Free "Free Markets": Part II

by: R.J. Moeller

(if you haven't read Part I, do so here first)

“Life, faculties, production --- in other words, individuality, liberty, property --- this is man. And in spite of the cunning of artful political leaders, these three gifts from God precede all human legislation, and are superior to it.”

-Fredric Bastiat The Law

In response to last week's "Free 'Free Markets': Part I" I received many emails from people asking for a further clarification of what exactly I meant by "a free market" or "capitalism", so in this week's second half of my column I will attempt to do just that.

A common theme heard from all the various thinkers throughout history who have championed liberty over unenforceable equality, and free enterprise over arbitrarily and ineffectively “planned” economies, is that the values and ideas being explained (or defended) stand upon their own merit. Liberty, freedom, and natural rights are, to quote the immortal words of Thomas Jefferson, “self-evident.”

Capitalism, a more recent term given to a long-standing idea that groups of individuals in a community are better suited to make decisions regarding their local commerce and economic interaction than “elites” in far-off cities of influence, is not a new idea. It’s just that until America came along, no country had been fortunate enough to have leaders that were wise and willing enough to implement such a subtly brilliant economic system. The reason our Founders said they did this? In short, capitalism, free markets, presume and encourage the de-centralization of power.

Like most great ideas, a free market system is simple in concept, but not always easy to fully explain. Much in this world that stems from common sense (and life experience) usually is. But for the sake of clarity let me, with the help of some of the intellectual giants whose shoulders I humbly stand upon, give some general explanations and definitions for what is meant by terms like as basic as “economics”, to those as complex and layered as “free market capitalism.”

Dr. Samuel Gregg from the Acton Institute defines economics as, “The study of how free persons choose to cooperate through voluntary exchanges to satisfy their own and others’ needs in light of the reality of limited resources.” Gregg points to Adam Smith, David Ricardo, and Reverend Thomas Malthus as the intellectual founders of modern economics. Smith is a big one, so let's dive in with him.

Adam Smith, the 18^th century Christian moral philosopher and economist, identified an “invisible hand” that seemed to direct economic trade and commerce between free individuals who voluntarily participated in a market for the purpose of satisfying their own “self interest.” A cattle rancher in Texas got up this morning before the rooster crowed not because he loves me, not even because Barack Obama’s our Rock-Star-in-Chief, but because he loves himself and his family enough to work day and night to provide a service (see: the steak in my Chipotle soft tacos), which yields an income.

Of course many have confused or purposely distorted Smith’s notion of “self interest” in order to disparage capitalism and promote ideas such collectivism or socialism (or even modern secular-progressive liberalism), but the simple reality is that everything we do is out of some form of “self interest”. Even the most pious religious person working with the poor in 3^rd world countries is doing so because they choose to, they personally deem it necessary and/or valuable, and ultimately because their relationship with their God or fellow man will grow stronger.

The Austrian-born economist F.A. Hayek, in his seminal work The Fatal Conceit, said, “Our civilization depends, not only for its origin but also for its preservation, on what can be precisely described only as the extended order of human cooperation, an order more commonly, if some-what misleadingly, known as capitalism.”

For Hayek, the key word when discussing the meaning of free market economies was “competition.” If people have to compete, if a baker knows that his baking has to be up to snuff or his customers will go elsewhere, then the quality of the product increases, his income increases, and both the customer and the vendor benefit. This isn’t possible or even likely in a government-run and planned economy. The Soviets didn’t have bread on their shelves in part because bakers were employees of the State who had little incentive to get up extra early and make sure the local people had their loaves for the day. (Also, the USSR had no wheat production to speak of, but that’s another matter for another blog.)

Hayek believed economies primarily controlled and directed by a central governing authority (i.e. the Euro-style federal government President Obama envisions) were fatally flawed. He saw that the conflict between those who favor higher degrees of free trade and those who favor centrally-planned markets hinged on a “factual error by the latter about how knowledge of available resources is and can be utilized.” Not only are the liberal-socialist aims factually unworkable, they are logistically and logically impossible.

The clearest modern example of champions of central planning is the American Left. Liberal Democrats, and “moderate” Republicans acting/voting like them, believe that with enough “smart” people from Harvard and Yale calling the shots, the same ones who oversaw our economy during both the Great Depression and our more recent economic crisis, any community can be organized.

Practically speaking, Hayek would contend that un-elected (and for that matter, elected) government officials in Washington D.C. don’t have the ability, vested interest, or motivation to know and do what is best for, let’s say, wheat farmers in Nebraska. Not to mention that such a power grab over commerce, the kind we’ve been perhaps unknowingly witnessing for decades, would technically be un-Constitutional and far removed from the vision of our Founders.

I know what some of you are thinking right now, but before you “go there”, realize that no one is arguing for a non-existent or thoroughly impotent government. Taxes are required, militaries must be funded, and Al Gore and Nancy Pelosi’s globe-trotting private jets need fuel and munchies to nosh on during those long flights to criticize America on foreign soils.

So how can a voluntary economic market co-exist with the State?

French legislator and economist Fredric Bastiat wrote that free markets were impossible without law, but that the law must be well defined, limit the powers of those in charge, and never supersede the “natural rights” of mankind. In The Law, one of the greatest works defending liberty ever penned, Bastiat said: “Life, liberty and property do not exist because men have made laws. On the contrary, it was the fact that they existed beforehand that caused men to make laws in the first place”

The purpose of the law in Bastiat’s mind was to “protect property and punish plunder.” A society and its laws should do everything possible to encourage personal responsibility and ensure protection from those who would seek to take away a man’s natural right to work and own private property (which includes the fruits of his labor). The biggest threat to the liberty of a free market in Bastiat’s eyes was a “perversion of the law” by a central authority that annexes itself more and more power. The reality of this constant back-and-forth between power and liberty was at the root of the matter. He explains it as follows:

“The fatal tendency that exists in the heart of man to satisfy his wants with the least possible effort helps to explain the almost universal perversion of the law. Thus it is easy to understand how law, instead of checking injustice, usually becomes the invincible weapon of injustice. It is easy to understand why the law is used by the legislator to destroy in varying degrees among the rest of the people, their personal independence and slavery, their liberty by oppression, and their property by plunder. This is done for the benefit of the person who makes the law, an in proportion to the power that he holds.”

But capitalism does not purely reside in the theoretical realm. In fact, it’s the most practical system in the world. University of Chicago economist Milton Friedman famously used the example of the production of a simple #2 pencil as one of his best explanations for how free market capitalism works, and why it is intrinsically superior to all other forms of market economy.

Think of all the products that go in to one single #2 pencil. There is rubber for the eraser. Lead to make your mark on the paper. You need wood for the body of the pencil. And don’t forget the metallic binding clip that hold your eraser to the pencil. Let’s just, for the sake of argument, say that those are the four materials needed for one of the most basic things we’ve all used a thousand times in our life. No big deal, right?

The hypothetical pencil company I am imagining produces them in Ohio, but has to get wood from Oregon, rubber from San Francisco, lead from the East Coast, and buys its metallic fasteners from “a guy” in Texas. Before a single employee can be hired to begin production on pencils in Ohio, that company has to have investors who deem the venture worthwhile, raise capital, retrieve loans, and buy property and equipment. Someone has to have a passion for pencils and want to do this more than anything because, especially in those early years, things won’t be easy and there will be long hours for little pay off.

So now you’ve got your funds and facilities, but you have to track down suppliers and negotiate with those suppliers prices for each of the materials. The people in Oregon supplying the timber for the saw mill that produces the wood that you use for your pencils have their own set of worries, everything from weather to union strikes to syrup-related accidents on the job site. Let’s say there is a fire or horrible storm and the price of timber skyrockets. Not only do the people in Oregon have to adapt, but so do the managers of the pencil factory in Ohio. And to make it all even more complicated, if the price of timber ruins the business of the pencil company, the people in San Fran with rubber and on the East Coast with their lead will be out of luck and have to adapt to price changes and lack of income themselves.

Now repeat all that, with even more incalculable and unpredictable variables, for each of the other three material providers for the pencil factory in Ohio. It’s mind-boggling what the average small business has to know and stay on top of at all times of the day for the entire life of the company. But those small businesses (and of course larger corporations) do it every day and do so because they have their livelihood, honor, name, and security of family members on the line. They adapt because immediate action and reaction spells death to the company who is even one step behind the demands of the market (i.e. you and me buying, or not buying, pencils to write funny notes to each other in History class).

What can a bureaucrat, even in a benevolent, hope-happy administration like that of Barack Obama’s, do to compete with the motivation, on-the-ground knowledge and understanding of all the commodities and factors involved, and personal stake that drives the tens of millions of hard-working Americans in the private sector?

Answer: nothing, so leave us alone and stop spending all of our money.

Capitalism works and it matters. Increasingly our government has sought to ham-string the private sector in favor of centralized economic authority in Washington. The only way this has been possible, and will continue to be a sad reality, is with the apathy of the American voter fueling the "change." Let us start demanding better from our elected representatives, each other, and ourselves.