A belief in the free market means a belief that people have an innate right to the fruits of their endeavors, and the right to dispose of the fruit the way they see fit, as long as other people don’t get pasted in the face with a rotten peach or something.
There are people who don’t believe this. Some of these people are just bad. They steal. Some of these people are “nationalistic” and think it’s okay to take things from other people if they live more than a peach toss away or speak another language or have a different religion or look funny. And the kings, emperors, and so forth who ruled mankind during most of history were under the impression that everything belongs to kings, emperors, and so forth.
Now that the kings and emperors have been shot or reduced to pathetic ceremonial posts, the most common reason given for not believing in economic liberty is that the free market is unfair. Socialists, Social Democrats, American liberals, and all other kinds of economic levelers think that unconstrained industry, agriculture, and commerce lead to the exploitation of people who aren’t very good at these things. A little bit of immoral wealth and a great deal of unconscionable poverty is supposedly thereby created.
It was Adam Smith in The Wealth of Nations (published with happy coincidence in 1776) who originally argued that a free market is good for everybody. Smith seems to have been the first person to realize that all voluntary exchanges increase prosperity. Wealth is created by any swap. It may seem like an even trade, but each trader gives up something he values less in order to receive something he values more. Hence the wealth of both traders grows. When Neolithic spear makers did business with Neolithic basket weavers, the spear makers were able to carry things around in a manner more convenient than skewering them on spear points, and the basket weavers were able to kill mastodons by a method more efficient than swatting them with baskets.
The free-market outcome benefits all. It’s moral. And the beautiful thing about this morality is that we don’t have to be good to achieve it. In the most, perhaps only, famous passage from an economics book, Adam Smith states, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Smith saw that a man’s selfish concern with his own well-being is a desirable, indeed, a splendid thing for society. “[He] intends only his own gain,” wrote Smith, “and he is in this…led by an invisible hand to promote an end which was no part of his intention.” That end is the end this book is about: economic progress.
The general morality of the free market, however, does not answer the specific objection of unfairness. Economic liberty leads to differences in wealth. And the differences are enormous. The “wealth gap” is the subject of a critical debate about economics. The perception of unfairness is the reason that enormous numbers of the world’s decent and well-meaning people, in fact the majority of them, do not rush to embrace the free market in its totality. Complete economic liberty would mean a system like Hong Kong’s under John Cowperthwaite with no barriers to trade or capital flow, and no barriers to labor flow, either; no check on immigration, no minimum wage, no cost controls, and no attempt to create a fair society. This is a daunting prospect, and it’s not just the Swedes and Fidel Castro who are daunted by it.
Socialists and capitalists naturally take opposing sides on the question of how economically fair life should be. But so do various political parties which claim to be pro-market. So do theologians and philosophers. And so do ordinary people when they’re voting for school-bond issues or deciding how much to cheat on their taxes.
Fairness is a potent emotional issue, but how is fairness to be delivered? It’s hard to build a political structure that provides economic fairness. The map is full of failed attempts, and so is this book. When a government controls both the economic power of individuals and the coercive power of the state, we get, at best, Shanghai. A businessman finds that one of his stockholders has tanks, artillery, and jet fighter planes. This violates a fundamental rule of happy living: Never let the people with all the money and the people with all the guns be the same people.
There is another difficulty with political control of the economy which keeps even the best-behaved governments from using resources well. This problem was explained by the economists Milton and Rose Friedman in their book, Free to Choose. The Friedmans argued that there are only four ways to spend money:
Spend your money on yourself.
Spend your money on other people.
Spend other people’s money on yourself.
Spend other people’s money on other people.
If you spend your money on yourself, you look for the best value at the best price—knockoff Pings on sale at Golf-Fore-Less. If you spend your money on other people, you still worry about price, but you may not know—or care—what the other people want. So your brother-in-law gets a Deepak Chopra book for Christmas. If you spend other people’s money on yourself, it’s hard to resist coming home with real Pings, a new leather bag, orange pants with little niblicks on them, and a pair of Foot-Joy spikes. And if you spend other people’s money on other people, any damn thing will do and the hell with what it costs. Almost all government spending falls into category four. This is how the grateful residents of Ukraine got Chernobyl.
Also, if fairness is important, what is really fair? We may say something like, “People have a right to food, a right to housing, and a right to a good job for decent pay.” But from an economist’s perspective, all those rights involve making finite goods meet infinite wants. Unless the fair society generates tremendous economic growth—which societies that put fairness first have trouble doing—the goods will come from redistribution. Try rephrasing the rights statement thus: “People have a right to my food, a right to my housing, and a right to my good job for my decent pay.”
Accepting the free market allows us to avoid the political abuse and financial mismanagement inherent in trying to design an economy that’s fair. It also allows us to see that economies can’t be designed. Economics is the measurement of how human nature affects the material world. The market is “heartless.” So are clocks and yardsticks. Saying that economic problems are the result of the free market’s failure is like gaining twenty pounds and calling the bathroom scale a bum.
Adam Smith recognized that markets are self-organizing. Man has a “general disposition to truck, barter, and exchange,” wrote Smith. If people are protected from coercion by other people, and from coercion by that agglomeration of other people known as the state, human brains and greed create economic growth. “The strength of the mastiff is not in the least supported either by the swiftness of the greyhound, or by the sagacity of the spaniel,” wrote Smith. “Among men, on the contrary, the most dissimilar geniuses are of use to one another.”
I had thought that economic problems were the result of ignorance about economics. I was wrong again. I asked a friend, who’s knowledgeable in the field: “Why is the concept of the ‘invisible hand’ so difficult to comprehend?” He said, “It’s invisible.” The hardest thing to understand about economics is that it doesn’t need to be understood. My beatnik friends and I, when we were in college, were perfectly justified in expending our intellectual energy on love and death instead of money.
But there was one thing that we did need to learn. And still do. And it’s a piece of knowledge that seems to contradict psychology, life experience, and the dictates of conscience: Economics is not zero sum. There is no fixed amount of wealth. That is, if you have too many slices of pizza, I don’t have to eat the box. Your money does not cause my poverty. Refusal to believe this is at the bottom of most bad economic thinking.
True, at any given moment, there is only so much wealth to go around. But wealth is based on productivity. Without productivity, there wouldn’t be any economics, or any economic thinking, good or bad, or any pizza, or anything else. We would sit around and stare at rocks, and maybe later have some for dinner.
Wealth is based on productivity, and p
roductivity is expandable. In fact, productivity is fabulously expandable, as Angus Maddison has shown in Monitoring the World Economy. Yet a person who is worried about fairness can look at Maddison’s figures and say that they are just averages. Per-capita GDP does not show us who actually got the cash. The worrier about fairness can recite the old saw: “The rich get richer and the poor…”
“Get entertained by People magazine stories about divorces among the rich.” That is not how the worrier was going to finish his sentence.
“Get lower mortgage rates because banks have more money to lend.” That is not it, either. “Get better jobs because there’s more capital to be invested in businesses.” No, the cliché is, “The rich get richer, and the poor get poorer.”
Except there is no evidence of this in recent history. Per-capita GDP is a tricky figure and doesn’t tell us much about the well-being of individual people. But there are other statistics that don’t present the same problems of averaging. Life-expectancy and infant-mortality rates do tell us how things are going for ordinary folks. No matter how rich a nation’s elite, its members aren’t going to live to be 250 and wildly skew the numbers. And a country can’t fake a low infant-mortality rate by getting a few rich babies to live while letting all the poor babies die.
The United Nations study World Population Prospects: 1996 Revision contains historical statistics on life expectancy and infant mortality. Figures are given for Most Developed Regions, Less Developed Regions, and Least Developed Regions. The last being places that are truly poor, such as Tanzania. In the early 1950s the richest countries had an average infant-mortality rate of 58 deaths per 1,000 live births. By the early 1990s the average was down to 11. During the same period the infant-mortality rate in the poorest countries dropped from an average of 194 deaths per 1,000 to 109 per 1,000. Infant-mortality rates declined in both rich and poor countries, and so did the gap between those rates. A difference of 136 deaths per 1,000 had diminished to a difference of 109 deaths forty years later. This is still too many dead babies (and it’s hard to imagine a number of dead babies that wouldn’t be too many, unless the fair-minded worrier is also a zealous pro-choice advocate). But infant-mortality rates give us some hopeful information about world economic growth. Yes, the rich are getting richer, but the poor aren’t becoming worse off. They’re becoming parents.
Life expectancy tells the same story. In the early 1950s, people in rich countries lived, on average, 66.5 years. By the early 1990s they were living 74.2 years. In the poorest countries, average lifespans increased from 35.5 years to 49.7 years (which, somewhat unnervingly, was my exact age when I wrote that sentence, and I was glad I didn’t live in Tanzania and had to die that night). Anyway, the difference in life expectancy between the world’s rich and poor has decreased by 6.5 years. The rich are getting richer. The poor are getting richer. And we’re all getting older.
So if wealth is not a worldwide round-robin of purse snatching, and if the thing that makes you rich doesn’t make me poor, why should we care about fairness at all? We shouldn’t.
Fairness is a good thing in marriage and at the day-care center. It’s a nice little domestic virtue. But a liking for fairness is not that noble a sentiment. Fairness doesn’t rank with charity, love, duty, or self-sacrifice. And there’s always a tinge of self-seeking in making sure that things are fair. Don’t you go trying to get one up on me.
As a foundation for a political system, fairness may be no virtue at all. The Old Testament is clear on this point. The Bible might seem an odd place to be doing economic research, especially by someone who goes to church about once a year, and only then because that’s when my wife says the Easter Bunny comes. However, I have been thinking—in socioeconomic terms—about the Tenth Commandment.
The first nine Commandments concern theological principles and social law: Thou shalt not make graven images, steal, kill, etc. Fair enough. But then there’s the Tenth Commandment: “Thou shalt not covet thy neighbor’s house, thou shalt not covet thy neighbor’s wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor anything that is thy neighbor’s.”
Here are God’s basic rules about how we should live, a very brief list of sacred obligations and solemn moral precepts, and right at the end of it is, “Don’t envy your buddy’s cow.”
What is that doing in there? Why would God, with just ten things to tell Moses, choose, as one of them, jealousy about the livestock next door? And yet, think about how important to the well-being of a community this Commandment is. If you want a donkey, if you want a pot roast, if you want a cleaning lady, don’t bitch about what the people across the street have. Go get your own.
The Tenth Commandment sends a message to socialists, to egalitarians, to people obsessed with fairness, to American presidential candidates in the year 2000—to everyone who believes that wealth should be redistributed. And the message is clear and concise: Go to hell.
If we want the whole world to be rich, we need to start loving wealth. In the difference between poverty and plenty, the problem is the poverty, not the difference. Wealth is good.
You know this about your own wealth. If you got rich, it would be a great thing. You’d improve your life. You’d improve your family’s life. You’d purchase education, travel, knowledge about the world. You’d invest in worthwhile things. You’d give money to noble causes. You’d help your friends and neighbors. Your life would be better if you got rich. The lives of the people around you would be better. Your wealth is good. So why isn’t everybody else’s wealth good?
Wealth is good when a lot of people have it. It’s good when a few people have it. This is because money is a tool, nothing more. You can’t eat or drink money, or wear it very comfortably as underwear. And wealth—an accumulation of money—is a bunch of tools.
Tools can be used to do harm. You can break into a house by driving a forklift through a window. You can hit somebody over the head with a hydroelectric turbine. Tools are still good. When a carpenter has a lot of tools, we don’t say to him, “You have too many. You should give some of your hammers, saws, screws, and nails to the guy who’s cooking omelettes.”
Making money through hard work and wise investment is a fine thing to do. Other ways of making money aren’t so bad, either, as long as everybody who’s in on the deal is there voluntarily. Better sleazy productivity than none. As terrible as Albania’s pyramid schemes were, Albania’s riots were worse.
And the Hong Kong of John Cowperthwaite shows that even the most resolutely free-market system makes use of private means for the public weal. If the United States radically reduced the size of its government, eliminated all subsidies, price controls, and corporate welfare, and abolished its entitlement programs, we’d still pay taxes. And those tax revenues would be spent—ideally—on such reasonable things as schools, roads, and national defense, in case the British invade again and try to hand over Wall Street to the Red Chinese.
Or take the real-world example of two kids who graduate from college with honors. One is an admirable idealist. The other is on the make. The idealist joins Friends of the Earth and chains himself to a sequoia. The sharpie goes to work for an investment bank selling fishy derivatives and makes $500,000 a year. Even assuming that the selfish young banker cheats the IRS—and he will—he’ll end up paying $100,000 a year in taxes: income tax, property tax, sales tax, etc.
While the admirable idealist has saved one tree (if the logging company doesn’t own bolt cutters), the pirate in a necktie has contributed to society $100,000 worth of schools, roads, and U.S. Marines, not to mention Interior Department funding sufficient to save any number of trees and the young idealists chained thereto.
And if the soulless yuppie cheats the IRS so well that he ends up keeping the whole half million? That cash isn’t going to sit in his cuff link box. Whether spent or saved, the money winds up invested somewhere, and maybe that investment leads to the creation of the twenty-first century’s equivalent of the moldboard plow,
the microchip, or the mocha latte. Society wins. Wealth brings great benefits to the world. Rich people are heroes. They don’t usually mean to be, but that’s their problem, not ours.
Almost everyone in the world now admits that the free market tells us the economic truth. Economic liberty makes wealth. Economic repression makes poverty.
Poverty is hard, wretched, and humiliating. Poverty is schoolgirl prostitutes trying to feed their parents in Cuba. Poverty is John driving around in the Tanzanian night looking for the doctor while his daughter dies. It’s grandmothers begging on the streets of Moscow. But what poverty is not is sad. Poverty is infuriating. These things don’t have to happen. These conditions don’t need to exist. We can’t solve all the problems of life, but we can solve the problem of gross, worldwide material deprivation. The solution doesn’t work perfectly. The solution doesn’t work uniformly. Nonetheless, the solution works. If we can’t fix everything, let’s fix the easy stuff. We know how to get rid of poverty. We know how to create wealth. But because of laziness, fear, complacency, love of power, or foolish idealism, we refuse to do it.
We think we can dabble in freedom—allow a few of its liberties and leave our favorite constraints in place. We think we can screw around with the free market—skip its costs and get all of its benefits anyway.
There is a joke that I think President Reagan used to tell to illustrate the attitude that some people have toward the blessings they get from freedom and private property. If Reagan didn’t tell the joke, he should have. He won’t mind the attribution. Doubtless he’s forgotten all about economics now. And I’m with the president on that. I intend to start forgetting about economics as soon as I can—keeping in mind, however, a few rudimentary conceits, such as the one about the traveling salesman who is staying overnight with a farm family. When the family sits down to eat, there’s a pig in a chair at the table. The pig has three medals hanging around its neck and a wooden leg. The salesman says, “Um, I see a pig is having dinner with you.”