what her production is worth.
How does the public decide what is a fair pay rate for each of these paths: doctor, car repair entrepreneur, and receptionist? It isn’t a decision made by some central decider; it is a result of many individuals making decisions based on their area of expertise—their own personal interests—something a bureaucrat far off in Washington, no matter how brilliant and well educated, will be clueless about.
With the basic economics course out of the way, we can go ahead and talk about the Free-Enterprise Zone. Just as with the political Freedom Zone, there’s a 45th parallel to stay above for optimum economic prosperity. In this zone, government is limited to its proper economic role: protect property rights, safeguard society from attack, and if called upon mint the monetary units while safeguarding the wealth. The US Constitution does limit the federal government. When government attempts to interfere, for whatever well-intentioned purpose, to stimulate the economy, manage unemployment, control interest rates, redistribute wealth, or tax for any purpose outside the proper role of government—it will always cause damage to the economy.
All that government needs to do is follow the Constitution, and we would have the most prosperous economy in world history in perpetuity. But following the Constitution has always been the challenge.
There’s a story from back in the days of Andrew Jackson’s presidency. Davy Crockett (yes, that one) was a US Representative from the state of Tennessee. There was an incident in which the Congress was voting to donate money to the widow of a naval officer. Crockett rose up and spoke against it, not on the grounds that the cause wasn’t worthy—he was willing to personally donate a week’s pay—but because it was an unconstitutional use of taxpayers’ money. He persuaded them. Later he was asked why he had spoken up like that, and he told a story of a similar vote the previous Congressional session. There had been a fire in Georgetown; everyone sympathized and wanted to help. He had voted along with the majority to donate $20,000 for relief. During the following campaign season, Crockett came upon a constituent who told him he couldn’t vote for him because of that misuse of the people’s money.
“It is not the amount, Colonel, that I complain of,” the man said; “it is the principle. In the first place, the government ought to have in the Treasury no more than enough for its legitimate purposes. But that has nothing with the question.” He points out to Crockett that the taxes collected by the Treasury come from every citizen, no matter how poor or well off. “So you see, that while you are contributing to relieve one, you are drawing it from thousands who are even worse off than he. If you had the right to give anything, the amount was simply a matter of discretion with you, and you had as much right to give $20,000,000 as $20,000. If you have the right to give to one, you have the right to give to all; and, as the Constitution neither defines charity nor stipulates the amount, you are at liberty to give to any and everything which you may believe, or profess to believe, is a charity, and to any amount you may think proper. You will very easily perceive what a wide door this would open for fraud and corruption and favoritism, on the one hand, and for robbing the people on the other. No, Colonel, Congress has no right to give charity. Individual members may give as much of their own money as they please, but they have no right to touch a dollar of the public money for that purpose.”
Crockett was persuaded that he had been wrong. He told the man he was glad for the correction and, if the man would support him, he would promise never to make a similar mistake.
In the 1830s, once the unconstitutionality of government charity was pointed out to them by an impassioned and plain speaking Davy Crockett, the legislators paid attention and changed their ways, at least for that bill.
Going even further back, in 1792 Congress appropriated $15,000 for French refugees. James Madison—who had been the principle writer of the Constitution and therefore most likely to know what was in it and what was meant by every word—wrote, “I cannot undertake to lay my finger on that article of the Constitution, which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.”
It is a pattern of people in power to exert more power than they have been granted, ostensibly to do good, thus usurping power they had not been granted but setting precedence for future exertion of that power. The founders knew this, had seen it and experienced it, and read and studied so that they would word the Constitution in a way that would purposely restrict government from usurping this power. But it takes constant vigilance in order to prevent the usurpation. And after decades, even centuries now, of lawmakers overstepping “for the general welfare,” we are far distant from the Freedom Zone.
We know what the Free-Enterprise Zone would look like: healthy, prosperous economy, with each worker benefiting from his own labors, and having the opportunities to meet his financial needs and build up wealth. There would be no guarantees of the success of every single person, but there would be better opportunities than in any other system in any country at any time in history.
Where Are We on the Sphere?
Since we haven’t spent much time in either the political Freedom Zone or the corresponding Free-Enterprise Zone, and have hardly even glimpsed it in the past century, where are we on the sphere? Much of US government history has been between the equator and upper 45th parallel (since we’re looking at the national level, by definition we’re looking at the eastern hemisphere, so in the lower portion of the northeast quadrant). Americans have been so much freer than most peoples have ever been, it has meant much prosperity and freedom. Other times we have been between the equator and the lower 45th parallel.
We seriously lowered ourselves on the sphere shortly after the turn of the last century. Income taxes were instituted, and the Federal Reserve Bank was formed. Woodrow Wilson set the standard for Italian and German fascism in his efforts at government control. He interfered in the economy and encouraged his followers to do so. It was the interfering policies put in place early in the century that led to the Great Depression; these policies followed by Hoover and then Roosevelt lengthened and deepened the Depression.
Remember, any government act meant to do other than to protect the people’s wealth is economically unsound—it will cause harm, either in the short term or eventually.
In light of this principle, look again at President Bush’s statement in late 2008, “We have to suspend free-market capitalism in order to save free-market capitalism.” It was a scary moment, and many people acted in panic. But now we can see, his actions didn’t rescue anything, and his successor’s expansion of the interference made things monumentally worse. What if we had, from that moment forward, actually allowed a free market to make the necessary corrections?
The same goes for price controls during the Nixon administration, and the multiple interferences during the Carter administration, not to mention interferences during the Clinton administration such as forcing banks to lower lending standards for mortgages, which led to the problems faced in the first decade of the century. We should have learned from The Great Depression, rather than repeating the same mistakes.
There was an earlier depression: 1920-21, every bit as deep and discouraging as the more well-known Great Depression. Under Woodrow Wilson unemployment rose from the 6% to 12% range, and GNP declined 17%. Warren G. Harding, in many ways the anti-Wilson, stepped in and cut government budget nearly in half, slashed taxes in all income brackets, and brought signs of recovery within half a year of his taking office (compared to the 10-12 years of “fiscal stimulus” under Hoover and Roosevelt in the Great Depression). National debt was cut by a third, and the market corrected itself, as was needed. Within 18 months the economy was back into growth. Luck? No. The solution was lack of government interference—or free enterprise.
Friedrich Hayek, in The Road to Serfdom and others of his writings, details why central planning (another term for government interference) in decision making wreaks havoc. He wrote in the 1940s, with the clarity of having been there and observing as things happened, how and why Wilson, Hoover, and Roosevelt policies failed—and continued to fail and will always fail.
There is such a stark difference between the failure of the controlled economy and free enterprise that even a relatively mild step from control toward freedom leads to remarkable increases in prosperity. The Ronald Reagan era is such an example. The years from Lyndon Johnson and Jimmy Carter showed a continual rise in the misery index (unemployment rate added to the rate of inflation), until an average high of 20.27 during Carter’s administration. In relatively short time, Reagan was able to drop the rate down to 11.19—not low enough, but a huge improvement. He lowered taxes and deregulated previously controlled business sectors. Even without the liberal Congress lowering spending as much as Reagan had intended, there was marked improvement. The index continued to go down through George W. Bush’s presidency, and only headed back up when the liberal Congress (during Bush’s last two years) started imposing economic controls. Obama, during his first year, imposed more controls than any president since FDR, socializing industries, controlling banks, redistributing wealth, attempting to socialize the health care system—and the misery index responded, rising from an average 8.1% under Bush to 12.33% after a single year.
And note that the misery could be higher if unemployment were more accurately calculated; those unemployed more than six months, or those no longer seeking employment or who have taken low-pay temporary jobs, are not included. This means that, if unemployment is really closer to 17%, then Obama in a single year has “controlled” the economy into depression-feeling Carteresque misery. Right now the inflation rate is being held artificially low with far below market interest rates, which will at some point need correction. So by some objective measures, Obama’s economic errors have already exceeded Carter’s.
Reagan didn’t get us all the way up to the Free-Enterprise Zone; he got us generally above the equator with an upward direction—more remarkable because it was reached without the assistance of a like-minded legislature. And the result was huge. Unemployment and interest rates dropped, and GDP started a growth spurt lasting two decades.
What Should Be Our Reasonable Goal?
So, two questions: 1) If we could make that much progress by going upward just above the equator, how much more prosperous would we be as a country if we followed the Constitution and moved up to the Free-Enterprise Zone and stayed there? 2) If we can get such good results from moving just above the equator, so we’re at least in the free enterprise hemisphere, and since it is so difficult to end existing programs because of people’s expectations of government aid, could we be satisfied with the prosperity level between the equator and upper 45th parallel?
The answer to the first question is speculative in extent, but known in part. The United States, from the time of the Constitution to about 1830, when Alexis D’Toqueville wrote Democracy in America, describing his findings upon visiting here, the fledgling country had become a prosperous world economy. Any country would envy the growth, prosperity, and general peace. And they didn’t have to wait a full 50 years to experience it. George Washington mentioned that peace and prosperity by the end of his term in office. The path was set; if the direction continued, success of the freedom experiment was inevitable.
There were still problems. Not every legislature and executive strictly followed the Constitution. And the agreement to allow the southern states twenty years to alter their economy away from slavery was never kept. If it had been, the Civil War, the greatest obstacle to peace and prosperity the US faced prior to the 20th Century, could have been completely avoided. The good conditions of the free economy could have been even greater, if the principles of freedom had been strictly adhered to. But that is hindsight. Our question is, will we adhere to the principles now and in the future?
Which brings us to the second question. The problem with settling for that middle section, the lower half of the upper hemisphere, is both philosophical and practical. Either you allow the government license to take money for purposes not granted in the Constitution or you do not. You can’t allow just a little and justify not allowing a lot, just as Crockett’s constituent said. The shape of the sphere is apt: if you were to stand on a giant ball, and passed below that 45th parallel, you’d find that gravity would work on you to cause you to slide downward. If you think it’s OK for government to give away your money for “charity,” where do you stop and say, “no, 1% of GDP is OK, but 50% is not”? What mechanism is there to define when the taking is too much? Your personal sense of being fleeced is all there is. There is no principle to protect you.
So the real question should be—since we want to get to the Free-Enterprise Zone, and we’re far from it right now, do we get there incrementally or radically? If we care for our future economic prosperity, this is the only debate that should be taking place.
I don’t know the answer; I want to hear both sides. I lean toward getting up to the Free-Enterprise Zone as quickly as possible—within one presidential term, say. But I recognize that undoing the incremental damage of a century of failed government entitlements has left people without either the mental attitude or financial resources to suddenly readjust to a loss of government-promised security.
Is it fair, for instance, to take 13% of a person’s income for five decades, while promising him a pittance of a pension in exchange for it, and then suddenly say, “We’re not paying Social Security any more”? The worker could have been putting that money aside to provide for himself, but he was prevented, and then the government breaks a promise! I don’t know what the answer is. I just know the program should never have been implemented, because it goes against free-enterprise principles, and, as you’d expect of a government program, was never as useful to the individual taxpayer as handling his own money would have been. Imagine if, instead of taking 13% of a person’s pay, the government instead reminded people of the benefits of compound interest and encouraged every worker to save a portion in an interest bearing account to ensure their retirement? That could have been done for free, with a mention in every State of the Union Address, or offered as a sound bite in a news conference. It would have cost nothing, instead of leading our prosperous nation toward bankruptcy as the Social Security tax has done. And it would have better provided for the elderly than Social Security has ever done.
Should society do something charitable for the occasional worker who, for reasons beyond his control, finds himself unable to support himself in his senior years? Yes. Society should. Starting with direct family, then extended family. Then church, community, and eventually broader philanthropy. Society has moral choices to make about helping the destitute. But that is a religious issue, not a government one. Government must get out of the business of charity: welfare, social security, Medicare, Medicaid, housing subsidies, and anything else that interferes with free enterprise--interference the US Constitution guarantees government cannot have the power to do, but power which government leaders have usurped despite their oath to uphold and protect the Constitution.
Free enterprise, capitalism, whatever you want to call it, is a moral means of benefiting from one’s own labor. Entitlements, offered by government, can only interfere with the prosperity that comes from doing work. Government must not interfere in any way except to protect people’s wealth from theft of any kind, and to protect the sovereignty that provides the legal structure for free enterprise. Any kind of redistribution of wealth by government is simply the immoral use of power to take wealth from someone who earned it to bestow it on someone who did not. While it is moral for a person to make a choice to give charitably, it is always immoral for government to force him to do it.
The question on the table should not be, “Does government owe us health care in addition to an education, financial security, and housing?” The only question on the table should be, “Since government must stop these illegal and immoral practices, how do we get to freedom from here: incrementally or radically?” If that were the question being debated, on news shows, between neighbors, among politicians, instead of whether to add more entitlements, we would already be on our way to greater prosperity.
How to Tell What Is a Right
There is a premise on the other side that people have a right to certain economic success—one of those “positive rights” pressed so hard by FDR. Let’s be clear on what a right is: it is not a privilege, something you might be granted under certain circumstances. It is something that you deserve simply for being human. You do not have to earn a right; you can’t rightfully be deprived of it (with possible forfeitures such as committing capital crimes). If it is a right, it does not come from government; it comes from God. Government may use its power to either guarantee a person’s rights, or to deprive a person of his rights. Restraint from depriving a person of his rights is not equivalent to granting rights. Rights simply do not come from government.
So, if something is a right, it is a person’s natural right whether there is a government entity guaranteeing it or not.
We’re born naked, impoverished, and inexperienced. It is by growth, hard work, and gaining in expertise that we try to overcome this condition throughout our life. We are born with the right to life, the right to live free (not enslaved), and the right to pursue our own path to overcome the naked impoverished state.
Do we have a right to clothing? Well, it’s sure nice to have the appropriate clothing when you live through a northern winter. But is it your neighbor’s obligation to work to provide your clothing? Or is that your own obligation? Would it be good of your neighbor to give you his surplus clothing if he saw you were in need? Yes. But his giving it to you is charity, or philanthropy, not an obligation to meet your right. If he had no surplus, but just enough clothing to keep himself from freezing, would it be his obligation to give up a coat to you? No. If he were heroic, he might work out a way to share with you and perhaps keep you both alive. But he is not obligated to do so. So, your clothing is not his obligation. Providing clothing for someone other than self is a charitable act.
At the basic level, the relationship of parent to child is charitable. The parent can clearly see that the child cannot provide his own clothing, so the parent, showing his care for the child, provides that clothing. Same with food. You might even say that the parent has an obligation to feed, clothe, shelter, and nurture the child, because the parent brought the child into the world and therefore has an obligation to that child. But the obligation isn’t without limit. The parent nurtures the child to be capable of feeding, clothing, and sheltering himself. And then, at that point, the parent no longer has the obligation to provide. If the grown child lost a job, and had a temporary need for economic help, it might be that the parent could step in and offer food, clothing, and shelter from his surplus (charity). But the parent would have no such obligation to a grown and capable child who lacked means simply because of unwillingness to work for them. And that parent would have absolutely no obligation to provide from his hard-earned supply to a lazy child of the neighbor down the road.
So, even though we need them, we do not have a right to food, clothing, and shelter. Ditto for a furnished apartment, a television, telephone, medical care, air conditioning, or a car. Nice to have. Important to have. Maybe even necessary to have in order to progress. But it is a capable person’s own obligation to work to provide these necessities for himself.
In a civilized society, there will be a desire to somehow provide these necessities to those who are not capable of taking care of themselves: the impoverished because of illness, accident, injury, or lowered mental capacity. But it is philanthropy that fills the need—not government taking from a producer by force to give to a non-producer.
The philanthropy answer is the purview of a religious, civilized society, so many economic answers come from a critical mass of people choosing to live a religiously influenced civilized life. More on that in “Civilized vs. Savage.”