Free Market

4 Common Capitalism Myths Debunked

January 12, 2018 ALOD Policy Blog

Fee.org (by: James Davenport)

One of the most disappointing things I face as a college professor is the lack of understanding most students have regarding capitalism. The simple fact is, despite its importance to our daily lives, relatively few people have a strong grasp of what causes economic growth and why markets are so central to continuously rising standards of living.

In my teaching, I have encountered several myths or misperceptions about capitalism from students as well as individuals outside the classroom. Dispelling these myths has become a focus of much of my teaching.

Myth #1: Capitalism Was “Created”

One of the most pervasive misunderstandings about capitalism is the idea that it was created by someone. Some of this can be attributed to the language used to describe Adam Smith’s role in explaining the market process. The common reference to Smith as “the father of modern economics” can lead people to assume that he in some way created the market system. It is also not unreasonable to conclude that, since socialism is generally reliant on planning, many would assume that capitalism is as well.

Markets arise out of our human qualities.

However, as Friedrich Hayek explained, the market system is not really “created” as much as it is a system that evolves out of human interaction and discovery. Similar to language, the market economy was not created by a single individual or group but evolved over a long period based on the interactions of many people. The rules and institutions which support the market economy arose from these interactions.This notion of a spontaneous order emerging out of the individual actions of millions of people, and the discovery of rules and institutions that will facilitate the continual progress of this order, may be the most important aspect of capitalism. It succeeds because it arises out of humanity itself.

Unlike socialism, which attempts to impose rules and institutions regardless of their conformity to human nature or desires, markets arise out of our human qualities. And the rules and institutions that facilitate the ability of markets to perform are discovered as we discover ourselves and in the way we interact with one another.

Myth #2: Capitalism Creates Poverty

This may be the most pernicious of all the misunderstandings I encounter regarding markets. The idea that absent market capitalism would create greater shared wealth within society continues to permeate the thinking of a great deal of people. This is despite mounting evidence that, as markets are used by more and more countries, global poverty is steadily decreasing.

All developed countries have market-based economies.

Importantly, the evidence is clear that this decline in poverty has happened as countries have come to embrace market capitalism as the way forward – especially China and India. As other countries see the success of these two previously very poor countries and begin following their lead, we can expect to see poverty in the rest of the developing world significantly reduced as well.In the Wealth of Nations, Adam Smith explained how markets, by continuously expanding the range of goods and services to an ever-increasing number of people, would produce what he called “universal opulence.” However, since Karl Marx & Friedrich Engels first launched their frontal assault on capitalism, many intellectuals, entertainers, and even politicians have embraced the idea that capitalism causes poverty, or at least prevents people from escaping it, and more disturbingly, that socialism leads to greater prosperity for the masses.

It’s not surprising, then, that these ideas filter down to the public-at-large. But this idea that capitalism leads to poverty for the masses while socialism leads to their prosperity is exactly opposite to all the evidence we have.

All developed countries have market-based economies. Those developing countries seeing the greatest growth have adopted market principles. Contrast this with countries that have fully adopted socialism, such as Venezuela or North Korea. It is troubling that incoming students do not understand this.

Myth #3: Capitalism Is about Capital

The underlying foundation of capitalism is human freedom.

The term “capitalism” was coined by Marx as a pejorative towards market-based economies. The term stuck and has led to some confusion about why markets actually work. As economic historian Deidre McCloskey has noted, people at all times have attempted to amass capital (land, resources, and money). But those collective attempts didn’t lead to the type of society-wide economic growth we have seen since 1800.The underlying foundation of capitalism is human freedom. As Adam Smith recognized, when individuals are permitted to pursue their self-interest through markets, they are amazingly good at finding ways of bettering not only themselves but society as well.

Equally important, as economist Joseph Schumpeter explained, out of this freedom arises a continuous process of improvement – what he called “creative destruction.” It is this constant innovation – discovering and bringing to market new products and services, finding ways of improving existing products and services, and finding more efficient ways to create these products and services – that truly drives economic growth and increases standards of living.

The fact is, while the accumulation of capital is a feature of a market economy, it’s certainly not exclusive to it. It is individual freedom and the innovation that arises from it that drives the engine of capitalism.

Myth #4: Capitalism Creates “Winners” and “Losers”

While it is true that some individuals and firms succeed while others do not in capitalism, this also is hardly an exclusive feature of markets. All economic systems have some individuals who succeed and others who fail in one form or another.

Over the long run, society in its entirety benefits as a result of markets.

However, capitalism is different in this regard in two important ways. First, capitalism increases the number of “winners.” Unlike other systems, capitalism reduces the barriers to entry into market activity for larger numbers of individuals. The resulting competition provides greater opportunities for success (both great and small) than in any other system.Second, over the long run, society in its entirety benefits as a result of markets. This is because markets, as mentioned above, bring more goods and services within reach of more people than any other system.

Markets also produce products and services that improve our lives in ways that our ancestors could never have dreamed. Just consider all the things that exist today, that didn’t a mere thirty years ago. The simple fact is that today even the poorest modern Americans have more goods and services at their disposal than kings and queens did just two hundred years ago.

So, although individual firms may fail, and individual people may not gain great wealth, the fact is that, over the long-run, we all win by enjoying better living standards than previous generations.

We Need Better Education

If the United States is going to continue to see its economy grow and the living standards of its citizens improve, it is important that students are taught the basics of the economic system that has allowed them to experience Adam Smith’s “universal opulence.” Without this basic knowledge, they’re easily led to believe the myths I’ve mentioned and to vote for politicians and policies that will ultimately undermine the very system that has made their lives significantly better than their ancestors, as well as better than most of their contemporaries across the globe.

James Davenport

James Davenport is an award-winning professor of political science at Rose State College and has also taught economics at the University of Central Oklahoma. You can find him online here.

Republish from Fee.org

The Dos and Don’ts of Talking Liberty

November 28, 2017 ALOD Policy Blog

by: Jeffrey Tucker

Nearly everyone knows there is something wrong with the world as it is. The liberty-minded person believes that he or she knows a major part of what is wrong. There is not enough flexibility and adaptability in the structures of government that presume to manage the social order. State systems have made life rigid and regimented–replete with regulations, taxes, mandates, and prohibitions–with the cost that too many people are excluded, demoralized, and impoverished. For moral and practical reasons, this situation must end.

The vast majority of the human family continues to live under the illusion that giving government more power will magically cure society’s ills.

In other words, freedom is the answer.We recall the moment when we discovered this. The light flicked on. The shades came off and the world looked different from before. Our lives changed. How can we help others arrive at this point?

The short summary of what we believe: the astonishing rise of government power over the course of the last one hundred years has truncated freedoms, human rights, and prosperity along with all the fruits of the human spirit. Government is the main enemy, but government hides under cover of social contract, social justice, democracy, religion, security, and a host of other changing veils.

All of this is clear to those steeped in the tradition of liberty-minded thought as it has gradually emerged over the centuries. But it is obviously not clear to the vast majority of the human family, who continue to live under the illusion that giving government more power will magically cure society’s ills by infusing us with a greater reality of fairness, justice, morality — or whatever they claim.

How best to correct this error? How best to share this knowledge? How best to bring others along to the same understanding?

Here are ten rules–five don’ts and five dos. And I know: every libertarian reader of this article is immediately saying “Don’t tell me what to do!”

1. Don’t Be Belligerent

Righteous anger at the state of the world is a feature of the libertarian mind. It was probably the reason for the initial interest in the ideology. When a person makes the link between war, mass killing, lies, and government power, the result is overwhelming. It seems unimaginable that others do not see this.

One burns with a passion for justice. One feels an intense desire to do something to fix the problem. Another example might be economics related. When a person discovers that the Fed is the reason for inflation, the business cycle, and the skyrocketing debt, the effect is shock and anger and the desire to make history right.

This is all completely understandable. The problem is to remember that others do not share in this anger because they have not been made aware of the cause and effect here. They do not share your understanding. All the dogmatism, belligerence, expressions of anger, and raised voices are not going to convince anyone of the case for liberty. Instead, quite the opposite, they just inspire others to fear your temper and tone.

The goal is to win hearts and minds.

A raised tone of voice, an increased volume, and a more insistent edge are not the same as a convincing argument. These approaches can seem to work only by causing others to back down in fear, but that is not the goal of persuasion. The goal is to win hearts and minds.An aggressive voice is not going to persuade people of the case for peace. An unwillingness to listen to others is not going to convince people of the case for exchange and cooperation. An absence of interest in another’s point of view is not going to bolster your credibility as an advocate of free speech and human rights. A posture of intolerance is not a good witness for the diversity and human flourishing we would see in a free society. The case for liberty needs to be made in a manner that practices what we preach.

The better approach is to speak with reason and with the intention of actually bringing a person along through making sense. That doesn’t mean being unprincipled. In fact, a reasoned approach enables you to speak about radical content with even more authority.

As Ludwig von Mises wrote in Liberalism (1927):

rhetorical bombast, music and song resound, banners wave, flowers and colors serve as symbols, and the leaders seek to attach their followers to their own person. Liberalism has nothing to do with all this. It has no party flower and no party color, no party song and no party idols, no symbols and no slogans. It has the substance and the arguments. These must lead it to victory.

2. Don’t Presume Hatred of Liberty

Many libertarians start with conversations, online or offline, with the presumption that the interlocutor is against liberty. That is not usually the case. The problem is usually of a different sort. It is that the person does not see the relationship between the law that he or she supports and the imposition on human liberty. A person who says “every person has a right to a decent education” may not actually mean “people should be robbed to support bad schools” or “all children should be forced into a prison-like building for 12 years.”

The person may not actually be against human liberty, only unable to see the relationship between certain principles and certain policies.

In the end, we must choose between liberty and power. There is nothing in between.

The job of the liberty-minded rhetorician is to illustrate the connection, and to show how impositions on liberty lead to bad results. For example, in the case of public school, people who think kids ought to be forced into school until they are 16 or 18 don’t imagine that juvenile detention is a good solution, or that kids ought to be prohibited from having viable work experience, or that parents can’t be good teachers at home. But that is the implication of the policies they support. What’s missing here is the logical relationship between the policy he or she supports and the inevitable downsides of a system of coercion and compulsion.

Almost all non-libertarians underestimate the implications of putting the state in charge of anything. They speak of how “society” should do something, how “we as a people should” do something, how “the community” needs to be committed to something. The reason for this evasive language is to mask, even from themselves, the gritty reality that in each case they are actually arguing for the state to have more power.

More state power means the use of more confiscatory power, more fines, more jails, and more violence. Indeed, in the end, violence is the only tool the state has, so every push for more intervention amounts to a call for a more violent society. This is even the case for gun-control laws: they mean using guns against people when their own peaceful choices conflict with the political priorities of the state.

The advocates of intervention don’t usually begin with a hatred of liberty. They are just unwilling or unprepared to recognize the relationship between their own outlook and the uses of the state as a tool of power. In the end, we must choose between liberty and power. There is nothing in between.

3. Don’t Presume Different Goals

Non-libertarians have a gigantic language apparatus they employ to push against the idea of liberty. They speak of the need for “social justice,” “equality,” “sustainability,” “solidarity,” “community,” “progress,” and a hundred other wonderful-sounding things that are really just covers for increasing government power.

It is very easy to presume that these people have completely different social goals than those of liberty advocates. That is usually not the case. More often than not–there are exceptions–the people who speak this way do not have different goals. There are some people who actually do favor poverty and human suffering, but that is not very common. Most people share the goal of prosperity, peace, a clean environment, and widespread wealth–whatever words or phrases they use.

A basic economic education is lacking in some of the world’s smartest people.

There is no point in getting hung up on words. Words are arbitrary sounds designed to facilitate conversation. Their meaning changes over time. Especially in our times, different sectors of society use different vocabulary to describe the same thing. If you can change your vocabulary and introduce someone to a cause, it is worth the effort. There is no reason to get hung up on word choices.4. Don’t Presume Ignorance

Many opponents of the free society and free markets are among the most educated people on the planet. You need only look at the faculty at top-level universities to see that, despite all their brilliance and reading and education, many fail to understand even the basics of economic forces like supply and demand. They are not ignorant. A basic economic education is lacking in some of the world’s smartest people, and a failure to integrate economic lessons into a larger worldview is the most common error among the academic elite.

What is often lacking is not education but the precise knowledge that turns out to be extremely important in forming a worldview. As Thomas Sowell has written, many of the world’s smartest people are guilty of unconstrained visions of what is possible. They see pockets of wealth alongside poverty and easily jump to the conclusion that spreading out the wealth would create fairness. That unconstrained vision of society is possible in a world without scarcity, and the world of ideas is indeed a world without scarcity. Intellectuals deal mainly in the world of ideas, which is why they are so tempted by the dream of a world of unlimited possibilities.

Where they get tripped up is in theorizing about the physical world, the world in which resources and time constrain possibilities. Here there can be no such thing as socialism, no such thing as creating wealth by taking it away from others. Here is where we must have private property, freely floating prices, exchange, contract, trade among all peoples, capital accumulation, and safety in ownership. All of these are essentials. Peter Boettke has written that almost all errors in economics come down to the failure to understand scarcity. True enough!

If the market teaches us anything, it is that we are all ignorant of the vast majority of human knowledge.

Non-intellectuals, in my experience, are more open to the ideas of liberty. They only need an appeal to daily experience. How many people really know that laundry has been totally destroyed by state regulation, that our clothes are dirtier thanks to government intervention? How many people understand how regulations have so seriously cartelized the business sector and reduced our options and made it so difficult for people to go into business? That there is a relationship between a large US military presence in the world and a welfare state that controls the civilian population at home, that the welfare-warfare state is one entity? That the Federal Reserve is the main reason behind the runup in federal debt and a main reason for all the corruption that people loathe?There is no reason to attempt to convince anyone of the full case for liberty in one exchange. It is a mistake to presume someone else knows nothing and we know all things, because it is absolutely untrue. We have so much to learn even from those who do not share our worldview. But if you presume another person’s ignorance, you will not gain that knowledge or understanding.

If the market teaches us anything, it is that we are all ignorant of the vast majority of human knowledge. The goal is not necessarily to convince everyone you meet of the case for liberty. Rather, take the opportunity, when presented, to learn from people who know more about subjects that you don’t.

I recall sitting next to a man in the airplane who specialized in making bags for potato chips. It was an absolutely fascinating conversation to learn all about the history, technology, and marketing of these bags. It is a rare opportunity to discover a sector of life that is mostly closed to us. Sometimes it is just good to be selfish in conversation, extracting as much information as possible as a way of making our own worldview more hands-on and realistic.

5. Don’t Regard Anyone as an Enemy

In democracy, government specializes in dividing people into warring tribes and devolves all meaningful conversation into sectarian squabbles. This is what elections are all about. Each politician finds his or her demographic and attempts to whip them up into a frenzy against others. It’s always the same: men vs. women, blacks vs. whites, natives vs. immigrants, rich vs. poor, able vs. disabled, religious vs. secular, and so on without limit. What is the effect of this constant prattle? It causes us to think of each other as enemies. If you really believe that it is super- critical to the future of civilization that Joe and not Tom is elected, you naturally believe that anyone who supports Tom is the enemy.

And you know based on demographics — or you have a pretty good idea — who is supporting whom. This creates the tendency for all of us to divide up the population around us into friends and foes. This is a major cause of social tension in a democratic society. Democracy purports to bring us all together to govern ourselves. Actually it only ends in dividing us into feuding clans, out to steal or keep from being stolen from. One person’s liberty comes at the expense of another. One person’s vision is only realized so long as others’ visions are not.

Remember that the enemy is the state, not your fellow human beings.

It is no wonder that society continues to have troubles with racism, sexism, nativism, and classism. That we can’t live together except by crushing each other is a major illusion of democracy. It is an artificial reality, one created by the state itself. So long as we buy into it, we are going along with a corrupt imposition. We are giving in.The best way to fight back is to not be manipulated into this situation. We should seek to make friends, not entrench enemies. Every human being is a friend of liberty somewhere deep inside his or her heart. It is just a matter of finding that spot and tapping into it. There is no religion, no race, no income group that cannot benefit on net from liberty. For that reason, there is no person who should not be on Team Liberty. That’s why it is best to approach the art of persuasion, and life itself, with the assumption that we are surrounded by friends. In this way, we avoid the trap that the state sets for us. Remember that the enemy is the state, not your fellow human beings.

6. Do Inspire

Libertarians are very good at making sense. There is a tendency to argue only from first principles, rely on axioms, push the point using hard dogmas that might be perfectly valid but do not hit the sweet spot to change minds. I’ve heard countless arguments over political points in which the libertarian wins the point on logic but loses in the area of common sense. This is why so many people find libertarianism to be somewhat scary, a form of fanaticism that would take away the comfort and stability of life itself.

Consider the point about privatizing streets. Liberty-minded thinkers favor this, but most people can’t imagine it. You can assert the point again and again and conjure up images of every street having a toll. Or you can simply point out that hundreds of large corporations today use private streets in their own factory grounds, streets that are built by private interests and are nonetheless available to everyone.

In addition, there is no necessary reason to believe that privatized streets would not be as open access as a search engine like Google or a video chat program like Skype or Snapchat. Producers have every interest in including users, not excluding them.

Insofar as it is possible, it is best to use examples of the private provision of goods and services that really exist in our world. One of the best cases is the whole of the Internet, which is the greatest experiment in anarchism that exists today. Trust relationships between merchants and consumers, user ratings, protections against identity theft, and consumer protection have all formed without recourse to government bureaucracies. Yet people continue to believe that government agencies are essential to our lives when they experience the beauties of anarchy every day.

See the anarchy all around us.

Actually, government contributes very little to the lives of average people. People realize this once they think about it. Our lives are great when we make them so, not because a bureaucrat has somehow intervened to improve our lot. The myth that government is somehow supporting or sustaining civilization is an embedded part of our civic culture, but it is a myth easily refuted by daily experience. Monitoring what we do day-to-day, we discover that it is actually private enterprise that we depend on for all the comforts and excitement of life.This is an inspiring realization. The notion that government is necessary is a very negative commentary on the capacity of people to manage their own affairs. Once you see the anarchy all around us, you realize that humanity is bursting with creativity, energy, the desire to get along, the impulse to fix problems, and the passion to value others and be valued ourselves.

Government has only one power in the end, and that is the power to stall and thwart this constructive process with force. If by doing so it prohibits peaceful behavior, it normally diminishes the quality of life for all of us. Liberty is an inspiring message. We should always avail ourselves to this to make our case.

7. Do Look for Love of Liberty

This is something of an art. When you are talking with someone about the subject of liberty, he or she will often say a long series of things that are just wrong from your point of view. One approach you can use is to sit patiently and listen as long as possible, refraining from commentary. At some point, the person will say something that makes sense–a rightist might speak of the need for gun rights or a leftist might talk about civil liberties–and this is the time to speak up.

Look for points of agreement.

If you can find a point of agreement on some point about human liberty, you have the basis for a real conversation. The point is not to look for error–there’s never a problem in finding those–but to look for points of agreement. As you pursue these lines, you will bump into a point of disagreement, but instead of arguing–which is often just pointless–you have the basis for a serious discussion of the merit of a free society.The secret here is to do this not as a strategy but as a sincere attempt to praise the good in another’s way of thinking.

There are very few people alive in the world today who do not believe in liberty in some part of their lives. Find that point and you can disarm a critic and have the basis for at least getting a hearing for your point of view.

8. Do Have Confidence in Your Beliefs

One thing that Internet culture has taught us: the weaker the argument, the stronger the rhetoric that backs it. Often times, insults, ad hominems, put-downs, and smears are just covers for a lack of confidence in a position. If you know a subject very well, there is no reason to resort to this way of thinking and arguing. You can respect another’s point of view and still make your points.

The case for liberty does not need loud, boisterous, belligerent arguments. If you have confidence in your beliefs, you can welcome any comers and face down any objection. If you find yourself getting flustered and angry in the course of a discussion, you might ask if the real problem is not the other person but rather your own lack of knowledge. It might be time to hit the books.

Nothing persuades others like a calm and cool demeanor in the face of vigorous criticism. But the best way to achieve that is to become a genuine expert with a deep and impenetrable conviction in what you believe.

9. Do Speak the Language of Your Interlocutor

Earlier I wrote about the tendency of different political tribes to use completely different language. It is sometimes good to completely mix this up. Why not call yourself a progressive, for example? After all, nothing is for progress as much as human liberty. Indeed it is the only real source of progress. Why not call yourself a liberal? In the 18th century, liberalism meant a belief in human rights, commerce, peace, and no government intervention. It’s true that we have mostly lost that term, but it still pertains historically, and there is nothing wrong with reclaiming it.

A world of liberty is a world without rulers lording it over the human population with swords, bullets, and tanks.

It is a waste of time to argue about terminology. Discussions that go places focus on concepts and ideas, not terminology. It is best, then, to adopt the language of others if that is possible.Consider the term “sustainability,” for example. It is mostly used as an attack on economic development and commercial freedom. But there is an element of free-market thought that is perfectly compatible with the idea of sustainability. Loose credit creates unsustainable bubbles. In fact, it is the main source of creating unsustainable institutions. This is true of many, if not most, government programs. Subsidies and protectionism create unsustainable results. This kind of language is just as much ours as theirs.

Probably as much as 95 percent of political argument today centers on debates about who should be ruling us, and the terms under which this rule takes place. Neither amounts to much because both miss the point. A world of liberty is a world without rulers lording it over the human population with swords, bullets, and tanks. It is a world without rulers that we seek, so it makes no sense to get distracted by arguments over which rulers should be in charge.

10. Do Suggest Great Literature

A major reason to know the literature well is to have ready references that fit with the outlook of another person. An engineering major will need to read different books from a literature major. A literature major might be persuaded by Russell Roberts’s wonderful novel The Invisible Heart. An engineering major might enjoy Nassim Taleb’s Antifragile. As great and essential as the old treatises are — Mises’s Human Action or Hayek’s Constitution of Liberty — they are not the only way to discover the ideas of liberty.

The lessons of human liberty are applicable to every aspect of life.

Beginners who need an economics education can always benefit from Hazlitt’s Economics in One Lesson, but it is not the only book. Faustino Balvé’s Essentials of Economics is also great.The literature of liberty is, at this point, very well developed. We have commentary on popular culture, philosophy, history, law, economics, foreign relations and war, as well as the history of art and even computer code. The lessons of human liberty are applicable to every aspect of life.

Never leave a conversation without making an excellent suggestion of a book to provide a follow-up. It could also be an article online. Speaking from a personal point of view, I will often be reading a book of any sort–fiction or nonfiction or history or something–and be unable to suppress talking to others about it. The enthusiasm you show for what you are currently learning can be infectious to those around you.

The future of freedom and liberty depends on our ability to convey the immeasurable benefit of freedom.

Liberty is a gigantic subject. “Conversion” doesn’t happen in a day — it is a process. There is no reason to strive for instant victories. To absorb the full truth about liberty takes time for it to be meaningful and penetrating. Moreover, there is no reason to seek victory over the full picture; achieving small victories is all that is necessary.It is a reflection of the confidence you have in your worldview that you don’t need to seek “conversions” so much as marginal steps toward enlightenment.

Conclusion

We were born free, but at one point or another we all became, in some form or another, supporters of the state. You were once one of those people who needed convincing. Imagine that you are speaking to yourself, before you saw the light. How would you want to be convinced? Be understanding and compassionate, but also patient and persistent. The future of freedom and liberty depends on our ability to convey the immeasurable benefit of freedom.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, economics adviser to FreeSociety.com, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books, most recently Right-Wing Collectivism: The Other Threat to Liberty, with a preface by Deirdre McCloskey (FEE 2017). He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press. He is available for press interviews via his email.

Republished from Fee.org

Adam Smith’s Concept of Justice

October 14, 2017 ALOD Policy Blog, Philosophy

by Dr. Vernon Smith

One of the best-known quotations from Adam Smith’s The Wealth of Nations (1776) defines natural liberty: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man.”

Smith inserted the condition “so long as he does not violate the laws of justice” ahead of the directive because it was central to his conception of liberty. What everyone remembers is “free to pursue his own interest,” with the last often turned into “self-interest.” But Smith’s conception of human sociality and economy—I like the word “humanomics”—was far deeper than modern utilitarianism.

Justice is the infinite set of permissible actions remaining after specifying the finite limited set of prohibited actions and corresponding penalties.

What did Smith mean by justice, and why is it so important for understanding his message? The carefully articulated answer was in his first book: The Theory of Moral Sentiments (1759, pp. 78-91).Justice for Smith was the negative of his proposition on injustice, which stated that improperly motivated (that is, intentionally) hurtful actions alone deserve punishment because they are the objects of a widely shared sense of resentment.

Rules that punished in proportion to resentment emerged naturally in pre-civil society as a means of defense only against real positive evil and to secure innocence and safeguard justice.

Hence, justice is a residual. Justice is the infinite set of permissible actions remaining after specifying the finite limited set of prohibited actions and corresponding penalties.

Imagine a large playing field in which people explore, discover, and innovate, but with well-defined foul boundaries that people are not to breach without penalty; these boundaries will change, based on consent, with experience, culture, and technology.

Smith saw society as seeking human socio-economic betterment through the control of actions that our common experience leads us to judge as hurtful rather than through collective actions designed to achieve future conjectured benefits. The latter is uncertain and fraught with unintended consequences; moreover, history is littered with examples of grandiose failures. The former relies on natural impulses for individuals and assemblies to pursue betterment, risking only their own resources; this framework led him to oppose slavery, colonialism, empire, mercantilism, and taxation without representation at a time when such views were unpopular.

His policy views derive from his belief that every person’s socio-economic achievements should depend as much as possible on merit and as little as possible on privilege.

Reprinted from the Independent Institute

Dr. Vernon Smith

Dr. Vernon Smith, Professor of Economics and Law at George Mason University, earned an economics Ph.D. at Harvard in 1955. In 2002. Dr. Smith was awarded the Nobel Prize in Economics for laying “the foundation for the field of experimental economics.”

Everyone Loves This Book But Who Has Actually Read it?

October 4, 2017 ALOD Policy Blog

After years of avoiding Hayek’s Road to Serfdom, I have decided to dedicate the next sixteen days to liveblogging each chapter.

by Brittany Hunter

I have never actually completed F.A. Hayek’s, The Road to Serfdom. I am completely comfortable admitting that. Still, like many who are intrigued with Hayek’s ideas but lack the willpower to read the entire book, I alway list The Road to Serfdom as one of my most influential readings.

To be sure, I had read the few chapters that were assigned to me by my school’s token libertarian political science professor. I assumed I had accurately interpreted its message. The three chapters I read were full of highlights and great quotes about the importance of the individual. But with all the other books out there in the world, why was finishing this one book so important?

Hayek makes it clear that this path refers to society’s “progressive” rejection of individualism.

It was not until my current mentor called me out on my inability to follow through on one of the most economically relevant books of all time, that I realized that I had robbed myself of an education by not finishing Hayek’s important work.

As a matter of millennial pride and also wanting to reclaim the knowledge I foolishly pushed aside as an undergrad student, I decided to dedicate the next sixteen days to both reading and liveblogging The Road to Serfdom.

The Individual Built the Modern World

Proponents of laissez faire capitalism and libertarian thinkers alike constantly throw around the phrase,” the road to serfdom.” And while most understand its general negativity towards socialism, the phrase is so ingrained in liberty speak that few often take the time to really explore what Hayek was trying to tell us.

In the book’s opening chapter, “The Abandoned Road,” Hayek makes it clear that this path refers to society’s “progressive” rejection of individualism. More importantly, he goes on to describe how this rejection of the sanctity of the individual has, and will continue to have, negative impacts on the society.

For a period of time, the western world had flourished under the 19th-century ideals of free market capitalism. For the first time in history, an individual was allowed to follow his own desired path without the status of his birth holding him back. All he needed was an idea and the ambition needed to make that idea a reality.

As a result we saw a revolution in thought and an industrial revolution incomparable to anything the world had ever experienced. In fact, even with the advent of the internet, the world has still never progressed quite as dramatically as it did during this laissez faire revolution.

And while this period brought the world the wisdom of Adam Smith and the rebellion of the American Revolution, it did not maintain its momentum of popularity as the 20th century approached.

As Hayek points out:

“We still believe that until quite recently we were governed by what are vaguely called nineteenth-century ideas or the principle of laissez faire…But although until 1931 England and America had followed only slowly on the path which others had led, even by then they had moved so far that only those whose memory goes back to the years before the last war know what a liberal world has been like.”

If in 1944, Hayek thought the world had already forsaken and forgotten true liberalism, I can scarcely imagine what he might say today. And it’s true that he was writing about a period of wartime economic planning both in the US and the UK. Prices and wages were controlled. Censorship was in place. Rationing and quotas governed the production and distribution of all essential goods and services. But even given all this, government consumed a far smaller degree of overall national production than today.

So far removed are we in 2017, that the individual is not even a consideration when contemplating economic policy. In fact, the “greedy” “selfish” individual is often the villain in modern economics, as he seems to always operate contrary to the whims of the collective. Now, terms like “individual mandates” are used to convey each person’s “social responsibility” to care for the collective.

As common as this anti-individualist sentiment has become, it wasn’t always this way. As Hayek reminds us in this opening chapter, the most tremendous strides towards human and economic progress were taken during a time when the individual was allowed to innovate and create without worrying about interference from the state on the grounds of protecting the greater good. But even though the positive implications of a pro-individualist society were proven by the innovations created during that time, society had still been steadily moving away from it.

“We are rapidly abandoning not the views merely of Cobden and Bright, of Adam Smith and Hume, or even of Locke and Milton, but one of salient characteristics of Western civilizations…Not merely the nineteenth- and eighteenth- century liberalism, but the basic individualism inherited by us from Erasmus and Montaigne, from Cicero and Tacitus, Pericles and Thucydides, is progressively relinquished.”

So far removed are we in 2017, that the individual is not even a consideration when contemplating economic policy.

Again, I have to wonder what Hayek might say if he were alive today and around to see how groupthink and collectivism have shaped our modern policies.

This chapter, then, sets the stage. He names liberalism as the system that gave birth to the greatest of human achievements ever seen in history. It was individualism that caused the most spectacular effect. If you understand that–and vast numbers today do not understand this–you are prepared to see how the abandonment of this system and idea leads to not only the unraveling of liberty but even what we call civilization.

So, yes, this book is a warning, not just against one party but all ideological positions that reject individualism for one or another version of the planning state.

Now onward to chapter two!

Brittany Hunter

Brittany Hunter is an associate editor at FEE. Brittany studied political science at Utah Valley University with a minor in Constitutional studies.

How Prices Promote Peace

August 31, 2017 ALOD Policy Blog

By Matthew McCaffrey

Donald Trump’s plan to escalate the war in Afghanistan makes it necessary to once again stress the value of peace and the importance of rejecting US militarism and imperialism. Yet it also provides an opportunity to think about the foundations of a truly peaceful society, and to reaffirm a basic social truth: no institutions more effectively promote peace than the institutions of the market economy.

Cooperating not Expropriating

Peace begins at home, or rather, it begins wherever you and I decide it does: at any time and place we realize that the best way to improve our lives is to cooperate rather than to brutalize each other.

Trade allows us to benefit from our different values, while hurting no one.

As economists like Ludwig von Mises point out, this realization is actually the foundation of human social relations. It also explains why we establish social bonds through trade: we recognize, first, that we each possess resources and skills that are less valuable to us than others that we hope to acquire, and second, that other people value things in just the opposite way. Trade then allows us to benefit from our different values, while hurting no one. It is an act of peace, one reason why it’s no surprise that Mises refers to the moment after exchange as a “state of rest” – including an absence of conflict.

Voluntary exchange is thus a rebuke to violence and war-making: it reveals to each of us, in a personal way, that increasing our own welfare means cooperating, not expropriating.

Prices are a social recognition of this deeper fact. They tacitly acknowledge that many individuals have foregone violence and realized the benefits of cooperation and trade, so much so that they can establish between them an objective estimate of the social worth of the things we hold dear: a price.

Eventually, a vast network of individual exchanges creates the price system, a gigantic engine for improving the welfare of all members of society. This engine works 24 hours a day to overcome the greatest cause of conflict among human beings: scarcity.

The Struggle over Scarce Resources

Property, exchange, and the price system enable us to put aside our conflicts.

Scarcity presents seemingly intractable problems: how can we thrive in a world where human wants outstrip the resources available to satisfy them? How can we ensure that the goods and services we produce will get to the people who need them most?

Prices are the answer, and the price system works from moment to moment to appraise and allocate countless scarce resources over which we no longer have to fight.

Property, exchange, and the price system enable us to put aside our conflicts. In fact, when prices can’t be established because property rights are unclear – as in the tragedy of the commons – the result is a desperate conflict over scarce resources as each person tries to exploit a “free” good.

Similarly, price controls prohibit buyers and sellers from agreeing on a way to mutually benefit. Inevitably, someone leaves the market unsatisfied. In fact, price floors and ceilings cause conflict by eliminating exchange and replacing it with rationing. Without prices, producers and consumers arbitrarily discriminate, thereby creating special privileges for certain individuals and groups.

For example, landlords of rent-controlled apartments might choose tenants based on their racial characteristics rather than those who need housing the most. Similarly, faced with increasing minimum wage rates, fast food restaurants hire college students instead of workers from less wealthy or educated backgrounds who more urgently need a job. Inevitably, the non-privileged groups start to resent the beneficiaries of discrimination, and social conflict is the result.

Non-Market Goods

The lack of prices for such “goods” reveals that they’re nothing of the sort.

Importantly, this effect works across borders as well, as domestic producers and unions reap the benefits of trade barriers and immigration controls at the expense of foreign workers. This kind of exploitation sows the seeds of economic and, eventually, military conflict. Allowing prices to exist for foreign goods and labor is, therefore, a vital step toward achieving global peace.

For that reason, we should also be deeply skeptical about the production of any weapons or military technologies that have no market applications – and no prices – in a free economy. The reason is simple: the lack of prices for such “goods” reveals that they’re nothing of the sort. Their purpose is to destroy life, not improve it.

Seeing prices emerge and change in the marketplace should be a cause for celebration just as much as the sight of a soldier laying down his weapons. Both are victories for humanity, but prices especially reflect a deep commitment on the part of many people to choose cooperation over conflict. In that sense, it’s not much of an exaggeration to declare: Blessed are the price-makers.

Republished from FEE.org

Matthew McCaffrey

Matthew McCaffrey is assistant professor of enterprise at the University of Manchester and editor of Libertarian Papers.

Twelve Economic Concepts Everyone Should Know

August 28, 2017 ALOD Policy Blog

By Richard N. Lorenc

When I tell people that I work at the Foundation for Economic Education, they sometimes ask: “What economic ideas should people understand?”

We at FEE have thought about this quite a lot for our articles, courses, seminars, and videos. We have distilled “economic thinking” into 12 key concepts. The following list has guided us internally for a few years, and I figure it’s now time to share it with the world.

1. Gains from trade: In any economic exchange, freely chosen, both parties benefit–at least in their own minds.

2. Subjective value: The value of any good or service is determined by the individual human mind.

3. Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.

4. Spontaneous order: Society emerges not from top-down intention or planning but from individuals’ actions that result in unplanned outcomes for the whole.

5. Incentives: Individuals act to maximize their own reward.

6. Comparative advantage: Cooperation between individuals creates value when a seller can produce a given item or service at a lower cost than the buyer would spend to produce it himself.

7. Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.

8. Seen and Unseen: In addition to the tangible and quantifiable effects, there are quite often invisible costs and unmet opportunities to any action or policy.

9. Rules matter: Institutions influence the decisions individuals make. For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.

10. Action is purposeful: Each person makes choices with the intention of improving his or her condition.

11. Civil society: Voluntary association permits people of all backgrounds to interact peaceably, create value, cultivate personal character, and build mutual trust.

12. Entrepreneurship: Acting on an opportunity to gather underused, misused, or undiscovered resources and ideas to create value for others.

You might think about all the ways and places these principles appear–as you shop, socialize, and plan your future. As we like to say, economics is everywhere!

Republished from FEE.org

Richard N. Lorenc

Richard N. Lorenc is the Chief Operating Officer of FEE and serves as managing director of FEE’s Youth Education & Audience Research (“YEAR”) project to develop and promote new content and distribution techniques for free-market ideas.

Money Is the Real Social Contract

August 26, 2017 ALOD Policy Blog, Philosophy

By Baudoin Collard

Despite major inconsistencies, the social contract theory remains one of the most prominent founding myths of our societies. Is it possible to revisit this dogma to correct its deficiencies?

The social contract theory finds its origins during the Enlightenment era in the 18th century. In the context of challenging royal institutions, philosophers like Rousseau and Hobbes sought to answer the following questions: How are societies born? Why do humans decide to live together? Where do governments derive their legitimacy?

According to Rousseau, an implicit contract binds men together to form a society. Through this contract, men relinquish some of their freedom to the state. In return, the state provides justice and security. This way, the general welfare is protected from special interests through the legislature, elected by the people.

The social contract theory has had a major influence on Western philosophy. As attractive as it is, the theory suffers from fundamental flaws.

First, no one has ever signed such a contract. One can argue that elections represent a tacit renewal of the contract. But in this case, abstention should be considered. And what about countries like Belgium where voting is compulsory?

Second, history teaches us that human societies emerged well before the institutions that govern them. It is the society that begets the institutions and not the reverse. Moreover, these institutions have been set up in bloody wars and revolutions.

Lastly, according to Rousseau, since the parliament represents the people, the minority must accept any decisions taken by the majority in the name of a nebulous “general interest.” In the 19th century, Alexis de Tocqueville had already mentioned the risk associated with this belief. Such a system drifts into a tyranny of the majority.

If we looked closer, we would see an institution inseparable from the human society that could perfectly fulfill this role of the social contract: money.

Is Money a Social Contract?

Money is proper to man. Historically, no society could develop without the support of some form of money. Conversely, the concept of money is meaningless when taken out of its social context. It is from its acceptance by users that money derives its legitimacy and value. Men voluntarily adopt money because they benefit from it.

By facilitating exchanges, money allows specialization — the source of new technological developments. As a store of value, it allows users to save, which is the source of investment and protection against the hazards of life. Investment and technological progress both generate growth. This is the fundamental reason why men unite: in order to draw greater benefit from each other’s labor.

Currency Manipulation

If money is the cement that binds society together, what happens when this cement disintegrates? The German hyperinflationbetween 1921 and 1924 is certainly one of the most tragic examples of monetary collapse, but it is far from an isolated case.

Given its critical role, it may be tempting for a minority to manipulate the currency to its advantage. If the phenomenon is not new, it has also become more complex over time.

An early example occurred with the use of minted coins.

Originally, coins ensured the weight and quality of the currency. But gradually, the right to mint coins has become a state monopoly. This has allowed governments to control currency and extract a rent (seigniorage and sometimes debasement).

The invention of the banknote was a major technological evolution. Originally introduced to facilitate increased trade, banknotes have gradually become a monopoly of the power in place. As a striking example, Napoleon Bonaparte gave the monopoly of printing bank notes to the Bank of France, of which he was a major shareholder.

The creation of central banks is the logical continuation of the state’s growing influence over money. Under the pretext of stabilizing money issuance and protect depositors from banking crises, the creation of central banks actually greatly facilitated state indebtedness, war funding, and ultimately inflation.

Speaking of inflation, here is precisely what Keynes said about it:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

From Social Contract to Social Control

But inflation is not the only stab to the social contract of money. From the moment the money is imposed by the government rather than freely chosen by citizens, it loses its legitimacy. Initially acting as a social contract, money in state hands becomes a tool of social control. It allows a minority to exploit their privileged position for profit and power.

The states impose the use of their currency in more or less subtle ways. In the most authoritarian countries like China, the currency is subject to strict controls.

Exchange rates are set by the government and capital movements are tightly monitored. In the so-called democratic countries, the currency is imposed through legislation and numerous regulations. For example, the official currency is the only one allowed for the payment of fines and taxes. Banking and insurance regulations require individuals to invest a proportion of assets in state bonds, to inform the government of all transactions above a certain amount, etc.

In terms of social control by the currency, governments can be very creative. One example is the introduction of price and wage controls. Another example is the introduction (and increasingly pervasive use) of the food stamp program.

A more pernicious threat now hangs over the money with the disappearance of cash so desired by our governments. The abandonment of cash threatens to increase our dependence on the banking system. It also increases the stranglehold of states over their citizenry by facilitating the establishment of taxation on savings accounts or even an outright confiscation of bank accounts, as was the case in Cyprus.

Freeing the Money

All monies do not fulfill their social contract equally. Among fiat currencies, large differences exist, depending on the objectives of central banks and economic policies. So if we compare the consumer price index (a proxy for inflation), we observe that the US Dollar has lost about 54 percent of its purchasing power over the last 30 years.

The Swiss Franc saw a decline in purchasing power when it was limited to 31 percent and then 14 percent for the Japanese Yen. At the same time, the currency’s purchasing power fell by more than 99 percent in Mexico, Turkey, and in many countries of the former Soviet Union.

Gold and precious metals enjoy a lasting credibility because these commodities are difficult to manipulate. Precious metals have also provided an effective hedge against inflation and other monetary turpitudes throughout history. Gold is still a reserve currency of choice for central banks.

Finally, a new form of currency has recently emerged: the cryptographic currencies among which Bitcoin is undoubtedly the most famous. Bitcoin appeared in 2009, at the height of the subprime crisis and bank bailouts by the taxpayers. If they have often aroused disbelief in their infancy, these cryptocurrencies now enjoy a combined capitalization largely exceeding $100 billion.

More fundamentally, cryptocurrencies are the perfect illustration of the competitive bidding of private currencies. This is similar to what was proposed by Friedrich Hayek in his book “The Denationalization of Money.”

Since the use of these currencies is free, their value fluctuates according to the interest they generate and the resulting demand. Their course is closely linked to the services they can provide, as a means of payment, and their credibility, as a store of value. The proliferation of these cryptographic currencies is a full-scale laboratory experiment for the future of money.

Money Guarantees a Free Society

Money, even more so than democracy, embodies the essence of the social contract. Its legitimacy comes from its acceptance, freely chosen by all users.

The fundamental role of money in exchange explains its catalytic action in the seeding of the development of human societies, long before the emergence of democratic institutions. Finally, currency manipulation inevitably causes the decline of a society,as democratic as it may be.

Nothing better sums up money that Ayn Rand’s quote:

“Money is the barometer of a society’s virtue.”

Money is a tremendous source of emancipation for the society. It promotes cooperation and peaceful exchanges between humans, no matter their views, gender, origin or preferences. It is the conductor that imperceptibly regulates the human action.

Conversely, anyone who aims to suppress money should be prepared to substitute it by a planned economy with cohorts of bureaucrats who impose by force. Anyone who denounces the dictatorship of money should recall that the worst tyrannies are those where citizens were deprived of their currency. And if money is regularly accused of being the root of all evil, it is all too often the victim of those who control it. Rather than blaming the money, let’s blame those who corrupt it.

Perfect currencies do not exist. As the brainchild of fallible humans, monies are bound to constantly face primal temptations. Failing to find such an illusory ideal, the freedom to choose currencies is the best guarantee of having sound money in a free society.

Republished from FEE.org

Baudoin Collard

Baudoin Collard is an active member of the Libertarian Party of Belgium (Parti Libertarien de Belgique). He holds a PhD in cryptography and is passionate about cryptocurrencies.

Millennials Are in a Love Triangle with Capitalism and Socialism

August 25, 2017 ALOD Policy Blog

By Andrew Taylor

There’s been a lot of talk recently about how Millennials – the generation born between roughly 1980 and 2000 – think about economics. Much of it was sparked by the fanatical support for self-described “Democratic Socialist” Bernie Sanders from young people in the Democratic primary for president last year.

Gallup found in April 2016 that, whereas Hillary Clinton had a net favorability rating of -23 among 18-24 year-olds, Sanders’s score was +39.

A Harvard University poll administered at about the same time revealed how this has been translated into policy views. The survey reported that only 42% of Millennials supported capitalism. According to a contemporaneous Gallup poll, that was about 10 percentage points lower than the general population. The Harvard survey showed 33% of Millennials wanted socialism.

So Millennials have economic attitudes that are different from older Americans. But is their economic behavior different? Do they walk the socialist walk?

Here, the evidence is decidedly mixed.

Health Care

Socialists tend to embrace public goods because all citizens can consume them. Millennials certainly like them. A Pew Research Center poll from June revealed 45% of 18–29-year-olds favored a single-payer health care system. This was 14 percentage points higher than any other single age group.

Census data show Millennials adopted health insurance more rapidly than any other age cohort when Obamacare began in 2014-15. I’m not entirely sure what kind of political philosophy this behavior illustrates, but it does seem to suggest Millennials embraced the Affordable Care Act, legislation most people believe moved health care in this country solidly to the left.

Recycling and Personal Consumption

Socialism, unlike capitalism, makes a virtue of constrained personal consumption. A major reason for this, of course, is that it is less suited to production. But the connection has helped fuse ecology to socialism in the platforms of left-wing parties across the globe.

You may have heard the argument that Millennials are more environmentally conscious than the rest of us – they don’t use plastic shopping bags or flush the toilet, etc. A survey commissioned by Rubbermaid reported earlier this year that two-thirds of Millennials would give up social media for a week if everyone at their company recycled.

Interestingly, however, the data on behavior do not bear this out. A 2014 Harris poll conducted for the Institute of Scrap Recycling Industries (ISRI) revealed that whereas roughly a half of respondents over thirty said they “always” recycled, only a third of the younger group did.

Millennials talk about saving the planet for humanity, behavior a socialist mindset deems heroic, but they do not seem to be doing more than anyone else to secure our world’s survival.

Transportation

Millennials also use public transportation much more than other groups. Over one-fifth ride a bus or train on a daily or almost-daily basis according to a Pew survey from late 2015. This was nearly double the proportion of any other age group.

Indeed, younger people seem to have much less love than their elders for that ultimate of American private goods, one’s own car. The number of licensed drivers in both the 24-29-year-old and 30-34-year-old cohorts decreased by about 10% between 1983 and 2014 according to the University of Michigan’s Transportation Research Institute. The drop for 18-year-olds was a fifth. At the same time, everyone over 45 continues their love affair with the automobile.

This seems consistent with the socialist rejection of material goods, but whether this is correlation or causation is unclear.

Sharing Economy

Moreover, Millennials have almost single-handedly nurtured the “sharing” economy – a marketplace in which peer-to-peer transactions are facilitated by a software platform that permits participants to divide consumption, as exemplified by Uber and Airbnb. According to Vugo, 57% of all ridesharing customers are aged 25 to 34.

The sharing economy may sound quite socialist because it seems to eschew private ownership. But as Duke professor Mike Munger has pointed out, people, in general, wish to consume the services that tangible goods provide, not the goods themselves. The sharing economy, in fact, provides access to the services of more material goods than the user would otherwise have – whether that’s a five-minute ride in a car or a two-day stay in a house. Its fundamental principles, therefore, are capitalist.

Entrepreneurialism

A 2014 Bentley University survey of Millennials reported that two-thirds of respondents expressed a desire to start their own business. But Millennial behavior is different. An analysis by the Wall Street Journal last year found that the proportion of Americans under 30 who own a business has dropped by 65% since the 1980s. Millennials might say they want to be Mark Zuckerberg, but they’re not particularly entrepreneurial.

There does exist therefore a disconnect between Millennial economic attitudes and behavior. What explains it? The generation is intrigued by the idea of socialism. It embraces many of its values and the public policies that would bring it about. But Millennials’ behavior is ambiguous. Entrepreneurship in private enterprise is not a particularly appealing career path to them in practice.

Additionally, Millennials’ reduced consumption is probably as much a function of economic necessity as it is a sacrifice of their personal wants to some grand social plan. The Great Recession has left them playing financial catch-up. A Pew analysis of census data reveals 15% of 25-to-35-year-olds still live with their parents. Traditionally that fraction has been around one tenth. A 2016 study by the left-leaning Center for American Progress found that Millennials make less than Gen Xers did in their early 30s. They only earn about the same as Boomers, who are 30 years older and 50% less likely to have graduated from college.

So perhaps there’s another explanation: When they appear to be rejecting capitalism, it’s often because Millennials are simply adjusting America’s core economic principles to new technologies and economic realities.

Reprinted from Learn Liberty.

Andrew J. Taylor

Andrew J. Taylor is professor of Political Science in the School of Public and International Affairs at NC State University. He received his Ph.D. from the University of Connecticut and teaches courses in American politics, including Introduction to American Government, the Presidency and Congress, the Legislative Process, Public Choice and Political Institutions, and the Classical Liberal Tradition.

Corruption Rises as Economic Freedom Falls

August 14, 2017 ALOD Policy Blog, Philosophy

By Richard M. Ebeling

The corruption of government officials seems to be as old as recorded history. For example, the ancient Roman senate passed laws against such political corruption in the first century, B.C. They defined a corrupt act as “whenever money is taken and a publicly-conferred duty is violated.”

Local magistrates in the Roman Empire were permitted to legally receive cash gifts of up to 100 gold pieces a year, but anything beyond this amount was considered “filth.” There was also a separate criminal category against what was called concussio, or the “shakedown” and “extortion.” A Roman official might claim to have a legal order against someone and demand a bribe not to enforce it against the individual’s person or property.

Emperor Constantine issued one of the strongest decrees against corruption during this time in A.D. 331. Those found guilty of such crimes might be exiled to an isolated island or a far-off rural area, while others might even be condemned to death. A judge, for example, might be executed if he had acquitted someone guilty of murder for the right price.

Ranking Corruption

Today, high levels of political corruption remain one of the major problems people confront around the world. While most of us think of such corruption as primarily impacting the hundreds of millions who live in the underdeveloped and developing parts of the globe, it touches those of us fortunate enough to live in the industrially developed Western democracies.

The Berlin-based non-profit organization, Transparency International (TI), annually surveys various forms of corruption around the world by various measures and types. A score of 100 in their 2016 Corruption Perception Index means the absence of any political corruption. A score approaching zero suggests a society in which little happens or gets done without layers of governmentally corrupt processes for people to get through in their daily lives. TI points out that “No country gets close to a perfect score” on the index.

However, according to Transparency International many of the least corrupt nations around the world are in the European Union and North America. In fact, Denmark ranks the least corrupt worldwide, followed by New Zealand. Among the remaining top ten of least corrupt countries are: Finland, Sweden, Switzerland, Norway, Singapore, the Netherlands, Canada and Germany. All of them have scores of 80 or better on TI’s scale of 100 having zero corruption.

The United States, however, is only ranked 18 with a score of 74. That placed America just below Belgium, Hong Kong and Austria. But the U.S. did rank above Ireland, Japan and Uruguay. And, happy to report, America is above France, which had a score of only 69.

The most corrupt nations of the EU, perhaps not surprisingly, are in Eastern Europe, in those countries that had been part of the former Soviet bloc. Poland only scored 62, followed by Slovenia (61), Lithuania (59), Latvia (57), Czech Republic (55), Slovakia (51), and Hungary and Romania (58). On the other hand, Greece, a longtime member of the EU, only earned a score of 44.

Former Soviet republics further to the east are even worse. The Russian Federation and Ukraine only scored 29, with the former Soviet republics in central Asia – Kazakhstan, Turkmenistan, Uzbekistan, for instance – barely making it above the low 20s range on the scale.

Africa, Asia, and Latin America

The lowest TI scores are generally earned in Africa and parts of the Middle East and Asia, with some other very corrupt countries in Latin America. The most corrupt countries on the planet, according to TI, are Somalia (10), South Sudan (11), North Korea (12), Syria (13), Yemen (14), Sudan (14), Libya (14), and Afghanistan (15). But in corruption depravity, Venezuela, Iraq, and Haiti are not far behind them.

In fact, on the Transparency International scale there are hardly any countries in Asia, the Middle East, Africa or Latin America that make it even to the 40s mark on their political corruption scale. The vast majority of the countries in these parts of the world are in the 30s and 20s, or less levels under TI’s scale.

As part of their annual survey on global corruption a few years ago, TI also asked people the frequency with which they had to pay bribes to government officials of one type or another in attempts to get by in their daily lives. In North America, one percent of Canadians surveyed said they bribed someone in government. In the United States that reply was given by two percent of the people asked.

But even in countries that have long been members of the EU bribery was reported. The worst occurred in Greece, where 27 percent of the people said they paid bribes during the preceding year. In most of Western Europe the bribery level was around 2-3 percent of the population, though the number was 6 percent in Luxembourg. (The bribery question was not asked in Germany and Italy.)

Bribery is far more endemic in the rest of the world. Africa suffers from political bribery the most, with 42 percent of all those in the countries surveyed saying they had paid bribes. The most extreme case was found by TI in Cameroon, where 79 percent – almost four out of every five people – admitted paying bribes, with the number being 40 percent of the people in neighboring Nigeria.

Bribing the Police

In Asia, the overall rate of bribe giving was reported to be 22 percent of the population. The highest rates were found in Cambodia (72 percent), Pakistan (44 percent), the Philippines (32 percent), Indonesia (31 percent), India (25 per- cent), and Vietnam (14 percent).

Finally, in Latin America, the average bribery rate was recorded at 13 percent of the people. But as in the rest of the world, it varies from country to country. Among the handful of Latin American countries surveyed, the highest rate was in the Dominican Republic with 28 percent. Bolivia followed with 27 percent.

Around the globe, the most bribes are paid to the police. In Africa, 47 percent of the respondents said they bribed the police; in Asia, 33 percent; in Latin America, 23 percent; and in Eastern Europe, almost 20 percent. Worldwide, about 17 percent of the people in the survey paid bribes to the members of law enforcement.

Bribing people in the judicial system came next, with the global response being about 8 percent of all those surveyed. About the same percentage around the world said they bribed government agents for business licenses and permits, though again the highest rates were in Africa (23 percent) and Asia (17 percent). But even in the United States and Canada, around 3 percent admitted paying such bribes.

Medical care is also a major area for such corruption. In Africa, 24 percent of the respondents said they paid bribes for access to medical services; in Asia, the response was 10 percent; in Russia and Ukraine, 13 percent; in Eastern Europe, 8 percent; in the EU, almost 5 percent; and in North America, 2 percent.

The Cause of Corruption

Political corruption, clearly, is found everywhere around the world and people, regardless of where they live, do not expect it to go away anytime soon. Yet, in spite of its global dimension, corruption pervades some parts of the world more than others and permeates certain corners of society to a greater degree. Why?

Part of the answer certainly relates to issues surrounding ethics and culture. The higher the degree of personal honesty and allegiance to ethical codes of conduct, the more we might expect people to resist the temptations of offering or taking bribes. However, economic and business analyst, Ian Senior, in his, Corruption – the World’s Big C: Cases, Causes, Consequences, Cures (2006), concluded that there were no significant correlations between high degrees of personal honesty and religious practice and less bribe-taking around the world.

A far stronger explanation can be found in the relationship between the level of corruption in society and the degree of government intervention in the marketplace. In a generally free market society, government is limited to the protection of the citizenry’s life, liberty, and honestly acquired property. The rule of law is transparent and assures impartial justice for all. Any other functions taken on by the government are few in number, such as a variety of public works projects.

Under these circumstances, government officials have few regulatory or redistributive responsibilities, and therefore they have few special favors, privileges, benefits, or dispensations to “sell” to some in the private sector at the expense of others in society.

The smaller the range of government activities, therefore, the less politicians or bureaucrats have to sell to voters and special interest groups. And the smaller the incentive or need for citizens to have to bribe government officials to allow them to peacefully go about their private business and personal affairs.

Influencing Market Outcomes

On the other hand, the very nature of the regulated economy in the interventionist state is to short-circuit the free market. The interventionist state goes beyond protecting people’s lives and property. Those in power in the interventionist state intervene by using government authority to influence the outcomes of the market through the application of political force.

The government taxes the public and has huge sums of money to disburse to various programs and projects. It imposes licensing and regulatory restrictions on free and open competition. It transfers great amounts of income and wealth to different groups through sundry “redistributive” schemes. It controls how and for what purpose people may use and dispose of their own property. It paternalistically imposes legal standards influencing the ways we may live, learn, associate, and interact with others around us.

Those in the government who wield these powers hold the fate of virtually everyone in their decision-making hands. It is inevitable that those drawn to employment in the political arena often will see the potential for personal gain in how and for whose benefit or harm they apply their vast life-determining decrees and decisions. Some will be attracted to such “public service” because they are motivated by ideological visions they dream of imposing for the “good of humanity.”

Some will see that bribing those holding this political power is the only means to attain their ends. This may be to restrict or prohibit competition in their own corner of the market or to acquire other people’s money through coercive redistribution. For others, however, bribing those who hold the regulatory reins may be the only way to get around restrictions that prevent them from competing on the market and earning a living.

The business of the interventionist state, therefore, is the buying and selling of favors and privileges. It must lead to corruption because by necessity it uses political power to harm some for the benefit of others, and those expecting to be either harmed or benefited will inevitably try to influence what those holding power do with it.

The Correlation between Freedom and Corruption

For 23 years the Heritage Foundation in Washington, D.C., has sponsored an annual Index of Economic Freedom (IEF). The IEF tracks a series of 10 measured indicators that include the following:

(1) business freedom; (2) trade freedom; (3) level of fiscal burden; (4) size of government; (5) degree of monetary stability; (6) investment freedom; (7) financial freedom; (8) protected private property rights and the general rule of law; (9) flexible labor markets; and (10) freedom from corruption.

The premise is that the greater the degree of individual freedom, the more secure property rights, the smaller the size and intrusiveness of government in the marketplace, and the greater the open competitive market environment at home and in foreign trade, then the more likely a society will experience rising prosperity and higher standards of living over time.

No country in the world is free from some degree of government intervention and regulation. Unfortunately, the nineteenth-century era of relative laissez-faire is long gone. But the extent to which governments intrude into the economic, social, and personal activities of their citizens does vary significantly around the globe. This includes the extent to which citizens are protected by an impartial enforcement of the rule of law, have the freedoms of association, the press, and religion, and the right to democratically participate in the selection of those who hold political office.

The Index of Economic Freedom, in its 2017 edition, estimates that based on composite scores of all ten indicators, the greatest amount of economic freedom can be found in the following parts of the world: Hong Kong, Singapore, New Zealand, Switzerland, Australia, Estonia, Canada, the United Arab Emirates, Ireland, and Chile. The United States ranks only 17 in the world by the Index of Economic Freedom benchmarks. Ten years ago, before the Barack Obama presidency, America ranked fourth in the world.

Regionally, North America, Western Europe, and Australia/New Zealand are estimated by Transparency International to be the areas of the world in which the lowest rates of corruption are to be found. The Index of Economic Freedom also ranks these parts of the globe as generally having the greatest amount of economic freedom or the least intrusion of government intervention (broadly defined) within the marketplace.

On the other hand, Africa, Asia, and Latin America are the parts of the globe with the highest reported amounts of bribery, and are also the areas that IEF estimates as far lower in the global rankings for degrees of economic freedom. Among the 180 countries included in the Index of Economic Freedom, many (though certainly not all) of the ones that Transparency International estimates as having particularly high levels of corruption are ranked at the bottom one-third in terms of economic freedom from government intrusion.

The correlation between a global low ranking in terms of economic freedom and a high reported rate of political corruption is certainly not one-to-one. There are many variables at work, including the extent to which different types of freedom used in the IEF surveys are restricted in the respective countries. Thus, domestic property rights might be legally more secure in one country compared to others, but that country may have a higher rate of price inflation and more restricted labor markets, resulting in it having a lower economic freedom ranking in the index compared to other nations.

But the assertion can be safely made that the wider and more intrusive the degree of government intervention, the greater the likelihood of a higher level of experienced and perceived corruption. The more the government interferes with marketplace transactions (e.g., through price and production controls, or import and export restrictions and quotas, or business licensing and permit rules, or high, complex, and arbitrary taxation), the more need and incentive for people to bribe those in political power to free or reduce the heavy hand of government over their lives.

Ending global political corruption in its various “petty” and “grand” forms, therefore, will only come with the removal of government from social and economic life. When government is limited to protecting our lives and property, there will be little left to buy and sell politically. Corruption then will be an infrequent annoyance and occasional scandal, rather than an inescapable aspect of today’s social and economic life around the world.

This piece was culled from FEE.org

Richard M. Ebeling

Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.

Lawrence Reed: Thoughts on a Free Market

August 11, 2017 ALOD Policy Blog, Philosophy

On Tuesday, March 28, Dr. Lawrence W. Reed, president of the Foundation for Economic Education (FEE), was invited by Young Americans for Liberty to speak about free trade and protectionism at the Miller Learning Center. Reed began his talk by explaining some fundamental definitions concerning economics and followed by making arguments in favor of free trade over protectionism, tariffs, and quotas.

In the past year, the question of how the United States should approach international trade has become an increasingly divisive topic, especially among conservatives. Many in the Trump camp favor his retreat from trade deals such as the Trans-Pacific Partnership (TPP) and his push to renegotiate the North American Free-Trade-Agreement (NAFTA). Concurrently, Dr. Reed and many other conservatives believe that Trump’s approach is ultimately regressive.

In his talk on the University of Georgia campus, Dr. Reed puts forth the question that was asked centuries ago by famous author and economist Adam Smith: “What makes a nation wealthy?” Reed’s answer is goods and services. He asserts that more and better choices in the market, not full employment, make a nation truly wealthy. “This is the general argument against protectionism,” says Reed. “Tariffs and quotas do not necessarily improve goods and services.”

Dr. Reed presents three arguments in favor of freer markets, confidently noting that he would say the same to a Detroit auto workers union.

THE LIBERTY ARGUMENT

He refers to his first argument as the “liberty argument.” This one is more principled than pragmatic. It declares that all potential traders have the right to voluntary exchange and that tariffs and quotas handed down by the government obstruct this right. This line of thinking is consistent with many libertarian and conservative positions dealing with individual and property rights.

THE PEACE ARGUMENT

The second argument is dubbed the “peace argument.” Here, Reed references French economist Frédéric Bastiat:

“If goods don’t cross borders, armies will.”

Many wars and conflicts in history have been catalyzed by trade disagreements, and Reed contends that diplomacy is a much preferable and more effective alternative. This argument has a basis among other free market thinkers, as well as national security theorists. Austrian economist Ludwig von Mises touted a similar theory to debunk the Marxist-Leninist contention that capitalism was a catalyst for war. Where Lenin saw the spread of worldwide capitalism as the internationalization of the eternal conflict between labor and capital, Mises posited that the interconnectedness of international trade established strong, mutually-beneficial commercial networks between countries that often served as a countervailing force against calls for martial conflict among trading nations. Ironically, though perhaps not surprisingly, a World Socialist website seemed to confirm Mises’ point back in 1999 when it noted: “The pledge to restart the talks [with China] came after a barrage of lobbying pressure by U.S. companies alarmed over the prospect of losing the billions of dollars in trade and investment opportunities.”

THE ULTIMATE ARGUMENT

Dr. Reed appropriately calls his final argument the “ultimate argument,” in which he takes a more economic look at the effects of protectionism. This argument claims that tariffs and quotas harm consumers by giving them inferior products, fewer options, and higher prices. Other trading parties also have the ability to retaliate to protectionist action. Dr. Reed closes this argument by saying, “You cannot close the door to imports without closing the door on exports.” Dr. Reed’s economic point has historical basis in our hemisphere, where “import substitution,” a much more drastic variant of protectionism, took Argentina from one of the top ten wealthiest countries at the dawn of the 20th century to an economic also-ran today. Chile, on the other hand, drastically reduced tariffs and opened its economy to the world, and has become the model economy for the region.

Dr. Reed is clearly wary of President Trump’s rhetorical tendency towards isolationism, and with good reason. It is imperative to maintain a free market for the nation’s continued prosperity. However, various conservatives believe that some countries have taken advantage of the U.S. due to its recent trade policy and that certain tariffs would put a stop to that. Our unwavering commitment to free trade is little solace to an entrepreneur whose intellectual property has been stolen by a state-owned Chinese manufacturer. To combat this, Joanne Butler, a former staffer of the House Means and Ways Committee, offers some enforcement tools that, she believes, can curb the violation of American property and intellectual rights. Butler references a law nicknamed “Special 301” as a means to punish countries that regularly engage in piracy of software, technology, high-end designer goods and other products by imposing tariffs on imported goods.

Former House Foreign Affairs Committee member Dan Burton claims that Trump was absolutely right to pull the U.S. from the TPP and renegotiate NAFTA. Burton opposes massive multilateral trade agreements that, he argues, “ceded our constitutional authority and economic autonomy to international organizations such as the World Trade Organization.” Burton goes on to stress the danger of the shift in manufacturing from domestic to globalized production has made the nation more vulnerable to international crises.

The key word in most conservative arguments for increased protectionism seems to be “fairness.” Dan Burton is not anti-trade, but he emphasizes the fact that trade only benefits the U.S. if it is free and fair. Finding a compromise in this discussion can be tricky, especially when dealing with a new president whose capacity for compromise is, at the very least, unproven. The United States has the world’s largest economy, and should not subject itself to unfair and harmful deals. However, those who argue for and orchestrate this pullback must not forget the principles of the free market and the benefits of free trade that allowed America to become great in the first place.

Republished from Archconuga.com

— J. Thomas Perdue is a sophomore studying journalism. He is a regular contributor to The Arch Conservative

4 Common Capitalism Myths Debunked

James Davenport

The Dos and Don’ts of Talking Liberty

Jeffrey A. Tucker

Adam Smith’s Concept of Justice

Dr. Vernon Smith

Everyone Loves This Book But Who Has Actually Read it?

by Brittany Hunter

Brittany Hunter

How Prices Promote Peace

Matthew McCaffrey

Twelve Economic Concepts Everyone Should Know

Richard N. Lorenc

Baudoin Collard

Millennials Are in a Love Triangle with Capitalism and Socialism

Andrew J. Taylor

Corruption Rises as Economic Freedom Falls

Richard M. Ebeling

Lawrence Reed: Thoughts on a Free Market

THE LIBERTY ARGUMENT

THE PEACE ARGUMENT

THE ULTIMATE ARGUMENT

Recent Posts

Recent Comments

Post Categories

About ALOD

Lawrence Reed: Thoughts on a Free Market