by Steve Forbes
But why didn’t government recede after the fall of the Berlin Wall and the end of the Cold War? Actually, it did, but only to a degree. Military spending was scaled back. Even today, defense spending as a proportion of the economy still doesn’t match the Reagan era of the mid-eighties. But the idea that government could guide the economy and provide an endless array of services for people became a given in American politics.
Today, two crises—the War on Terror and the “Great Recession”—are once again causing government to expand. Is socialism inevitable? No. You can have prosperity and entrepreneurship and sound safety nets without massive government domination. That doesn’t mean eliminating government services that people have come to see as fixtures. It means structuring them so they are economically sustainable. The strength and prosperity of this nation were built on a freemarket economy and a thriving private sector. Social Security, Medicare, and Medicaid, as we have discussed, can be reformed so that people have more control over their benefits and that funding these programs does not become an impossible tax burden.
Only by encouraging private enterprise will we be able to return to the growth we’ve seen in the past thirty years. But we can achieve this only if policy makers and the public have a greater appreciation of how the economy works in the Real World and the importance of economic freedom. We’ve summed up key principles below.
1 Free markets are best at serving the needs and wants of people. Adam Smith explained in his classic work The Wealth of Nations that transactions in a free market are about achieving the greatest possible mutual benefit. Because no one is forced to enter into a freemarket transaction, it can take place only if both sides benefit. This is the opposite of “exploitation.”
2 Self-interest—not “greed”—compels people in free markets to meet the needs and wants of others. There are greedy and unethical people in all societies. But greed, which means taking too much of something that you do not rightfully deserve, does not drive transactions in a free market. It undermines them. The bank robber’s coercive demand, “your money or your life,” is the exact opposite of a freemarket transaction: there is no mutual benefit, and it deprives the other person of free choice.
3 Only a dynamic, entrepreneurial private sector is capable of producing the growth and prosperity that we take for granted in a free society. Government command-and-control economies simply can’t do it. The deprivation of state-controlled economies—in nations from North Korea and Venezuela to the old Soviet Union—attests to the inability of staterun command-and-control economies to provide for the needs of their citizens. Bureaucrats and central planners cannot anticipate the vast and complex array of consumer desires we take for granted in a modern society—from cell phones to social-networking Web sites. With its focus on maintaining order and pleasing political interests, government bureaucracies are simply not capable of the risk taking and trial-and-error experimentation that produce growth-generating innovations. But in the open markets of democratic capitalism, if people have a need, entrepreneurs will fill it—if they’re allowed to.
4 Entrepreneurial innovation is a free society’s foremost “natural resource” and the true driver of a democratic capitalist economy. This is the Real World principle that even the “experts” can miss about democratic capitalism: the broadest prosperity is created in nations that give people the greatest latitude to innovate. Entrepreneurial inventiveness and creativity turned Hong Kong, an area with few natural resources, into an economic powerhouse. It is what transformed the mysterious black ooze bubbling up from the earth into the fuel that powers our engines and automobiles. And it is why the United States has consistently outperformed its competitors. Without the freedom to innovate in open markets, society would never have advanced.
5 “The rich” make everyone richer. People become rich by meeting the needs and wants of other people. They build or invest in the innovative, job-creating businesses whose goods and services make life better. The outsized wealth of many rich individuals reflects the risks they take as entrepreneurs or investors. People who start businesses are the last ones to benefit from the wealth they create. They reap their profits after paying off their workers, creditors, and investors—and that’s when things are going well. People who buy into capitalism’s bad Rap think rich and poor are fixed groups with opposing interests. But in the Real World, rich people are not only necessary, they’re vital to a healthy economy. Their investment, entrepreneurship, and spending provide opportunities that enable other people to build their own wealth. Throughout history, countries that have scapegoated and destroyed their merchant class—from Uganda to fifteenth-century Spain—have seen their economies collapse or decline.
6 Profit is a vital barometer in a democratic capitalist economy and the key source of investment capital. Profit does more than make some people rich by generating dividends and capital gains. It is the way our economic system mobilizes people to provide for others. Profit is a critical barometer of demand, telling producers where they should invest—or where they should cut back. It keeps supply flowing smoothly. Profit is also a key source of the investment capital that companies use to expand operations, innovate, and create jobs. Contrary to what Marx believed, profit is not just “surplus.” It replaces what has been lost as a result of the economy’s creative destruction. Politicians like to think that punishing profits serves the public interest. But the Real World economic truth is that it does the opposite. Without the barometer profits provide, you end up with shortages and other distortions. There would be no capital to build the advances of the future. Nations that have banned profit have seen their economies—and societies—decline.
7 Government’s role in the economy is not to “do nothing;” it’s to help free markets work. Government does indeed have a critical role in democratic capitalism. Open markets cannot function successfully where there is no government to protect people’s rights and assure the rule of law. Government’s role in a democratic capitalist economy is to create hospitable conditions that give people the freedom to meet one another’s needs. It should enable them to develop their talents and to innovate, with the least possible interference and protection from harassment. Government must create an environment of certainty and predictability, such as assuring stable money and instituting a progrowth tax system. Government is also needed to respond to challenges created by change. One example: how should the law respond to the copyright issues raised by online distribution of music? Far from doing nothing, government should be essential to creating an environment that allows economic freedom, where people can advance and businesses can be established and thrive.
8 The most effective regulation in the Real World establishes the “rules of the road” and does not attempt to micromanage markets. People who buy into the bad rap on capitalism fail to recognize that, to a great extent, free markets are self-regulating. Regulations may be designed with good intentions. But in the Real World too many rules are a drag on an economy. They stifle innovation, locking in the status quo and favoring established market players. They rarely if ever produce their desired results or deliver on the promise of fairness. Instead they impose artificial constraints on activities that produce marketplace imbalances—economic distortions that end up hurting the very people the rules were supposed to help. The most effective regulations in a freemarket economy establish the “rules of the road.” They establish basic guidelines for conduct and are not politically motivated or capricious.
9 Government tends to politicize and not solve economic problems. Innovations and solutions in a free market are developed by entrepreneurial people and businesses. They succeed or fail based on how well they provide what people want. In contrast, government policies directed at solving market problems, or achieving fairness, are developed by politicians seeking to please political constituencies and remain in power. Rather than fostering open markets with the greatest degree of competition, government, in the name of protecting favored groups, more often imposes ri
gidities—restricting activity or imposing costs that limit the number of market players. The result is less innovation and growth—and often, market imbalances that hurt people. With government’s political solutions, you often get rationing, shortages, and higher prices for most consumers. Think rent control—where a few people get cheap apartments, with costs shooting through the roof for everyone else—and the wild prices of today’s heavily regulated healthcare market.
10 The best economic stimulus results when government unleashes the private sector by lowering tax rates and opening up markets. Government efforts to “stimulate” or “fine-tune” the economy—through spending or monetary policy—have never produced sustained long-term growth. Big government spending failed to lift the United States out of the Great Depression, which lasted more than a decade. And it failed to revive the economy of Japan in the 1990s, despite ten stimulus spending programs. That’s because the taxes and borrowing needed to fund government’s “investment” suck job-creating capital from the economy. Similarly, government attempts to artificially “fine-tune” the economy through increasing the money supply may deliver a short-term boost. But as the financial crisis has demonstrated, it also creates disastrous economic distortions like the housing bubble. The way to lasting economic growth in the Real World is for government to reduce impediments to productive economic activity—cutting taxes and regulations and unleashing the energies of entrepreneurs. When the federal government shrank as a portion of the U.S. economy during the 1980s and ’90s, the economy enjoyed its greatest expansion to date.
11 The best way to boost tax collections is to enlarge the tax base through progrowth tax policies—namely, meaningful cuts in tax rates. Economic growth means that people and businesses earn more. That, in turn, means a larger tax base and higher tax collections. Tax collections rose, not fell, after the tax cuts of the 1980s. Tax increases may produce an initial spike in revenues, but they ultimately slow growth and shrink an economy. Remember, taxes raise the cost of constructive economic activity. Therefore less of it takes place. The best way to bolster an economy and increase tax collections is through reasonable tax rates that allow for optimum business investment and job creation.
12 Protectionism kills more jobs than it saves. People who buy into capitalism’s bad rap miss the bigger picture of the benefits of global trade. They focus myopically on certain “jobs being shipped overseas.” Meanwhile, in the past three decades up until the recession, the opportunities created by global trade helped keep America’s overall unemployment levels at record lows. Remember the lesson of the Smoot-Hawley Tariff. It didn’t save jobs in the 1930s. Instead we got a terrible global trade war and a long Depression. After World War II, many nations of the world came together to liberalize global trade and put such destructive policies in history’s rearview mirror. The lesson? Protectionism kills an economy. Free trade means not less but more job creation, competition, innovation. Relatively few jobs in the Real World are lost because of outsourcing or offshoring.
13 It’s easier to see the destruction that occurs in free markets than the creation and growth that are simultaneously taking place. People who decry the destruction of jobs and industries that occur in capitalism’s open markets are missing the bigger picture of the creation that also takes place—often because it happens elsewhere in the economy. For example, automotive manufacturing jobs “shipped overseas” are denounced as “irreplaceable” losses, while thousands of well-paying manufacturing jobs are simultaneously being created by foreign automakers building facilities in the United States. The development of the iPod and iTunes undoubtedly destroyed some jobs—but it created thousands of others, not only in the Internet industry, but also in retailing and manufacturing. Even in good economic times, there is “churn,” the destruction and creation of jobs, as new technologies and industries displace others in open markets. If this process of “creative destruction” could not take place, the economy and society would not advance. We’d still be using typewriters instead of computers and making operator-assisted calls instead of using cell phones and cheaper automatic landlines.
14 Only government, with its immense market power, is capable of causing systemic economic upheaval on the scale of history’s greatest economic failures. Through its ability to tax, regulate, and control the supply of money, as well as its political influence, government has more market power than many WalMarts and Googles put together. The creative destruction of freemarket capitalism can create job losses and disruption within specific economic sectors. But only the actions of government have the kind of impact on the national—indeed, global—economy capable of causing a systemic meltdown on the scale of the Great Depression of the 1930s, the Great Inflation of the 1970s, and the economic crisis and recession of 2008–2009. Yet politicians and others who buy into the bad rap on capitalism almost always blame these traumas on “unfettered markets”—responding with still more government “solutions” that only make matters worse.
Bottom line: Trust we the people. We are the economy!
ACKNOWLEDGMENTS
We are deeply grateful to the following individuals for helping to make this book a reality. The encouragement and enthusiasm of our agent, the spirited Larry Kirshbaum, were critical in pushing this project forward. At Crown, John Mahaney’s superb editorial instincts and deft judgment were indispensable. His colleague Jo Rodgers also earns our gratitude. All three represent the publishing industry’s gold standard.
This project required extensive research. Juliette Fairley spent countless hours fact-checking the manuscript. Deroy Murdock provided invaluable recommendations for a first-rate editorial research and checking team that included the tireless Jacob Laksin, as well as Ilya Laksin, RiShawn Biddle, and David Feith. Scott Bistayi, Elizabeth Gravitt, and Susan Radlauer cheerfully handled numerous requests for information. Audrey Wecera painstakingly helped prepare this manuscript.
Rich Karlgaard’s insights on entrepreneurial innovation were inspiring and invaluable. Over the years, George Gilder has provided profound insights into the moral basis of entrepreneurial capitalism. Without the ever-patient assistance of Jackie DeMaria and Maureen Murray, Steve would never have been able to find the time for this project. Steve is also grateful for the moral support of Merrill Vaughn and the always wise counsel of Bill Dal Col.
On a personal note, we would like to express our profound appreciation to our families, without whose encouragement and patience this project would have been well-nigh impossible.
NOTES
Introduction: Why Capitalism Is the Answer
1. Committee on Oversight and Government Reform, “The Financial Crisis and the Role of Federal Regulators,” hearing, 10:00 a.m., Thursday, October 23, 2008. http://oversight.house.gov/story.asp?id=2256.
2. Joseph Alois Schumpeter, Capitalism, Socialism and Democracy, 5th ed. (New York: Routledge), originally published in 1976, p. 143.
3. Business and Media Institute, “Bad Company: For the American Businessman, Primetime Is Crimetime,” special report, June 21, 2006. http://www.businessandmedia.org/specialreports/2006/badcompany/
badcompany_execsum.asp
4. Stephen Moore and Julian L. Simon, “The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years,” Cato Institute Policy Analysis No. 364, December 15, 1999. http://www.cato.org/pubs/pas/pa-364es.html.
5. Schumpeter, Capitalism, Socialism and Democracy, p. 143.
6. Ibid.
7. Thomas Sowell, “Is Anti-Semitism Generic?” Hoover Digest, no. 3, 2005. http://www.hoover.org/publications/digest/2931421.html.
8. Ibid.
9. George Roche, “Education and the Free Society,” The Freeman, vol. 46, May 5, 1996. http://www.thefreemanonline.org/featured/education-and-thefree-society-2/.
10. Bryan Caplan, The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton University Press, 2007), ch. 3, pp. 30, 36, 40, 44. See also Wikipedia summary, http://en.wikipedia.org/wiki/index.html?cur
id=13081323.
11. The Fortune Encyclopedia of Economics (Time Warner, 1993), David Henderson, ed., pp. 636–39. http://www.lewrockwell.com/rothbard/rothbard106.html.
12. Leonard E. Read, “I, Pencil: My Family Tree as told to Leonard E. Read,” The Freeman, December 1958. http://www.econlib.org/library/Essays/rdPncl1.html. First published in the December 1958 issue of The Freeman, it was reprinted in The Freeman in May 1996 and as a pamphlet entitled “I, Pencil” in May 1998.
13. Read’s influential story, “I, Pencil,” has over the years inspired others to imagine in a similar vein what would happen if government—or a single individual—attempted to make a pencil.
14. Rob Walker, “The Guts of a New Machine,” New York Times Magazine, November 30, 2003. http://www.nytimes.com/2003/11/30/magazine/the-guts-of-a-new-machine.html.
15. Fredrik Reinfeldt, Prime Minister of Sweden, “The New Swedish Model: A Reform Agenda for Growth and the Environment,” address delivered at the London School of Economics and Political Science, February 26, 2008. http://www.sweden.gov.se/sb/d/10296/a/99193.
16. John Mackey, “Winning the Battle for Freedom and Prosperity,” Liberty, June 2006, Vol. 20, No. 6. http://libertyunbound.com/archive/2006_06/mackey-winning.html.
17. David Mamet, “Why I Am No Longer a ‘Brain-Dead Liberal,’ ” Village Voice, March 11, 2008. http://www.villagevoice.com/2008-03-11/news/why-i-am-no-longer-a-brain-dead-liberal/2.
18. Milton Friedman, “The Hong Kong Experiment,” Hoover Digest, no. 3, 1998 (reprinted from National Review, December 31, 1997, from an article entitled “The Real Lesson of Hong Kong.”) http://web.archive.org/web/20060220030940/
www.hooverdigest.org/983/friedman.html.
19. Andrew P. Morriss, “Freedom Works: The Case of Hong Kong,” The Freeman, November 2008, vol. 58, no. 9. http://www.thefreemanonline.org/featured/freedom-works-the-case-of-hong-kong/.
Chapter One: “Is Capitalism Moral?”