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The One Minute Case For Capitalism

Capitalism a social system based on the principle of individual rights.

A capitalist society is based on the recognition of individual rights, including property rights. Under capitalism, all property is privately owned, and the state is separated from economics just as it is from religion. Economically, capitalism is a system of laissez-faire, or free markets, where the government plays no part whatsoever in economic decisions.

Capitalism is the only social system compatible with the requirements of man’s life

To pursue the values necessary for his life a society, man requires only one thing from others: freedom of action. Freedom means the ability to act however one pleases as long as one does not infringe on the same and equal freedom of others.   In a political context, freedom means solely the freedom from the initiation of force by other men. Only by the initiation of force can man’s rights be violated. Whether it is by a theft, force, fraud, or government censorship, man’s rights can be violated only by the initiation of force. Because man’s life depends on the use of reason to achieve the values necessary for his life, the initiation of force renders his mind useless as a means of survival. To live, man must achieve the values necessary to sustain his live. To achieve values, man must be free to think and to act on his judgment. To live, man must be free to think. To be free to think, man must be free to act. In the words of Ayn Rand, “Intellectual freedom cannot exist without political freedom; political freedom cannot exist without economic freedom; a free mind and a free market are corollaries.”

Capitalism recognizes the inherent worth of the individual

In a human society – one that recognizes the independence of each man’s mind – each individual is an end in himself.  He owns his life, and no one else’s.  Other men are not his slaves, and he is not theirs.  They have no claim on his life or on the values he creates to maintain his life, and he has no claim on theirs.  In a free society, men can gain immense values from each other by voluntarily trading the values they create to mutual gain.  However, they can only create values if they are free to use their minds to exercise their creativity.  A man is better living off on his own than as a slave to his brothers.  Capitalism recognizes each man as an independent, thinking being.

The individual is an end in himself

Just as no individual has the right to initiate force against anyone, neither does any group of men, in any private or public capacity. It is immoral to initiate force against any individual for any reason. This includes the initiation of force for “the public good.” The “public” is merely a collection of individuals, each possessing the same rights, and each being an end in himself. Any attempt to benefit the “public good” is an immoral attempt to provide a benefit to one group of individuals at the expense of another. In a free society, no individual benefits at the expense of another: men exchange the values they create in voluntary trade to mutual gain. The rule of law in a free society has just one purpose: to protect the rights of the individual.

Capitalism leads to freedom and prosperity

A free, capitalist economy has never existed anywhere in the world. The closest the world came to a free market was during the Industrial Revolution in Great Britain and during the late 19th century in the United States. The Industrial Revolution was a period of unprecedented economic growth and unimaginable improvements in quality of life. In less than two hundred years, the life of most people in the Western world changed from a a short life filled with poverty, plague, and near-constant war to a modern, comfortable existence that  even the kings of medieval Europe couldn’t have imagined.  Since 1820, the leading capitalist nations have increased their wealth sixteen fold, their populations more than four-fold, their productivity twenty-fold.  Annual working hours went from 3,000 to less than 1,700 and life expectancy doubled from thirty to over seventy years. 1

Yet despite the undeniable material superiority of capitalist societies, its critics continue to attack it as inhuman and selfish.  What the world lacks is not evidence of capitalism’s practical superiority, but a moral defense of a man’s right to his own life.

Reference

  1. Angus Maddison. Phases of Capitalist Development, p4 (1982)

Further Reading

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The One Minute Case Against Interventionism

Free markets created the modern world

A free, capitalist economy has never existed anywhere in the world. The closest the world came to a free market was during the Industrial Revolution in Great Britain and during the late 19th century in the United States. The Industrial Revolution was a period of unprecedented economic growth and unimaginable improvements in quality of life. In less than two hundred years, the life of most people in the Western world changed from a a short life filled with poverty, plague, and near-constant war to a modern life that even the kings of medieval Europe couldn’t have imagined.1 This miracle was made possible by the philosophical and political ideals formed during the Enlightenment, and the freedoms demanded and fought by the philosophers, statesmen, and entrepreneurs of Western civilization. Yet the Enlightenment also laid the sees for the collectivist and materialist ideology behind socialism, which struck the first major blow against capitalism with the Sherman Antitrust Act of 1890.

Capitalism declined with the rise of collectivism in the 20th century

The assault on free markets was intensified by Herbert Hoover, who imposed unprecendented regulations of Wall Street to eliminate “vicious speculation”, regulated labor markets, and created government works programs.2 FDR inherited these programs and created numerous government agencies which made the financial industry is the single most regulated industry in the economy and turned an economic recession into the Great Depression.3 The Federal Reserve was supposed to stabilize the currency, The FDIC was supposed to prevent bank runs, the SEC was supposed to be stop shady investments, Fannie May and Freddie Mac were supposed to make homes affordable to everyone. Yet also these restrictions on capitalism had the opposite effect of their intended purpose: the dollar has lost 95% of it’s value, the SEC is the main cause of corruption in Wall Street4 5, and housing prices are unstable and highly inflated.

Interventionism is a vicious cycle of wealth destruction

Economic interventionism, also known as statism, exists in every mixed economy – a society in which the government interferes with market economy. In a interventionist economy, the state takes wealth away from from some enterprises and transfers it to other organizations or individuals. Whether it does so through taxation, corporate welfare and bailouts, monopoly privileges, wage and price controls, trade restrictions and tariffs, currency inflation, antitrust regulations, state-ownership of businesses, or “make work” programs, the effect is the same: to punish virtue and competence and reward vice and waste.

All the values created by a business are possible only because its customers value them sufficiently to pay for them. To the extent that any individuals voluntarily exchange value for value without harming anyone else, their actions benefit themselves and harm no one. However, in an interventionist state, the product of those individuals is seized and transferred to those who did not earn it. This is a vicious cycle, because it rewards those in the public and private sector who manipulate the state to seize unearned benefits and punishes the productive individuals who focus on creating values and create products and services that consumers want.

The more the looters seize, the fewer wealth is available to producers. The more productive businesses fail or move elsewhere, the heaver the burden is on those who remain. The more money is taken from the producers, the greater the incentive for the lazy to skim from their labor. When the burden of stealing sufficient wealth outright becomes too unpopular, politicians resort to stealing it by printing money, until the currency of the country becomes worthless, trade becomes impossible, and productive activity grounds to a halt. Inevitably, it is the executives of the productive businesses who politicians blame for the crisis their own policies created.

Entrepreneurs and CEO’s are the unrecognized heroes of the modern world

Capitalism cannot guarantee that all our needs will be provided for – no system can turn mere wishes into reality. But it does give entrepreneurs the incentive to compete to provide the best possible service they can. The brief flowering of freedom during the 19th century created the wealthy, industrial society in which we now live in – but it is being destroyed from within by the collectivist ideology of interventionism. When political connections rather than consumers decide who is allowed what values should be created, entrepreneurs have no incentive to improve their products or to try bold new techniques, and instead spend their resources trying to bribe politicians.  Politicians can force prices to be artificially low, but they cannot lower costs or substitute for the creative risk taking that drives the economy – they can only drive the remaining wealth creators out of existence.

References

  1. The Capitalist Manifesto, The Industrial Revolution Brings Advance by Andrew Bernstein, 2005
  2. Hoover’s Attack on Laissez-Faire by Murray Rothbard, 1963
  3. Robert Higgs: How FDR Made the Depression Worse
  4. Robert P. Murphy: The SEC Makes Wall Street More Fraudulent
  5. See the The One Minute Case against the SEC

Further Reading

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The One Minute Case against the SEC

Markets regulate themselves

Long before the existence of the Securities and Exchange Commission, medieval guilds and trading houses established common standards, accreditation agencies, and accounting rules that have evolved to the present day. The system of English common law has been evolving since the 12th century 1, and the accounting system used today was codified in 1495.2.

Numerous non-governmental bodies have continued to develop accounting rules and set auditing standards for public organizations.3 It is the American Institute of Certified Public Accountants, not the government, which sets ethical standards for the profession and U.S. auditing standards for audits of private companies; federal, state and local governments; and non-profit organizations.

Voluntary oversight organizations are embraced by their participants because they provide executives with a value – they allow them to discover waste and fraud and advertise honesty to partners and customers. Unlike government regulatory bodies, they are flexible, efficient, and competitive. When the compliance costs of accounting rules exceed their value, or when lax controls lead to unethical or risky behavior, the markets embrace new standards. The Securities Act of 1933 and the Securities Exchange Act of 1934 did not begin the process of regulating markets, but nationalized much of the auditing market and turned it over to politicians and bureaucrats.

Regulations hinder competition and raise costs for investors

The SEC subsidizes politically connected corporations at the expense of smaller firms, hindering innovation and encouraging corruption. Established corporations lobby the government to create burdensome regulations that smaller investment funds and markets cannot afford, thus creating coercive monopolies that raise profits a few firms at the expense of investors.4 Government bodies like the SEC, the MSRB, the FTC, the USITC, the Fed, the Treasury, the IRS, the OTS, the MSRB, and the state attorney’s offices issue hundreds of thousands of laws, rules, opinions, bulletins, comment letters and threats and require numerous reports, statements, forms, notices, and approvals that investment firms and public companies must obey. 5 This creates an artificial scarcity of investment products that benefits large corporations and discourages savings and investment. Smaller companies cannot afford to raise money by issuing stock, and investors are forced to choose between public but expensive mutual funds and secretive and risky hedge funds with entry fees that only the rich can afford.

The SEC creates corruption

Rather than making Wall Street honest, regulatory agencies are the primary instruments of fraud and corruption on Wall Street. Politicians who control regulatory agencies have an incentive to use their power to extract benefits for themselves and their constituencies, rather than to keep markets honest and efficient. Power hungry politicians like Eliot Spitzer use the power of the SEC to go on crusades again innocent businessmen 6, and thus force regulatory bodies to hide the evidence of real corruption.7 By blocking outsiders from seeing its records, the agency is makes it harder for investors to discover real fraud.8

The case of Bernie Madoff is a typical case study in how the SEC encourages fraud. Investors figured out that Madoff couldn’t possibly make the profits he claimed, and have been writing the SEC since 1999, urging them to put a stop to Madoff’s Ponzi scheme. However, Madoff used his close family ties to the SEC, and was instrumental in founding key regulatory bodies – and then nominated his family members to serve on their boards. When skeptical investors inquired about the irregularities in his fund, Madoff told them that the SEC had already investigated and cleared him over a period of three years.

While Madoff stole $50 billion dollars under their noses, the SEC’s budget surpassed $900 million dollars, and grew at record rates during the two Bush administrations. In response to this outrageous case of nepotism and corruption, the government will likely increase its budget and staff once again.9

The SEC makes markets more volatile and risky

By banning crucial market functions like short selling10 and “insider trading” 11 the SEC hinders the market’s ability to react to new information, and makes markets more unpredictable and expensive.

The SEC cannot even oversee itself

While the SEC is charged with enforcing regulations like Sarbanes-Oxley, it consistently fails to control and report on its own processes and receives failing grades from the government’s own auditing body.12 This is not surprising – like any socialist organization, it has no incentive to be efficient or responsible to stockholders.

The chief source of fraud and corruption in the United States is not Wall Street, but Washington D.C.

Notes

  1. Medieval English common law: foundations for 21st century legal systems
  2. Wikipedia: The history of accountancy
  3. Self-Regulation in Today’s Securities Markets: Outdated System or Work in Progress?
    CFA Institute Centre Publications (September 2007)
  4. See How the SEC Subsidizes Stocks by Jeff Scott and SEC: Protecting Investors Or Uncompetitive Companies?
  5. (There are so many regulations that the department charged with publishing them can only report that “The Office of the Federal Register Library now contains more than 550 cubic feet .. which has the force and effect of law.” – History of the Federal Register
  6. The Cost of the “Ethical” Assault on Honest Businessmen by Alex Epstein and Yaron Brook (Silicon Valley Biz Ink, July 8, 2003)
  7. Deafened by the S.E.C.’s Silence, He Sued
  8. The S.E.C. Prevents Investors From Discovering Accounting Fraud
  9. The SEC Makes Wall Street More Fraudulent by Robert Murphy
  10. See the One Minute Case for Stock Shorting
  11. See Inside Insider Trading and Should Insider Trading Be Legal? by Yaron Brook
  12. GAO Finds Material Weakness in SEC’s Controls

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The One Minute Case for the Austrian Business Cycle Theory

The Austrian Business Cycle Theory was developed by the economist Ludwig von Mises to explain the phenomenon of business cycles. It provides crucial insight for understanding the cause of cyclical boom/bust cycles and their connection the government’s manipulation of the economy. To understand the Austrian Business Cycle Theory, an analogy is helpful:

Imagine an economy with just one actor: Robinson Crusoe on an island. Crusoe loves fish, so he spends half of each day fishing so he can enjoy fish in the evenings. Additionally, Crusoe spends Friday mornings maintaining his fishing dinghy and nets. In order to have fish on Friday, he must fish for an extra hour every other day of the week. In economic terms, Crusoe has a savings rate of one hour per day. His savings rate is also his investment rate, or the percentage of present income he sets aside to maintain or increase future consumption.1

Crusoe doesn’t have a fridge, so he preserves his catch by throwing it in a small, dark pond. He can’t see how many fish are in the pond, so he keeps a stack of small rocks near it. Every time he adds a fish, he adds a rock, and every time he eats one, he removes one. The rocks are his money supply.

Suppose that Crusoe shares the island with some mischievous monkeys, who see Crusoe adding rocks to his pile. They decide to imitate him, so every time Crusoe ads a rock, they sneak in and add one as well. The monkeys are inflating the money supply by injecting currency into Crusoe’s investment fund.2

One day, Crusoe suddenly notices that his “savings rate” of fish is double the usual. He decides to compensate by eating some of the fish he catches during the “savings hour.” This is the consumption-side of the boom phase of the business cycle. Crusoe also decides to take some extra time each day to start building himself a new hut. This is the investment-side of the boom phase of the business cycle.

Crusoe now believes that the cost of saving fish is half the usual, while in fact his savings rate is too low for the investments he is planning.

Before long, Friday comes around. When it comes time to eat his midday meal, Crusoe suddenly realizes that he’s out of fish – despite having a surplus of rocks. He’s exhausted his investment capital because the additional currency snuck into his money supply did not represent a real increase in his productivity or savings rate. He doesn’t have the capital (fish) to maintain his previous consumption rate, much less increase it. He is forced to cut his investment rate (he must spend some of his Friday fishing) just to have some fish for Friday’s dinner. He must also abandon his incomplete hut because he does not have the time to finish it. The abandoned hut is an extravagant expenditure that represents a loss of capital.3 This is the bust phase of the business cycle.

To review, here’s the overall impact of the monkey’s trickery: Sunday-Friday, Crusoe catches the same number of fish, but consumes more, and therefore saves less. That’s the boom period. Friday, Crusoe consumes less fish, and spends less time for maintaining his nets (capital). Some of his investment/consumption time must now be spent in production. That’s the bust period. If Crusoe’s initial savings rate allows him to just break even each week 4, his nets will gradually get worse and worse and he will eventually go hungry.5

Notes

  1. Crusoe prefers to enjoy his fish sooner rather than later, but he is willing to put aside some of his catch to get more fish later. The discount he gives to eating a fish Friday is his time preference, or his originary interest rate. (To that, he adds the risk that the fish will spoil by Friday to get the market or “real” interest rate.)
  2. As long as the monkeys keep contributing one stone for every fish, Crusoe can account for their trickery. But if the monkeys are unpredictable, it will be impossible for Crusoe to set the proper savings rate.In the real world, the originary interest rate reflects the average time preference of all savers. If someone starts monkeying around with the interest rates, it becomes impossible for investors (or the monkeys at the Fed) to know what the real rate of savings is even if they know that the rate is being manipulated.
  3. That abandoned hut represents investments which exceed the ability of the actual savings rate to complete. The resources it takes to build compete with worthwhile investments (such as repairing the fishing nets) by raising the prices for all capital. Ridiculous business models and sky-high salaries during the dot-com boom, as well as over-extended sub-prime mortgages likewise compete with legitimate business models, salaries, and mortgages. Manipulating the money supply makes it difficult to distinguish bad investments from good ones, so no one can escape the inevitable crunch.
  4. That is, zero net profit, an equilibrium rate of savings, or “the evenly rotating economy” in Mises’ terminology.
  5. Suppose Crusoe decides to ignore his hunger and work on his nets all Friday. In other words, he trades current production (and therefore consumption) for higher future consumption (that is, economic growth). If he does so voluntarily, there’s nothing wrong with that. But there’s nothing inherently more desirable or efficient in spending some of one’s time starving just to increase future production (that is, in valuing economic growth over present consumption.) Note that the longer Crusoe delays the shift back to production, the more severe the miss-allocation of resources (and his hunger) becomes. The monkey’s trickery does not actually make Crusoe to become a better saver – he is more likely to start saving less because of uncertainty over the future.

Further reading

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The One Minute Case For Unrestrained Profit

Profit is the engine of production

Restraining profit by taxing it or limiting it has the effect of limiting production. Restraining profit means an economy will produce fewer goods, of less variety, and at higher price. Innovation suffers. As a result, to the extent profits are restrained, all consumers suffer. Profit drives production in several ways:

Profit is the incentive for production

The profit motive is the supreme motivator of productive business activity. The creativity of scientists, the entrepreneurship of businessmen, and the resourcefulness of financiers are all motivated, in whole or part, by the pursuit of profits.

Profit provides the means of production

Profits and savings are the ultimate source of the investment capital (money) that finances construction of factories, research laboratories, distribution centers, ships, warehouses, and all of the equipment that is used to invent, produce and distribute the goods that we consume. To restrict profits is to deny a source of capital necessary for production.

Profit directs capital to the production of goods most urgently wanted

The highest profits are earned by the businessmen who can supply the goods most wanted by customers. iPods, portable generators after a hurricane, personal computers, fashionable clothes, and all of the goods consumers want most, are made by those who make the greatest profits. The profitability of an enterprise is the ultimate measuring stick of how well it has satisfied its customers. A money losing business is either making products consumers do not want or charging too much for them.

Profits result in everyone’s gain

Profits do not come from the net loss of anyone. On the contrary, profit results from the creation of goods that people voluntarily buy in the marketplace. A businessman who makes a huge profit makes things that are good enough that many people want them and willingly buy them from him.

Profit is property

Profits are the property of the shareholders and other investor/owners of the business. Restricting or taxing profits is not just impractical, but is theft.

Honest profits are an essential feature of capitalism

A profit honestly earned in a capitalist society is beneficial and good for all. Profits must be distinguished from the money a businessman might get because of special governmental favors, such as tariffs, regulations or subsidies. These interventions are contrary to capitalism and allow some businessmen to gain at other people’s expense. Their gain is not profits, but a form of theft.

Further reading

  • Capitalism: The Unknown Ideal by Ayn Rand
  • Atlas Shrugged by Ayn Rand
  • “Profit and Loss” by Ludwig von Mises

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