|Debati i Madh Ekonomik i Shek. XX|
Forbes ne Artikullin e Marsit ne Imprimis (Kolegji Hillsdale)
The Great (and Continuing) Economic Debate of the 20th Century
STEVE FORBES is president and CEO of Forbes, Inc., and editor-in-chief of Forbes magazine. In 1985, President Reagan named him chairman of the
Board for International Broadcasting, where he oversaw the operation of Radio Free Europe and Radio Liberty. He was reappointed to this post by
President George H. W. Bush and served until 1993. Mr. Forbes graduated in 1966 from Brooks School in North Andover, Massachusetts, and received a
B.A. in history from Princeton University in 1970. He serves on the boards of the Ronald Reagan Presidential Foundation, the Heritage Foundation and
the Foundation for the Defense of Democracies. His most recent book is Flat Tax Revolution: Using a Postcard to Abolish the IRS.
The following is adapted from a speech delivered at Hillsdale College on January 29, 2006, during a five-day seminar co-sponsored by the Center for
Constructive Alternatives and the Ludwig von Mises Lecture Series on the topic, Great Economists of the Twentieth Century.
The great economic debate of the twentieth century was between collectivists and free-marketers. In one sense, the free-marketers won: When the Berlin
Wall fell in 1989, it was widely acknowledged that Soviet socialism had been a catastrophic, not to say murderous, failure. But in another sense, the
debate continues. Democratic capitalism still has not vanquished the idea of collectivism. Far from it.
At the beginning of the last century, free markets seemed to be on the ascendancy everywhere. But two events gave collectivism its lease on life. The
first was World War I. In addition to the slaughterand to breeding the ideologies of communism, state fascism, Nazism, and even the Islamic fascism
we are battling todayWorld War I served as an intoxicating drug to those in the West who believed that a handful of people in government could manage
affairs better than the messy way in which free peoples tend to do so. Massive increases in government powers, coupled with massive increases in
taxation, gave many the idea that you can achieve massive increases in production by commandeering the financial resources of society.
The second event that served as a boon to collectivism was the Great Depression, which was widely seen as a free-market failure. This view was false.
Misguided government policies were at faultthe Smoot-Hawley Tariff, for instance, which dried up the flow of capital in and out of the country. If
you track the stock market crash of 1929, it parallels the course of this tariff bill through Congress. When Smoot-Hawley arose in the fall of 1929,
the markets fell; when it looked like the tariff bill was sidetracked in late 1929, the markets revived (the Dow Jones went up 50 percent from its
lows in November); in the spring of 1930 it was signed into law, and the rest is history. There were other factors at work in the Great Depression, of
course, such as President Hoovers gigantic tax increases of 1931. But despite the fact that these also involved bad policies, the lesson taken away
by many was that economies will implode unless the government manages them. John Maynard Keynes, the intellectual guiding light behind New Deal
economics, believed that an economy was like a machine: If you put doses of money into it or pull money out at the right times, he thought, you can
achieve an equilibrium. This idea that government can drive an economy as if it were an automobile has had baleful consequences.
Other leading economists at the time, such as Joseph Schumpeter, recognized that an economy is an aggregate of disparate activitiesthus that the idea
of achieving equilibrium, while it makes for a neat theory, is nonsense in the real world. A vibrant economy is full of constant disequilibria: New
enterprises rise up, old ones decline, etc. Snapshots of such economies mean very little. In the real world, therefore, free markets operate
rationally and efficiently in a way that government regulators simply cant. Here in America we came to this realization at the end of the 1970s.
Following World War II, we largely bought into the idea that government must play an active role to prevent the economy from going off the cliff. But
in the late 1970s, the devastation of inflation and high taxes brought about a reassessment. With the election of Ronald Reagan, the U.S. took a step
back from Keynesian economics. Since then, as Western Europe has stagnatedcreating, for instance, only a fraction of the private sector jobs that the
U.S. has createdour country has undergone an economic revival.
Nonetheless, democratic capitalism often still seems on the defensive. Why?
Is Democratic Capitalism Good?
One of the great vulnerabilities of capitalism is the perception that it is somehow less than moral, if not positively amoral. A common view of
business was depicted in the movie Wall Street, in which Michael Douglass character made famous the phrase, Greed is good. Capitalism is widely
seen as promoting selfishness. We tolerate it because it gives us jobs and prosperity, but many look on this as a Faustian bargain. Charity and
capitalism are seen as polar opposites. Thus theres a phrase thats often used todayI myself use it from time to time without thinkingwhich is
giving back. If youve succeeded in business, its counted a good thing if you give back to the community. And charity is, of course, a good
thing. The problem with this phrase is its implication that by succeeding, we have taken something that wasnt ours. The same idea is summed up in the
cynical saying, Behind every great fortune lies a great crime. This way of thinking about democratic capitalism is wrong.
In fact, philanthropy and capitalism are two sides of the same coin. To succeed in business in a free-market economy, one must meet the needs and
wants of others. Even someone who makes babies cry is not going to succeed unless he or she provides a product or a service that people want. This
system weaves intricate webs of cooperation that we dont even think about. Take a restaurant: Someone who opens a restaurant assumes that farmers
will provide the food and that someone else will process and package it and that someone else will deliver it, having been supplied the fuel to do so
by yet someone else, etc. These marvelous webs of cooperation happen every day throughout a free economy. No one is commanding it. It occurs
spontaneously in a way that economists like Schumpeter understood.
Free markets also force people to look to the future and take risks. Misers do not found companies like Microsoft. Nor should we look on it as immoral
for people to work for the betterment of themselves and their families. We are all born with God-given talents, and it is right to develop them to the
fullest. The great virtue of democratic capitalism is that it guarantees that as we develop our talents, were contributing to the public good.
Statistics show that the U.S. is both the most commercial nation and the most philanthropic nation in human history. And this is no paradox. The two
Another vulnerability of democratic capitalism is that although it leads to progress and to an increase in our societal standard of living, progress
is usually disruptive. This allows collectivists to play on peoples natural fear of change. We saw this with the rise of industrialism in the 19th
century. We had paintings and writings depicting a pastoral agricultural past. Then railroads came along to disrupt the canals, and cars came along to
disrupt the railroads. Buggy-whip makers and blacksmiths were done for. One can imagine what 60 Minutes would have been investigating 100 years ago:
the poor blacksmiths being put out of work by Henry Ford. Likewise, when TV came along in the late 1940s and early 1950s, most movie theaters in the
country went broke. Now the Internet is disrupting newspapers and Craigs List is disrupting classified advertising. Disruptions are inevitable in a
free-market system. The political challenge is to allow these disruptions to take placethey are ultimately constructive, after allrather than
reacting in a way that stymies progress.
In recent decades, collectivists have also hijacked the cause of environmentalism to promote their agenda. Im not talking about the desire to have
clean water; were all in favor of that. Or clean air; one of the great things weve done in the last century is getting lead out of the air. Saving
tigers and elephants is also a good thing. Im talking about those who use the mantra of environmentalism to try to control the economy the way the
old-time socialists wanted to, breathing hellfire and damnation on those who dont subscribe to their new, post-Christian religion. The fact is, if
our goal is to improve the environment, increasing government regulation and destroying manufacturing is counterproductive. Affluence is the friend,
not the enemy, of the environment. As people become better off, they want a higher quality of life, including environmental improvements. And new
technology drives such improvements. Consider the east coast of the U.S. Even though its population has more than doubledin some areas, its
tripledand even though there are more developments, malls, and urban sprawl, there are more trees today than there were 80 years ago. Why? Because of
technology that allows us to grow more food on less land. Technology is a friend of the environment.
Additional Collectivist Myths
Let me mention three additional myths that are used to promote collectivism. One is the idea that demand is the key to economic growth. Collectivist
economists often talk about means to increase aggregate demand, as if that would ensure that the economy will grow. Following Keynes, they assume
that the economy is like a machine. But again, the economy is an aggregate of tens of millions of people, millions of businesses, millions of
technologies. We dont know how it interacts on a day-to-day basis. We dont know whats going to work or not work. Who could have conceived of eBay
ten to twelve years ago? But today, 400,000 people make their livings on eBay. When Google was launched, there were ten other search engines. Who
would have thought another one was needed? Isnt that how you get so-called bubbles? But Google found a way to do it better and ended up on top.
Innovation is the key. Whether its railroads, cars, computers, the Internet, or iPods, risk-taking is messy. It is often irrational, and seemingly
wasteful. But its the only way to determine what works best and what doesnt.
Another collectivist myth concerns trade. If I were dictator of the worldeven though I believe in the First AmendmentI would ban trade numbers,
especially merchandise trade numbers. They just lead to mischief. We are given the impression that a trade surplus is like a profit and a trade
deficit is like a loss. But trade is not a transaction between countries. It takes place between parties. For example, Forbes magazine buys paper. For
all of the 88 years that weve been in existence, weve run a trade deficit with our paper suppliers. If you look just at that trade deficit, you
might think we are doing poorly. But if you look at the two parties involved, that turns out to be an illusion. The paper supplier thinks hes going
to make money selling his paper. We think were going to make money by taking the paper and putting print on it, with value added. So its a mutually
profitable transaction, even if it looks like a trade deficit. Or consider a book printed in Taiwan. Looking at the trade number alone, it appears
there is a two dollar trade deficit with Taiwan. Yet the book comes back here and retails for $24.95. The value added is in the U.S. The author gets a
cut, the publisher gets a cut, booksellers get a cut, distributors get a cut, and remainder stores get a cut. Something similar happened with iPods: A
lot of its parts are made overseas, but where is most of the value added? Here in the United States. North America has had a merchandise trade deficit
for 350 out of the last 400 years, and we have done very well, thank you.
The final myth Ill mention concerns budget deficits. Milton Friedman said several years ago that if he had a choice between a federal budget of $1
trillion that was in the red and a federal budget of $2 trillion that was balanced, he would take the former. Deficits, in and of themselves, are not
evil. Deficits must be put in context, because Washingtons inability to curb spending is often used as an excuse to raise taxes.
Principles of Prosperity
Now let me turn to five basic principles of economic growth. First and foremost is the rule of law: Without individual equality before the law,
entrepreneurs cannot challenge already existing businesses. Alliances between the latter and government regulators who place barriers before
entrepreneurs must be guarded against.
The second essential principle is property rights. We take it for granted in this country that if you buy a piece of property, everyone acknowledges
that you own it. Most countries dont have that kind of uniform property system. A few years ago, Hernando DeSoto, a great economist from Peru, saw
that in countries like his, although there is entrepreneurial activity, there isnt the corresponding prosperity found in the U.S. And he wondered
why. In his recent bookThe Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Elseone of the key factors he cites is the
absence in so many other countries of a legal foundation for property rights. In Brazils shanty towns, an individual may know that he owns the house
in which he lives, and his neighbors may know it, but the fact is not recognized elsewhere.
Mr. DeSoto was asked by the Egyptian government a few years ago to determine who owns the businesses and residences in Egypt. His finding was that 88
percent of the businesses in Egypt are illegal. Why is that? Here in the U.S., it is possible to set up a business legally in a matter of days. In
Egypt, it takes a couple of years. It requires going through numerous bureaucracies, doling out numerous bribes, etc. So it makes sense to proceed
informally. On the other hand, running a business outside the law limits its growth. Most informal enterprises never grow beyond the level of
family enterprises, because if they get too big, they might attract the attention of the tax collector. DeSotos group also reported that 92 percent
of Egyptian housing is illegal. People living in residences may have deeds; but only a few miles away, those deeds are not recognized. In Egypt, as in
so many other places, there is no uniform system of establishing and protecting property rights. As a result, four billion people around the world own
$9 trillion of assets that amount to dead capital.
What do I mean by dead capital? Remember that here in the U.S., the most important source of capital for new ventures is not Wall Street, the local
banker or the venture capitalist. It is the mortgage market. People either increase their mortgage or take out a second mortgage in order to start
businesses. This is not possible in countries like Egypt. Understanding this was the key to Japans post-World War II economic boom. General MacArthur
reformed a feudalistic property system, in which the peasants had only an informal system of property exchange, into a system with formalized property
rights. Immediately, the Japanese economy took off. The importance of property rights is not sufficiently recognized by those of us who take them for
The third principle of economic prosperity is low taxes. Taxes are not just a means of raising revenue for the government. They are also a price.
Income taxes are a price paid for working; taxes on profits are the price paid for being successful in business; taxes on capital gains are the price
paid for taking risks. In light of this, the importance of low taxes is easy to see: When you lower the price of good thingsthings like work, success
and risk-takingyou tend to get more of them. Raise the price of these good things and you get less. In 2003, we lowered tax rates in the U.S. and the
economy started to grow again. As weve seen time and again, tax cuts do not mean a loss of tax revenue. By increasing incentives, the government
comes out ahead. Washingtons revenues in the last fiscal year were up 15 percent$100 billion above expectations. Washingtons problem is not
revenue, but spending.
The fourth principle I would mention is making it simpler to launch legal businesses. Getting bureaucracy out of the way will inject a new vibrancy
into the economy. The fifth and final principle is free trade. Expanding markets and creating greater opportunity for trade benefits us all.
In closing, I will remind you of a point I made earlier: The reason that the great economic debate continues into the 21st century, despite the proven
superiority of free markets in terms of delivering prosperity, is because of the misperceptions that keep democratic capitalism from capturing the
moral high ground. Dispelling these misperceptions should be our priority as we carry on that debate in the years ahead.