How Capitalism Will Save Us Read online

  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:

  I began reading not only the economics of Thomas Sowell (our greatest contemporary philosopher) but Milton Friedman, Paul Johnson and Shelby Steele, and a host of conservative writers, and found that I agreed with them: a freemarket understanding of the world meshes more perfectly with my experience than that idealistic vision I called liberalism.17

  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.

  Today, 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:

  Compare Britain—the birthplace of the Industrial Revolution, the nineteenth-century economic superpower on whose empire the sun never set—with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbor.18

  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.19

  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.

  CHAPTER ONE

  “Is Capitalism Moral?”

  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.

  Is capitalism moral? The question has been debated for generations. But it has more relevance today than ever in the wake of the recent financial crisis and recession.

  Capitalism’s critics insist that evidence of its “immorality” is everywhere—from the collapse of Enron in the early 2000s to the “predatory lending” that helped bring on the subprime-mortgage meltdown and subsequent recession to investment adviser Bernard Madoff’s mammoth $50 billion Ponzi scheme that wiped out personal and institutional fortunes around the globe. These and other events, they say, demonstrate that the free market is a winner-take-all jungle, a place where the most ferocious and dishonest triumph, where nice guys finish last, where greed rules and people get ahead by exploiting others.

  No doubt there can be bad behavior in a capitalist system. There is bad behavior in any society. However, when viewed as a system, capitalism is more moral than any and all alternatives.

  Ca
pitalism has produced the world’s highest standard of living by promoting the moral values of cooperation, democracy, and free choice. Nobel Prize-winning economist and noted freemarket advocate Milton Friedman frequently made the point that capitalism’s foremost historic contribution has been its moral influence.

  As we started to discuss in the introduction to this book, capitalism is not about selfishness, but about the needs and wants of others. Former U.S. ambassador, noted theologian, and author Michael Novak makes this point:

  The capitalist economy is not characterized, as Marx thought, by private ownership of the means of production, market exchange, and profit. All these were present in the precapitalist aristocratic age. Rather, the distinctive, defining difference of the capitalist economy is enterprise: the habit of employing human wit to invent new goods and services, and to discover new and better ways to bring them to the broadest possible public.1

  Adam Smith explained in his classic work The Wealth of Nations that the exchange of goods and services in a market takes place only if both sides benefit. Such mutually beneficial exchanges, multiplied by the hundreds of millions, form what Smith referred to as “the invisible hand.” The classic example of the pencil illustrates how these exchanges spontaneously allocate resources in a way that benefits more and more people.

  To see the benefits of the Invisible Hand, one need only look around at the profusion of entrepreneurial businesses in most American communities. The vast array of goods and services generated by our vibrant democratic capitalist economy is unequaled: from 24-hour gyms and copy centers to supermarkets with countless varieties of food to even day spas in airports. The open markets of democratic capitalism meet needs that people don’t even realize they had. Who ever would have imagined, for example, that we would need social networking sites such as Facebook? Or that you’d want to get a massage at an airport? Millions of Americans—and people around the world—now use Facebook and other similar sites every day, and they benefit from an Internet industry that began in the United States.

  Free markets don’t just meet the needs of the majority. If there’s something people want or need, entrepreneurs in an open market will figure out a way to provide it—from size 22 shoes to hard-to-find spare parts for home appliances.

  Since the emergence of democratic capitalism in the last three hundred years, humankind has made more advances—in incomes, standard of living, social mobility, and longevity—than in all the previous centuries put together.

  Those who buy into capitalism’s bad rap fail to see the moral significance of democratic capitalism’s ability to provide for people’s material well-being. And yet, would anyone question the immorality of regimes such as Venezuela, North Korea, and the former Soviet Union, where restrictions on personal and economic freedom have caused citizens to suffer extreme deprivation, food shortages, and even famine?

  Democratic capitalism is moral precisely because it gives people the greatest latitude to meet their needs and desires by serving those of their fellow citizens. Through doing so, it generates broad-based prosperity.

  Many people today have forgotten that, for centuries, China was technologically ahead of Europe in metallurgy and shipbuilding. Both Europe and China, for example, developed the compass. But Europeans were the first to use it in navigating and exploring the earth. Why? Because Europe had a religious belief in the necessity of progress that eventually became a key underpinning of capitalism.

  Milton Friedman wrote that capitalism is about being “free to choose.”2 That’s why free markets have caused people around the world to move in the direction of democracy. Michael Novak has observed: “Every democracy on earth that really does protect the human rights of its individual citizens is based, in fact, upon a free capitalist economy. Empirically speaking, there is not a single contrary case.”3

  Free markets are about people expressing their desires, saying yes or no to a product or service by essentially voting with their money. Economist Walter Williams has written that, in contrast to statedominated societies, capitalism respects “the sanctity of the individual” and is “rooted in voluntary relationships rather than force and coercion.”4

  In a democratic capitalist economy, people interact in networks of cooperation that teach discipline and moral lessons—from the importance of showing up for work and handling money responsibly to the value of teamwork. Americans take capitalism’s moral ethos for granted. Cynics may ridicule chirpy fast-food servers who greet them with “Have a nice day.” But this etiquette reflects an emphasis on meeting the needs of others that is not present in other societies.

  For example, twenty years after the fall of the Soviet Union, visitors to Russia still complain about the sullen customer service. That’s because Russia’s formerly communist society was run by a repressive government that controlled all resources and imposed its agenda on citizens. People had to accept what they got, take it or leave it. The idea of freely meeting people’s needs—and being polite to them—in an open market was largely alien to this culture.

  Russians are only now learning customer-service values from Western businesses like McDonald’s that have managed to gain a foothold in the country’s difficult business environment. The story is often told that when McDonald’s started in Russia twenty years ago, company trainers had to overcome the famously dour attitude of service personnel whose attitude was “We’ve got the hamburgers. The customers don’t.”5

  The value capitalism places on meeting the needs of others doesn’t stop with the marketplace. It has made America a more charitable nation. No citizens give more of their income and time than the American people. According to New York University professor Claire Gaudiani, the U.S. gives twice as much as the next most charitable country—about $300 billion each year. This generosity extends throughout all income levels and is not limited to domestic charities. Americans have sent hundreds of millions of dollars overseas to help those in need after natural disasters ranging from the Burmese cyclone to the Asian Tsunami.

  To fully appreciate the morality of democratic capitalism, it helps to have lived in other societies. Author and human rights activist Ayaan Hirsi Ali was born in Somalia, spent time in Saudi Arabia, and later lived in the Netherlands, where she served as a member of parliament. She now lives in the United States. Having experienced a repressive terror state, a Middle Eastern feudal society, and a European social welfare system, she believes that the moral standards of American free enterprise “are far higher than those of history’s other great powers.”

  Why? Because, she says, democratic capitalism is a “meritocracy” that offers people the greatest opportunity to pursue their own goals, to innovate and excel, both in their business lives and at home in their communities. Not only does Ali believe democratic capitalism to be more moral than the oppressive systems of the former Soviet Union, prereform China, and Saudi Arabia. She writes that it is also superior to the welfare states of Western Europe, whose statist economies “corrode” individual responsibility by encouraging dependency.

  In a freemarket society, where liberty comes first, individuals tend to be more creative and to innovate; in welfare states that assign priority to equality, the natural resourcefulness of human beings is perverted. To become successful, you must learn how to “work the system” rather than how to develop a better product. Risk is avoided, and individual responsibility is thwarted. Although superficially the system may appear fair, it promotes mediocrity and a sense of victimhood, and it discourages those who want to excel.6

  Ali believes that the innovation and open exchange of ideas that take place in democratic capitalism make people more likely to seek remedies to social problems. For example, she says, moral debates about issues such as pollution are conducted mainly in freemarket societies. And in her experience capitalism’s entrepreneurs solve problems more efficiently than the bureaucrats of any government.

  Ali readily acknowledges that our system of democratic capitalism is far from perfect—�
��There are many wealthy, decadent, and vapid people in America.” However, she warns that the quest for moral perfection in a society can itself have immoral consequences:

  In the course of history, the search for perfect societies—that is, the failure to acknowledge human imperfection—almost always ended in one or another form of theocracy, authoritarianism, or violent anarchy. But for those who seek to work with human flaws of every stripe, and to increase the sum total of individual happiness, the free market, combined with political freedom, is the best way.7

  We wholeheartedly agree.

  Q BUT DON’T FREE MARKETS RELY ON GREED?

  A FREE MARKETS RELY ON TRUST.

  Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms—greed for life, for money, knowledge—has marked the upward surge of mankind.”

  That’s how Gordon Gekko, the iconic Wall Street financier in the 1980s film Wall Street, famously—and cynically—summed up a widespread view of the free market economy—a place where all economic transactions, for good and ill, occur because of greed, the darker side of human nature.

  Modeled on the notorious corporate raiders of the 1980s, Gekko was a fictional character. But his belief is shared by numerous individuals who see capitalism as immoral and based on greed.

  Those who equate capitalism with greed will sometimes quote from the eighteenth-century Adam Smith classic The Wealth of Nations: “Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens.”

  True, Adam Smith’s brewer and baker give you dinner for a self-interested reason: they want your money. But self-interest isn’t greed.

  One of the seven deadly sins, greed means taking too much of something that you may not rightfully deserve. That is what Bernard Madoff was accused of doing, and that is why he went to jail. But his behavior, like that of any criminal, is an exception. People don’t get ahead in a democratic capitalist economy by taking what they don’t deserve. They may for a while, but, as the story of Bernard Madoff shows, sooner or later they pay the price.