by Joe Kernen
Capitalism’s critics are even older than the Progressive movement itself, though not by much; Karl Marx wrote Capital (Das Kapital ) in 1867, only about twenty years before the start of the “Progressive Era.” One hundred and fifty years later, the opinion pages are still blaming “unfettered” free markets (by which they mean, if my dictionary is correct, “free markets without leg irons” or “free markets that are free”) for the Great Recession.
And even without those attacks, it’s not easy to explain the value of free-market capitalism in a child’s terms, since understanding the long-term importance of a growing economy requires a long-term view—something not exactly easy for a ten-year-old. Blake doesn’t really have any way of comparing the abundance of products available today—cell phones, MP3 players, and personal computers, for example—to those available twenty years ago, much less two hundred. Moreover, Blake, like most kids (and all Progressives) tends to believe in fairness; and to her, and to Progressives, that means dividing the pie equally, not making it larger.5
From this sort of thinking—that the economy is a zero-sum game where every player’s gain must be balanced by another player’s loss—it’s a short leap to the idea that anyone who has more than anyone else must be greedy—and, as we know, greed ain’t good.
On the other hand, Blake does love animals . . .
“Blake?”
“Yes, Dad?
“You know how chimps groom each other?”
“Sure.”
“What do you think would happen if a chimpanzee offered another one a piece of food and asked for help grooming as payment?”
“Depends on the chimp. If it was an average chimp, the second one would just take the food and run away.”
“Actually, they almost always act as if ‘one good turn deserves another.’”
“Why?”
“Because a chimp that just takes the food doesn’t get offered anything next time.”
“Kind of like a golden rule, right?”
This was actually what primatologist Frans de Waal described in a book called Chimpanzee Politics, but the even more interesting part is that chimps that regularly trade with one another are much more likely to cooperate on other matters, such as defending against an attack by a third chimp. Free trade, it seems, promotes cooperation as well.
And fairness, too. In looking for some examples of games I could use as a teaching tool for Blake, I came across one called Ultimatum, which has been used experimentally to test the ways that members of different cultures behave. Here’s how the game is played: Participants pair off, with one player given a hundred points and the other none. The first player has to offer a portion of the points to the second; if the offer is accepted, the parties divide things that way; if not, no one gets anything. The way the rules are written, if second players accept any offer, they’re still better off than if they decline it, since even an offer of ten points is more than nothing. But an offer of ten points is hardly ever accepted, since players sense it to be unfair.
Now here’s the interesting part. A professor of psychology and economics named Joseph Henrich played the game with thousands of participants from fifteen different societies—hunter-gatherers, slashand-burn farmers, nomadic herders, small-scale farmers, and so on. And what he found is that in societies with no or little trade—huntergatherer societies, for example—the average offer accepted is around twenty-five points (usually in the form of something less abstract than points, like food); but in societies with trade—and all industrial societies—the average number quickly approaches an even split. The freer and more familiar trade is, the fairer it tends to become.
The reason is that free markets depend on, and therefore promote, the virtue of trust. In fact, it’s impossible to imagine free-market capitalism functioning without trust—and a lot of it. When I drop off my car for an oil change, I’m trusting that it will still be there when I return, and the mechanic who did the work is trusting that I’ll pay for it. And that the credit card I use to pay will eventually transfer money into a different account. The credit-card company, of course, is trusting me to pay the bill at the end of the month. In societies without trade, no one needs to trust anyone else; in societies without freedom, no one is able to trust anyone else (see Soviet Union, and North Korea).
There are, in fact, a lot of virtues promoted by free markets, including diligence, hard work, and promptness (Adam Smith himself, in his Lectures on Jurisprudence, wrote, “When the greater part of people are merchants, they always bring probity and punctuality into fashion, and these are the principal virtues of commercial nations”). Free markets even promote the highest sort of morality: Our church teaches that the three theological virtues are faith, hope, and charity; free markets depend on the first two and make the third possible.
Free markets especially promote hope in the future, without which no new business would ever be started. Free-market societies are, by far, the best ones for dreamers and visionaries. And needless to say, for our children. Their futures depend on the number of choices they will have; free markets create more choices for more people, and those progressive slot machines—the idea that a nation’s elites have the best idea how to allocate wealth and distribute income—reduce those choices. Whether the machines have been operated by Soviet commissars or social democrats, the result has differed only in degree.
And if that’s not immoral, then I don’t know what is.
CHAPTER 2
February 2009: The ABCs of the Free Market
In February 2009, when you couldn’t turn on the TV without hearing someone talk about “ bailouts” or “ derivatives” or “stimulus packages” (usually without any idea what they were talking about), I asked Blake to write down any words or phrases that seemed to puzzle her—or, at least, to ask me to explain them.
Rereading those explanations months later, I can see that I might have allowed myself a small amount of opinionated commentary. Okay, a lot of opinionated commentary.
Advertising. Noun. Communication intended to persuade someone to take an action, where the persuader doesn’t know the object of the communication.
Progressives hate advertising, at least whenever it’s used to sell them something they don’t approve of. This is even true in the media business itself, which would hardly exist without advertising dollars. Blake doesn’t care for much of it herself and is unable to figure out why most of the commercials during SpongeBob SquarePants are promoting other Nickelodeon shows (she does make an exception for those times when an ad is more entertaining than whatever it is interrupting, as with the average Super Bowl). The three big objections to advertising are its constant presence, the belief that it misleads people into spending money on things they don’t need (or, occasionally, voting for candidates they don’t “really” support), and the cost it adds to the products and services they buy. I admit to sharing the first objection, even though a big chunk of every dollar I get paid is directly traceable to an advertisement; I knew we’d passed some sort of threshold when I saw that the plastic bins used to pass through airport security now included print ads. But the other two, like most Progressive beliefs, shrivel on close examination.
The idea that ads get people to do things they don’t really want to do is really just another version of the idea that most people need to be told what they should want: a core Progressive notion. This is both insulting and just plain wrong: Almost all advertising is intended not to persuade people to buy beer or cars or a new-and-improved laundry detergent but to persuade them to buy one beer/car/detergent rather than another. To the degree that a rich economy offers consumers choices, there will be some sort of advertising intended to inform those choices. Even the idea that we need an entire body of law intended to regulate advertising is pretty hard to demonstrate. In fact, as Jeffrey Miron of Harvard University and the Cato Institute points out, a good case can be made that too much reliance on regulation makes people careless; if you really believed that everything you se
e is neither false or misleading, you are “way too gullible.”
Even dumber is the idea that advertising results in an increase in the costs of goods and services and is therefore a drain on the economy. In 1922, when the U.S. gross domestic product was $73.4 billion, total advertising expenditures were $2.2 billion, or about 3 percent. In 2008, advertising had ballooned to a little less than $278 billion . . . or 2 percent of a $14 trillion economy. In short, it’s a lot likelier that advertising is responsible for the incredible success story that is the U. S. economy than that it is some sort of hindrance to it.
Bailout. Noun. A way for taxpayers to pay off the debts of bankrupt companies without all the fuss and bother of a bankruptcy.
Bank. Noun. A financial middleman that accepts deposits (on which it typically pays interest) and pays and collects money promised against those deposits.
Ten-year-olds tend to have a pretty concrete view of the world, and to Blake, a bank is a building with a vault full of money. This is understandable: The bank on her corner is just a bigger version of the piggy bank in her bedroom. Explaining how this can be a business requires that the explainer—I—go back to first principles.
The only truly basic business for a bank is to collect money and guarantee the payments that its depositors make against that money. For hundreds if not thousands of years, bankers—the term “bank” comes from a word for the table on which money was accepted and exchanged; Blake’s notion that a bank is a place isn’t so far off—made their profit by charging their depositors for the service. It wasn’t until sometime during the Middle Ages (probably) that some enterprising competitor came up with the idea that a better way to make money was to use the depositor’s money to make loans and investments. There was so much money to be made with the depositor’s money, in fact, that banks starting paying depositors for the privilege: paying interest for deposits and charging interest for loans.
Which brings us to the modern version of banking—and the peculiar modern problem that it presents to a free market. Banks obviously offer some pretty valuable functions in a free capitalist economy; without them, there’s no way to borrow money to invest in business. However, since most people still want the bank to behave like Blake’s piggy bank—to have their money on hand whenever they want it—the government regulates banking in a number of ways, some good (or at least not too bad) and others, well, not.
“Dad?”
“Yes, Blake?”
“Do you remember those silver dollars Mommy had? Where are they?”
“They’re in the safety deposit box at the bank.”
“Is that where all our money is?”
“Not exactly . . .”
The scariest thing about banks is that while everyone’s money can’t be paid out at once (since most of it has been lent or otherwise invested), everyone has to believe that they can get theirs. When they stop believing this and try to take their money out, panic sets in, since no one wants to be the last one in that particular line.
Enter regulators. Banks are required to keep a percentage of their total obligations on hand to pay their depositors, and the federal government guarantees deposits of up to $250,000. More recently, big banks have been given what is essentially a guarantee that no matter how reckless they are in the way they lend or invest their depositors’ money, the federal government will absorb the risk—and as happens with all laws and policies intended to reduce the costs of risky behavior, the new regulations actually increased their frequency.
The Progressive response to yet another failure of regulation is, as usual, more regulations. Regulations that will forbid banks from trading on their own account, or trading derivatives at all. The idea here is that no bank that is “too big to fail” should be allowed to engage in practices that are going put it at risk of failure, with the costs of that failure borne by the taxpayer.
Deciding how big is too big is something that Progressive legislators and regulators practically salivate about. However, since the underlying logic of all banking regulation is to preserve depositors’ access to their money—to make sure Blake can get those silver dollars back—there is actually a better, free-market solution, to that particular problem. Instead of worrying about the kinds of businesses that banks have, or about how big they are, we could simply require that they have enough money on hand to meet their obligations. If you fix capital requirements, you don’t need to worry about being too big too fail, or derivatives trading, or any kind of trading at all. Are there costs to this particular free-market solution? Sure, but they are definitely less than the trillions of dollars that bailing out the current system is likely to cost.
Bankruptcy. Noun. The legal recognition that a debtor is unable to pay its creditors. Bankruptcy may be initiated by either a creditor or debtor but in practical terms is generally a voluntary act taken by a debtor to end pursuit by creditors. In the United States, bankruptcy can be a temporary protection while a debtor negotiates repayment and reorganizes. Or it can be the complete surrender of assets to a judge, who parcels them out to creditors.
Ask Blake what she thinks of when she hears the word “bankrupt,” and she’ll tell you that that’s what happens to a player in Monopoly who has no money. Ask her what she thinks of when she hears the word “bailout,” and she’ll just look confused.
She’s not the only one.
The reason generally offered up in support of the dozens of different bailout programs intended to blunt the collapse of 2008 was that bankruptcy for America’s big financial institutions (well, most of them, anyway—see Lehman Brothers) would be too dangerous. But when a bank goes bankrupt, it doesn’t vanish (though its shareholders may wish they could). Instead, someone takes over the assets and a bankruptcy judge resolves claims and sells off what’s left. Someone buys them—a company that didn’t do the things that caused the first one to go bankrupt in the first place.
Cap and trade. Noun. The so-called market-based method for reducing the amount of CO2 emitted into the atmosphere by businesses. The “cap” is the amount of CO2 each company is permitted, set by either government committee or auction; the “trade” refers to the way in which companies that need more permits can purchase them from companies that need fewer, thus setting a market price for emissions.
Whenever anyone starts moaning about the size of their (or my) “carbon footprint,” I’m prone to ask them whether they mean the dirty lumps of coal left in bad kids’ Christmas stockings or the carbon dioxide that is the end product of cellular respiration and the raw material for photosynthesis, which is to say, life on earth? Changing “CO2” to “carbon” would make my old chemistry professors pretty testy, but no one can deny its PR value.
And it needs every bit of that value. I freely admit that I’m skeptical about many aspects of global climate change, but I also have to admit that Blake doesn’t always share my skepticism. Her environmentalism is one of her defining characteristics, and she rarely meets a plan for saving the planet without falling in love with it. And you might think that a free-market zealot like me would love the idea of letting the marketplace set a price for CO2. Or even carbon.
But there’s a problem with cap and trade: There is no real market for CO2 emissions, which is why the government has to make one. And whenever governments try to do what markets do, which is essentially allocate resources efficiently through pricing, they stink. Just do the numbers: Even if you buy the prediction by the UN’s Intergovernmental Panel on Climate Change of a worldwide temperature increase of 2.8 degrees Celsius by 2100, you also have to accept its estimate that an increase of 4 degrees Celsius would result in a reduction in worldwide economic output of around 3 percent (and if this sounds a little less dire than Al Gore wants you to believe, see the PR comment above). If the cap-and-trade system currently proposed by the U. S. House of Representatives were to be fully implemented, however, the temperature increase would be only one-tenth of one degree Celsius less than it would be if the system weren’t implemented. Th
e economic benefit to the United States of such a reduction is tiny: one-fortieth of 1 percent of GDP. But the cost is 0.08 percent of GDP: at least ten times greater. Progressives are notoriously bad at arithmetic, but this is ridiculous.
Capitalism. Noun. A system in which a society’s productive resources are privately owned and freely traded.
“Blake?”
“Yes, Dad?”
“Have you ever heard the word ‘capital’ ” ?
“The capital of the United States is Washington DC. And the state capitol is in Trenton. We went there on a field trip.”
“Trenton?”
“That’s the state capital, isn’t it?”
It’s probably too much to blame public education for preferring field trips to teaching basic economics. Most people have only a pretty sketchy idea about the basics of capitalism, partly because, in America at least, they don’t really have anything to compare it with. The systems that preceded the idea that the best engine for economic growth (actually, the only engine for economic growth) was to allow capital goods—the land, factories, and patents that are used to make the goods people actually use: consumer goods—to be privately owned are long gone. The traditional systems of feudalism and mercantilism were actually intuitively pretty appealing for thousands of years because people thought all wealth was, finally, precious metal or land, and as a result, also thought that the total amount of it was finite.