Posts Tagged ‘capitalism’

Consider this a “bookend” post, following up on some of the sentiments from my series on Jews and Liberalism — particularly the “Jewish Freedom and the Free Market” post of the other day. It comes primarily from the final ‘Parting Thoughts’ chapter of economist John R. Lott, Jr.’s book Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t, with a few comments of my own thrown in, of course….

“Altruism is a noble quality — but in a large economy, it only goes so far. Adam Smith had it right: individuals, by pursuing their own self-interest, enrich society. Smith understood the fundamental principle of economics: when you make something more costly, people will do less of it. In other words, incentives matter. Studying the incentives that underlie our everyday decisions shows us that economic, criminal, and political policies work best when they direct individuals’ natural motivations toward a common good. These are policies that allow people the freedom to profit from their own work, that create meaningful and fair disincentives to committing crimes, and that carefully consider what factors encourage people to participate in our democracy by voting.

In a free market, those who only see the incentives of professionals and corporations to rip off their consumers are only considering one type of incentive. They miss the complex and fascinating process of how markets tend to evolve to solve cheating problems without government intervention. They fail to see not only that reputations matter, but that there are great incentives for the continual evolution of new mechanisms to guarantee the quality of products and services. As technology improves, these mechanisms become ever more efficient and creative.”

Economic Freedom and Corruption (2003), chart 3

“It is easy to point to some area of economic dissatisfaction, claim that the market is failing, and demand that the government step in. Whether forcing insurers to give discounts fof LoJacks, lobbying for government subsidies for honey producers, or mandating professional licenses to ensure the quality of professionals, advocates of government intervention fail to understand that consumers and producers tend to find solutions themselves when their own money is at stake. Solutions to free-riding problems that seem so simple and obvious today, such as advertising on radio, almost didn’t come along in time before the government stepped in. Because a modern economy is so complex, the wise men tasked with devising regulations frequently create more problems than they solve.”

I have to go on a mini-tangent, here. While I am not averse to a certain amount of government regulation (in some areas) for public safety, and I’m pretty certain Dr. Lott would agree, there are costs to such regulation, as well. Besides the obvious, like administration of regulatory agencies, there are less obvious costs, like higher prices, fewer choices, and less innovation. In fact, the latest & best estimate of the total cost for regulation by the U.S. government is $1.75 trillion per year, as reported recently by the Small Business Administration’s Office of Advocacy. That’s roughly equal to the GDP of Italy! At about $15,000 per household, that’s more than Americans pay in income taxes, which was about $900 billion for 2009, if I remember right! The upturn from the last SBA report (2005: $1.1 trillion/yr) accounts not only for regulatory costs that were previously overlooked but also includes a $445 billion increase in the cost of economic regulation. Sheesh!

Back to our regularly scheduled program…

“There will always be some duplicity in the free market. But there is also an ever-present incentive ingrained in the system for individuals and companies to behave honestly. If someone can make a buck by treating his customers better than someone else, eventually someone will try it. Political markets also have their own mechanisms to limit cheating, resulting in the election of politicians who, by and large, accurately represent their constituents.

The free market isn’t perfect, but that isn’t the right standard by which to judge it. The government is hardly perfect either.

Markets not only increase our wealth, they also increase our freedom. And so long as people have the freedom to act on their own incentives, the U.S. economy will continue to embody the best, most creative, and — I would dare say — the most honest aspects of our society.”

Epilogue to the Epilogue

While looking for a good image to accompany this article, I came across a Heritage Foundation study called “Ethics, Corruption, and Economic Freedom” (2003) that included the above graph. In her conclusion, Senior Policy Analyst Ana Isabel Eiras states the following:

“To fight corruption and informality, it is essential to understand that corruption is a symptom — of overregulation, lack of rule of law, a large public sector — not the root of the problem. The perceived problem is unethical/corrupt behavior of the private sector, which leads the government to press more on private-sector activities. The real problem is the government action/regulations causing undesired behavior of the private sector. The optimal solution would be to eliminate burdensome regulations so that unethical behavior does not occur.”

Very interesting…

“Enlightened self-interest” + “the invisible hand” + limited government intervention + (enforced) rule of law = a free-market, capitalist system that promotes & produces more freedom and more wealth for everyone who participates, while inherently reducing corruption. Sounds good to me!

In today’s excerpt from Why Jews Should NOT Be Liberals (2001, rev. 2006), Larry Sternberg returns to the issue of free market capitalism, its benefits, and what part a good Jew should play in the system….

Most observers of American politics would agree that between the two competing political doctrines of liberalism and conservatism, when it comes to promoting, encouraging, stimulating, praising, expanding, and identifying themselves with the free market, capitalistic system, it is conservatism that captures the prize. Of course, liberals welcome the fruits and benefits of the free market, but it is mostly to their liking because it creates sufficient wealth for their redistribution schemes and not because it is the most natural and productive system yet devised by man. Still liberals continue to want to tinker with it, to control it, and when necessary, to intervene with their own pet programs and ideas….

Green Bay Tea Party with signs

Green Bay Tea Party practicing free speech and the right to peaceably assemble in protest

Conservatives, on the other hand, seem to be generally more in favor of permitting people to spend their money as the individual sees fit. They are content to permit the free market to do its wondrous work, and with the “invisible hand” doing its thing, they sit back and enjoy the fruits of their endeavors….”

Yeah, I’d say that about sums it up. No profound insights, but a pretty fair assessment, I think.

So, what does this have to do with American Jews being liberal? If we agree that it is the conservatives who do the best job of growing the free market; and if we agree that the free market is the best system yet devised by man to spread the wealth created among all the participants; and if one of the cherished goals of Judaism is to help solve the problem of poverty, then doesn’t it follow that American Jews should be the foremost champions of growing the free market, and to do this they should be conservatives?

[…] The link between Judaism and capitalism is well described by Ellis Rivkin in his book, The Shaping of Jewish History. Rivkin wrote that it was the onset of capitalism beginning in the late seventeenth century that began to bring freedom to European Jews…. Where Jews participated in the creation of a capitalistic society as in America, they enjoyed a high degree of equality from the outset. Where capitalism failed to gain a secure foothold,… Jews were either expelled or persecuted….

The history of Jews in the modern world makes explicit the connection between individual freedom and developing capitalism. And yet, there seems to persist the notion that somehow capitalism breeds too much greed and selfishness, and we Jews must be the guardians against such evil spirits. It is okay for us Jews to become wealthy and to accrue power and influence through the workings of our marvelous free market, but we’ve got to protect society and the poor and the children from the evil inclinations that must reside in those “other rich and powerful” folk. Apparently, only wealthy Jews (and liberal Democrats) possess that kindness of spirit that entitles them to possess the wealth they accumulate. So we Jews must continue to support the liberal cause because that is the only doctrine that seems to be consistent with our Jewish calling of Tsedekah, and which can control the evil impulses of those other rich guys….

lots of large denomination bills

A Whole Lotta Gelt! Moolah!

Where Jews should be making their contribution to our market economy is by exhibiting the highest morality in their dealings with others in the business world. Our capitalistic system depends on honesty, integrity, and the carrying out of one’s promises. It is when fraud and deceit enter the picture that the worst excesses occur, and when people begin to doubt the value of our system. If Jews who are already so prominent in the business world would stress the positive aspects of the free market and set great examples of honesty in their business dealings, they could do more to help the economy grow and provide jobs than any government program existing. In the process, they would also demonstrate some of the basic morality of our Jewish religion.”

We have seen several examples of “fraud and deceit” in our capitalist society over the past several years — e.g., the Enron debacle, WorldCom, Bernie Madoff, recent scandals involving banks & securities firms, etc. They are actually quite few, when you think of how many businesses, business executives, and big-time investors there are out there. But, they are an embarrassment of sorts and serve as poster-children for corporate greed & corruption, which the socialists and free market skeptics point to as justification for their suspicions & accusations. Let’s not forget, though, that greed and corruption are rampant in socialist/communist nations, too. They just don’t have as much money to steal.

I think it behooves all free-marketers to accept Sternberg’s exhortation, though, especially those of us with a religious worldview that encourages moral, ethical behavior in all aspects of our lives. We must do our level best to act honorably and with moral integrity in all business dealings.

Outside of South America, I would be willing to bet that most people think of Chile as just another developing, “third-world” country with a handful of (relatively) wealthy people lording it over the peons. And, a few years ago, that would have been a fairly accurate description. Inflation was skyrocketing, the people were dirt poor and many (most?) of them unemployed — sort of like pre-quake Haiti.

Map of Chile (general)

Map of Chile

But, surprise! Last month, Chile became the first South American country asked to join the Organization for Economic Cooperation and Development (OECD), consisting of the (now) 31 wealthiest and most stable economies of the world. Chile has also now moved into the Top 5 in the Cato Institute’s ‘Index of Economic Freedom’, outranking even the U.S. [Note: The U.S. ranks a close 6th, not #17 as Glenn Beck (who got it from an IBD editorial) mistakenly reported a few weeks ago.]

What happened?

In the mid-1960s, center-left President Eduardo Frei Montalva initiated widespread social & economic reforms, focusing on housing, education, and agriculture. But, due to ever-increasing resistance from the political Left AND Right, Frei was only able to achieve some of his goals, while his country fell into an economic depression. When Socialist Salvador Allende took office in 1970, Marxist policies including nationalization and collectivization were instituted, resulting in decreased worker productivity, price freezes & wage increases, withdrawal of bank deposits, and runaway inflation. Then, in 1973 the U.S. assisted in a military coup by General Augusto Pinochet. Pinochet turned out to be a brutal dictator of an oppressive regime. But,…

If one good thing can be said about Pinochet, it is that he recognized the failures of socialist economics and he resolved to do something about it. Pinochet gave de facto control of the Chilean economy to the “Chicago boys”, a group of 10 economists who had studied the theories of John Locke (not the one on Lost), F.A. Hayek, & Milton Friedman at the University of Chicago. Beginning in the late 1970’s, they were authorized to begin implementing a long-term plan based on free-market principles — not an easy thing to do in a corrupt regime, under a dictator’s rule (even with his OK), and surrounded by similarly “difficult” neighbors. Chile began deregulating markets, opening up trade and courting agreements with multiple countries around the world. The economy was de-politicized and bureaucratic red tape was eliminated (well… somewhat). They cut taxes and removed wage & price controls. A balanced budget was instituted and private property once more respected. Eventually, the rule of law took root, as well, thereby greatly improving the safety and freedoms of the Chilean people.

The past two decades since Pinochet was defeated in 1988 have seen several left-wing presidents, but they have pretty-much stayed the course — while expanding government-sponsored social services, as well — and Chile’s economic growth has continued. Once a “closed” economy dominated by labor unions, Chile is now one of the most open economies in the world. Foreign trade with the Americas, Asia, and Europe brings in tens of billions of dollars to the Chilean economy. Chief exports include copper, wood products, fresh fruit, seafood, and wine. Many government-run enterprises have been sold off. (Some, like copper giant CODELCO, are still owned by the state, and there remains one government-owned bank.) Foreign investments, banking reform, increased personal and corporate savings, and the privatization of pension plans have all contributed to strengthening Chile’s financial stability. Poverty rates have dropped by more than half, and Chile’s per capita GDP has risen from $1300 (1980) to $15,000.

In addition to terrific economic growth, Chile now gets high scores for political & civil liberties, democratic governance, safety & security, etc., by groups like Freedom House and the Legatum Institute.

Chile's new President-elect Pinera

Chile's new President-elect Pinera

Following closely on the heels of its induction into the OECD, Chile’s people elected self-made billionaire Sebastian Pinera as their new president. Pinera is the first truly conservative leader Chile has had in decades. The current global financial woes have affected Chile, with unemployment inching up and a “contracted” economy, but the government has been able to dip into reserves from its copper revenues. With Pinera’s great personal success in media, sports, & airlines, some think he can bring even more financial & economic wisdom into the government, guiding Chile out of its current slowdown. The president-elect has vowed to be an “entrepreneurial president”, working to improve efficiency in the government by cutting red tape and demanding bureaucratic accountability, encourage private investment (e.g., partially privatizing CODELCO), revise employment law, make the business environment more attractive for local start-ups. Oh, and he’s got some ideas about fighting crime, too. (Do they include a cape & cowl, I wonder?) In short, he wants to make Chile “the best country in the world.”

So, obviously Chile’s economy still has problems. (Most countries do, especially these days.) There is room for improvement. But, it is still inspiring to see the amazing progress this once-impoverished and bankrupt nation has made in just 30 years. It is a case study of how Marxist theories and policies simply don’t work, whereas free-market capitalism and conservative policies bring people out of poverty, giving many (not just an elitist few) the opportunity to become quite wealthy, and improving the standards of living for all who participate. Or, as one expert on Latin American politics & economics, Andres Martinez of the New America Foundation, put it:

If trends continue, Chile will soon be considered one of those rare countries that has graduated out of the developing world, according to plenty of living-standard indices. The country is also the poster child for those who believe globalization and free trade can lift living standards, as Chile’s economic course has long been anchored in its free-trade agreement with the U.S. and its dynamic export sector. It also stands out among South American countries in that its governing socialists have pragmatically been the ones embracing this pro-business, market-oriented economy.”

I’ll support this kind of growth and progress over Leftie “hope and change” every time.