How Capitalism Will Save Us (5 page)

Real World economics is beyond partisan politics. Presidents and politicians on both sides of the political spectrum have shown both understanding and ignorance of Real World economic principles. John F. Kennedy’s tax cuts ignited the booming economy of the 1960s. Kennedy also understood the need for a strong dollar, declaring, “The dollar should be as good as gold.”

Unfortunately, Richard Nixon didn’t feel the same way. Nixon’s abandonment of the gold standard, combined with his wage and price controls, ushered in the stagflation of the 1970s. He failed to heed the market-based policies that have been associated with his party. Bill Clinton also defied political stereotypes—with better results. Unlike his party, he believed in reducing international trade barriers. He successfully
enacted the North American Free Trade Agreement. And he understood the dangers inherent in a weak dollar.

On the negative side, like Jimmy Carter and George W. Bush, Clinton pushed banks to make uneconomical mortgages. When he first took office, he raised income taxes, nearly aborting the recovery that was under way. He made amends for that error early in his second term, supporting a big capital gains tax cut that helped produce a vibrant economy and stock market.

Clinton’s successor, George W. Bush, got it right on taxes with his 2003 rate cuts, which convincingly pulled the United States out of the 2000–2001 recession. But his weak-dollar policy and other mistakes made in 2008 produced the worst economic disaster since the 1930s.

Ronald Reagan slashed income-tax rates and, working in tandem with Paul Volcker at the Federal Reserve, killed the devastating inflation that had pockmarked the 1970s. Together these achievements—not to mention winning the cold war—set off a great, long boom in America and the world that didn’t end until the crash of 2007.

R
eal World economics isn’t about “left” or “right.” It’s based on tried-and-true principles that offer the best explanations of how the economy—and daily life—really works.

Ironically, as many in the U.S. question capitalism, nations that have been held up as models of “Third Way” democratic socialism are increasingly embracing Real World free market principles. Prime Minister Fredrik Reinfeldt of Sweden openly blames high taxes and welfare state policies for the problems of his nation’s economy. As he noted in a speech in 2008, his country’s much-vaunted affluence was built before the nation turned to socialism.

Thanks to Swedish socialism, Reinfeldt said, the wealth that “took a hundred years to build was almost dismantled in twenty-five years.” As he recounts, “Growth fell off. Unemployment rose. The quality of welfare declined.”

Between the 1970s and the 1990s, Sweden fell from fourth to eighteenth place among nations belonging to the Organisation for Economic Co-operation and Development (OECD). As we discuss in
chapter 2
, not only Sweden but other Nordic nations have a lower material standard of living than many people think, with dramatically less disposable income and fewer basic necessities. Reinfeldt’s government, elected in 2006, is working to turn things around with initiatives like tax cuts, smaller government, and privatization—Real World pro-market policies.

Whole Foods founder John Mackey confesses he once thought that “business and capitalism were based on exploitation: exploitation of consumers, society and the environment.” At one time an ardent believer in capitalism’s bad rap, Mackey admits, “I believed that ‘profit’ was a necessary evil at best, and certainly not a desirable goal for society as a whole.” However, when he founded Whole Foods, his view of the world began to evolve.

Mackey’s transformation was helped along by exposure to freemarket thinkers: “I stumbled into reading Milton Friedman, Friedrich Hayek, Ludwig von Mises, Ayn Rand—I read all of them. I said to myself, ‘Wow, this all makes sense. This is how the world really works. This is incredible.’ ”
¹⁶

All of this caused him to conclude: “Business, working through free markets, is possibly the greatest force for good on the planet today. When executed well, business increases prosperity, ends poverty, improves
the quality of life, and promotes the health and longevity of the world population at an unprecedented rate.… How many people in our greater society comprehend [this]?”

The noted playwright David Mamet attracted media attention when he wrote about a similar awakening:

Both Mackey and Mamet realized that, as we’ll show in this book, freemarket principles are, for better or worse, the best description of how people go about their business each day and how markets actually function in the Real World.

T
oday, Americans are contemplating entering a new age of unprecedented government control of the economy—and their lives. Politicians have sold it as the answer to today’s searing recession. But government micromanagement of an economy has seldom if ever succeeded in the Real World. As we show in this book, government solutions may benefit certain narrow sectors and interests. But they end up shortchanging the larger society—reducing prosperity and living standards and creating different inequities and “unfairness.”

In every single case, democratic capitalism is still the answer: it provides economic and social solutions that, while not always perfect, are ultimately better for society than the command-and-control economies advocated by proponents of “big government.”

Traditional economists will tell you that economics is fundamentally about scarcity—how people go about allocating scarce resources. This idea does not describe what takes place in the Real World economy, which routinely turns scarcity into abundance.

Consider Henry Ford. He took the car, then a scarce commodity and exotic toy for the rich, and through his innovation, the assembly line, transformed it into something that could be mass-produced and affordable for working people. In other words, he turned scarcity into abundance.
Not only did Ford and his company prosper, but so did the millions of automobile buyers who benefited from using the car in their personal and professional lives.

People who don’t like capitalism and, surprisingly, many economists, fail to fully appreciate the power of innovation, an intangible, to drive—indeed to transform—the economy.

No one, for example, anticipated that automobiles and trucks would largely supplant railroads. Or that the Internet would transform the news business. Conventional economic wisdom, the prognostications and solutions of “experts,” too often assume fixed conditions—which is why they are so often wrong.

Giving people the maximum latitude to meet their own desires and the desires of others through innovation is a more potent wealth creator than a cornucopia of natural resources. This freedom is the reason that Hong Kong—a small territory with few national resources—became an economic powerhouse. The late economist and Nobel Prize winner Milton Friedman once observed:

University of Illinois business professor Andrew Morriss recounts in an excellent article in the magazine
The Freeman
that no one thought much of Hong Kong’s prospects when the British acquired it as part of a settlement of a minor war in 1842. Shanghai, on the mainland, was a better natural port. Hong Kong seemed of little consequence, and so “Britain did relatively little with its new colony, beyond establishing public order and extending the rule of law.” Hong Kong’s economic freedom, however, made it a magnet for entrepreneurs from the repressive mainland. In the twentieth century, the tiny colony ended up outstripping its onetime “mother country”—per capita income went from 28 percent of Britain’s in 1960 to 137 percent of Britain’s in the late 1990s, when the colony was formally turned over to China.
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Neighboring mainland China was far larger and more resource rich. But its centrally controlled economy lagged for decades under communist rule until it finally began to liberalize.

This book will illuminate a fundamental Real World Lesson:
the needs and wants of society are most effectively met when individuals are free to harness their powers of creativity to provide the goods and services most desired by others
.

Some may say that this sounds like Adam Smith’s classic notion of the power of self-interest to drive people and markets. But saying that the free market is solely about self-interest is a woefully blinkered perception. Self-interest alone did not invent the automobile, the Internet, the personal computer, the cell phone, or countless other wealth-creating inventions. These and other innovations are the product of the brilliance and creativity of individuals—and an economic environment that gives these people sufficient freedom to take risks and pursue their visions.

Far from being a Madoff economy, democratic capitalism is an iPod economy, a dynamic marketplace where people seek to get ahead by finding new ways to meet the wants of society through the constant process of trial and error. Yes there are greedy individuals, and there is destruction that takes place as well as creation. But through this process of innovation and growth, the standard of living is raised and wealth is created. More people live better. Society advances. Indeed, it is no accident that few revolutionary inventions have originated in authoritarian nations. As we note in
chapter 1
, when new technologies do emerge, such as in China centuries ago, the stranglehold of government bureaucracy prevents would-be entrepreneurs from bringing them to society and maximizing their potential.

This book will explore and explain these and other facts of economic life in the Real World. Many of the ideas we discuss are illustrated with examples drawn from the financial crisis and other recent events. These stories will continue to develop. But the principles do not change. We will show that, throughout history, capitalism has consistently disproved the doubters—and is the most radically constructive force in American life.

Forbes
magazine founder B. C. Forbes, a near-penniless Scottish immigrant, came to this country in the early part of the last century. He began every set of editorials in
Forbes
with a phrase from Proverbs—“With all thy getting, get understanding.” We hope this book promotes a true understanding of our economic system—with answers that will motivate you to move ahead and fulfill your dreams and aspirations.

THE RAP
Capitalism is an amoral, dog-eat-dog system founded on greed and the survival of the fittest.

THE REALITY
Capitalism is the world’s most humane economic system, promoting the democratic values of a free and open society: hard work, cooperation, generosity, charity, and devotion to the rule of law.