The Great (and Continuing) Economic Debate of the 20th Century

The great economic debate of the twentieth century was between collectivists and free-marketers. In one sense, the free-marketers won: When the Berlin Wall fell in 1989, it was widely acknowledged that Soviet socialism had been a catastrophic, not to say murderous, failure. But in another sense, the debate continues. Democratic capitalism still has not vanquished the idea of collectivism. Far from it.

At the beginning of the last century, free markets seemed to be on the ascendancy everywhere. But two events gave collectivism its lease on life. The first was World War I. In addition to the slaughter—and to breeding the ideologies of communism, state fascism, Nazism, and even the Islamic fascism we are battling today—World War I served as an intoxicating drug to those in the West who believed that a handful of people in government could manage affairs better than the messy way in which free peoples tend to do so. Massive increases in government powers, coupled with massive increases in taxation, gave many the idea that you can achieve massive increases in production by commandeering the financial resources of society.

The second event that served as a boon to collectivism was the Great Depression, which was widely seen as a free-market failure. This view was false. Misguided government policies were at fault—the Smoot-Hawley Tariff, for instance, which dried up the flow of capital in and out of the country. If you track the stock market crash of 1929, it parallels the course of this tariff bill through Congress. When Smoot-Hawley arose in the fall of 1929, the markets fell; when it looked like the tariff bill was sidetracked in late 1929, the markets revived (the Dow Jones went up 50 percent from its lows in November); in the spring of 1930 it was signed into law, and the rest is history. There were other factors at work in the Great Depression, of course, such as President Hoover’s gigantic tax increases of 1931. But despite the fact that these also involved bad policies, the lesson taken away by many was that economies will implode unless the government manages them. John Maynard Keynes, the intellectual guiding light behind New Deal economics, believed that an economy was like a machine: If you put doses of money into it or pull money out at the right times, he thought, you can achieve an equilibrium. This idea that government can drive an economy as if it were an automobile has had baleful consequences.

Other leading economists at the time, such as Joseph Schumpeter, recognized that an economy is an aggregate of disparate activities—thus that the idea of achieving equilibrium, while it makes for a neat theory, is nonsense in the real world. A vibrant economy is full of constant disequilibria: New enterprises rise up, old ones decline, etc. Snapshots of such economies mean very little. In the real world, therefore, free markets operate rationally and efficiently in a way that government regulators simply can’t. Here in America we came to this realization at the end of the 1970s. Following World War II, we largely bought into the idea that government must play an active role to prevent the economy from going off the cliff. But in the late 1970s, the devastation of inflation and high taxes brought about a reassessment. With the election of Ronald Reagan, the U.S. took a step back from Keynesian economics. Since then, as Western Europe has stagnated—creating, for instance, only a fraction of the private sector jobs that the U.S. has created—our country has undergone an economic revival.

One of the great vulnerabilities of capitalism is the perception that it is somehow less than moral, if not positively amoral. A common view of business was depicted in the movie Wall Street, in which Michael Douglas’s character made famous the phrase, “Greed is good.” Capitalism is widely seen as promoting selfishness. We tolerate it because it gives us jobs and prosperity, but many look on this as a Faustian bargain. Charity and capitalism are seen as polar opposites. Thus there’s a phrase that’s often used today—I myself use it from time to time without thinking—which is “giving back.” If you’ve succeeded in business, it’s counted a good thing if you “give back” to the community. And charity is, of course, a good thing. The problem with this phrase is its implication that by succeeding, we have taken something that wasn’t ours. The same idea is summed up in the cynical saying, “Behind every great fortune lies a great crime.” This way of thinking about democratic capitalism is wrong.

In fact, philanthropy and capitalism are two sides of the same coin. To succeed in business in a free-market economy, one must meet the needs and wants of others. Even someone who makes babies cry is not going to succeed unless he or she provides a product or a service that people want. This system weaves intricate webs of cooperation that we don’t even think about. Take a restaurant: Someone who opens a restaurant assumes that farmers will provide the food and that someone else will process and package it and that someone else will deliver it, having been supplied the fuel to do so by yet someone else, etc. These marvelous webs of cooperation happen every day throughout a free economy. No one is commanding it. It occurs spontaneously in a way that economists like Schumpeter understood.

Free markets also force people to look to the future and take risks. Misers do not found companies like Microsoft. Nor should we look on it as immoral for people to work for the betterment of themselves and their families. We are all born with God-given talents, and it is right to develop them to the fullest. The great virtue of democratic capitalism is that it guarantees that as we develop our talents, we’re contributing to the public good. Statistics show that the U.S. is both the most commercial nation and the most philanthropic nation in human history. And this is no paradox. The two go hand-in-hand.

Another vulnerability of democratic capitalism is that although it leads to progress and to an increase in our societal standard of living, progress is usually disruptive. This allows collectivists to play on people’s natural fear of change. We saw this with the rise of industrialism in the 19th century. We had paintings and writings depicting a pastoral agricultural past. Then railroads came along to disrupt the canals, and cars came along to disrupt the railroads. Buggy-whip makers and blacksmiths were done for. One can imagine what 60 Minutes would have been investigating 100 years ago: the poor blacksmiths being put out of work by Henry Ford. Likewise, when TV came along in the late 1940s and early 1950s, most movie theaters in the country went broke. Now the Internet is disrupting newspapers and Craig’s List is disrupting classified advertising. Disruptions are inevitable in a free-market system. The political challenge is to allow these disruptions to take place—they are ultimately constructive, after all—rather than reacting in a way that stymies progress.

In recent decades, collectivists have also hijacked the cause of environmentalism to promote their agenda. I’m not talking about the desire to have clean water; we’re all in favor of that. Or clean air; one of the great things we’ve done in the last century is getting lead out of the air. Saving tigers and elephants is also a good thing. I’m talking about those who use the mantra of environmentalism to try to control the economy the way the old-time socialists wanted to, breathing hellfire and damnation on those who don’t subscribe to their new, post-Christian religion. The fact is, if our goal is to improve the environment, increasing government regulation and destroying manufacturing is counterproductive. Affluence is the friend, not the enemy, of the environment. As people become better off, they want a higher quality of life, including environmental improvements. And new technology drives such improvements. Consider the east coast of the U.S. Even though its population has more than doubled—in some areas, it’s tripled—and even though there are more developments, malls, and urban sprawl, there are more trees today than there were 80 years ago. Why? Because of technology that allows us to grow more food on less land. Technology is a friend of the environment.

Let me mention three additional myths that are used to promote collectivism. One is the idea that demand is the key to economic growth. Collectivist economists often talk about means to increase “aggregate demand,” as if that would ensure that the economy will grow. Following Keynes, they assume that the economy is like a machine. But again, the economy is an aggregate of tens of millions of people, millions of businesses, millions of technologies. We don’t know how it interacts on a day-to-day basis. We don’t know what’s going to work or not work. Who could have conceived of eBay ten to twelve years ago? But today, 400,000 people make their livings on eBay. When Google was launched, there were ten other search engines. Who would have thought another one was needed? Isn’t that how you get so-called “bubbles”? But Google found a way to do it better and ended up on top. Innovation is the key. Whether it’s railroads, cars, computers, the Internet, or iPods, risk-taking is messy. It is often irrational, and seemingly wasteful. But it’s the only way to determine what works best and what doesn’t.

Another collectivist myth concerns trade. If I were dictator of the world—even though I believe in the First Amendment—I would ban trade numbers, especially merchandise trade numbers. They just lead to mischief. We are given the impression that a trade surplus is like a profit and a trade deficit is like a loss. But trade is not a transaction between countries. It takes place between parties. For example, Forbes magazine buys paper. For all of the 88 years that we’ve been in existence, we’ve run a trade deficit with our paper suppliers. If you look just at that trade deficit, you might think we are doing poorly. But if you look at the two parties involved, that turns out to be an illusion. The paper supplier thinks he’s going to make money selling his paper. We think we’re going to make money by taking the paper and putting print on it, with value added. So it’s a mutually profitable transaction, even if it looks like a trade deficit. Or consider a book printed in Taiwan. Looking at the trade number alone, it appears there is a two dollar trade deficit with Taiwan. Yet the book comes back here and retails for $24.95. The value added is in the U.S. The author gets a cut, the publisher gets a cut, booksellers get a cut, distributors get a cut, and remainder stores get a cut. Something similar happened with iPods: A lot of its parts are made overseas, but where is most of the value added? Here in the United States. North America has had a merchandise trade deficit for 350 out of the last 400 years, and we have done very well, thank you.

The final myth I’ll mention concerns budget deficits. Milton Friedman said several years ago that if he had a choice between a federal budget of $1 trillion that was in the red and a federal budget of $2 trillion that was balanced, he would take the former. Deficits, in and of themselves, are not evil. Deficits must be put in context, because Washington’s inability to curb spending is often used as an excuse to raise taxes.

Now let me turn to five basic principles of economic growth. First and foremost is the rule of law: Without individual equality before the law, entrepreneurs cannot challenge already existing businesses. Alliances between the latter and government regulators who place barriers before entrepreneurs must be guarded against.

The second essential principle is property rights. We take it for granted in this country that if you buy a piece of property, everyone acknowledges that you own it. Most countries don’t have that kind of uniform property system. A few years ago, Hernando DeSoto, a great economist from Peru, saw that in countries like his, although there is entrepreneurial activity, there isn’t the corresponding prosperity found in the U.S. And he wondered why. In his recent book—The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else—one of the key factors he cites is the absence in so many other countries of a legal foundation for property rights. In Brazil’s shanty towns, an individual may know that he owns the house in which he lives, and his neighbors may know it, but the fact is not recognized elsewhere.

Mr. DeSoto was asked by the Egyptian government a few years ago to determine who owns the businesses and residences in Egypt. His finding was that 88 percent of the businesses in Egypt are illegal. Why is that? Here in the U.S., it is possible to set up a business legally in a matter of days. In Egypt, it takes a couple of years. It requires going through numerous bureaucracies, doling out numerous bribes, etc. So it makes sense to proceed “informally.” On the other hand, running a business outside the law limits its growth. Most “informal” enterprises never grow beyond the level of family enterprises, because if they get too big, they might attract the attention of the tax collector. DeSoto’s group also reported that 92 percent of Egyptian housing is illegal. People living in residences may have deeds; but only a few miles away, those deeds are not recognized. In Egypt, as in so many other places, there is no uniform system of establishing and protecting property rights. As a result, four billion people around the world own $9 trillion of assets that amount to dead capital.

What do I mean by “dead capital”? Remember that here in the U.S., the most important source of capital for new ventures is not Wall Street, the local banker or the venture capitalist. It is the mortgage market. People either increase their mortgage or take out a second mortgage in order to start businesses. This is not possible in countries like Egypt. Understanding this was the key to Japan’s post-World War II economic boom. General MacArthur reformed a feudalistic property system, in which the peasants had only an informal system of property exchange, into a system with formalized property rights. Immediately, the Japanese economy took off. The importance of property rights is not sufficiently recognized by those of us who take them for granted.

The third principle of economic prosperity is low taxes. Taxes are not just a means of raising revenue for the government. They are also a price. Income taxes are a price paid for working; taxes on profits are the price paid for being successful in business; taxes on capital gains are the price paid for taking risks. In light of this, the importance of low taxes is easy to see: When you lower the price of good things—things like work, success and risk-taking—you tend to get more of them. Raise the price of these good things and you get less. In 2003, we lowered tax rates in the U.S. and the economy started to grow again. As we’ve seen time and again, tax cuts do not mean a loss of tax revenue. By increasing incentives, the government comes out ahead. Washington’s revenues in the last fiscal year were up 15 percent—$100 billion above expectations. Washington’s problem is not revenue, but spending.

The fourth principle I would mention is making it simpler to launch legal businesses. Getting bureaucracy out of the way will inject a new vibrancy into the economy. The fifth and final principle is free trade. Expanding markets and creating greater opportunity for trade benefits us all.

In closing, I will remind you of a point I made earlier: The reason that the great economic debate continues into the 21st century, despite the proven superiority of free markets in terms of delivering prosperity, is because of the misperceptions that keep democratic capitalism from capturing the moral high ground. Dispelling these misperceptions should be our priority as we carry on that debate in the years ahead.

"Reprinted by permission from IMPRIMIS, the national speech digest of Hillsdale College, www.hillsdale.edu."

There's plenty of evidence suggesting tobacco companies knew full well the lethality of their products before they ever started consumer product-label warnings or publicly admitted the fact.

Oh my God!! A conspiracy!!! The government is involved too!!

The only thing to do is to kill all the people who ever owned the stock, even in a mutual fund they held. And every one in all levels of government who knew cigarettes were bad for you. Poor smokers, they thought they were smoking health food.

"And if you did have proof, you'd like to hold a shareholder like me responsible?"

Not criminally, if you had no idea that people were being killed. If you failed to recognize the fact through a lack of due-diligence, then that should make you liable for damages. If you deliberately shirked personal responsibilty by not voting to recall a product once you became aware that it was fatal and failed to bring it up to board members, then you'd be complicit at the least.

I invest in the market, but I make darned sure to investigate the companies beforehand. It's called due-diligence and personal responsibility. Caveat emptor., and 'risk-reward' are being removed from capitalism, and replaced by an utter lack of business ethics, and personal responsibility on the part of ownership.

Corporatism is destructive. It benefits the lazy, the irresponsible, or those averse to taking the genuine personal risks that are inherent to true enterprise. Exactly the opposite outcome of capitalism, which benefits hardworking, enterprising individuals.

>>>
Those laws are being undermined by corporate lobbying efforts whose main goal is to get legislation passed and/or repealed that benefits the corporate entity rather than our society as a whole (and the individuals that comprise it).
<<<

That behavior is called "rent seeking" (seeking profit through manipulation of the economic environment rather than through trade and the production of added wealth). Rent seeking is not limited to corporations. If you receive the mortgage interest deduction you are benefiting from rent seeking.

Rent seeking can only arise when you have a large and intrusive government. To end this behavior, we do not need to get rid of corporations; we do need to rid ourselves of intrusive government and the redistributive state.

In the absence of corporations, how would you organize large scale enterprises (given that some endeavors have a large minimum efficient scale)?

If you deliberately shirked personal responsibilty by not voting to recall a product once you became aware that it was fatal and failed to bring it up to board members, then you'd be complicit at the least.

I'm curious, what corporation allows shareholders to vote on a product recall?

I invest in the market, but I make darned sure to investigate the companies beforehand.

I'm curious, what companies do you own that you know, for sure, aren't breaking any laws?

Corporatism is destructive. It benefits the lazy, the irresponsible, or those averse to taking the genuine personal risks that are inherent to true enterprise.

So in your perfect world we'd have millions of tiny companies and no large ones?

I suggest that you read a LOT of history; especially, but not only that, related to business and stock/bond/option/commodities exchanges. Beginning with any and all books about the ROBBER BARONS, then, THE HISTORY OF THE NYSE, and any number of books about the Crash of '29. Oh yes and there's an interesting one about the forerunner of Met Life, which you need to read. I'll send you a book list in a few weeks, when I get home.

From your posts, it is patently obvious that your education is these areas, is sorely lacking.

What....you think that the CEOs of ENRON just invented the two book method of keeping figures? LOL

And delving outside of America,as well into several centuries back, I also suggest that you read up on THE SOUTH SEA BUBBLE!

"To end this behavior, we do not need to get rid of corporations; we do need to rid ourselves of intrusive government and the redistributive state."

We need to do both. Corporatism benefits most those good at gaming the system to the detriment of society. True capitalism rewards those who can produce something of genuine value to their fellows. These large corporations are in no less a hurry than the socialists to increase the size of government, or harm individuals for their own gain. The genesis of labor-laws and consumer protection in this country can largely be traced to late 19th, and early 20th century abuses of power by corporate interests. Tit-for-tat.

"In the absence of corporations, how would you organize large scale enterprises (given that some endeavors have a large minimum efficient scale)?"

Interest-bearing loans. Multiple ones if necessary. Or we could simply hold shareholders to the same level of accountability that is expected of proprietary owners. Either would re-direct our system of capitalism back towards its' original and resplendant path.

I'll wager dollars-to-dimes that there is a direct chronological relationship to the prevalence of corporate ownership over private ownership, and the growth of socialism within our country.

Since most shareholders have less than no say in corporate decisions, why should they be held responsible for what the corporation does or does not do?

Why are you not aware of the fact that you are saying that the employees of ENRON ( and I'm using that company, solely because you appear to be hung up on it ), are as culpable as Lay, et al, because they owned ENRON stock? To keep to this position, of yours, it then needs must stand to reason, that the very employees, who "greedily" had ALL of their 401Ks filled to the brim with NOTHING but ENRON stock, should also be on trial and sent to prison.

Do you wish to make that retroactive?

If someone bought several shares of ENRON, long before any nefarious shenanigans were found out, and sold them, also PRIOR to that, is that ex shareholder also culpable?

What about companies that insured slaves, when slavery was still the law of the land? Are you for or against the latest spate of law suits being brought against companies who bought out older companies, who are now being sued for the long ago, now defunct companies' supposed "treatment"/complicity in "slave labor"? What about the now centuries dead shareholders of these companies/corporations?

First of all, the tobacco reference is a bad one to use; a VERY bad one!

In Colonial America, there was a VERY well known little poem which begins :"TOBACCO IS A DIRTY WEED,I LIKE IT. IT STINKS THE BREATH....." and goes on, verse after verse, with several stating that it KILLS!

Well, lots of things "kill" people, but tobacco doesn't ALWAYS "kill", as taking rat poison or strychnine does. You've bought the smokeNazi line completely!

Many hundreds of thousands of people have been killed or maimed in car accidents, through the years. I guess cars should be outlawed and Ford and Buick and Packard ( whoooops...they've long been out of business ) and all of the share holders should be sued. Right?

The same is true for trains and planes and liquor. How about John Deere? Didn't that company manufacture the wood-chipper that a crazy used to kill quite a few people? How about knives and guns and hammers and box cutters?

I'm curious, what companies do you own that you know, for sure, aren't breaking any laws?

None for 100% sure, but I try and keep abreast of company dealings as best I can, and steer clear of companies who openly market products that I consider potentially harmful. Risk is risk. Nothing ventured, nothing gained. Negligence is the failure to practice due dilligence, not a lack of omniscience.

I'm curious, what corporation allows shareholders to vote on a product recall?

The board of directors can be voted on or petitioned by shareholders. If you're one of the little-guys, you still have a say. In the case of company execs, most are also considerable stake-holders in the company. All that's required to escape liability is due-diligence and reasonable action.

So in your perfect world we'd have millions of tiny companies and no large ones?

Nope. We'd just have more valuable ones, by re-introducing the principle of individual personal responsibility to business ownership. Talk to your average sole-proprietor, and then visit with your average day-trader. Tell me who you think is more genuinely industrious. ;)

"Many hundreds of thousands of people have been killed or maimed in car accidents, through the years. I guess cars should be outlawed and Ford and Buick and Packard ( whoooops...they've long been out of business ) and all of the share holders should be sued. Right?"

Don't be ridiculous. In the case of the tobacco industry, their public denial went on long-after they became aware of scientific evidence that it was highly lethal. Strychnine and rat poison aren't 100% fatal either. Purposely administering them in any dose without knowledge and consent consent is illegal, and considered attempted murder in most jurisdictions. No different than someone putting a dropper-full into your cocktail.

>>> The genesis of labor-laws and consumer protection in this country can largely be traced to late 19th, and early 20th century abuses of power by corporate interests. <<<

It just as likely, was the abuse of corporate interests by power. That is to say, those in power realized they could shakedown corporations with the threat harmful legislation.

The Myth of the Robber Barons explains that there were corporations who were producing value for consumers without fear, fraud or corruption.

There is nothing inherent in corporations that cause rent seeking behavior. The biggest rent seeking groups are, home owners (mortgage deduction), retired people (Social Security, Medicare) and government employees (Teachers etc.). Not one of these groups has a corporate form. Abolishing the corporations will not remove these groups from the trough. In any case, some corporate rent seeking could be seen as defensive rather than offensive, an attempt to protect themselves from other rent seeking groups. When government is large and intrusive people will always band together to seek favor and protection. Abolishing corporations will not change this.

Having worked for both types, I would say that the "abuses" of employees are far worse under proprietor run/small business than any large corporate concern.

The author makes many of the same points as made by the PBS series "Commanding Heights" including the focus on Henando DeSota's work as the distiction beyond free markets alone providing the rising tide that floats all boats. I don't see the tremendous focus on Hayek that the series had, and perhaps his research is parallel, but if he saw that series, he should credit what he drew from it.

"There is nothing inherent in corporations that cause rent seeking behavior."

That's untrue. Why else would they engage in it? "In any case, some corporate rent seeking could be seen as defensive rather than offensive, an attempt to protect themselves from other rent seeking groups."

They have a tit-for-tat relationship with one another. One good collectivist turn deserves another...and on and on and on. They have a mutually abusive relationship, which normally leaves We the People directly in the line of fire, and our country paying the price.

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