Read How Capitalism Will Save Us Online
Authors: Steve Forbes
Along with bringing prosperity to millions, democratic capitalism has undermined political tyranny and promoted democracy and peace between nations of the world. It is, without doubt, the world’s most moral system.
This last statement may raise eyebrows in an era that has seen scandals from the collapse of Enron to the devastation of personal and charitable wealth caused by Bernard Madoff. That is not to minimize the crimes of individuals like Madoff and others or the damage they cause. As we explain, the off-the-charts criminality of individuals like Madoff no more reflects the immorality of free enterprise than the murderous crimes of a Ted Bundy or a Jeffrey Dahmer reflect a fundamental breakdown of democratic society. Democratic capitalism,
as a system
, is more humane than government-dominated economies, including those in countries that are otherwise democracies.
Nations that liberalize their economies, that allow people greater economic self-determination, end up moving, sooner or later, toward
democracy. Since the nations of the world began to liberalize their economies in the mid-1980s, the percentage of democratically elected governments has surged from 40 percent to more than 60 percent today. China, for example, is not yet a Western-style democracy. But the nation is freer today than it was during the era of Mao Tse Tung and the repressive Cultural Revolution.
Despite all the gloom and doom voiced by its critics, the freeenterprise system is—and has always been—the best way to unleash the creativity, inventiveness, and energy of people and mobilize them to meet the wants and needs of others. That’s because free-market transactions, far from being driven by greed, are about achieving the greatest possible mutual benefit, not only for the parties directly involved but eventually for the rest of society.
T
he question remains: Why does capitalism’s bad Rap exert such a powerful hold on the American psyche—not only in bad times but in good? Indeed, it’s a spectacular irony that so many of the people who have benefited most from our market economy, who have been smartest about using it to their advantage, disdain the very system that produced their success. In his seminal book
Capitalism, Socialism and Democracy
, economist Joseph Schumpeter explained that capitalism’s prosperity and democratic values sooner or later cause the “capitalist class” to question the system.
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The capitalist process, so we have seen, eventually decreases the importance of the function by which the capitalist class lives…. Capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.
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People also question capitalism because free markets are messy and unpredictable. Jobs are lost (and also created) in ways people don’t expect. Companies like Google and Wal-Mart become large and successful without the permission or anticipation of bureaucrats and experts. People
become wealthy who offend the sensibilities of the more cultivated establishment.
The cultural roots of today’s anger go back thousands of years. In ancient times, people struggling to survive amid disease, famine, and other harsh conditions resented the relative wealth of “money changers.” Christ believed rich people had less chance of going to heaven. These beliefs were not limited to Westerners. In feudal Japan, merchants were regarded as parasites because they dared to make a profit by charging more for the goods they sold than what they had paid for them.
Economist and scholar Thomas Sowell has written extensively about the universal mistrust of people he calls “middleman minorities” in retail trade or in money lending whose work “takes place somewhere between producers and consumers.”
Retailing and money-lending have long been regarded by the economically unsophisticated as not “really” adding anything to the economic well-being of a community…Both medieval Europe and the Islamic countries regarded the charging of interest as a sin and, in other societies in Asia and Africa, it was considered morally suspect, even without a religious prohibition against it.
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Ostracized middleman minorities have included the Jews, Asian immigrants in the United States, the Ibo in Nigeria, and the Parsis in India, among many others. But Sowell says that the prejudices against them were not really based in ethnic hatred.
An often-cited article by a British economist who was a prisoner of war in Germany during World War II pointed out how middleman economic activities arose spontaneously among the POWs—and how the individuals who engaged in those activities were resented by the other POWs, even though these individuals were not from some middleman minority, but ranged from a Catholic priest to a Sikh.
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While less hostile, America’s attitude toward its merchant class has long been ambivalent, dating back to the political rivalry of Founding Fathers Alexander Hamilton and Thomas Jefferson. A plantation owner and believer in the agrarian model, Jefferson distrusted cities and commerce. He envisioned a more socially stratified, agrarian society. Hamilton, by
contrast, believed in an America based on vibrant commerce, where people, regardless of their birth, would have a chance to move ahead economically.
Their opposing visions partitioned the nation’s soul: America became a country based on capitalist principles and free markets, where some of its most successful entrepreneurs are nonetheless considered “robber barons.” And corporations are seen as mechanistic oppressors of the human spirit.
But there’s more to today’s rage than cultural ambivalence. The truth is that a surprising number of people simply don’t understand how our economy works. Despite America’s preeminence as the world’s foremost innovator and wealth creator—whose economy is the envy of other nations—many of us are remarkably uninformed about the system that produced our prosperity.
Little wonder economics is referred to as the “dismal science.” “Dismal” describes how it is taught in most classrooms—a jumble of bloodless equations and technical terms like
frictional unemployment, GDP
, and
income elasticity of demand
. It’s difficult to imagine that these subjects have any relation to the lives of real people.
According to a 2007 study by the National Council on Economic Education, just seventeen states require students to take an economics course.
Many Americans have had no formal instruction in the economic principles that govern everything from the price of milk to the interest rate on your home mortgage to where you are most likely to find employment. Research has shown that in “test after test,” more than 60 percent of the nation’s high school seniors were unable to define the word
profit
. Only half of all college seniors could define
inflation, productivity
, and
fiscal policy.
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Several years ago the
Washington Post
, the Henry J. Kaiser Foundation, and the Harvard University Survey Project compared the views of more than 1,500 average Americans with those of 250 economists on various economic matters. George Mason economics professor Bryan Caplan reported that average citizens surveyed were far more prone than economists to emotional, negative perceptions and “anti-market bias.”
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In other words, the less people know about how the economy works, the more likely they are to take the darkest possible view of free markets.
This book will answer classic questions about democratic capitalism, addressing the central contentions that are a part of capitalism’s bad Rap—that cause people to distrust or dislike free markets. Using examples from recent events, we illuminate what we call Real World Economics, the principles of how markets work, highlighting Real World Lessons that people all too often miss about democratic capitalism—that help explain where we are today.
W
e’ve written this book as an informal conversation, the kind of discussion of hot-button topics that you might have at the dinner table or in the classroom. The first chapter asks the question, is capitalism moral?
Fundamental to the Rap on capitalism is the insidious notion that freemarket transactions are based on “greed,” where one party “exploits” the other. The reality is quite the opposite: capitalism is based on trust.
Transactions in free markets are about achieving the greatest possible advantage—but that advantage must be mutual. To cite the classic example from eighteenth-century economist and philosopher Adam Smith, the baker or the butcher sells you food in exchange for your money. True, as Smith points out, this relationship is based on self-interest. They provide your dinner because they seek your money. However, for a transaction to occur, each side must benefit. The deal they strike may not necessarily be the one originally envisioned by both parties—but it is nonetheless the one of greatest mutual benefit based on the realities of supply and demand. As the late free-market economist Murray N. Rothbard once wrote,
Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.
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Smith’s description of what takes place in a market, Rothbard wrote, supplanted antiquated notions held by mercantilists of sixteenth- to eighteenth-century Europe, who argued that “in any trade, one party can benefit only at the expense of the other, that in every transaction there is
a winner and a loser, an ‘exploiter’ and an ‘exploited.’ ” After all, a trade does not take place if it is a zero-sum game where only one person gains.
A free-market economy is a latticework of these mutually beneficial exchanges. Together they form what Adam Smith referred to as “the invisible hand,” directing resources to where they are most needed.
How does this take place? That’s the miracle of the free market—it just does. Free markets are spontaneous. No central planner or bureaucrat is needed to determine the needs of others—or how they must be met.
The classic illustration of how the invisible hand mobilizes people and resources is found in the children’s story
I, Pencil
, written by Leonard Read and cited by the late Milton Friedman and other freemarket economists. The pencil narrates the story of how it came to be. It started out as a tree—“a cedar of straight grain that grows in Northern California and Oregon.” The pencil goes on to describe the countless people and processes involved in its production—from cutting and transporting logs to supplying electrical power to mining graphite and extracting the rapeseed oil from the Dutch East Indies that goes into making erasers.
Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. … Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.
There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work.
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This is how wealth is produced in society: countless individuals seek to meet their own needs by meeting the needs of others. Forming networks of cooperation, they create businesses that produce innovations—not only the pencil, but inventions from laptops to washing machines. In the process of providing for themselves, people generate the capital and
innovations that yield economic growth, improving living standards and enabling society to advance.
Those who buy into capitalism’s bad Rap, who believe free markets are based on “exploitation” and “greed,” fail to appreciate how the invisible hand works. People in a free market are mobilized not by greed but by self-interest. As we will discuss in
chapter 1
, there’s a big difference between the two.
Greed
means taking what does not belong to you or simply taking too much of something. Texas mom Catherine “K.K.” Patton was motivated by anything but greed when she set out to find a way to minimize the unpleasantness of daily insulin injections for diabetes patients. She perceived a need and a potential market. Patton was mobilized by more than the prospect of financial gain: she herself was a diabetes patient who hated the sticks and bruising of daily needles. Her “self-interest”—both financial and personal—propelled her to invent the i-port injection port, a device worn by patients that reduces the pain of injections. Users inject insulin into a little disk implanted in their skin that delivers medication into their bodies. Recently approved by the FDA, the invention is beginning to catch on with a growing number of diabetes patients.
Steve Chen, Chad Hurley, and Jawed Karim, three young employees of PayPal, were also motivated to fill a need based on self-interest. They wanted to share their home videos over the Internet. In 2005 the three founded YouTube, which virtually overnight became one of the Internet’s biggest success stories, sold to Google after only one year for $1.65 billion. YouTube, of course, has gone far beyond meeting the simple need for which it was invented. It took the Internet revolution one step further, bringing the Web closer to television in its ability to deliver video content. Countless Web sites, including those of major news organizations, now use YouTube to deliver not only taped but live webcasts.