by Caleb Nelson
· What kind of society recognizes that it should pass no laws restricting freedom of trade and production?
The kind of society, or social system, which would make these things possible, must be based on the recognition and protection of individual rights. Then we must ask:
· What are the essential features of a social system based on individual rights?
· What are rights and how they are violated?
After these are answered completely, and we have resolved any contradictions in our ideas, we will understand the broader philosophical, social, and political meaning of capitalism, rather than merely its narrow economic meaning. We will come to understand that capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned, and in which no one may initiate the use of force against others.
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A social system that protects rights necessarily banishes the initiation of physical force from human relationships. The only function of government in a capitalistic society is protecting its citizens from physical force, acting as the agent of man’s right of self-defense. A capitalist society places the retaliatory use of force under objective control. All human relationships in such a society are voluntary. We can all persuade, cooperate, discuss, and contract freely, or choose not to.
(Unfortunately, hearing capitalism’s principles described clearly like this does not automatically dispel all misconceptions associated with it. Typically, the false ideas have to be removed one by one, which we will work on later in this book.)
JUSTICE AND FREEDOM
The justice capitalism claims as its ruling principle is simple: the justice of reality. Justice means seeking and granting only what is earned—good or bad, success or failure, honor or guilt. Justice means granting respect to those who have earned it by being honorable. It means granting a good grade to a good learner, and a poor grade to a poor learner. It means being distrustful of someone who has earned a false respect by lying. It means refusing to do business with someone who has cheated you.
Equality under capitalism means what it meant to the Founders—equality of rights. All men are created equal, not in things, talents, genetics, or circumstance, but equal in what matters most: equal in the protection of their life, property, and liberty of conscience. Equality does not mean that if one person has a private jet, everyone should have a private jet. Equality means that a white man and a Black man get the same prison sentence for the same crime.
In his historic book, The Naked Communist, Dr. Cleon Skousen identified four specific freedoms that a capitalistic system protects:
The Four Economic Freedoms of Capitalism:
· The Freedom to Try
· The Freedom to Sell
· The Freedom to Buy
· The Freedom to Fail
The freedom to try is one of the most essential ingredients in a healthy economy. If a man wants to be a professional rock climber, he is free to try it. In a free country a man can develop a new mousetrap, an improved screwdriver, or a faster computer. When he is through, no one may wish to buy his product, but he is still free to try and sell it if he can.
If men are to be left free to use their inventive and creative genius, they must also be left free to sell their product for a profit. “Of course,” says Dr. Skousen, “some new product might make a whole industry obsolete, temporarily throw thousands out of work and require numerous economic, social, and political readjustments.”
[104] Such new industries have included the cotton gin, printing press, DVDs, airplanes, and microchips. This is one of the keys to success in a free enterprise economy. Selling is not to be curbed unless it involves products or services that criminally threaten others.
The public must also have the freedom to buy. Price controls and restrictions create shortages, black markets, and a depressed economy. Taxes, duties, and fees all inhibit the free choice of a consumer to buy a product, especially when they can’t afford or don’t want to pay the higher price caused by the tax.
The “golden secret” of all capitalist economies is the freedom to fail. Every businessman must continually study his operation, improve products and services, increase efficiency and customer service just to keep from failing. Failure is a lesson to be learned about your performance, and it is the constant threat of failure which keeps businesses focused on being better at customer service, less expensive, and more efficient than their competitors. These benefits come because of the natural incentives not to fail. But when natural incentives are removed, people behave differently. If a company cannot make a profit and is subsidized by tax dollars, the company receives an incentive for their inefficiency. No lesson is learned. If the choice to fail is not followed by failure, this encourages businesses to invest more time in pleasing government officials rather than their customers. The very thing which spurs a company to succeed is the possibility of failure.
Saying, “This company is too big to fail!” implies that because it’s a large company (or more likely because it has active lobbyists), it’s more important than the protection of individual rights. Property is then expropriated either directly through taxation, or indirectly through inflation, to “bailout” the failed company for the “good of Main Street.” There is always some evasion or rationalization to accompany it. During his Presidential campaign, Senator John McCain was asked how he could support such “socialistic” bailout programs. His response was, “It’s not socialism, it’s necessary.” In other words, he likes to make decisions not on principle, but on apparent expediency. A social system is rapidly losing any connection with capitalism when the freedom to fail is suspended.
The basic moral code of capitalism is founded on the premise that every man is an end unto himself, not the means to the ends of others, and on the premise that men must deal with each other voluntarily as traders, through mutual choice and benefit.
[105] As Isabel Paterson put it, “Capitalism is the economic system of individualism.”[106]
We’ve defined capitalism, but to help clear any additional false ideas about it, we will study some economic principles as well as collectivist social systems, and then move on to addressing common attacks against capitalism.
Review
Q1: Why must capitalism be viewed not only as an economic system, but as a philosophic system and a social system?
Q2: What is the most fundamental characteristic that sets capitalism apart from every other social system?
Q3: What is the only means by which rights can be violated?
Q4: What premise is the moral code of capitalism is based on?
Chapter 9: Principles of Economics
FREEDOM OF CONSCIENCE
“When politics and religion ride in the same cart, the whirlwind follows.” - Frank Herbert, Dune
The phrase “the separation of church and state” came from a personal correspondence of Thomas Jefferson. But what does it mean?
Government should not pass any laws which foster or suppress any religion, nor should it proscribe what we believe. Religion and government have no reason to ever be mingled together by earthly men and should absolutely be separated because when they’re not, tyranny can abound, and our freedom of conscience may be violated.
What are the consequences of failing to separate religious opinions from government? Just look at countries with Islamic Shariah law. In such places, government becomes religion’s police force to punish citizens who break religious commandments, where women can’t drive, can’t vote, and must wear all black abiyahs in the scorching sun, where gays and adulterers are stoned to death, and apostates are hanged.
There are less extreme, but still problematic examples in America. The constitutions of some states has prevented Catholics and atheists from holding public office. In 2012, with 54% of the vote, the predominantly Mormon residents of Highland, Utah, passed legislation forcing businesses to remain closed on Sundays, claiming they have a right to estab
lish values.
[107] There is no qualitative difference between forbidding women to get educations and forcing a business to close on Sunday. Each is motivated by “values” and traditions, but neither is based in reason or respect for the rights of other humans. Freedom of conscience is often destroyed by non-objective religious laws. An educated woman behind the wheel or a store being open on your holy day does nothing to violate your rights. It is abominably evil to use government to force others to live your religion.
Economy and state should be separated, as Ayn Rand put it, “in the same way and for the same reasons as the separation of state and church.”
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The primary reason is freedom of conscience. What is the difference between the government telling us we have to pay a tax to support a specific church, and telling us we have to pay a tax to bail out or subsidize a certain company? What is the difference between the government telling us we must support a particular creed, and telling us we are required to pay social security taxes whether we agree with it or not? What is the difference between the government suppressing our religion and the government regulating, taxing, and suppressing our business? The same violation of freedom of conscience happens when we are forced by the state to buy specific products, pay certain wages, and bail out certain companies, as occurs if we are forced to pay tithes, change our beliefs, or attend any church. In economy, as in religion, governments have no proper or moral role—whether national or local—except, as always, to guard against physical violence, violation of contract, fraud, and other infringements of rights. When a government acts outside of its moral scope, its actions violate principle, and will therefore cause problems.
Why must we have freedom of conscience? Man’s tool of survival is his mind, and he must be free to act on his own judgment. It is for the sake of man’s survival and prosperity, as well as of justice and fairness, that we must keep the government separate from things that fall outside its proper purpose. A government exists to protect the rights of all its citizens universally. It must not do anything which cannot be done universally, such as promote one religion over another or one business over another. Such actions do not universally benefit the general welfare, but suppress the welfare of some for the supposed benefit of others. Such circumstances need never exist.
Everyone has the right to choose their destiny, to follow their passion, and to prosper, or fail, according to their own will and labors; and a social system which recognizes this truth, and protects it, is the best-suited for men’s happiness and prosperity.
ECONOMICS 101
“We have abundant reason to be convinced that the spirit of trade which pervades these states is not to be restrained; it behooves us, then, to establish just principles . . .”
[109] - George Washington, 1785
You may have noticed that you often hear a journalist or a politician quote a supposed “expert economist” on a given subject. You may also have noticed how an “expert” can seem to be found to support or contradict any idea or proposal. Some of these experts have admitted as much and more. Consider what one of the most “successful” economists, John Perkins, of the late 1970’s had to say: “The fact was that I never thought of myself as a bona fide economist . . . My status as chief economist and as manager of Economics and Regional Planning could not be attributed to my capabilities in either economics or planning; rather, it was a function of my willingness to provide the types of studies and conclusions my bosses and clients wanted.”
[110] With that in mind, it’s probably best if we learn to use economic principles ourselves, then we won’t have to worry about what an alleged expert wants us to believe.
You may have heard the phrase, “There are lies, damned lies, and statistics.” Statistics can be used to paint any picture and prove any point. All the difference is made by what details are left out. The truth about the economy contains millions of data points. To have a complete understanding of the whole economy would require you to know about every single part and how they each interact and fit together.
In the figure below, notice that there is an upward trend. But if we made a graph that only showed the area in the circle, we would all reach the opposite conclusion—that the trend was downward. The truth in the context of the small area is that there is a downward trend.
The truth in looking at the larger graph is that there is an upward trend. Perhaps if we zoomed way out of the big graph, we would find that our upward trend is actually just a small blip in what is an overall downward trend. These truths are in opposition to each other, but they do not contradict each other because they are each placed in their proper context. If we remove the context, we destroy the truth. We must never forget that there is no truth without context. Anytime we see a graph or statistic, we must remember it is a small part of the whole and consider the context we do not see.
We have an ocean of information to make sense of. There’s no possible way we could sort through it all. It isn’t viable for us all to get doctorate degrees in economics. We can listen to the experts, but which ones? How do we know who is right when there is so much contradiction? Here again is the value of principles. If we understand the overarching laws of causality that govern economics, we can have firm footing in our understanding and decisions.
We must keep in mind that there are very broad principles and very specific ones. Specific principles, governing cause and effect on smaller scales can act as exceptions in specific contexts, and be factors which alter, delay, or change outcomes from what the general principle would predict. The more principles we know, the more confident we can be in our decisions. Having a broad outline of the main principles involved can be an effective guide to keep our actions in line with reality.
Economics is essentially the study of human interaction: how people exchange with and relate to one another and in doing so produce, distribute, and consume goods and services. One of the first basic principles that governs economics has to do with why these interactions happen in the first place. As the authors of Freakonomics simply put it, “Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing.”
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Human beings respond to incentives. There is always some reason why we do what we do. Ignoring the role of incentives creates waste and inefficiency. There have been many well-intentioned laws and programs designed to change human behavior that have failed because they did not consider the actual incentives. For example, the DARE program is an antidrug program used in many schools. But research shows that it is not effective.
[112] Why? Because one of the premises DARE operates on is that kids use drugs because they don’t understand the risks. The problem is, kids don’t use drugs because they are ignorant of the consequences. People use drugs as a coping mechanism. If DARE wants to keep kids off drugs, they need to address anxiety, depression, and coping skills.
Another basic principle of economics is illustrated by Henry Hazlitt in his book, Economics in One Lesson: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
[113] If we understand the role of incentives in driving behavior and have the ability to consider systemic and long-term effects, we will likely see things experts and public officials do not.
It is not within the scope of this book to examine and disprove every economic fallacy. The aim of this book is to help the reader identify true principles and to apply those principles to any issue. We will give a few brief examples of how to understand economics and how this applies to your life.
Henry Hazlitt
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PUBLIC WORKS MEAN TAXES
“Everything we get, outside of the free gifts of nature, must in some way be paid for.”
[114] - Henry Hazlitt
It is important to alwa
ys remember that, however much our elected officials and professional lobbyists evade the matter, all government expenditures in our current system must eventually be paid for through taxation (and inflation is merely a form of taxation).
For example, Hazlitt offers a $10 million bridge project. It is easy to observe the two hundred employed bridge workers, and the bridge itself. These are obvious. What is not obvious is what we cannot see: that for every job created on the bridge, a private job was destroyed somewhere else. There are two hundred fewer employees to work on other things. Yes, we will have more bridge-builders, but fewer clothing makers, electronics engineers, and dance instructors. What we don’t see are all of the products, services, and jobs that would have existed had the taxpayers been allowed to spend their money in the places of their own choosing. That $10 million left in the pockets of those who earned it would have been used in thousands of transactions, acting as fuel to the economic engine. This would have equated to greater prosperity as more jobs, products, and services were created. Now, instead of paying for dance classes for your daughter, you pay taxes for a bridge worker. Instead of replacing your old television or paying off your car, you pay taxes for a bridge worker.
Taxing everyone to create jobs, doesn’t create more overall jobs—at best, it merely shifts them from industries the public would choose to industries the government chooses. This violates the freedom of conscience of the public in choosing where to spend its own money, and it decreases the incomes of all businesses and people to whom that money would have been freely exchanged for goods and services.