A World of Wealth: How Capitalism Turns Profits into Progress
This chapter is from the book
This chapter is from the book
This chapter is from the book
There are two kinds of economists: Those who think the free market always works, except when the results don’t suit them; and those who think the free market never works, except when the results do suit them.
In my view, the free market always works. Whether the results suit me or you is a matter of taste, and if we don’t like the results, we can change them anytime, just by adding our money to the market. The best thing about economics is the free market, and the best thing about the free market is freedom.
In this book, I am attempting to provide intelligible advocacy and explain economic issues, and I offer some historical background for the topics in each chapter.
I’m throwing out all the charts, graphs, and technical terms, throwing out the mathematical analysis, throwing out game theories, and throwing out professional economists. What remains is a way of looking at the world through the powerful lens of capitalist investment and productivity.
This book cannot give you all the answers, but I hope that after reading it, you will be ready to have interesting conversations with other intelligent people interested in politics, business, and history. If you take the lessons of this book to heart, you should be ready to have warm and vigorous conversations, for the ideas here are controversial. Many well-meaning people would rather impose their ideas on others for their own good; they recoil at the idea that people should make their own choices, for better or worse. The consistent philosophy in this book is that free markets are effective—capitalism provides superior solutions to most of our looming problems. Even more important, free markets and capitalism are good because they promote individual liberty.
Economics has been called the “dismal science,” and there’s plenty going on in the world that supports that charge. Poverty and the unequal distribution of wealth, the population explosion, trade conflicts, immigration, outsourcing, environmental damage, rising energy prices, uncertain health and pension benefits, and many more discouraging economic issues push their way onto our computer displays, television screens, and front pages every day.
The phrase “dismal science” was coined by Thomas Carlyle, the nineteenth-century essayist, in a retort to the forecasts of Thomas Malthus, an economist who projected that the earth’s food supply could not grow as fast as its population; hence, humanity is doomed to suffer frequent famines.
“Dreary, stolid, dismal, without hope for this world or the next,” said Carlyle of the Malthusian prophecy. He also applied the whole phrase “dismal science” to his own economic argument in 1849 that freeing the slaves who worked the West Indies sugar plantations had not been in the slaves’ best interests. Carlyle said that, without plantation owners’ capital and enterprise, the best the former slaves could do on their own was subsistence agriculture and fishing. Sugar had been more lucrative and life as a slave had been more secure, he claimed.
Dismal science, indeed, if it were true. Man, however, does not live by bread alone: A hungry free man is better off than a well-fed slave. In this book, we explore some hard questions about capitalism and humanity. It’s true that economics sometimes turns up some distressing conclusions because it is the science of human behavior stripped of all illusions. Economists observe what people do for money; it is often not a pleasant sight.
Capitalism is business, and the study of capitalism is the study of the sources and uses of profits—how money becomes wealth. Although some historians consider capitalism to be a form of social organization, all forms of social organization are based on the concentration of wealth for investment, and societies prosper on the returns of their investments.
Studying capitalism should eventually produce an awakening like that of the Molière character who discovered he had been speaking prose all his life without knowing it. When we talk about the creation, distribution, and consumption of wealth, we are talking about capitalism, whether we believe in it or not.
Supply and demand are the chief forces in economics. Demand is always infinite and supply never is. We would all like to gorge ourselves on our favorite things, but they are not infinitely available. Prices are set by the availability of things—supply—and the combined desires of people to have certain things in preference to other things—demand. Supply and demand are hard to measure because they don’t stand still. For each product or service in the global economy, supply and demand are constantly changing according to the needs and desires of billions of people. Large imbalances between supply and demand also occur, creating general price inflation or deflation. Economics theorists talk about “equilibrium,” the point where supply and demand are in balance, prices are stable, and supplies are predictable. It is a wonderful mathematical exercise, worth many Nobel Memorial Prizes in Economic Science. But as Yogi Berra might have said, “The difference between theory and practice is that in theory, there is no difference, but in practice, there is.” Any person interested in economics must understand that prices constantly change with the preferences of buyers and the availability of parts, labor, and capital (all of which also have prices set in markets).
Value is a different concept from price. There is no such thing as an intrinsic value of goods or services. Value in an economic sense is nothing but a price set in a market. It changes constantly.
Creating Capital
The origin of wealth lies in scarcity. Anything we can have without effort has no value. When we must work to hunt, mine, farm, when we buy tools and sell products, and when we must defend our gains, we establish an economy, an interrelationship of many people. As quickly, we become capitalists—owners of tools, large or small. Day laborers who own their shovels are in that small sense capitalists, just as owners of factories or farms are capitalists with more physical capital. We also work to acquire skills that can be termed human capital.
Goods and services are made and provided from ingredients, sometimes called the factors of production. The classic description of these ingredients is land, labor, and capital. Land is more than just a field—it stands for the resources of the earth, from mining to agriculture. Labor is more than the sweat of our brows—it stands for all forms of energy use. Capital is more than just money or wealth—it stands for tools, machinery, and knowledge.
Any product and nearly all services require judicious mixtures of all three, so management should be counted as a fourth factor of production. It is the human talent involved in combining the other three.
A farmer works the land using capital equipment, such as a plow, horse, or tractor, and seed. He is more productive if he knows how much seed is enough, how deeply to plow for the particular crop, how hard to work the horse, how much to feed him, and countless other variables. Even a peasant must manage complexity.
Available resources have changed over time as technology pushes the limits to growth. From horses to tractors, from seed gathered and saved to seed genetically engineered and sold at the farm dealer, from rain to irrigation, from manure to chemicals—every aspect of production changes because of technology.
Changes in social organization also affect the optimal allocation of land, labor, and capital. Sharecropping leaves little incentive to make permanent improvements; the growth of banking and credit make land more affordable; insurance and futures markets make ventures less risky; education makes farmers more skilled. The study of such forces may be the most serious, and certainly the most difficult, part of economics.