The Story of the United States

This Prager U video features Nick Adams, a best-selling Australian author and political commentator, giving his perspective on what makes America different, and admiring how “nowhere else are you as free to take entrepreneurial risks.”

Milton and Rose Friedman, in their popular book and 1977 TV series, Free to Choose, describe the story of the United States as such:

“The story of the United States is the story of an economic miracle and a political miracle that was made possible by the translation into practice of two sets of ideas both, by a curious coincidence, formulated in documents published the same year, 1776.

One set of ideas was embodied in The Wealth of Nations, the masterpiece that established Adam Smith as the father of modern economics. It analyzes the way in which a market system could combine the freedom of individuals to pursue their own objectives with the extensive cooperation and collaboration needed in the economic field to produce our food, clothing and housing.  Adam Smith’s key insight was that both parties of an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange will take place unless both parties do benefit. No external force, coercion nor violation of freedom is necessary to produce cooperation among individuals who can benefit from participating. That is why, as Adam Smith wrote, an individual who “intends only his own gain” is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

View this 1-minute video from Learn Liberty that explains Adam’s Smith theory about individual freedom.

The Friedmans continue in Free to Choose:

“The second set of ideas was embodied in the Declaration of Independence, drafted by Thomas Jefferson to express the general sense of his fellow countrymen. It proclaimed a new nation, the first in history established on the principle that every person is entitled to pursue his own values: ‘We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights: that among these are Life, Liberty and The Pursuit of Happiness.’

Economic freedom is an essential requisite for political freedom.  By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised. In addition, by dispersing power, the free market provides an offset to whatever concentration of political power may arise.”

There is no other country founded on these principles.

In this fascinating video, watch Swedish academic and medical doctor Hans Rosling plot the evolution of 200 countries over 200 years in just four minutes. You’ll see how the U.S. led the way in increased life expectancy and economic growth, and how the rest of the world is following us.

Dr. Deidre McCloskey, author of the book “Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World,” writes in the Wall Street Journal:

“Over the past 200 years, the average real income per person—including even such present-day tragedies as Chad and North Korea—has grown by a factor of 10. It is stunning. In countries that adopted trade and economic betterment wholeheartedly, like Japan, Sweden and the U.S., it is more like a factor of 30—even more stunning.

And these figures don’t take into account the radical improvement since 1800 in commonly available goods and services. Today’s concerns over the stagnation of real wages in the U.S. and other developed economies are overblown if put in historical perspective. As the economists Donald Boudreaux and Mark Perry have argued in these pages, the official figures don’t take account of the real benefits of our astonishing material progress.

Look at the magnificent plenty on the shelves of supermarkets and shopping malls. Consider the magical devices for communication and entertainment now available even to people of modest means. Do you know someone who is clinically depressed? She can find help today with a range of effective drugs, none of which were available to the billionaire Howard Hughes in his despair. Had a hip joint replaced? In 1980, the operation was crudely experimental.

Nothing like the Great Enrichment of the past two centuries had ever happened before.”

The first four chapters of Milton and Rose Friedman’s book, Free to Choose, provide a great overview to economic theories of the free-enterprise system.

Friedman concludes with the following impactful paragraph, particularly relevant to today’s situation among policy makers who disagree about the best ways to address income inequality:

“A society that puts equality – in the sense of equality of outcome – ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests.  On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom, and greater equality. Though a by-product of freedom, greater equality is not an accident. A free society releases the energies and abilities of people to pursue their own objectives. It prevents some people from arbitrarily suppressing others. It does not prevent some people from achieving positions of privilege, but so long as freedom is maintained it prevents those positions of privilege from becoming institutionalized; they are subject to continued attack by other able, ambitious people. Freedom means diversity but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables almost everyone, from top to bottom to enjoy a fuller and richer life.”

Also see Milton Friedman’s essay titled “Why Government is the Problem“. Though published nearly 25 years ago, it is still relevant to today’s problems;  for example, see the section on New York taxicabs in light of what is happening today with government attempts at regulating ride-sharing services like Uber.

Free or Equal?

Swedish economist Johan Norberg is the host of the new documentary “Free or Equal?”, which retraces and updates the 1980 classic “Free to Choose” PBS TV series, featuring Milton and Rose Friedman. Like the Friedmans, Norberg travels the globe to look at the conditions under which prosperity and freedom flourish – and under what conditions they wither and die.

For the entire Free to Choose series, see this link.

If you want to read more about Free to Choose and Milton Friedman, Arkansas blogger Everette Hatch compiled a list of publications at Daily Hatch. 

 

I, Pencil - The Power of Free Enterprise

This foundational piece illustrates the incredible power of free enterprise versus central planning. Hundreds of thousands of Americans of all ages have enjoyed this simple and beautiful explanation of the miracle of the “invisible hand” by following the production of an ordinary pencil.  Economist Leonard Read shows that none of us knows enough to plan the creative actions and decisions of others.

Story of the Pencil:

You can read the 50th anniversary edition of Read’s “I, Pencil” essay here.

Visit the website of the Foundation for Economic Education, established by Leonard E. Read (1898–1983)  in 1946. For the next 37 years, he served as FEE’s president and labored tirelessly to promote and advance liberty. He was a natural leader who, at a crucial moment in American history, roused the forces defending individual freedom and private property.

Did you know that there was a “Hall of Free Enterprise at New York’s 1964 World Fair? The Hall of Free Enterprise was sponsored by the American Economic Foundation and funded by contributions averaging $491 from individuals and small businesses. Exhibits and movies explained the principles of “free competitive enterprise, properly regulated, unhampered by unwarranted interference” in a variety of ways. The Fair’s program and guide describes the exhibits featuring the free-enterprise and economic drivers.  For more details, see this 1963 Times-News article about the exhibit.

 

The Moral Case for Free Enterprise

This Free to Choose Media video counters the claim that the free-market is “corrupt” or “rigged,” and examines the relationship between morality and free markets.

 

Don’t Eat Your Dog, written by Arthur Brooks, president of the American Enterprise Institute, outlines a compelling moral case for capitalism and explains how economic growth is lifting billions of people out of poverty.

 

Here’s Arthur Brooks on the idea of “Earned Success”:

Also see AEI’s handy fact sheet which dispels the myths against the free market system and explains how it actually promotes innovation, prosperity, and happiness.

 

The Way The World – and Free-Market Economics – Works

In a 2011 Forbes article, “The Way the World — and Free-Market Economics — Works,” excerpted and adapted below, Peter Ferrara writes:

 

“Free market economics is not about a few winners doing really well and then prosperity trickling down to everyone else. President Kennedy understood what the administration in Washington since 2008 seems to forget or ignore. As Kennedy explained the American experience since the early 1700s, ‘A rising tide lifts all boats.’  The booming economic growth of the free market is the only means of benefitting working people and the poor, far more effective than counterproductive redistribution, which only retards the prosperity of working people, and consigns the poor to a lifetime of dependency.

You have heard some leaders say of the free market, ‘It doesn’t work. It’s never worked. It didn’t work when it was tried in the decade before the Great Depression. It’s not what led to the incredible post-war boom of the 50s and 60s. And it didn’t work when we tried it during the last decade.’

 

Why It Did — and Does — Work

As Brian Domitrovic explained in his highly insightful economic history Econoclasts, ‘The unique ability of the United States to maintain a historic rate of economic growth over the long term is what has rendered this nation the world’s lone “hyperpower.” How that was achieved is well-explained, among many other places, in Jude Wanniski’s highly readable book, The Way the World Works.

The key to understanding the impact of taxes on the economy is to focus on tax rates, particularly marginal tax rates, defined as the tax rate that applies to the last dollar earned. The tax rate determines how much the producer is allowed to keep out of what he or she produces. For example, at a 25% tax rate, the producer keeps three-fourths of his production. If that rate is increased to 50%, the producer keeps only half of what he produces, reducing his reward for production and output by one-third. Incentives are consequently slashed for productive activity, such as saving, investment, work, business expansion, business creation, job creation, and entrepreneurship. The result is fewer jobs, lower wages, and slower economic growth, or even economic downturn.

In contrast, if the tax rate is reduced from 50% to 25%, what producers are allowed to keep from their production increases from one-half to three-fourths, increasing the reward for production and output by one-half. That sharply increases incentives for all of the above productive activities, resulting in more of them, and more jobs, higher wages, and faster economic growth.

Moreover, these incentives do not just expand or contract the economy by the amount of any tax cut or tax increase, as a Keynesian stimulus purports to do. For example, a tax cut of $100 billion involving reduced tax rates does not just affect the economy by $100 billion. The lower tax rates affect every dollar and every economic decision throughout the economy.

That is because every economic decision is based on the new lower tax rates.  Indeed, the new lower tax rates affect every dollar, or unit of currency, and every economic decision throughout the whole world regarding whether to invest in America, start or expand businesses here, create jobs here, even work here, because all these decisions will be based on the new lower tax rates.  Tax rate increases have just the opposite effect on every dollar and economic decision throughout the economy and the world.

In addition, marginal tax rates do not just affect the incentives of those to which the rates currently apply.  They also affect those to which the rates may apply in the future.  For example, consider a small business owner.  If he invests more capital in the business to expand production, or hires more workers to increase output, that may result in higher net taxable income.  It is the tax rate at that higher income level, not at his current income level, that will determine whether he undertakes the capital investment, or hires more workers.

These are the reasons why reductions in tax rates promote economic growth and prosperity, and why increases in tax rates retard economic growth and prosperity.  Experience follows the logic, as sharp rate reductions produced dramatic prosperity in the 1920s, the 1960s, and the 1980s through the mid 2000s.

Sometimes, there is a full Laffer curve effect, and cutting tax rates actually leads to higher tax revenues.  That is why every time the capital gains tax rate has been cut in the last 40 years, capital gains revenues have gone up, not down (and every time the capital gains tax rate has been raised, capital gains revenues have gone down, not up).  Such a Laffer curve effect will be seen more the more years after a rate cut, the analysis goes.  In other words, more rate cuts will be seen to lead ultimately to higher revenues than otherwise several years after the cut, as the resulting economic growth effect gains momentum.

[To read more about the Laffer curve, click here.]

The Cost of Regulation

Similarly, regulations impose increased costs on businesses and consumers, and sometimes flat out prohibit productive economic activity altogether. Estimates of the cumulative total annual cost of regulations fall somewhere between $1.25 trillion and $2 trillion per year, according to the following studies:

Top put this in perspective, The U.S. treasury collected approximately $1.4 trillion in individual income taxes in 2014, meaning “the annual costs of regulations may be roughly as consequential as what the public pays in income taxes” (National Affairs).

These regulatory burdens increase the cost of production, and consequently reduce the net return to the producers, reducing the reward for production quite similarly to taxes. For example, by one estimate, compliance costs for manufacturers rose 7.6% each year between 1998 and 2012. Such regulations also decrease the incentive for production, reducing economic growth and prosperity. Alternatively, reducing regulatory burdens reduces the cost of production, increasing the net return to producers, which adds to the incentives for production. The result is increased economic growth and prosperity.

But some leaders dismiss concerns over the costs of regulation by saying simplistically that businesses are always complaining about regulation. But the results show up in unemployment, declining real wages, increased poverty, and less economic growth and prosperity. Those effects will only worsen the more the regulatory tsunami is allowed to grow.

Of course, some regulations are necessary, just as some taxes are necessary.  Some regulation is essential to protect the public health and safety, or to prohibit some conduct analogous to fraud or  theft and invasion of property rights.  The point is to repeal unnecessary regulatory burdens, to minimize regulatory costs thereby maximizing economic growth and prosperity. See The Policy Circle’s Government Regulation Brief for more.

[See the videos below for Milton Friedman’s reflection on government regulation and its impact on the free enterprise system, and the role of government in a free society.]

A Sound Dollar

A third component of pro-growth economic policy is restrained monetary policy to maintain a stable dollar without inflation or deflation.  The more certainty that the dollar will be stable, the greater the incentive for investment and increased production, because investors and entrepreneurs know their investment and business returns will not be depreciated by inflation or a declining dollar, or destabilized by wild swings of the business cycle.

The best economists argue that this is the most important factor of all in promoting booming and lasting economic growth and prosperity.  Failure on this component can consequently undermine the success of the other components.

The necessary monetary stability used to be provided by the gold standard.  The question now is whether the same stability can be achieved by restricting the Fed’s discretion to following a “price rule” in its conduct of monetary policy.  The Fed’s monetary policy would be guided by prices in real markets, particularly the most policy sensitive commodity prices, such as oil, silver, copper and other precious metals, but most especially gold, the most policy sensitive commodity of all given its ancient tradition as a store of value and money in itself.

When such prices start to rise in markets, that signals the threat of inflation is rising, and the Fed should tighten monetary policy and the money supply.  When such sensitive prices start to fall, that signals the threat of deflation and recession, and the Fed should ease monetary policy.  Following such monetary policies would avoid inflation and deflation, and cyclical bubbles and recessions, and maintain a stable value of the dollar.

But this issue doesn’t even seem to come up on some leaders radar screen who are still true believers in the outdated Keynesian discretionary monetary policy of Bernanke, which was thoroughly discredited by the 1970s.

Spending, Deficits and Debt

The final component of pro-growth economic policy involves government spending, deficits and debt, which drain the private sector of the resources for savings, investment and production to provide economic growth and prosperity.  Perversely, big government proponents are locked in an antediluvian, unreconstructed, sophomoric, Keynesian mindset stuck in the delusion that runaway government spending, deficits and debt are the foundation of economic growth and prosperity.

But the truth is just the opposite.  Minimizing government spending, deficits and debt to the essentials is what maximizes economic growth and prosperity.

These pro-growth, free market economic policies are the opposite of trickle down economics.  They all involve decentralized markets, with prosperity welling up from the people to create a rich and prosperous nation. Trickle down economics is really what big government and nanny states are all about, sprinkling government spending across the economy, and expecting that to trickle down to benefit working people and the poor.  The fallacy is to overlook that the money has to come from out of the private economy first to finance all that runaway government spending, failing to see the counterproductive effects of drawing that money out in the first place.”

 

American Entrepreneurship

Following the 2008 financial crisis, American entrepreneurship was going through a tough time. In his 2015 article “American Entrepreneurship: Dead or Alive?” Jim Clifton, CEO of Gallup, notes the U.S. ranked 12th among developed nations in business startup activity, behind countries including Hungary, Italy, Sweden, and New Zealand.

Since 2016, however, steady economic growth has played a role in generating more U.S. startup activity. That year, small businesses created 1.8 million net jobs, with firms employing fewer than 20 employees experiencing the largest gains of 1.2 million net jobs. The most recent data from the Small Business Association notes in total there are 30.7 million small businesses in the U.S. employing almost 60 million employees, about 47% of the private workforce.

In the third quarter of 2017, there were over 240,000 startups entering the market and creating over 850,000 new jobs. During that same period, 226,000 startups exited, with a loss of 763,000 jobs. This presents a net increase of startups, reflecting improvements from the entrepreneurial dilemmas that plagued the U.S. after the 2008 financial crisis until 2015, when U.S. closures outpaced startups by about 70,000 annually.

This improvement is important, as Jim Clifton notes: “When new businesses aren’t being born, the free enterprise system and jobs decline. And without a growing free enterprise system, without a growing entrepreneurial economy, there are no new good jobs. That means declining revenues and smaller salaries to tax, followed by declining aid for the elderly and poor and declining funding for the military, for education, for infrastructure — declining revenues for everything.”

In America, where entrepreneurship is highly valued, it is the small and medium businesses that have allowed the U.S. economy to grow and continue growing.

 

 

What Legos Can Teach Us About Free-Market Economics

ECONSTORIES is a media channel dedicated to exploring the world of economics with visual storytelling and entertainment. Economics is a study of rich and complex human interaction, exchange and individual values. No one story can capture it all. Their goal is to help people appreciate the economic way of thinking and empower them to apply it to what they see and hear around them, while recognizing the limits of our knowledge in complex world.

Here’s an entertaining video of the economics lessons of the Lego Movie. On this channel you will also find videos of Hayak vs. Keynes, two well-known economists with differing views.

 

 

Dig Deeper: Recommended Reading

Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government, Yaron Brook

Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World,  Deidre McCloskey (2016)

Free to Choose, Milton and Rose Friedman (1980)

The Wealth of Nations, Adam Smith (1776)

The Road to Serfdom, Friedrich Hayek (1944)

Short Reads: Foundational Readings for the Free Market Woman, The Policy Circle (2017)

 

 

Questions for discussions

Here are some questions for discussion:

  • What does the government do well?
  • What is the role of government in our society?
  • What helps the most vulnerable in our society?
  • Discuss a government regulation that may stop someone from either starting or growing a business?
  • How does the rule of law relate to free enterprise?
  • What is the case for individual freedom?
  • What did you learn about free enterprise from the brief?
  • What do you think is the most compelling argument for free markets?
  • What arguments have you heard against free market economics? How would you counter those?

 

© 2018 The Policy Circle  ALL RIGHTS RESERVED

Suggestions for your Next Conversation

Explore the Series

This brief is part of a series of recommended conversations designed for circle's wishing to pursue a specific focus for the year. Each series recommends "5" briefs to provide a year of conversations.