A CAPITALIST MANIFESTO A CAPITALIST MANIFESTO Understanding the Market Economy and Defending Liberty By Gary Wolfram DG DUNLAP GODDARD Copy right © 2012, 2013 by Gary Wolfram All rights reserved No part of this book may be reproduced, stored in a retrieval sy stem, scanned, or distributed in any printed or electronic form by any means without permission Please not participate in or encourage piracy of copy righted materials in violation of the author’s rights Purchase only authorized editions Published in the United States of America Manufactured in the United States of America First Edition published in 2012 Second Edition published in 2013 FIRST PRINTING ISBN-13: 978-0-965-60407-9 (trade paperback: acid free) ISBN-13: 978-0-965-60408-6 (ebook) LCCN: 2013747609 A CIP catalogue record for this book is available from the publisher Jacket Design by Maria Diodati Book Design by Tom Grace QUANTITY PURCHASES: Companies, professional groups, clubs and other organizations may qualify for special terms when ordering quantities of this title For information, email Special Sales Department at info@dunlap-goddard.com Economics is too important to be left to the experts —Ludwig von Mises Our reliance is in the love of liberty which God has planted in our bosoms Our defense is in the preservation of the spirit which prizes liberty as the heritage of all men, in all lands, everywhere —Abraham Lincoln CONTENTS I / The Roots of Capitalism II / Two Economists on a Bus III / Demand IV / Supply 23 V / Equilibrium 30 VI / Profit 40 VII / The Market Economy vs Socialism 44 VIII / A Just Political System 49 IX / Individual Liberty 53 X / Characteristics of a Free Society 57 XI / Preserving Freedom: The Constitution 64 XII / Progress 67 XIII / A History of Western Progress 71 XIV / Lessons from History 89 XV / The Role of Government and Macroeconomic Theory 93 XVI / Money and the Role of Government 107 XVII / The Individual, the Market System, and Society 116 XVIII / Business Cycles: The Austrian View 118 Glossary 125 Notes 131 Index 137 Chapter I The Roots of Capitalism are ancient, so ancient in fact that they likely predate even language in the development of civilization Capitalism arose from something so uniquely human and so intuitive that it may well be hard wired into our genetic code—barter Imagine the dawn of man, clans of hunter-gatherers following the herds in search of food A few of our ancestors doubtless possessed greater physical abilities and refined skills in hunting game or locating edible vegetation, and their success won them a greater share of the bounty Even at this primitive stage, other members of the clan would have specialized in the making of tools or the tanning of hides, activities that support the primary goal of feeding the clan Those earning a greater share of the bounty would exchange some of their perishable surplus for a straighter spear or warmer clothing—simple barter transactions based on the perceived value of the goods offered Capitalism evolved as one of the earliest characteristics distinguishing human behavior from that of all other animals; we alone have developed the ability to satisfy our needs and wants through the peaceful exchange of value for value The elegant beauty of capitalism lies in the fact that regardless of how global or interconnected the world becomes economically, it never loses sight of the importance of the individual The genius of capitalism is that it is not a monolithic, centrally planned monstrosity, but rather a fluid system with millions of individual exchanges, resulting in the most efficient allocation of resources The difference between centrally planned economies and free market capitalism is the difference between glaciers and the ocean The debate over government’s role in the economy is a staple of modern politics, with opposing sides arguing for greater or lesser intervention in the marketplace This debate took on a new form in the fall of 2011 with the Occupy Wall Street protest Interviews with these anticapitalism protesters reminded me of a scene in the 1979 Monty Python film Life of Brian that ended with the following exchange between a group of anti-Roman protesters: The roots of capitalism Protester 1: “All right…all right…but apart from better sanitation and medicine and education and irrigation and public health and roads and a fresh water system and baths and public order…what have the Romans done for us?” Protester 2: “Brought peace!” Protester 1: “What?! Oh…Peace, yes…shut up!” In a similar vein, the Occupy Wall Street crowd’s reactionary furor against capitalism apparently blinds them to the myriad benefits of capitalism, including many that have made both their lives and even their protest possible In their demagoguery they conveniently ignore the fact that modern market capitalism has reduced poverty and raised life expectancy more in the past century than did all previous economic systems in the previous five thousand years of recorded human history The Wall Street protesters lack a fundamental understanding of capitalism and how the market system works They appear to think that the cell phones they use, food they eat, hotels and tents they stay in, their sleeping bags and clothes, the cars they drive and the fuel that powers them and all the goods and services they consume every day would exist under a different system, perhaps in more abundance While the hypocrisy of the Occupy Wall Street crowd may be entertaining, the threat they and their like-minded allies pose to civilization is real and rooted in a lack of understanding of the founding American principles of individual liberty and self-governance We are threatened by an education system that fails to instruct our children in how limited government and a market economy lead to liberty and wealth for the masses The reason people in sub-Saharan Africa and rural India live like refugees is not that they don’t work as hard as we do, or are not as smart as we are, but that they live in an economic system that doesn’t allow them to be productive The basis of our economic prosperity is market capitalism, individual liberty and responsibility, and limited government It took six thousand years from the invention of the wheel until we developed the two-wheeled cart In the film The Ten Commandments, we see Moses parting the Red Sea to let the Israelites escape from the Pharaoh’s army, which is riding in two-wheeled carts From the time of Moses to Wyatt Earp we move from two-wheeled carts to four-wheeled carts—buckboards and stagecoaches Yet Wyatt Earp, who is an adult when he participates in the gunfight at the OK Corral, sees the movement from four-wheeled carts to the Model T My grandparents were born before man had ever seen powered flight, yet lived to see a time when you could buy a trip into space The rapid increase in innovation and the wealth of the masses occurred because the West gradually developed the economic system of market capitalism and a compatible political system Capitalism allows for the creation the greatest wealth for the masses, and offers the greatest benefits and opportunities to the poor Capitalism is not a collusion between big business and big government to advance the interests of stockholders and management at the expense of workers—it is rather a system of voluntary exchange based on private property rights, limited government, and individual freedom Voluntary exchange ensures that only businesses that provide what consumers want at the right price will survive, fostering continuous innovation One becomes wealthy in a market system by pleasing others, and the more individuals you please the wealthier you become Each day we go about our business in complete confidence that the rest of society will provide for our basic needs Typically, we not stop to wonder how food gets to our table, clothes into our closet, or how our shelter is provided We not take the time to consider that millions of people will awake in our largest cities tomorrow and there will be the right amount of coffee, dental floss, toilet paper, and an astonishing array of other goods and services sold during the day Yet if we stop to think about it, it is a miracle The market system delivers untold wealth to millions of persons Societies that not have market economies have been forced to concede that only free markets are capable of producing on a scale that affords even the poorest person a standard of living well above what would have been unthinkable just a few hundred years ago Socioeconomic order is determined by the rules under which we play the game This is the political process But as the French political economist Frédéric Bastiat noted, it is not possible to develop a science of politics without understanding how the economic system works Nobel laureate Friedrich Hayek refined this idea by offering that if people not understand and believe in market capitalism, they will ask their government to undertake actions that in the end will make us less wealthy and free This has proven true with the faltering Western social democracies and lies at the root of anticapitalist movements What goes wrong in today’s society too often occurs because people have not thought very much about how the world works They are too busy, think themselves uninformed, or simply aren’t interested However, it does not require more than an ability to read and think critically to make sense of many confusing and contradictory statements; to recognize that what our government does to solve problems often makes things worse and that federal, state, and local officials are often advised that their policies will fail The difference between a good economist and a bad economist, Bastiat observed, is that the bad economist sees the seen, but the good economist sees the unforeseen In other words, the good economist can imagine the unintended consequences of a policy action The goal of this book is to make you a good economist Chapter II Two Economists on a Bus of colleges and universities in Western Massachusetts Years ago, five of these formed a compact to share facilities and to operate a bus service between their campuses The buses are free to all students and are often taken between one of the all-women and one of the all-men colleges on Friday and Saturday evenings One evening, while riding this bus with a colleague, we were talking to two students about an incident that occurred the previous winter We were told that one of the buses could not negotiate the steep hill that separates two colleges with a full load of passengers because of the snow The bus driver needed to have ten students exit the bus in order to make it up the hill My colleague and I failed to sympathize with one of the students telling the story, who had to exit the bus and walk up the hill in a snowstorm Instead, we were sidetracked with how to optimally choose ten persons to exit the bus There are, of course, a number of ways to pick the ten unfortunate students who must walk up the hill Some of those that readily came to mind were: Choose the last ten persons who boarded the bus, a sort of first-come, first-served solution; Choose those who are best dressed for the inclement weather; Choose those who appear to be in the best shape to make the walk up the hill; Choose ten freshmen You can easily envision a number of other options Most would involve some sense of fairness using a rule that has been established in other contexts, such as a seniority solution (#4), or attempting to judge who among the students would be least inconvenienced by having to walk (#3) The problem with solutions like these is that only those students on the bus can know to what extent they may be inconvenienced, or what special circumstances might make blindly following a rule of thumb unfair A solution that came immediately to my colleague and me was to have everyone exit the bus and then buy their way back on This solution has some appealing characteristics First, it does not require the bus driver or anyone in authority to judge which students would be best able to climb the hill Neither does it force anyone to make the value judgment of which solution is most fair Instead, it allows each individual to express his or her value of remaining on the bus Special circumstances can be taken into account, and students can express their intensity of preference by the amount they are willing to pay to get back on the bus Second, there exists a price at which exactly ten persons will be unwilling to pay to get back on the bus If the bus driver sets the price at $2 and all but two want to ride the bus, he can move the price higher If at $4 there are too few riders, he can move the price lower There will be a price at which the quantity of seats available will equal the amount of seats demanded This market-type solution brings up a number of questions First, what might one with the There are a number ... Da is your demand, Db is my demand, and Dm is the market demand The market demand curve Market demand curves have all the characteristics of individual demand curves That is, they slope down and. .. government and a market economy lead to liberty and wealth for the masses The reason people in sub-Saharan Africa and rural India live like refugees is not that they don’t work as hard as we do, or are.. .A CAPITALIST MANIFESTO A CAPITALIST MANIFESTO Understanding the Market Economy and Defending Liberty By Gary Wolfram DG DUNLAP GODDARD Copy right © 2012, 2013 by Gary Wolfram All rights