The essential difference between these schools is in their solution to the problem of human values. Liberals see individuals as rational, self-interested, and autonomous beings who can best resolve their conflicting material and spiritual values through voluntary cooperation. This means advocating a free market with a free marketplace of ideas (i.e. a pluralistic society) being its essential corollary.

Conservatism and Marxism also sees the individual as self-interested, but therefore as fundamentally irrational, corrupt, and unable to resolve conflicting values independently. Conservatives believe that individual desire is inherently corrupting and therefore advocate centralized guidance and control of spiritual values, and prohibition of material goods which might lead to spiritual corruption. Marxists believe that the pursuit of material goods is inherently violent and conflicting, and the essential controls must be of material pursuits. Marxists belittle ideas as irrelevant and advocate control of self-interested motivates through centralized social structures such as compulsory state-run schools. Conservatives are explicitly opposed to the marketplace of ideas, while Marxists explicitly view ideas as irrelevant, but in practice ruthlessly suppress dissent when it conflicts with their policy goals.

Since man is an integrated being, both Conservatives and Marxists end up advocating the same policies in the downward spiral to prevent the perverse consequences of the controls they instrument. Unchecked, they both lead to tyranny.
It should be noted that these are only tendencies and the vast majority of people are some combination of these three perspectives.  Judging intellectuals means evaluating the particular combination of these perspectives. Furthermore, these perspectives are not primaries, but derivates of a basic perspective of human nature. This means that political views rarely change directly, but rather filter up through changes in a person’s basic view of human nature.

See Also

• Wikipedia: the development of Western conservatism
• Wikipedia: Marxism
• Wikipedia: Classical Liberalism

The cosmological argument

Some religious individuals argue that whatever begins to exist has a cause and since nothing causes itself, there has to be a First Cause, namely God. There are several objections to this argument, some of them being as following;

• What caused the First Cause? By making use of the cosmological argument one presupposes that an uncaused effect exists, enabling it to cause a chain of effects without being caused itself. Seeing that the argument is reliant upon the premise that all effects have a cause it is in consequence invalid.
• The First Cause is by no means equal to a deity. Even though the origin of the universe remains scientifically unexplained, it doesn’t justify supernatural religious claims.

The Teleological argument [Intelligent Design]

This argument states that some phenomena are too complex, or too apparently purposeful, to have occurred randomly. Therefore, these phenomena must have been designed by an intelligent or purposeful being (God).

- Who designed the designer? If an intelligent designer only is able to design irreducibly complex units, then an even more intelligent designer is necessary to design the original designer. This entails an infinite chain of designers. To counter this counter-argument some individuals make use of the cosmological argument. However, as explained above, this argument fails because it omits why a designer can be undersigned while the universe cannot.

William Paley’s watchmaker analogy makes use of this argument, and is to this date one of the most famous teleological arguments. He argues that there are structures which cannot function unless all substructures are present. By asserting that each substructure constitutes no benefit alone, evolutionary theory is unable to explain the substructures presence. Since the substructures presence cannot be explained, the whole structures presence cannot be explained either. Counter-arguments are as following:

• There is a probability that all substructures came into existence simultaneously.
• Substructures may have changed in function. A gradual replacement by several advantageous substructures’ function can lead to the evolution of structures claimed to be irreducibly complex.

The omnipotence paradox

Most, if not all, monotheistic religions claim the existence of an omnipotent God. This argument leaves the concept of omnipotence as a mere paradox unable to exist in a logical universe. If a deity is in fact omnipotent, then he is able to create a rock he himself cannot lift. Since he cannot lift the rock he just created he is not omnipotent.

Argument from free will

All monotheistic religions claim their god to be omniscient, and at the same time claim to have been given free will by the very same god. These two concepts are incompatible. Here is why: An omniscient being knows everything, including the future will of his supposed free willed- designees. Since the will is already known, it cannot be free at the same time.

Other[inductive] arguments state that a complete being (God) must also be dead or non-existing in order to be fully complete. Furthermore, some conclude that since most theistic religions eventually were regarded as untrue, all theistic religions are most likely to be untrue. Stephen F. Roberts formulated this beautifully by saying:
“I contend that we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours.”

See Also

• The One Minute Case For Atheism

Parents ought to want healthy children

While there are many valid motivations to become a parent, in choosing to create a human being, parents assume a moral obligation to provide for and educate their children to become independent, mature adults. Beyond the legal obligation of providing minimum care, to the extent that parents love and value their children (and there is no reason to have children otherwise), parents ought to strive to maximize their child’s ability to become fully functional adult human beings – physically, spiritually, socially, romantically, etc. This means providing both appropriate education, and taking care of their physical needs.

Health can be objectively defined in relation to the requirements of human life

It is possible to make judgments about which mental and physical states are objectively superior in relation to other states. For example, a broken leg, a bout of flu, or a headache are undesirable because they prevent one from accomplishing a whole range of actions which are required for human life. We recognize this when we use technology (medicine) to help people overcome and heal from their injuries and illnesses. The same applies to genetic physical and mental deformities, which adversely impact one’s ability to accomplish his values. If someone suffers from clinical depression or schizophrenia, we offer them drugs that improve their ability to use reason to deal with reality and achieve the values they desire. If healthy, successful, productive human life is a value, then it is moral to use all available technology to maximize human potential to achieve the values they desire.

Biotechnology adds new tools to an ancient arsenal of genetic techniques for better offspring

If health is desirable and can be objectively defined, then parents ought to choose to have healthy children. They do this in a variety of means: Genetically, humans instinctively seek mates likely to produce healthy offspring – this is the basis of selective sexual attraction based on physical traits. Consciously, parents choose partners who share their child-rearing values. They also take measures to prevent child defects, such as abstaining from drugs during pregnancy and choosing to have children earlier in their life. Genetic counseling and prenatal screening are just two new tools for enhancing an ancient process.

The Gattaca objection confuses the potential for the actual

The Gattaca objection to screening undesirable traits is that people with undesirable traits have made many valuable contributions, and are capable of living fully productive lives. Supporters often give examples of great scientists like Albert Einstein or Stephen Hawkins with genetic or developmental abnormalities, or of people with serious impairments such as Down Syndrome who nevertheless hold jobs and assume most of the functions of normal adults.

This objection confuses between the seen and the unseen. What we see is that many people with undesirable traits are unusually successful, either in relation the average person, or to people with their symptoms. What we don’t see are all the people who failed to achieve their values because of their symptoms. If their genotype or embryo had been eliminated before birth, the unhealthy people would not exist, but an equal number of healthy people would. Unless the undesirable symptom itself contributed to their success, the percentage of unusually successful healthy people would be far higher than the number of extraordinarily successful unhealthy people. Certainly, healthy people would have a better chance at a normal life than someone with a chronic syndrome such as Down Syndrome, Tay-Sachs, or Spina bifida.

Genetic diversity is valuable – but only if it is used to enhance human life, not impair it

The “neurodiversity” movement opposes genetic screening on the grounds that atypical neurological development should be recognized and respected. The movement has a valid point insofar as neurodiversity has played a critical part in the development of human civilization. If every human being had exactly the same intelligence and developed in the same way, we would have no great scientists, artists, intellectuals, or entrepreneurs.

Unfortunately, the neurodiversity advocates only support “diversity” when it is due to ignorance, not conscious choice. They support a baby being born with Autism, Parkinson’s disease, dyslexia, or other disorders because the parents had no choice in the matter, but they oppose giving the parents the power to choose to have a child which is healthier than he would “naturally” be. If most parents could consciously choose what traits to give their children, they might prefer more intelligence, curiosity, a longer life, or stronger muscles. These are also varieties of genetic diversity.

Objections to genetic counseling and gene engineering are ultimately objections to technology

Few parents would choose to have their children be born blind, deaf, retarded, or crippled. Yet this is precisely what the “diversity” advocates want: to prevent parents from being able to improve on the “natural” forms of biodiversity.  Traits due to  sexual selection, random genetic mutation, and embryonic variation are acceptable to them, but traits due to conscious human choice are not.

Genetic screening via sexual selection has been practiced since the dawn of life itself.  No one suggests that we should pick a mate entirely at random, so the objection to genetic screening and engineering is due to the element of technology. Their objections are not to “designer babies” as such, but to the use of technology to improve the lives of human beings. They apply equally to a child whose genes are altered after birth, or to an adult. The logical conclusion of this neo-luddism is the opposition of all man-made improvements to human life as “unnatural.”

Bankruptcy is a financial state that occurs when a person or business can no longer repay its debts. In the legal sense, bankruptcy begins when a court recognizes that the financial state of bankruptcy exists. The bankruptcy court takes charge of the bankrupt entity and disposes of its assets or reorganizes it to pay off as much of the debts as possible.

A bankruptcy proceeding recovers money for the creditor, but both parties benefit.

The purpose of a bankruptcy proceeding is to facilitate the maximum recovery of the money owed to the creditor. But it also benefits the debtor. After the debtor pays off what he can, his remaining debt is extinguished. This is not a “get of jail free” card; the debtor, whether a person or business, must face the damage to its reputation and a greater difficulty in obtaining credit for a long time into the future. Rather, it is an acknowledgement that the debtor simply cannot repay his debt. For both parties, bankruptcy offers timely resolution to an otherwise unsolvable dilemma. The creditor regains a portion of the money owed, and the debtor, relieved from the burden of a debt he cannot pay, can move on with his life.

Bankruptcy is economically valuable.

In economic terms, a speedy and fair process of bankruptcy allows both assets and people to resume being productive as quickly as possible. The creditor regains cash that it can redeploy as it sees fit. If it is a bank, it has regained funds that it can loan out again to more productive businesses or creditworthy individuals. The creditor can also redeploy the assets of the bankrupt entity into the hands of a more capable manager.

Take the financial malaise of General Motors as an example. Although effectively bankrupt, there has been no legal recognition of this fact (as of this writing in March 2009). As a result, its factories and workers continue to be tied up inefficiently making mediocre cars. General Motors is a drag on the American economy.

Bankruptcy would free General Motors’ factories and employees to be more productive. Once a court legally acknowledges General Motors’ bankruptcy, it could allow General Motors’ new owners, its creditors, to appoint a more competent manager. Or the creditors could sell the plants to a superior car manufacturer, such as Toyota. Either way, after reorganization under bankruptcy, the plants would be used to make cheaper, more attractive cars that customers want to buy.

The creditors may also choose to shut down some or all of the plants and sell them for scrap. But recycling the old plants into new steel that becomes the girders of modern, efficient factories is a better use for those plants if they are obsolete. No party is in a better position to make these judgments than General Motors’ creditors, who have their financial self-interest at stake.

While General Motors is just a single, albeit enormous, example, speedy and fair bankruptcies end the bleeding of money-losing operations across the economy, and re-direct inefficiently utilized assets and capital to more productive activities. In sum, bankruptcy facilitates economic recovery. A failure to permit bankruptcy prolongs stagnation.

Some fallacies about bankruptcy

Bankruptcy always means shutting down a business. This is not true. Creditors, in consultation with the bankruptcy court, decide whether to shut down and liquidate, or to operate under new management. Creditors have every incentive to make the decision that maximizes their pay-out over time, not just the amount of cash that can be had right now.

Bankruptcy is bad for employees. Considered in full context, bankruptcy is good for employees. An economy with speedy and fair bankruptcy procedures is one where healthy, growing companies predominate. Healthy companies can pay employees more because their labor is worth more to them. Therefore, employees benefit from bankruptcy, even if someone occasionally faces dislocation or the uncertainty of working for new management. But, even if employees dislike such occasional dislocation, there is no alternative to bankruptcy if their employer is not financially viable.

Bankruptcy allows deadbeats to avoid meeting honest obligations. When bankruptcy laws are properly drafted and applied, this is the exception rather than the rule. Bankruptcy laws are designed to protect the rights of all parties, not to unfairly favor debtor or creditor. Bankruptcy acknowledges a fact, that the debtor cannot repay all his debts, and it facilitates the repayment of all debts that can be repaid.

Government should stop bankruptcies. During financial panics, governments sometimes try to prevent bankruptcies by putting moratoriums on them, subsidizing bankrupt entities, or changing the laws governing bankruptcy to favor debtors. Such interventions are both unjust and impractical. They are unjust because they deny the legitimate right of the creditors to collect what they are owed. The money they are owed is their property, and they have the right to collect it, to the extent it is reasonably possible. Such interventions are unjust and impractical because they attempt to deny reality. “Stiffing” the creditors or forcing innocent third parties to bail out the bankrupt entity through subsidies does not change the fact that the bankrupt entity cannot repay its debts.

Bankruptcy is moral.

Bankruptcy is just, if resolved through a fair and speedy judicial process. A bankruptcy proceeding acknowledges the actual state of affairs that exists, that the bankrupt entity cannot repay its debts. It resolves this dilemma for the maximum benefit of the creditor, but in so doing allows both parties – debtors and creditors – to resolve this matter with finality, and move on with their lives. Bankruptcy only involves the parties to the debt obligation. It does not require that innocent, third parties be forced to subsidize or bail out creditors or debtors. In doing so, it respects the rights of all concerned.

A just process of bankruptcy is also economically practical. Bankruptcy removes assets from those who have mismanaged them, and puts them into the hands of those who are most capable of putting them to productive and financially responsible use.  The institution of bankruptcy is an essential part of a prosperous and just capitalist society.

Economic growth is made possible by forgoing current consumption. For example, consider the case of a teenager considering whether to save money for his future. If he spends his salary on toys and trinkets, he will never accumulate any savings. If, on the other hand, he minimizes expenses and saves money for college, he will forgo current consumption and invest in capital improvements. The same tradeoff applies to all consumers and producers: capital improvements require a sacrifice in current consumption to invest resources needed to expand future production.

Production, not consumption drives economic growth

The lack of a consumer culture is not an impediment to economic growth, as resources that are not consumed are invested into new markets and production capital. If a consumer forfeits a new car now to buy a better car at some point in the future, his savings are not lost. Instead of being directed into present consumption, his savings become the investment capital for new factories and R&D into cheaper and better cars. This is why such high economic growth is possible in “Asian tigers” such as Hong Kong and South Korea – high rates of savings support rapid technological progress and investment into industry at the cost of a much more frugal lifestyle than in the West.

Capital has structure

Politicians and the media treat GDP as a single number, but it is crucial to understand that producers face a choice between producing consumer goods and investing in intermediate goods used to create consumer goods. Those goods differ as well: a factory owner can invest in merely maintaining his factory, building a similar factory to expand production, or engaging in a long-term research and development program in a new product or production process. Thus, the goods produced by an economy can be one, two, or more level removed from consumer goods.

Capital investments require savings and stability

Economic and technological progress requires that entrepreneurs make long-term investments in intermediate production goods many levels removed from the consumer. In order for this to happen, two things are necessary: that consumers forgo current consumption to invest in future production, and that reliable long term predictions can be made about future savings rates and demand patterns.

Monetary policy disrupts economic growth

Governments control over the currency allows them to use monetary policy to achieve short-term economic goals, such as increasing GDP. But the consequences of artificially manipulating interest rates are disastrous. By expanding the money supply through manipulation of interest rates or (as is happening now) sending money directly from the printing presses to banks and other corporations, the government is devaluing savings and redirecting them into increased consumer spending. This improves the economic statistics in the short run at the cost of wiping out the resources set aside for long-term capital improvements. Furthermore, the arbitrary nature of government intervention in the economy makes long-term predictions about future savings and demand impossible.

Let the market direct savings and investment or face financial ruin

There is no single right answer  to the tradeoff between current consumption and the savings available to invest in future production and increased economic growth. Every individual must choose for himself how to balance present spending with investments in his future. In a free market, the sum of individual savings rates becomes the real interest rate.

For the last few decades, America’s spending binge has been funded by foreign investment and rapid technological innovation, but ultimately, unless we drastically cut our consumption, and direct our income into savings and repaying our debts, we will find our money increasingly worthless both here and internationally.  The dire consequences of hyperinflation can be seen in Zimbawbe, where life expectancy has declined from 60 to 37/34 years, unemployment is at 80%, and as much as half the surviving population has left the country.

Further Reading

• The One Minute Case for the Austrian Business Cycle Theory
• Friedrich Hayek. The Paradox of Thrift 1929
• Ludwig Lachmann. Capital and Its Structure 1956
• Israel Kirzner An Essay on Capital 1966

What determines wages? Can employers pay workers whatever they want?

A wage is the price an employer pays for the services his employee. While the two may negotiate any wage they come to mutual agreement on, the mutual self-interest of both and market forces intersect at a market-set price that represents the intersection of their interests. Disregarding non-economic factors, an employer wishes to pay his employee as little as possible. The maximum amount he will pay however is the value of the marginal productivity a given worker provides. (The marginal productivity is the value per unit of time the worker provides to the employer.) If the worker refuses to work at or below his marginal productivity, then the employer will not hire him, since doing so will incur a loss. Conversely, disregarding non-economic factors, the employee wishes to be paid an infinite amount. The minimum wage he will actually accept is the marginal value of his labor. This can be measured in terms of the next-most useful value-producing activity the workers may engage in.

For example, suppose that my marginal productivity as a programmer is $30 per hour. I will accept any job paying above $30 an hour, but no job below it, since I can find an employer paying that much in another computer or tech-related industry. A fast-food worker might have a marginal productivity of say, $6 an hour – the value per hour that his labor creates for the business. From the employer’s perspective, I create $40/hour of value, and the fast food workers creates $7 of value, so he will be willing to hire us. (Assuming that no one is willing to provide the same value for a lower wage.) However, if I only provide $20 of value, the employer will not hire me, because he would incur an hourly loss of $10 in doing so. Similarly, if the fast food worker only provides $5 of value, he would no be hired either because he would cause a loss of $1 for each hour he works.

Can the government increase wages when employers don’t pay enough?

Suppose that the government imposed a minimum wage of $8. Would the fast food worker who provides a value of $7 per hour now be paid $8? No, he would lose his job – because keeping him would mean a $1 loss for each hour he works to his employer. All minimum wage laws have a similar effect – they cause everyone with a marginal productivity below the minimum wage to lose their jobs – most often teenagers and the very poor. Wage caps (including progressive income taxes) have a similar effect – they lead the most productive individuals of our society to retire early or forgo new opportunities — resulting in a lost opportunity for them, and for everyone who might have benefited from their ideas.

What if the government creates a job by paying an unemployed worker to do make-work such as digging holes in the ground?

Where would the money to pay for his wage come from? It would have to be taken by force from the remaining employed fast food workers and computer programmers. Everyone will be paid less to pay for the government workers, but has a job been created? No – now the fast-food employer has $1 less to pay to his other $8 employees, so he must fire some of them or go out of business. Each new $7 government worker costs at least one $7 privately employed worker. This is always a social loss because by definition, the government worker is less productive. If he were not, then the private business would voluntarily employ workers to perform his job.  While a minimum wage causes everyone who produces less than the marginal productivity of the minimum to lose his job, each new government job causes at least one more productive worker to lose his job.

If the government cannot raise wages, can it lower prices?

Prices are determined by the marginal value of a given good, just as a wage is determined by the marginal productivity of an employee. Attempts to regulate the cost of goods have the same effect as wage controls: if the price is set below the cost of a good, producers will be unable to make any.   Since different producers have different costs, lowering the prices of a good will decrease the percentage of producers able to supply them, until they can make none at all.

So how can prices be lowered?

The only way for prices to go down is to increase the productivity of workers.  Productivity in the production of a good comes from the application of mental effort to the production of values. A profit (the difference between the value of a good to a consumer and the cost to produce it) is the reward of an entrepreneur for bringing about the new wealth he’s created. In the absence of government coercion, profits can exist only as long as men continue to create new values ,or improving on existing ones.  The only to make goods cheaper is to allow entrepreneurs the freedom to invest in improvements in the capital and labor methods used in production

Doesn’t a more efficient product result in lost jobs for those who were replaced by automation or better processes?

When oil lamps replaced candles, the cost of producing affordable lighting greatly decreased. In the absence of a government monopoly, competing lamp-makers quickly started making their own lamps, which brought the price decrease to the consumer. In the process of transitioning from candles to laps, many thousands of candle-makers lost their jobs.  However, oil lamps did created a new industry of their own and increased the prosperity of society as a whole, just as electric lighting did in the 20th century.  Since consumers could buy cheaper lamps, they now had more money to spend on other things, ,creating new industries, and raising their overall standard of living.

Technological progress and capital accumulation has both created new careers made us enormously more productive – we not only have a wider range of vocations to choose from but work far fewer hours.

Can government “soften the blow” when all these candle-makers lose their jobs?

In today’s world, the government would probably try to subsidize the candle or lamp-makers when their chief product became outdated. What would that subsidy accomplish? It would save the candle-makers jobs – but it would cost the jobs of everyone who stood to benefit from the increase wealth that came from cheaper lights. In the short term, the candle-makers might benefit – but in the long term, they would lose too, since they would lose the new, higher paying jobs the could have making electric lights and the new products the cheaper lights would allow consumers to afford. Meanwhile, the Thomas Edison’s, Graham Bells, Thomas Moore’s, and Bill Gates’ would be too busy working to pay off taxes to have the time or money for research.

Of course, we know that these inventors and entrepreneurs succeeded. But how many didn’t because they never got their first break in the field because of a minimum wage, or gave up before they tried because the red tape was too much, or the taxes too high, or they knew that the old, outdated industries would use the government to tax and regulate them out of existence? The real tragedy is that we will never know.

A capitalist society is based on the recognition of individual rights, including property rights. Under capitalism, all property is privately owned, and the state is separated from economics just as it is from religion. Economically, capitalism is a system of laissez-faire, or free markets, where the government plays no part whatsoever in economic decisions.

Capitalism is the only social system compatible with the requirements of man’s life

To pursue the values necessary for his life a society, man requires only one thing from others: freedom of action. Freedom means the ability to act however one pleases as long as one does not infringe on the same and equal freedom of others.   In a political context, freedom means solely the freedom from the initiation of force by other men. Only by the initiation of force can man’s rights be violated. Whether it is by a theft, force, fraud, or government censorship, man’s rights can be violated only by the initiation of force. Because man’s life depends on the use of reason to achieve the values necessary for his life, the initiation of force renders his mind useless as a means of survival. To live, man must achieve the values necessary to sustain his live. To achieve values, man must be free to think and to act on his judgment. To live, man must be free to think. To be free to think, man must be free to act. In the words of Ayn Rand, “Intellectual freedom cannot exist without political freedom; political freedom cannot exist without economic freedom; a free mind and a free market are corollaries.”

Capitalism recognizes the inherent worth of the individual

In a human society – one that recognizes the independence of each man’s mind – each individual is an end in himself.  He owns his life, and no one else’s.  Other men are not his slaves, and he is not theirs.  They have no claim on his life or on the values he creates to maintain his life, and he has no claim on theirs.  In a free society, men can gain immense values from each other by voluntarily trading the values they create to mutual gain.  However, they can only create values if they are free to use their minds to exercise their creativity.  A man is better living off on his own than as a slave to his brothers.  Capitalism recognizes each man as an independent, thinking being.

The individual is an end in himself

Just as no individual has the right to initiate force against anyone, neither does any group of men, in any private or public capacity. It is immoral to initiate force against any individual for any reason. This includes the initiation of force for “the public good.” The “public” is merely a collection of individuals, each possessing the same rights, and each being an end in himself. Any attempt to benefit the “public good” is an immoral attempt to provide a benefit to one group of individuals at the expense of another. In a free society, no individual benefits at the expense of another: men exchange the values they create in voluntary trade to mutual gain. The rule of law in a free society has just one purpose: to protect the rights of the individual.

Capitalism leads to freedom and prosperity

A free, capitalist economy has never existed anywhere in the world. The closest the world came to a free market was during the Industrial Revolution in Great Britain and during the late 19th century in the United States. The Industrial Revolution was a period of unprecedented economic growth and unimaginable improvements in quality of life. In less than two hundred years, the life of most people in the Western world changed from a a short life filled with poverty, plague, and near-constant war to a modern, comfortable existence that  even the kings of medieval Europe couldn’t have imagined.  Since 1820, the leading capitalist nations have increased their wealth sixteen fold, their populations more than four-fold, their productivity twenty-fold.  Annual working hours went from 3,000 to less than 1,700 and life expectancy doubled from thirty to over seventy years. ¹

Yet despite the undeniable material superiority of capitalist societies, its critics continue to attack it as inhuman and selfish.  What the world lacks is not evidence of capitalism’s practical superiority, but a moral defense of a man’s right to his own life.

Reference

1. Angus Maddison. Phases of Capitalist Development, p4 (1982)

Further Reading

• Andrew Bernstein: The Capitalist Manifesto
• Ayn Rand: Capitalism: The Unknown Ideal
• The One Minute Case For Individual Rights
• The One Minute Case Against Interventionism
• The Bernstein Declaration On the Principles and Possibilities of Capitalism
• The Capitalism Site

A free, capitalist economy has never existed anywhere in the world. The closest the world came to a free market was during the Industrial Revolution in Great Britain and during the late 19th century in the United States. The Industrial Revolution was a period of unprecedented economic growth and unimaginable improvements in quality of life. In less than two hundred years, the life of most people in the Western world changed from a a short life filled with poverty, plague, and near-constant war to a modern life that even the kings of medieval Europe couldn’t have imagined.¹ This miracle was made possible by the philosophical and political ideals formed during the Enlightenment, and the freedoms demanded and fought by the philosophers, statesmen, and entrepreneurs of Western civilization. Yet the Enlightenment also laid the sees for the collectivist and materialist ideology behind socialism, which struck the first major blow against capitalism with the Sherman Antitrust Act of 1890.

Capitalism declined with the rise of collectivism in the 20th century

The assault on free markets was intensified by Herbert Hoover, who imposed unprecendented regulations of Wall Street to eliminate “vicious speculation”, regulated labor markets, and created government works programs.² FDR inherited these programs and created numerous government agencies which made the financial industry is the single most regulated industry in the economy and turned an economic recession into the Great Depression.³ The Federal Reserve was supposed to stabilize the currency, The FDIC was supposed to prevent bank runs, the SEC was supposed to be stop shady investments, Fannie May and Freddie Mac were supposed to make homes affordable to everyone. Yet also these restrictions on capitalism had the opposite effect of their intended purpose: the dollar has lost 95% of it’s value, the SEC is the main cause of corruption in Wall Street^{4 5}, and housing prices are unstable and highly inflated.

Interventionism is a vicious cycle of wealth destruction

Economic interventionism, also known as statism, exists in every mixed economy – a society in which the government interferes with market economy. In a interventionist economy, the state takes wealth away from from some enterprises and transfers it to other organizations or individuals. Whether it does so through taxation, corporate welfare and bailouts, monopoly privileges, wage and price controls, trade restrictions and tariffs, currency inflation, antitrust regulations, state-ownership of businesses, or “make work” programs, the effect is the same: to punish virtue and competence and reward vice and waste.

All the values created by a business are possible only because its customers value them sufficiently to pay for them. To the extent that any individuals voluntarily exchange value for value without harming anyone else, their actions benefit themselves and harm no one. However, in an interventionist state, the product of those individuals is seized and transferred to those who did not earn it. This is a vicious cycle, because it rewards those in the public and private sector who manipulate the state to seize unearned benefits and punishes the productive individuals who focus on creating values and create products and services that consumers want.

The more the looters seize, the fewer wealth is available to producers. The more productive businesses fail or move elsewhere, the heaver the burden is on those who remain. The more money is taken from the producers, the greater the incentive for the lazy to skim from their labor. When the burden of stealing sufficient wealth outright becomes too unpopular, politicians resort to stealing it by printing money, until the currency of the country becomes worthless, trade becomes impossible, and productive activity grounds to a halt. Inevitably, it is the executives of the productive businesses who politicians blame for the crisis their own policies created.

Entrepreneurs and CEO’s are the unrecognized heroes of the modern world

Capitalism cannot guarantee that all our needs will be provided for – no system can turn mere wishes into reality. But it does give entrepreneurs the incentive to compete to provide the best possible service they can. The brief flowering of freedom during the 19th century created the wealthy, industrial society in which we now live in – but it is being destroyed from within by the collectivist ideology of interventionism. When political connections rather than consumers decide who is allowed what values should be created, entrepreneurs have no incentive to improve their products or to try bold new techniques, and instead spend their resources trying to bribe politicians.  Politicians can force prices to be artificially low, but they cannot lower costs or substitute for the creative risk taking that drives the economy – they can only drive the remaining wealth creators out of existence.

References

1. The Capitalist Manifesto, The Industrial Revolution Brings Advance by Andrew Bernstein, 2005
2. Hoover’s Attack on Laissez-Faire by Murray Rothbard, 1963
3. Robert Higgs: How FDR Made the Depression Worse
4. Robert P. Murphy: The SEC Makes Wall Street More Fraudulent
5. See the The One Minute Case against the SEC

Further Reading

• The One Minute Case For Individual Rights
• The One Minute Case For Free Trade
• The One Minute Case Against Socialized Healthcare
• The Bernstein Declaration by Andrew Bernstein
• Global Capitalism: The Solution to World Oppression and Poverty by Andrew Bernstein

Long before the existence of the Securities and Exchange Commission, medieval guilds and trading houses established common standards, accreditation agencies, and accounting rules that have evolved to the present day. The system of English common law has been evolving since the 12th century ¹, and the accounting system used today was codified in 1495.².

Numerous non-governmental bodies have continued to develop accounting rules and set auditing standards for public organizations.³ It is the American Institute of Certified Public Accountants, not the government, which sets ethical standards for the profession and U.S. auditing standards for audits of private companies; federal, state and local governments; and non-profit organizations.

Voluntary oversight organizations are embraced by their participants because they provide executives with a value – they allow them to discover waste and fraud and advertise honesty to partners and customers. Unlike government regulatory bodies, they are flexible, efficient, and competitive. When the compliance costs of accounting rules exceed their value, or when lax controls lead to unethical or risky behavior, the markets embrace new standards. The Securities Act of 1933 and the Securities Exchange Act of 1934 did not begin the process of regulating markets, but nationalized much of the auditing market and turned it over to politicians and bureaucrats.

Regulations hinder competition and raise costs for investors

The SEC subsidizes politically connected corporations at the expense of smaller firms, hindering innovation and encouraging corruption. Established corporations lobby the government to create burdensome regulations that smaller investment funds and markets cannot afford, thus creating coercive monopolies that raise profits a few firms at the expense of investors.⁴ Government bodies like the SEC, the MSRB, the FTC, the USITC, the Fed, the Treasury, the IRS, the OTS, the MSRB, and the state attorney’s offices issue hundreds of thousands of laws, rules, opinions, bulletins, comment letters and threats and require numerous reports, statements, forms, notices, and approvals that investment firms and public companies must obey. ⁵ This creates an artificial scarcity of investment products that benefits large corporations and discourages savings and investment. Smaller companies cannot afford to raise money by issuing stock, and investors are forced to choose between public but expensive mutual funds and secretive and risky hedge funds with entry fees that only the rich can afford.

The SEC creates corruption

Rather than making Wall Street honest, regulatory agencies are the primary instruments of fraud and corruption on Wall Street. Politicians who control regulatory agencies have an incentive to use their power to extract benefits for themselves and their constituencies, rather than to keep markets honest and efficient. Power hungry politicians like Eliot Spitzer use the power of the SEC to go on crusades again innocent businessmen ⁶, and thus force regulatory bodies to hide the evidence of real corruption.⁷ By blocking outsiders from seeing its records, the agency is makes it harder for investors to discover real fraud.⁸

The case of Bernie Madoff is a typical case study in how the SEC encourages fraud. Investors figured out that Madoff couldn’t possibly make the profits he claimed, and have been writing the SEC since 1999, urging them to put a stop to Madoff’s Ponzi scheme. However, Madoff used his close family ties to the SEC, and was instrumental in founding key regulatory bodies – and then nominated his family members to serve on their boards. When skeptical investors inquired about the irregularities in his fund, Madoff told them that the SEC had already investigated and cleared him over a period of three years.

While Madoff stole $50 billion dollars under their noses, the SEC’s budget surpassed $900 million dollars, and grew at record rates during the two Bush administrations. In response to this outrageous case of nepotism and corruption, the government will likely increase its budget and staff once again.⁹

The SEC makes markets more volatile and risky

By banning crucial market functions like short selling¹⁰ and “insider trading” ¹¹ the SEC hinders the market’s ability to react to new information, and makes markets more unpredictable and expensive.

The SEC cannot even oversee itself

While the SEC is charged with enforcing regulations like Sarbanes-Oxley, it consistently fails to control and report on its own processes and receives failing grades from the government’s own auditing body.¹² This is not surprising – like any socialist organization, it has no incentive to be efficient or responsible to stockholders.

The chief source of fraud and corruption in the United States is not Wall Street, but Washington D.C.

Notes

1. Medieval English common law: foundations for 21st century legal systems
   
2. Wikipedia: The history of accountancy
   
3. Self-Regulation in Today’s Securities Markets: Outdated System or Work in Progress?
   CFA Institute Centre Publications (September 2007)
   
4. See How the SEC Subsidizes Stocks by Jeff Scott and SEC: Protecting Investors Or Uncompetitive Companies?
5. (There are so many regulations that the department charged with publishing them can only report that “The Office of the Federal Register Library now contains more than 550 cubic feet .. which has the force and effect of law.” – History of the Federal Register
6. The Cost of the “Ethical” Assault on Honest Businessmen by Alex Epstein and Yaron Brook (Silicon Valley Biz Ink, July 8, 2003)
   
7. Deafened by the S.E.C.’s Silence, He Sued
   
8. The S.E.C. Prevents Investors From Discovering Accounting Fraud
   
9. The SEC Makes Wall Street More Fraudulent by Robert Murphy
   
10. See the One Minute Case for Stock Shorting
    
11. See Inside Insider Trading and Should Insider Trading Be Legal? by Yaron Brook
12. GAO Finds Material Weakness in SEC’s Controls

For most people, the decision to cheat or not is guided primarily by emotion.  Does the feeling of guilt exceed the feeling of satisfaction he will receive from getting an A?  But emotions are ultimately based on one’s values and ideas.  The predominant idea behind cheating is that morality is a conflict of self-interest versus self-sacrifice.  Cheating is the “selfish” thing to do, and confers an advantage in class and in life.  The “right” thing to, whether justified by promises of divine reward, utilitarian considerations, or a vague appeal to social harmony, requires an immediate personal sacrifice.  In such a conflict, the “moral” choice is understandably difficult for students to justify.  Without rational ideas to justify honesty and integrity, hard-working and “practical” students believe that morality only holds them back from success in life, and that they can “play by the rules” once they are out of school, and give lip-service to morality when it comes to more abstract and non-practical matters.

This is a grievous error is created by bad philosophy.  The lesson that students need to learn is that the choice between the practical and the moral is a false dichotomy.  Morality is the means to a successful life, not an impediment.  Teaching the practical, selfish value of honesty is the best way to discourage cheating.

The primary purpose of an education is to provide the practical knowledge and thinking skills that allow success in life and career. Cheating erodes both those goals. In a career, success of failure has material consequences on one’s work and the people it affects.  A grade on a biology exam is just a number, but a doctor who takes shortcuts with patients, or a construction engineer who takes shortcuts with buildings endangers both his career and other people’s lives.  The ultimate goal of education is not a piece of paper, but practical skills and knowledge, and cheating deprives oneself of that knowledge.  Whatever immediate benefit cheating provides is outweighed by the long-term harm.  Educators need to stress the practical value of their lessons, and the harm students do to themselves when they forfeit their education.

Even though it is an attempt to deceive others, cheating is a form of self-deception as well.  Cheating to get ahead will cause oneself to lose a grasp of what his skills actually are.  Someone who cheats on a quiz will find out that he is unprepared for the final.  Students who cheat in an entry-level class will find themselves helpless in higher-level classes. The more a student cheats, the more ignorant he becomes of his actual knowledge.  The more he gets ahead by his falsehoods, the harder he has to work to keep up his un-earned position.  Even if his dishonestly-obtained diploma gets his dream job, he will still be unqualified for it, and forced to continue his deception at work.  He will attempt to hide his inadequacy from co-workers and bosses just as he hid it from classmates and professors.  Cheating is an addictive habit that will surely destroy a career even if it does not (publicly) destroy an education.

Honest peers compete on the basis of their skill and hard work.  Their mutual excellence inspires and motivates each other to success.  Classmates and coworkers who cheat on the other hand, compete by the standard of who is the better liar.  They lose focus of the purpose of their education or career, and try to outdo the audacity of each other’s frauds.  Their peers do not inspire and motivate them, but present the constant threat of having their lies unmasked.  As they lose sight of their real goals, they will find themselves slipping behind.

The solution to the rise of cheating is not to attempt to instill a vague sense of moral guilt, but to explain and demonstrate that cheating is counter-productive and self-destructive.  Honesty does not require guilt or the threat of worldly or divine punishment.  Instead, ambition, integrity, and pride should guide one to success.

Sources

1. Wilfried Decoo, Crisis on Campus: Confronting Academic Misconduct (Cambridge, Mass.: MIT Press, 2002), 23.

Stock shorting is a method of profiting from a decline in a stock’s price. It is the opposite of investing long, where the investor profits from a rise in the stock’s price. “Going long” or hoping for a gain in the stock’s price is the more familiar method of investing. However, “going short” and profiting from a decline in a stock’s price is an equally valid method of investing.

How does stock shorting work?

Shorting a stock is a little more complicated than going long where a stock is simply bought and then sold later for either a gain or loss. Shorting stock first involves borrowing it from an existing owner. The short seller pays a fee to the owner to borrow his shares. Upon borrowing it, the stock is immediately sold and the proceeds are kept in the short seller’s brokerage account. When the short seller wants to close out his position (or the shares’ owner wants them back), he buys equivalent stock in the marketplace and returns the shares he borrowed back to the owner.

If the stock has fallen in value, he makes a profit that is the difference between the price at which he borrowed the stock and the price at which he bought it back. Conversely, if the stock has risen in value, he suffers a loss since he has to buy back the stock at a higher price than he borrowed it for.

Short sellers fulfill a crucial and productive role in financial markets:

Short sellers bring to light valuable information about poorly run companies.

Short sellers have a strong incentive to uncover poorly run companies. If a short seller successfully discovers ahead of others that a company is destroying value through incompetence, bad luck or even criminal activity, he profits by shorting the stock and publicizing the information. Short sellers are similar to good investigative journalists. They make more money if they can “scoop” others with information that will drive the stock down.

It is this aspect of short selling that many company managers, regulators and others find discomforting. Yet these same managers and regulators have no problem when an investor uncovers a successful company. Why should they be opposed to someone who does the opposite, and uncovers the overvalued, incompetent, lazy or even fraudulently managed companies?

Short sellers help capital go to the best companies.

By taking financial capital away from poorly run companies, short sellers free up money that can go to the best-run companies. Short sellers are the other half of the value-creating process of financial markets whereby capital is continually re-directed to those who can put it to the most valuable use.  The existence of short sellers means that capital will more quickly flee the poorly run companies and thereby become available that much faster for the better-run companies. The profit that a short seller makes is his reward for aggressively uncovering the poorly run companies.

Short selling is challenging.

Short selling is not for everyone for the simple reason that stocks generally tend to go up. During the 20th century, stocks gained 9% a year on average, although there was significant yearly variation. Stocks do not decline in value across the board for long periods of time. Because of this, short sellers must time their moves well, and attempt to short at the top of a stock’s move and then close out the position when it has hit bottom. If the short seller mis-times his moves, he will lose money. Such precision in timing is less important for long investors because stocks generally go up.

It is a misconception that short sellers can unfairly cause stock prices to go down.

This is the most common misconception about short sellers. However, short selling is only likely to be successful if companies truly have problems. If a seller shorts a strong or improving company, he will lose money. It is a misconception to think that short sellers (or long investors) can cause stock prices to deviate for meaningful time periods from their true values.

The only power a short or long investor has comes from being right. When he is right, he is rewarded for helping to bring true information to the marketplace. When he is wrong, his wealth is dissipated and his ability to invest further is diminished. If he is wrong often enough, all of his wealth will be dissipated and his ability to influence stocks will be nullified.

Conclusion: Short selling is moral and should be permitted.

Short selling creates value by making the capital markets work more efficiently. Short sellers help bring negative information about companies to the market. By doing so, short sellers provide liquidity to the market and help capital to flow away from the worst companies and toward the best companies. Without short sellers, markets would be less liquid and more violatile. Long investors would have more difficulty selling their positions, and the lack of liquidity would make it more difficult for companies to raise funds in public offerings.

To restrict short selling not only harms the efficiency of the markets, but it violates the right of stock owners to freely dispose of their shares as they see fit. Because their shares belong to them, it is their property, they have the right to do what they want with them, including loan out their shares to short sellers. Conversely, short sellers have the right to borrow those shares.

A proper understanding of short selling demonstrates the valuable and productive role it plays in the financial markets.

Further reading

• Investopedia: Short Selling: Introduction
• Investopedia: Short Interest: What It Tells Us

The growing use of non-lethal weapons such as tasers by the police has to calls to ban or restrict their use. The real issue being debated is the extent to which police officers should risk their safety to detain suspects. Should they only use force when someone’s life is in danger, or to avoid the risk of injury when attempting to tackle a suspect, or to avoid a sprain from having to run after someone? It is likely that further debate will result in a consensus enforced by the legislative and judicial branches of government. But what criteria should be used to determine the level of risk that police officers may be exposed to before using force?

Under the current system, police officers are only held responsible for injuring others only if found guilty of a miscarriage of justice, that is, willful malice or negligent behavior in the performance of their job. This provides an incentive for the judicial branch to minimize liability by maximizing the leeway officers have in deciding whether to use force. Furthermore, establishing standards for proper police procedure is a highly-non objective process, based on factors such as the public’s fear of police brutality, their desire for safety, the cost of lawsuits from police actions, and the political gain politicians find from pushing more or less draconian policies. One means of improving on this process is to establish a strict liability criteria for police actions.

What is strict liability?

Under a strict liability standard, it is not necessary to find a party guilty of malice or negligence, only of fault. Perpetrators of damages arising from inherently dangerous activities are responsible for damages regardless of whether they acted improperly. For instance, drivers at fault for damaging another car or injuring a driver are held financially responsible regardless of whether they acted maliciously or negligently. Under strict liability, a police agency would be held responsible for personal injury and property damage if an officer injures an innocent suspect, or unnecessarily injures a criminal — even if the officer acted properly in the performance of his duty. For example, an officer who fires at a guilty suspect who poses a real threat would not be liable, but an officer who fires at a suspect who does not pose a threat will be held liable for damages whether the officer is guilty of a miscarriage of duty or simply made an error in judgment. Furthermore, such a system would repay defendants who are exonerated at trial for their time and suffering.

Strict liability shifts incentives to the party best qualified to control costs

One objection to the strict liability standard is that it would greatly increase the financial risk faced by police departments and courts. However, by placing the burden of minimizing costs on the judicial agency, a strong incentive is created to minimize mistakes – and therefore costs. It is likely that police departments would attempt to insure themselves against risk, and the insurance agents would in turn establish guidelines that seek to minimize their risk. Such guidelines may ban tasers because of their health dangers – or they may require them in most situations where deadly weapons were formerly employed. Police agencies may prefer to hire men because they would find it easier to tackle suspects (and thus avoid a major incentive for taser use) or women because they are better at resolving conflicts peacefully. Because they would bear the cost of mistakes, police agencies would be motivated to experiment on the most effective way to perform their jobs, while the public they protect would be financially shielded from their mistakes by a strict liability standard.

Strict liability discourages prosecution of victimless crimes

Another objection to strict liability under the current legal framework is that it would make police agencies averse to enforcing laws that are prone to mistakes or unsuccessful prosecutions – namely, those known as “victimless crimes.” Adultery, gambling, homosexuality, and the trade of illicit substances and goods are areas where the lack of a victim makes errors in suspect identification and successful prosecutions especially likely. This is especially true of laws pushed by vocal voters on unwilling recipients – for example, communities that favor drug or alcohol prohibition on communities that tolerate drug and alcohol users. Yet this only illustrates the insulation of government policies (and by extension taxpayers) from the cost of economically expensive (and thus socially destructive) laws. If enforcement agencies are required to pay for their mistakes, they will favor laws that can be objectively enforced, and violations of which result in victims pushing for enforcement.

Further reading

• Civil Liability for Government Wrongdoing

Imagine an economy with just one actor: Robinson Crusoe on an island. Crusoe loves fish, so he spends half of each day fishing so he can enjoy fish in the evenings. Additionally, Crusoe spends Friday mornings maintaining his fishing dinghy and nets. In order to have fish on Friday, he must fish for an extra hour every other day of the week. In economic terms, Crusoe has a savings rate of one hour per day. His savings rate is also his investment rate, or the percentage of present income he sets aside to maintain or increase future consumption.¹

Crusoe doesn’t have a fridge, so he preserves his catch by throwing it in a small, dark pond. He can’t see how many fish are in the pond, so he keeps a stack of small rocks near it. Every time he adds a fish, he adds a rock, and every time he eats one, he removes one. The rocks are his money supply.

Suppose that Crusoe shares the island with some mischievous monkeys, who see Crusoe adding rocks to his pile. They decide to imitate him, so every time Crusoe ads a rock, they sneak in and add one as well. The monkeys are inflating the money supply by injecting currency into Crusoe’s investment fund.²

One day, Crusoe suddenly notices that his “savings rate” of fish is double the usual. He decides to compensate by eating some of the fish he catches during the “savings hour.” This is the consumption-side of the boom phase of the business cycle. Crusoe also decides to take some extra time each day to start building himself a new hut. This is the investment-side of the boom phase of the business cycle.

Crusoe now believes that the cost of saving fish is half the usual, while in fact his savings rate is too low for the investments he is planning.

Before long, Friday comes around. When it comes time to eat his midday meal, Crusoe suddenly realizes that he’s out of fish – despite having a surplus of rocks. He’s exhausted his investment capital because the additional currency snuck into his money supply did not represent a real increase in his productivity or savings rate. He doesn’t have the capital (fish) to maintain his previous consumption rate, much less increase it. He is forced to cut his investment rate (he must spend some of his Friday fishing) just to have some fish for Friday’s dinner. He must also abandon his incomplete hut because he does not have the time to finish it. The abandoned hut is an extravagant expenditure that represents a loss of capital.³ This is the bust phase of the business cycle.

To review, here’s the overall impact of the monkey’s trickery: Sunday-Friday, Crusoe catches the same number of fish, but consumes more, and therefore saves less. That’s the boom period. Friday, Crusoe consumes less fish, and spends less time for maintaining his nets (capital). Some of his investment/consumption time must now be spent in production. That’s the bust period. If Crusoe’s initial savings rate allows him to just break even each week ⁴, his nets will gradually get worse and worse and he will eventually go hungry.⁵

Notes

1. Crusoe prefers to enjoy his fish sooner rather than later, but he is willing to put aside some of his catch to get more fish later. The discount he gives to eating a fish Friday is his time preference, or his originary interest rate. (To that, he adds the risk that the fish will spoil by Friday to get the market or “real” interest rate.)
2. As long as the monkeys keep contributing one stone for every fish, Crusoe can account for their trickery. But if the monkeys are unpredictable, it will be impossible for Crusoe to set the proper savings rate.In the real world, the originary interest rate reflects the average time preference of all savers. If someone starts monkeying around with the interest rates, it becomes impossible for investors (or the monkeys at the Fed) to know what the real rate of savings is even if they know that the rate is being manipulated.
3. That abandoned hut represents investments which exceed the ability of the actual savings rate to complete. The resources it takes to build compete with worthwhile investments (such as repairing the fishing nets) by raising the prices for all capital. Ridiculous business models and sky-high salaries during the dot-com boom, as well as over-extended sub-prime mortgages likewise compete with legitimate business models, salaries, and mortgages. Manipulating the money supply makes it difficult to distinguish bad investments from good ones, so no one can escape the inevitable crunch.
4. That is, zero net profit, an equilibrium rate of savings, or “the evenly rotating economy” in Mises’ terminology.
5. Suppose Crusoe decides to ignore his hunger and work on his nets all Friday. In other words, he trades current production (and therefore consumption) for higher future consumption (that is, economic growth). If he does so voluntarily, there’s nothing wrong with that. But there’s nothing inherently more desirable or efficient in spending some of one’s time starving just to increase future production (that is, in valuing economic growth over present consumption.) Note that the longer Crusoe delays the shift back to production, the more severe the miss-allocation of resources (and his hunger) becomes. The monkey’s trickery does not actually make Crusoe to become a better saver – he is more likely to start saving less because of uncertainty over the future.

Further reading

• Austrian Business Cycle Theory: A Brief Explanation
• The Austrian Business Cycle Theory at Mises.org

While the abundance of advertising is usually viewed as a sign of the vitality of capitalism, it is nevertheless under a near-universal assault by intellectuals. Because advertising “blatantly and unapologetically appeals to the self-interest of consumers for the blatant and selfish gain of capitalists”¹, attacks on advertising are an assault on capitalism and ethical egoism. Arguments against advertising usually take two forms: the argument is that advertising is economically inefficient and the argument that advertising is somehow coercive. ²

The myth of “perfect competition”

Most economic arguments against advertising derive from the theory of “perfect competition, ” which is an ideal state against which markets are to be judged. This state is characterized by homogeneous products, relatively small sellers without monopoly power, prices which approach the cost of goods, consumers who have perfect information about all products and prices, and no entry costs to markets.

Advertising violates all these conditions, mainstream economists argue. Advertising seeks to establish product loyalty, and therefore to make certain brands more valuable than others. This creates barriers to entry by giving companies monopoly privileges, and allows them to price goods above cost. Furthermore, advertising is an imperfect and biased way of communicating product information to consumers. Finally, advertising retards progress by making it more expensive for new producers to enter the market.

In the real world, markets work quite differently: the essential characteristic of capitalism is the entrepreneurs who invest capital in new services, products, technologies, and businesses models. When their predictions are right, they gain a temporary advantage over their competition and turn a profit; when they are wrong, they take a loss. Success in business requires continual insight into which investments will prove profitable.

Rather than being a barrier to entry, advertising makes competition possible. New businesses and products stimulate demand by announcing their benefits to consumers. Expanding demand makes goods cheaper by creating economies of scale. While advertising is often attacked for creating demand for shoddy goods, it is not sufficient to advertise to gain consumer loyalty – only positive customer experience and continued positive goodwill can do that. Advertising is what allows new market entrants to capitalize on consumer dissatisfaction and dislodge established firms, as Japanese auto makers did when they demonstrated the superior value and quality of their cars over American ones.

The perfect competition model assumes that competing companies automatically lower prices to match their competitors. In reality, no business wants to lower prices unless consumers expect them – and it is advertising which performs that role by educating consumers about the competition. Advertising itself is a check on high marketing budgets: as consumers become better educated, competitive pressure creates price wars which force businesses to minimize expenses. ³

Yet another criticism is that advertising is a biased method of consumer education. Yet the continued importance of advertising as an influence on buyers proves that the creator of a good is the party most qualified to communicate the value proposition it offers, whether directly or through an intermediary. While word-of-mouth reports and independent product testing organizations are essential sources of consumer education, competitive pressure through advertising provides the claims whose veracity they evaluate.

Advertising is non-coercive

Opponents of “consumerism” often claim that advertising creates its own demand. But a commercial cannot simply implant a desire in the viewer. Rather, advertising tells consumers how their existing values can be satisfied in a particular concrete form. Some advertisements seek to meet well-defined values: toothpaste for clean teeth. Others educate consumers about products which fill a specific need: sports drinks for athletes, or diet colas for the health-conscious. Some advertising functions much like art, and present a concretization of highly abstract or subconscious values. For example, a sports car commercial may appeals to consumers who seek independence and efficiency, while a luxury sedan commercial might appeal to those who value comfort and elegance. Attacking advertising solely for appealing to emotions is as silly as criticizing a painting or a movie for appealing to the viewers’ emotion rather than presenting a dry, factual account.

Ultimately, advertising is a public appeal to the mutual self-interest of the seller and buyer. Movements to silence or limit advertising seek to regulate the freedom of the individual to voluntarily interact with others, and therefore are an assault on both freedom of speech and the right of association.

References:

1. Google Books: Jerry Kirkpatrick: In Defense of Advertising: Arguments from Reason, Ethical Egoism, and Laissez-Faire Capitalism.
2. The Five (Wrongheaded) Complaints against Advertising by Jerry Kirkpatrick
3. Persistently high advertising budgets are indications of high barriers to entry, usually due to government interference. For example, in the case of drug companies, the FDA forces drug makers to spend up to a billion dollars to deliver a single drug to market. This limits the drug market to all but the largest companies and most profitable medicines. Prescription drugs have large advertising budgets because the legal barriers to entry make it prohibitively expensive to compete on price or quality, or to appeal to smaller markets such as rare diseases.

Further reading:

• Advertising is Good Medicine by Wayne Dunn
• A philosophic defense of Advertising by Jerry Kirkpatrick
• The Concise Guide To Economics: Advertising

The United States was founded with the declaration that all men have the right to “life, liberty, and the pursuit of happiness.” The Founders recognized that all men have a moral right to be free from the coercion of others, as long as they allow others the same freedom. They believed that rights do not impose a positive obligation on others, but only the negative obligation to restrain from the initiation of force.

The claim that there is a “right to healthcare” violates the principle of individual rights because it requires that the liberty of doctors and the property of taxpayers be violated to provide for others. When the New Deal and Great Society programs forced doctors and taxpayers to become sacrificial offerings to the “common good”, the current “healthcare crisis” was born.

The myth of “free” healthcare

It is a common belief that when government provides something, it is free or cheap. But politicians cannot create wealth – they can only redistribute it. Money for all government spending comes from business – whether by entrepreneurial investment, the wages of patients, or taxes.

Whether by price controls of outright nationalization, when governments make prices artificially low, demand skyrockets, and shortages result. Politicians respond by passing ever more regulations to control costs. These regulations stifle innovation, drive up costs, and force healthcare providers out of business. The end result is to replace capitalism, the greatest wealth-generating system known to man, with an onerous system of central planning.

Capitalism cannot guarantee that all our medical needs will be provided for – no system can do that. But it does give entrepreneurs the incentive to compete to provide the best possible service they can. Centralized socialized systems have no incentive to improve service or to try bold new techniques. Politicians can force prices to be artificially low, but they cannot lower costs – they can only drive doctors, hospitals, and drug companies out of business.

The victims of “universal” healthcare

The waiting time for treatment in Canada varies from 14 to 30 weeks. Waiting lists for diagnostic procedures range from two to 24 weeks. Some patients die while waiting for treatment. To stop sick people from circumventing the “free” system, the government of British Columbia enacted Bill 82 in 2003, which makes it illegal to pay for private surgery. Patients waiting for critical procedures are now forced to seek procedures in the U.S. and doctors are abandoning Canada in droves. Cleveland, Ohio is now Canada’s hip-replacement center. Ontario is turning nurses into doctors to replace some of the 10,000 doctors who left Canada in the 1990’s. ^{1 2}

What will patients do when it is illegal to seek private medical treatment in the U.S.? Politicians are already working towards that goal. State and federal regulation impose onerous regulations which forbid insurance companies from offering services such as basic coverage for emergencies by requiring coverage of many types of procedures. Medicare forces doctors to follow 130,000 pages of regulations. Critics often attack the “capitalist” nature of American health care system. The reality is that the government now pays for 50% of health care, and closely regulates the rest.

Healthcare is only affordable under capitalism

If a society is not wealthy enough to afford healthcare, health socialism will not make it richer. Cuba, a poster child of socialist healthcare schemes, spends $229 on healthcare per person each year, while the U.S. spends $ 6,096.³ Premium services are available only to paying foreigners, while natives must bribe doctors for timely treatment and bring their own towels, bed sheets, soap, food, and even sutures.⁴

A government can decide to replace individual choice with state-mandated decisions of what goods and services are more important for the “common good.” But it can only spend on one area at the expense of another. If Cubans are not totally deprived of medical treatment, it can only be at the expense of all other goods. A doctor’s salary in Cuba is 1.5 times the median at $15-20 per month. ⁵ A telling sign of their deprivation is the Cuban suicide rate, which is the highest in Latin America and among the highest in world. Cubans in Miami on the other hand, kill themselves less often than other Miamians.⁶ When they risk their lives in leaky boats to escape to the U.S., the right to make their own decisions regarding their health is among the freedoms they hope to gain.

References:

1. “Free Health Care in Canada” by Walter Williams
2. “Do We Want Socialized Medicine?” by Walter Williams
3. Reuters: Health care in Cuba more complicated than on SiCKO
4. BBC: Keeping Cuba Healthy by John Harris
5. “An Evaluation of Four Decades of Cuban Healthcare” by Felipe Eduardo Sixto (PDF)
6. Miami Herald: “Study: Suicide epidemic exists under Castro” by Juan O. Tamayo

Further reading:

• Moral Health Care vs. “Universal Health Care” by Lin Zinser and Dr. Paul Hsieh
• Health Care Is Not a Right by Leonard Peikoff, Ph.D.
• Health Care Is a Business—or Should Be by Richard E. Ralston
• Video: Unisured in America (Free Market Cure Documentary Series)
• Americans for Free Choice in Medicine
• American Health Care: Essential Principles and Common Fallacies
• FIRM: Freedom and Individual Rights in Medicine
• The “Cost” of Medical Care by Thomas Sowell
  
• Michael Moore’s Shticko by Michael C. Moynihan
• NY Times: “As Canada’s Slow-Motion Public Health System Falters, Private Medical Care Is Surging“
• Do fat people deserve medical treatment?
• The One Minute Case for Individual Rights