Tag Archives: Capitalism

Jay Richards: eight common myths about wealth, poverty and the free market

I have a key that will unlock a puzzling mystery
I have a key that will unlock a puzzling mystery

Have you read Jay Richards’ book “Money, Greed and God?” Because if you haven’t, he’s written a series of articles that summarize the main points of the book.

The index post is here.

Here are the posts in the series:

  • Part 1: The Eight Most Common Myths about Wealth, Poverty, and Free Enterprise
  • Part 2: Can’t We Build A Just Society?
  • Part 3: The Piety Myth
  • Part 4: The Myth of the Zero Sum Game
  • Part 5: Is Wealth Created or Transferred?
  • Part 6: Is Free Enterprise Based on Greed?
  • Part 7: Hasn’t Christianity Always Opposed Free Enterprise?
  • Part 8: Does Free Enterprise Lead to An Ugly Consumerist Culture?
  • Part 9: Will We Use Up All Our Resources?
  • Part 10: Are Markets An Example of Providence?

Parts 4 and 5 are my favorites. It’s so hard to choose one to excerpt, but I must. I will choose… Part 4.

Here’s the problem:

Myth #3: The Zero Sum Game Myth – believing that trade requires a winner and a loser. 

One reason people believe this myth is because they misunderstand how economic value is determined. Economic thinkers with views as diverse as Adam Smith and Karl Marx believed economic value was determined by the labor theory of value. This theory stipulates that the cost to produce an object determines its economic value.

According to this theory, if you build a house that costs you $500,000 to build, that house is worth $500,000. But what if no one can or wants to buy the house? Then what is it worth?

Medieval church scholars put forth a very different theory, one derived from human nature: economic value is in the eye of the beholder. The economic value of an object is determined by how much someone is willing to give up to get that object. This is the subjective theory of value.

And here’s an example of how to avoid the problem:

How you determine economic value affects whether you view free enterprise as a zero-sum game, or a win-win game in which both participants benefit.

Let’s return to the example of the $500,000 house. As the developer of the house, you hire workers to build the house. You then sell it for more than $500,000. According to the labor theory of value, you have taken more than the good is actually worth. You’ve exploited the buyer and your workers by taking this surplus value. You win, they lose.

Yet this situation looks different according to the subjective theory of value. Here, everybody wins. You market and sell the house for more than it cost to produce, but not more than customers will freely pay. The buyer is not forced to pay a cost he doesn’t agree to. You are rewarded for your entrepreneurial effort. Your workers benefit, because you paid them the wages they agreed to when you hired them.

This illustration brings up a couple important points about free enterprise that are often overlooked:

1. Free exchange is a win-win game.

In win-win games, some players may end up better off than others, but everyone ends up better off than they were at the beginning. As the developer, you might make more than your workers. Yet the workers determined they would be better off by freely exchanging their labor for wages, than if they didn’t have the job at all.

A free market doesn’t guarantee that everyone wins in every competition. Rather, it allows many more win-win encounters than any other alternative.

2. The game is win-win because of rules set-up beforehand. 

A free market is not a free-for-all in which everybody can do what they want. Any exchange must be free on both sides. Rule of law, contracts, and property rights are needed to ensure exchanges are conducted rightly. As the developer of the house, you’d be held accountable if you broke your contract and failed to pay workers what you promised.

An exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game.

On this view, what you really need to fear as a consumer is government intervention that restricts your choices in the marketplace, or makes some choices more expensive than they need to be (tariffs).

If you care about poverty, it’s often tempting to think that it can only be solved one way – by transferring wealth from the rich to the poor. But that is a very mistaken view, as any economist will tell you. The right way to create prosperity is by creating laws and policies that unleash individual creativity. Letting individuals create innovative products and services, letting them keep what they earn, making sure that the law doesn’t punish entrepreneurs – that incentivizes wealth creation. Fixing poverty does not mean transferring wealth, it means giving people more freedom to create wealth on their own. Free trade between nations is an important way that we encourage people to create better products and services that what they have available in their own countries.

Economists agree on the benefits of free trade

Who could possibly disagree with free trade? Well, many people on the left do. But economists across the spectrum of ideology (university and private sector and public sector) agree on the benefits of free trade.

Harvard economist Greg Mankiw explains what most professional economists agree on.


Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)
  12. A minimum wage increases unemployment among young and unskilled workers. (79%)
  13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
  14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

Socialist economic policies don’t work because they are making policies that are based on economic myths. We know that these myths are myths because of economics is a mathematical science, and because we have tried good and bad policies in different times and places. We have calculations and we have experience to know what works and what doesn’t work. If you want to help the poor, you have to respect what economists know about how wealth is created. The solution is not to “spread the wealth around”, it’s to encourage people to create more wealth by inventing things that people freely choose to buy.

What is the difference between capitalism and socialism?

Over 100,000 Venezuelans pouring into Colombia from the Venezuela in order to buy food
Over 100,000 Venezuelans cross into Colombia in order to buy food

(This photo H/T Prager University)

One country that has done a good job of implementing socialism is Venezuela.

Here is an article from March 2013 from Slate, a web site that strongly favors socialism. The headline is “Hugo Chavez’s economic miracle: The Venezuelan leader was often marginalized as a radical. But his brand of socialism achieved real economic gains”. The author is “a senior writer for the International Business Times”.

He writes:

Chavez became the bugaboo of American politics because his full-throated advocacy of socialism and redistributionism at once represented a fundamental critique of neoliberal economics, and also delivered some indisputably positive results. Indeed, as shown by some of the most significant indicators, Chavez racked up an economic record that a legacy-obsessed American president could only dream of achieving.

What did Chavez do, precisely, that caused the Venezuelan economic to boom? Well, he nationalized private industry and redistributed wealth from job creators and entrepreneurs to the poor.

As The Week correctly put it, while “Chavez’s policies of redistribution and nationalization of oil assets endeared him to Venezuela’s working class” and produced many laudable results, the country’s “oil-centric economy has taken away resources from other areas that are badly in need of development.”

OK, so that’s pretty much what the Democrat party wants to do in the United States as well. Nationalize the energy sector, nationalize health care, etc. Let the government take over the private sector industries in order to eliminate “inequalities”. Raise taxes, and redistribute the money to the low income people via social programs, also known as welfare.

So, how does it work? Is socialism really an “economic miracle”?

Here is the latest from Venezuela, as reported by CNN Money. (H/T William)


Venezuelans cried at the sight of fully-stocked supermarket shelves in Colombia.

Pregnant women, children and even elderly Venezuelans crossed into Colombia on Sunday after the border was temporarily reopened, allowing them to buy basic foods and toiletries — rare commodities in their home country.

Tearful Venezuelans had gone weeks without basic food items like milk, flour and toilet paper. It’s a sad but common part of daily life today in crisis-ridden Venezuela, a country that has the world’s largest proven reserves of oil. Colombian officials estimate that about 100,000 Venezuelans crossed the border.

Venezuela is expected to dive deeper into the abyss this year, according to new projections published Wednesday by the International Monetary Fund.

The IMF forecasts Venezuela’s economy will shrink 10% this year, worse than its previous estimate of 8%. It also estimates that inflation in Venezuela will catapult to 700% this year, up from the earlier guess of about 480%.

“Venezuela’s economic condition continues to deteriorate,” says Alejandro Werner, chief Latin America economist at the IMF. The estimates for growth and inflation are the worst worldwide.

The numbers are just the tip of the iceberg. Venezuela is deep into a humanitarian crisis — people are dying in ill-equipped hospitals and many live without basic food items. Venezuela can’t pay to import goods because its government is desperately strapped for cash after years of mismanagement of its funds, heavy spending on poorly-run government programs, and lack of investment on its oil fields.

[…]It’s all even more tragic given that despite Venezuela’s oil abundance, its state-run oil company, PDVSA, is broke. Venezuela’s oil production fell to a 13-year low in June, according to OPEC, of which it’s a member.

That’s what you get when you let the government take over the free enterprise system, or even when you just stifle the free market with burdensome regulations and high taxes. That’s what socialists in Venezuela did. That’s what the Democrat party would do. They’re  two sides of the same coin.

Dennis Prager

Dennis Prager put out a good video recently explaining the problems with socialism:

Why would anyone prefer a system that encourages some people to feel entitled to what other people create and earn? We want a system that is focused on serving your neighbor – not stealing from them.

Arthur Brooks

If you would like a very brief introduction to capitalism, also known as the free enterprise system or the free market system, then you can watch the videos below, featuring Arthur Brooks, president of the American Enterprise Institute.

Here is the first one, which explains the myths that most Americans are taught about capitalism in school and in the culture:

An important advantage of capitalism is that it lifts people out of poverty. The poorest people in America live much better than the wealthy in Venezuela.

And the second video explains what capitalism offers to individuals for their fulfillment, which socialism does not:

Earned success makes people happier, which is at least as important as the wealth benefit.

We can compare the results of each system by looking at where it’s been tried. Capitalism lifts people out of poverty – all the people in the society who are willing to work are lifted out of poverty. Even the people who can’t work in a capitalist society enjoy the benefits of charity from their neighbors – when people do well, they give more money away. Socialism drives those who work and those who don’t work into poverty, and eliminates charity. No one has anything to share when everyone is poor.

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Happy Independence Day 2016!

The Stars and Stripes
The Stars and Stripes

The Declaration of Independence

Here’s the complete text of the Declaration of Independence here.

And now let’s take a look at an article at The Federalist which talks about what the Declaration of Independence tells us about the character of America.

It says:

The Declaration of Independence, Thomas Jefferson famously wrote, was “intended to be an expression of the American mind.” Although not intended as such, it was also an expression of the American character. Woven throughout the text are insights into the minds and virtues of those Lincoln called the “once hardy, brave, and patriotic, but now lamented and departed race of ancestors” who fought for the independence we still enjoy.

This aspect of the Declaration of Independence receives scant attention from scholars and citizens, yet it must be understood. The theory of government elaborated in that text presupposes the existence of citizens who know how to govern themselves and are willing to assert their rights. The American character is the unstated premise of the argument, without which the theory, though still true, doesn’t work in practice.

So, what’s the American character?

What sets us Americans apart is that we do not merely declare for liberty. We staunchly stand for it. To be an American is not only to know that you are born free, it is to have the courage to defend your freedom. This admirable aspect of the American character is evident in the fifth grievance the Declaration levels against the king.

It reads: “He has dissolved representative houses repeatedly, for opposing, with manly firmness, his invasions on the rights of the people.” The king acted as monarchs are wont to do. Our forefathers, although they were subjects, did not take his abuses passively. They resisted—with manly firmness.

Today, King George III is long gone. Our representative houses are no longer dissolved at will (although they have unconstitutionally been declared to be in recess). Our rights, however, are still encroached upon, whether by the U.S. Department of Health and Human Services or the Environmental Protection Agency. Thankfully, courageous Americans still push back, like the Green family, who challenged Obamacare’s abortifacient mandate, or the Sacketts, who fought the EPA’s effective seizure of their property.

No charter of liberties or Constitution—not even one handed down by God himself—could ever, on its own, protect the rights of the people. James Madison, the father of our own Constitution, was not so foolish as to place his trust in mere “parchment barriers against the encroaching spirit of power.”

In Federalist No. 57, Madison takes up the question of “what is to restrain the House of Representatives from making legal discriminations in favor of themselves and a particular class of the society?” His answer: “the genius of the whole system; the nature of just and constitutional laws; and above all, the vigilant and manly spirit which actuates the people of America—a spirit which nourishes freedom, and in return is nourished by it.”

The 56 men who signed our Declaration of Independence set the example for their fellow countrymen and for future generations. They did not simply proclaim the universal rights of man. They also pledged “to each other, our Lives, our Fortunes, and our sacred Honor.” And they meant it. Twelve served as combat commanders during the Revolutionary War. Five were captured and imprisoned by the British. Seventeen lost part of their fortunes.

America is not a country for servile men and women. We not only have a right to be free, but a duty to be free. For “when a long train of abuses and usurpations, pursuing invariably the same object evinces a design to reduce them under absolute despotism, it is their right, it is their duty, to throw off such government, and to provide new guards for their future security.” Free as we are, we have no liberty to choose despotism—even if it is sugarcoated, as it is today, with material comfort and license.

[…]Two centuries later, the American character endures, battered and bruised though it may be. It has been corroded by the Progressive faith in government, the sixties ethos of “if it feels good, do it,” and the mindlessness and vulgarity of pop culture. But we can still readily discern among many Americans the habits of mind and the virtues of a free people. For this, we should be grateful on this Fourth of July.

To love liberty means to be willing to stand up for liberty, and that can mean something as simple as 1) not voting for bigger government just because they are handing out money to you and 2) not voting for bigger government because they are letting you do immoral things.

Standing up for liberty means standing up for your own personal responsibility. It means looking primarily to yourself for earning a living. It means choosing to behave morally so that you don’t create a situation where you need the government to bail you out of your own immoral decisions with someone else’s money.

Arthur Brooks: why is the American public shifting from optimism to envy?

Labor Force Participation down to 62.8%
Labor Force Participation down to 62.8%

An editorial by Arthur Brooks appeared today in the leftist New York Times. His topic is the shift from optimism to envy, why it is happening, and whether envy makes us happier than optimism.

Excerpt: (links removed)

The Irish singer Bono once described a difference between America and his native land. “In the United States,” he explained, “you look at the guy that lives in the mansion on the hill, and you think, you know, one day, if I work really hard, I could live in that mansion. In Ireland, people look up at the guy in the mansion on the hill and go, one day, I’m going to get that bastard.”

[…]Unsurprisingly, psychologists have found that envy pushes down life satisfaction and depresses well-being. Envy is positively correlated with depression and neuroticism, and the hostility it breeds may actually make us sick. Recent work suggests that envy can help explain our complicated relationship with social media: it often leads to destructive “social comparison,” which decreases happiness. To understand this, just picture yourself scrolling through your ex’s wedding photos.

My own data analysis confirms a strong link between economic envy and unhappiness. In 2008, Gallup asked a large sample of Americans whether they were “angry that others have more than they deserve.” People who strongly disagreed with that statement — who were not envious, in other words — were almost five times more likely to say they were “very happy” about their lives than people who strongly agreed. Even after I controlled for income, education, age, family status, religion and politics, this pattern persisted.

It’s safe to conclude that a national shift toward envy would be toxic for American culture.

Unfortunately, in the wake of the Great Recession, such a shift may well be underway, given the increasing anxiety about income inequality and rising sympathy for income redistribution. According to data from the General Social Survey, the percentage of Americans who feel strongly that “government ought to reduce the income differences between the rich and the poor” is at its highest since the 1970s. In January, 43 percent of Americans told the Pew Research Center that government should do “a lot” to “reduce the gap between the rich and everyone else.”

Why the shift? The root cause of increasing envy is a belief that opportunity is in decline. According to a 2007 poll on inequality and civic engagement by the Maxwell School of Citizenship and Public Affairs at Syracuse University, just 30 percent of people who believe that everyone has the opportunity to succeed describe income inequality as “a serious problem.” But among people who feel that “only some” Americans have a shot at success, fully 70 percent say inequality is a major concern.

People who believe that hard work brings success do not begrudge others their prosperity. But if the game looks rigged, envy and a desire for redistribution will follow.

This is the direction we’re heading. According to Pew, the percentage of Americans who feel that “most people who want to get ahead” can do so through hard work has dropped by 14 points since about 2000. As recently as 2007, Gallup found that 70 percent were satisfied with their opportunities to get ahead by working hard; only 29 percent were dissatisfied. Today, that gap has shrunk to 54 percent satisfied, and 45 percent dissatisfied. In just a few years, we have gone from seeing our economy as a real meritocracy to viewing it as something closer to a coin flip.

There is a good lesson in this for people who want what is best for the poor. Simply receiving money from others is not going to make poor people happy. What we need to focus on is providing the poorest people with opportunities.

One way to help the poor is by giving poor children a better education. Conservatives support school choice, which takes money away from government and puts it back in the hands of parents, letting them choose the best school for their child. Schools have to produce good outcomes in order to earn the money, just like private businesses have to compete for customers. But Democrats oppose school choice, as when they killed the D.C. voucher program that helped poor black students. Less school choice helps public schools to be insulated from competition, which provides worse outcomes to students, especially poor minority students. If we really cared about poor, minority students, we would put pressure on public schools to compete with private schools. But the Democrats don’t want that, they prefer to give favors to their teacher union allies.

Democrats also want to punish job creators with high taxes and burdensome regulations. Democrats passed Obamacare, which punishes businesses with taxes if they allow part-time workers to work for more than 30 hours a week. Many jobs were lost because of this, and many people are now struggling to pay higher premiums for plans with higher deductibles and co-pays. Obamacare is a nightmare of intrusive regulations, too. Now the Democrats are talking about raising the minimum wage, which is going to put even more pressure on employers to lay off workers, because they can’t afford to pay them more money for the same work. For Democrats, this is all to the good, though. Because if the poor don’t have jobs, or can’t work enough hours, they start to see the economic game as “rigged” and they are more responsive to “envy rhetoric”. They start to look to big government for handouts, rather than trying to prevent the government from taxing and regulating job creators.

What we need to see is that it’s not the Democrats’ objective to help people find jobs. They gain when people become more envious, like in European countries, and start to vote to grow the size and power of government to redistribute wealth. Speeches about income inequality never have the goal of giving people jobs. None of Obama’s policies aim to do that. That’s why he won’t build the Keystone XL pipeline, or boost domestic energy development here at home. Instead, they want to extend unemployment benefits and pass the costs on to the next generation. Their goal is to get you unemployed or on disability or on welfare, so that you will vote for the government to continue to take your neighbor’s money to give it to you. That manufactured envy is what keeps the Democrats in power.

This plan to borrow from young people to buy the votes of old people today works for a while, until the money runs out. But by then, the politicians who put in place the redistribution programs are usually long gone .

Donald Trump’s plan to introduce tariffs is just a tax on consumer goods

I have a key that will unlock a puzzling mystery
I have a key that will unlock a puzzling mystery

What are the consequences of adopting tariffs for all of the people who are affected? What happens next, after stage one?

Here’s a lesson in basic economics from Joe Carter, writing for the Acton Institute.

He writes:

Both Sanders and Trump propose increasing tariffs on goods imported from other countries — and increase them significantly.* This isn’t that surprising for Sanders, a socialist who, on the issue of economics, is one of the most ill-informed candidates in modern history. But Trump should (and probably does) understand the detrimental impact tariffs have on the poor. And yet he has proposed an economy-crippling, poverty-increasing tariff.

In 2012, Trump proposed a tariff on China of 25 percent. In 2016 he bumped it up to 45 percent. (He later tried to lie and say he never proposed the 45 percent increase, but there is audio of him making the proposal.) A tariff is simply a tax on imports or exports, so Trump is proposing to raise taxes on imported goods by 25 to 45 percent. (To keep this point in mind, I’ll hereafter refer to tariffs as “taxes.”)

You might be thinking, “ So what? That’s a tax the Chinese have to pay.” But that’s not the way tariffs works. China doesn’t pay the tax — you do. If a tariff on Chinese goods is increased by 25 to 45 percent then you pay 25 to 45 percent more for those goods.

Here’s a way to think about it. Imagine there are two hamburger stands in town. One is owned by the mayor’s wife, Veronica, and one is owned by a woman who lives in the next town over, Betty.

Of the two, Betty makes the tastier burger. She is also able to charge $1 a burger since she is able to buy her supplies in her own hometown for much cheaper. Veronica’s burgers aren’t quite as good and cost more to make. She has to charge $1.30 per burger.

The mayor decides to implement a new tax of 45 percent on producers (like Betty) who don’t live in the city limits. Since Betty’s profit margin is already low, she has to pass the bulk of the 45-cent tax on to her customers. Instead of $1 she now has to charge $1.35.

So who is better off in this scenario? The only winner is Veronica. Since her burgers are now cheaper, she is likely to sell more. And who is worse off? The customers who now have to pay 30 to 35 cents more for every burger. That is money they could have used to buy other products or services. Now they have to spend additional money on this new tax.

The same principle applies to taxes on goods and services imported from other countries. Customers simply have to pay more for goods and services they used to get much cheaper.

To understand how Trump’s tax increase would affect consumers, take a trip to Target or Wal-Mart and add 45 percent to almost all the prices. That’s money that comes directly out of your pocket into the hands of the federal government — all to punish you for buying goods that are cheaper to make in China.

Harvard University economist Greg Mankiw explains what most professional economists agree on. The economic benefit of free trade tied for first place, with 93% agreement:

The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

My favorite textbook covers business cycle theory toward the end of the book (the last four chapters) precisely because that theory is controversial. I believe it is better to introduce students to economics with topics about which there is more of a professional consensus. In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)

  2. Tariffs and import quotas usually reduce general economic welfare. (93%)

He is the author of his “favorite textbook”, which is published by Harvard University Press.

This is not controversial among professional and academic economists. Economists across the ideological spectrum understand that free trade lowers the prices of consumer goods, and allows individuals, families and businesses to get more quality for their dollars. We can do better than Donald Trump and his naive, populist economic pablum.

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