Why Put Capitalism on Trial?

This past Friday, the STA Money Hour economists talked about Capitalism on Trial. Usually their radio show is about managing your investments and retirement, so this seemed different and caught my attention.

Luke Patterson was doing most of the talking; along with him was Max Gaines. Patterson started this segment by pointing out that we have nearly 16 million new eligible young voters, who were not old enough to have voted in 2016, the last presidential election. What is on the mind of these new voters?

Not the stock market, not tax cuts, and not deregulation, but rather things like climate change, and income inequality, and forgiving of student loan debt, and more free stuff.

If even half of these voters show up to vote, that could be a problem for Donald Trump. And the alternative—all of them: Warren, Sanders, Biden, even Buttigieg—are extreme (what he calls left, and what is southern statist tyranny on the Spherical Model) and open about their socialist plans.

The economic sphere is the center of the discussion this election. As he puts it,

Profiteering, capitalism, free markets are absolutely on trial—I think fundamental this election. The way of life in the United States I think is also on trial—what we want, and how we want to do things.

So, Patterson goes ahead and makes the case for capitalism. He sets up the defense with this information about what capitalism has done for the United States:

There are now 46.8 million millionaires around the world. That’s up 1.1 million from mid-2018. That’s according to a report released this week by the Credit Research Institute. Thanks again to the value of both financial, like stocks, and non-financial, like real estate assets. The report reveals that there are a lot more millionaires—again totaling 46.8 million millionaires around the world.

From the Credit Suisse Research Institute
Global Wealth Report 2019, p. 11

You’ve got the United States that’s a big part of that. About 25% of the global market capitalization, and the United States is the millionaire capital of the world, according to this report. This year the United States extended its unbroken spell of wealth gains, which they say began after the global financial crisis of 2008. The country now accounts for 40% of dollar millionaires worldwide and 40% of those in the top 1% of global wealth distribution.

The United States, and its system, makes a lot of millionaires. A lot of wealthier people.

This is just the beginning point. The opposition might even say this is a bad thing—creating more inequality, because they don’t understand wealth creation and they think someone gaining wealth means they’re taking it from someone poorer. So there’s more education to do to defend capitalism. Here’s more from the radio broadcast on how US wealth creators compare to other countries:

Luke: And on a per capita basis, there is no country even close. Not even China. Not even close to the United States. They are so distant in second, they’re not even second.

logo found here

What’s more, the biggest gain in the number of millionaires this year comes from—I’ll give you two guesses, Max. Is it Denmark, Switzerland, someplace in Western Europe, China? Gaining the most millionaires this year, with all those people, with a 6% annual GDP growth? Is it China that is creating the most millionaires? Who do you think it is? Western Europe? China? Gaining the most millionaires this year? With all those people, with a 6% annual GDP growth? Is it China that is creating the most millionaires? Who do you think it is?

Max: You’re putting me on the spot.

Luke: I think you know the answer. Give it to us.

Max: I’m not going to say Denmark.

Luke: No. No, you won’t. But it’s the economic system that’s being, I think, promoted by many on the left, as sort of the system to aspire to, the Western European style system.

He’s tells us the answer eventually. But first he’s making clear how the opposition is characterizing capitalism:

Again, capitalism, profit taking, and corporations, and billionaires especially are evil, and our system broken, and so it should be eliminated and rebuilt under a socialist system. That’s what they’re advocating for.

They don’t even apologize for it anymore. It’s not something that they’re saying, well, you know, it just needs to be tweaked around the edges, improve the capitalist system, or make better the things that need improving. They’re not saying any of those things. They’re saying, Listen, this thing is broken. It’s rotten from the inside. It has to be eliminated and criminalized, called out for being evil—to rise up, squash it, and rebuild under a socialist system.

Here’s the essential information, and the answer to his quiz question:

But, as it stands, according to this data, the biggest gain in the number of millionaires this year comes from none other than the United States, which added 675,000 new millionaires in the past year. 675,000 of the 1.1 million.

Hear me on this. This exceeded the extra newcomers in the next nine countries combined.

So, the United States created, this year, 675,000 new millionaires. This exceeded the next nine countries combined: Japan, China, Germany, The Netherlands, Brazil, India, Spain, Canada, Switzerland.

Let’s let that set for a moment. And repeat it. The number of millionaires created in the US this past year exceeds the number of millionaires created in the next nine countries combined. That’s not a small difference.

But, so what if capitalism creates millionaires? Shouldn’t they just feel guilty for that? Don’t we need fewer billionaires and millionaires? Unfortunately, the opposition believes that.

As Patterson says,

So capitalism is on trial. You’ve got Elizabeth Warren. She proposed the Accountable Capitalism Act (nice word), which obliges large corporations to obtain a federal charter requiring directors to consider the interests of all stakeholders—not only shareholders and customers, but also groups representing societies, such as their employees, local communities, civil society, including non-representative anti-business NGOs.

The Chief Justice of the Supreme Court of Delaware—where, by the way, more than two-thirds of the Fortune 500 corporations have their legal home—has written a book arguing that corporations should be run for the benefit of their workers. The Financial Times also launched a new agenda: “Capitalism: Time for a Reset. Business must make a profit, but should serve a purpose too.”

People are buying into this nice-sounding irrationality. He adds,

In a recent letter by the Business Roundtable, 181 corporate CEOs disavow the profit motive. The corporate directors, accountability shareholders, the CEOs champion a new view now widely held by them. It says that profit could only be justified for virtuous conduct, that profit should merely be a byproduct of making certain contributions to society. It’s a proposition that the Business Roundtable already implicitly accepts.

So there’s the central debate question: shouldn’t making contributions to society be a higher value than making a profit? Patterson makes this assertion:

In fact, the profit that a business earns is a pretty good approximation of its contribution to society. One might think of it in terms of a simple equation: revenue (what people pay in a competitive market) minus cost (the value of resources used to provide a product or service) equals profit—which is a first order indicator of a business’s contribution to society.

Here's the equation more visually:

revenue – cost = profit

Profit isn’t bad. As Patterson says, “profit is one of the most powerful signaling devices in the free market.”

Back in 2013 I was taking an online Hillsdale College class on economics, and also reading Poverty of Nations. So I wrote a number of economics pieces, for example, here, here, and here. Professor Gary Wolfram, the Economics 101 teacher at Hillsdale, had pointed out that the decentralized free market system makes it possible for the market to prepare and provide what he wants to buy his wife for her birthday even before he has thought about it. It’s amazing. The wide variety of choices, at costs we’re willing to pay (exchange for the fruits of our labor) are far beyond what is available practically anywhere else in the world. He also said—and I’ve heard others point this out as well—capitalism is based on providing goods or services to people—to serve others. The only way to make a valuable exchange is to think about what will make the customer so pleased that they are willing to exchange their own profits (the fruits of their labors) for whatever it is you’re offering them.

Back to the defense of capitalism. Here’s Luke Patterson again:

In their search for profit, businesses create the dynamic for economic growth and prosperity, rising living standards. Is this not a contribution to society of the most dramatic kind imaginable? The contribution to society, the profits making people wealthier, bringing more people out of poverty? Is that not a contribution to society?

He later goes into some detail about estimates of costs surrounding Medicare-for-all, which is just one of the promises of “free stuff” that Elizabeth Warren fails to show how she will pay for. She says she’ll never take from the middle class. But studies show there isn’t enough wealth in the upper class to take from to pay for this giveaway, which takes profits, and even prices, out of the equation.

Here’s what we can know for sure: the free market creates wealth. It doesn’t just move money from some people and place it in the hands of others; it creates actual wealth—new surplus resulting from work. The free market has indeed lifted more people out of poverty than any other system.

It’s not just luck. It’s not just “Well, things are going OK for now, but that can’t continue.” It’s not just, “Sure, socialism has failed every time it’s been tried, but it just wasn’t ever done right.”

I know, for certain, that I am a better expert on what kind of healthcare I am willing to pay for, what foods I’m willing to buy, what kind of transportation will meet my personal needs—or anything else we make payment exchanges for—than some bureaucrat in a faraway office.

Prosperity requires the freedom to make those exchange decisions for ourselves. The person who earns the wealth should be the one to decide how, when, and whether to spend it, save it, or invest it. Any path that allows anyone else to make that decision leads to poverty.

So, when we’re talking economics with young people, we need to make sure that, if they insist that they care about the poor (which they think might include them), we let them know the way to lift the poor is more free market, combined with careful philanthropy—not more government control.

Defining Socialism and Capitalism

Wednesday evening Glenn Beck did a special called “Capitalism: A Warning from the Dead.” I don’t know how long it will be available without a subscription, but it’s worth seeing. Plenty of history and comparisons to our day.

Glenn Beck, during "Capitalism: A Warning from the Dead"
screenshot from here

Somewhere in there he reports on a recent poll:

In 2010, 68% of 18-29-year-olds had a "favorable" view of capitalism. By 2016, that had dropped to 57%. Two years later, the exact same poll indicated that only 45% viewed capitalism as "favorable." This is a death spiral! Younger people are completely abandoning capitalism because they don't really know what it is!

At the same time—the exact same decade in question—if you ask millennials about the free market, "being your own boss," and entrepreneurship, it has a 90%+ favorability rating.

So capitalism is at 45%, but free market entrepreneurship is at 90%? This shows that no one knows what they're talking about. This proves that no one knows what socialism is, what its goals represent, where it aims to take us, and the difference between socialism and capitalism.

That’s puzzling. They disapprove of the very thing they overwhelmingly approve of.

We need to define terms and do some teaching, which will involve some questions that use the concepts without the words, to see if that will get us better clarity on what people really want. It might turn out we have more agreement when we do that.

Socialism

What my old dictionary says:

1.    Any of various theories or systems of the ownership and operation of the means of production and distribution by society or the community rather than by private individuals, with all members in society or the community sharing in the work and the products.

2.    a) political movement for establishing such a system; b) the doctrines, methods, etc. of the Socialist parties.

3.       The stage of society, in Marxist doctrine, coming between the capitalist stage and the communist stage, in which private ownership of the means of production and distribution has been eliminated.

What young people think it means:

To be like Sweden or Denmark or places like that, where they get free healthcare, free schooling, guaranteed jobs, and stuff like that.

What I think it means:

A government interference with the free market. This can be a single socialist policy, or a wide array of such policies in an attempt to replace the free market with centralized economic control.

This means that I differ somewhat from many commentators who rightly point out that Sweden and other “socialist” economies are not actually socialist economies. They have certain segments of society, such as healthcare, that the government has taken over—and for which they charge very high taxes. But, beyond these specific segments, they still respect private property ownership. And they tend to move away from government control, toward free market, when the capital they were using for their projects becomes depleted. Some of these countries rate equally on the Heritage Foundation Freedom Index as the United States.

Just to be clear, socialism doesn’t have anything to do with being sociable. It claims to be “fair,” but it ignores individual input, such as work, preparation, cleverness, risk of personal assets, and instead looks mainly at equal outcomes regardless of inputs. Most people wouldn’t find that fair.

It comes from Marxist ideology. As I’ve said before, is an attempt to replace capitalism, along with the governmental systems that support capitalism. Instead of individuals making individual market choices, central planners—elite power wielders—make decisions, such as the price of goods, the choices of jobs, the products produced.

And I’ll add that the Marxist experiment always ends badly. If a country doesn’t do an about face and stop heading in the direction of more government control, and instead returns control to the people, the result is mass poverty, loss of freedom, and death. Take a look at the news from Venezuela this week.

Capitalism

What the dictionary says:

1.    The economic system in which all or most of the means of production and distribution, as land, factories, railroad, etc. are privately owned and operated for profit, originally under fully competitive conditions: It has been generally characterized by a tendency toward concentration of wealth, and, in its later phase, by the growth of great corporations, increased governmental control, etc.

2.    The principles, methods, interests, power, influence, etc. of capitalists, especially of those with large holdings.

Let’s add how the dictionary defines capitalist:

1.    A person who has capital; owner of wealth used in business.

2.    An upholder of capitalism.

3.       Loosely, a wealthy person.

What young people think it means:

Greedy corporations, in bed with corrupt politicians, taking advantage of the working class. So, it’s evil.

What I think it means:

Capital is the accumulation of work above and beyond what is essential, followed by careful use of it toward a good idea intended to result in even more surplus. Capitalism is a system for using capital (accumulated surplus wealth) to invest it in more wealth creation.

Capital comes from surplus work. So, capital is a representation of surplus work that is invested to find ways to produce more wealth. And wealth is defined simply as the accumulated results of labor.

Capitalism, in this sense, is never evil. It is, simply, the free market allowed to work its miracles at lifting people out of poverty.

However, what young people think it is, really is what we could call “crony capitalism,” or more accurately just cronyism. And that is a bad thing.

Cronyism has been around a long time—long enough to show up as a definition for capitalism in my 1980 dictionary. Long enough to be represented by the character Mouch in Ayn Rand’s Atlas Shrugged. 

Back in 1980 economist Milton Friedman spoke at a graduation ceremony at Brigham Young University (not mine, but I was there). He talked about the dangerous influence of big businessmen. “They aren’t promoting free enterprise when they ask for handouts and regulations and controls to avoid competition,” he said. And he added,

The two greatest enemies of free society are intellectuals and businessmen—for opposite reasons. Intellectuals want freedom for themselves but no one else. Businessmen want free enterprise for everyone else, but special consideration for themselves.

So, the millennials and I, we agree that cronyism is not a good thing. The problem is, referring to this bad sort of business/government collusion as capitalism leads people to believe actual capitalism—a synonym for free market economy—is bad. Still, that doesn’t exactly explain why those who misunderstand these words would then think a great solution is a whole lot more interference by government.

Moving forward, maybe we can just use more accurate words, like free-market and entrepreneurship. Or avoid the words they don’t understand and just get on with the concepts using concrete examples.

With that in mind, let’s try these questions:

·         When you earn money at work, who should decide how you spend it? You, or a distant central controller?

·         Who should decide how much you earn? You along with your employer, or a distant central controller?

·         Who should decide how you pay for your healthcare—whether out-of-pocket, with a health savings account, or with help of insurance that you’ve chosen for your needs—or a distant central controller?

·         Who should decide whether you want to try a particular medical method or therapy? You, or a distant central controller?

·         Who should decide what kind of car is best for you and your family? You, or a distant central controller?

·         Who should decide whether you can use your skills and efforts to start a business? You, or a distant central controller?

And then, let’s add these additional questions:

·         Who should pay for your housing? You, or your heavily taxed neighbor, who is coerced by government to pay it?

·         Who should pay for your healthcare? You, or your heavily taxed neighbor, who is coerced by government to pay it?

·         Who should pay for your childcare? You, possibly along with voluntary help from an employer, or your heavily taxed neighbor, who is coerced by government to pay it?

·         Who should pay for your advanced education? You, or your heavily taxed neighbor, who is coerced by government to pay it?

·         Who should pay charitable donations to those unable to sustain themselves? You, along with your church or other organizations in touch with those in need, or your heavily taxed neighbor, who is coerced by government to pay it?

We could go on, but you get the idea. Socialism means decisions normally made by free people are instead made by some distant controller. And whenever you get something “free” or “low cost” because of socialism, that means government is heavily taxing your neighbors—not just the rich—to make those payments.

Government doesn’t “give” you “free” anything. Government produces no wealth from which to draw those funds. Government is simply power. And any government powerful enough to coerce you to pay for your neighbor’s wants is powerful enough to take away your choices about what you produce, what you earn from work, and how you spend those earnings.

And if they’re powerful enough to control your life, maybe they’re powerful enough to take your life. At least that’s how it has turned out every time it’s been tried.

Socialism Is Selfish

Dennis Prager spoke at the University of Wyoming this past week, despite student protests. He spends 25 minutes addressing the protests; he had also had a protester on his radio program. The accusations were both absurd and unfounded. For example, he was accused of being anti-Semitic. Um, he’s Jewish, and has written books on Judaism and anti-Semitism.

screen shot from video

He gets to his topic, “Why Socialism Makes People Selfish,” at about 25 minutes into an hour-long speech plus Q&A. I did a transcript of that beginning 10-minute segment on the topic. He says things that I’ve said.

So, the topic was “Socialism Makes You Selfish.” I didn’t forget the title. According to all sorts of opinion polls, you, your generation—half of you believe in socialism and not capitalism. So, let me respond to a few things, the moral and the economic. I’ll just begin with the economic.

The only thing that has ever raised large numbers of people from abject poverty is capitalism. Nothing else in the history of humanity has raised large numbers of people from abject poverty. You would think that would matter to people who care about people living in abject poverty. But they don’t. That’s the interesting thing. People on the left care about equality, not prosperity.

It’s a different moral world. Just understand that. They live in a different moral world. And clarity is our best friend. They don’t care about lifting large numbers of people from abject poverty; they care about the inequality in the Western world.

But inequality only bothers people who are bothered by inequality. That’s a tautology, obviously. In other words, only if you resent the fact that some people make more than others do you resent inequality. Inequality doesn’t bother me.

Mr. Prager then tells a story about being raised middle middle class, related to cars. The man next door bought a Cadillac every year; he was clearly much richer than the Oldsmobile-buying Prager family. They were happy for Mr. Klein. His wealth in no way harmed them.

Then he gives other comparisons and finishes his first main point:

Shortstops make more than surgeons. Is that fair? No. In some utopian world it isn’t fair, because surgeons save more lives than shortstops. OK, that’s just a fact. But it doesn’t matter. In a free society shortstops will make more than teachers and surgeons and nurses, and all people doing sweet and good things. That’s just the way it is. And it’s OK. Why would it bother me? If they make their money legally and ethically, why do I care?

I don’t care. They care. Because they covet. They resent the fact that some people have more than others.

I’ve been pointing this out as well—it’s because they covet. I wrote about that here and here, and more recently here. Prager continues:

Capitalism, not socialism, has taken people out of poverty. Capitalism also has a lot of inequality, because all liberty will have inequality. If you develop an iPhone, you make a lot of money. That’s just the way it is. And everybody likes using some sort of smart phone. That’s good. It’s good for everybody.

Why does it hurt me if some guy has billions of dollars? It doesn’t hurt me in any way. It helps me, because I am more productive, thanks to what that person has developed.

Socialism spends the money that capitalism creates. That is what you need to understand. Socialism does not produce wealth. Only capitalism produces wealth.

And the only moral question is not, “Why is there poverty?” The only moral question is, “Why is there wealth?” Poverty is the norm. Wealth is the aberration. All of the world was impoverished. But capitalism saved them from it.

This is also something I’ve written about. The economic section of the Spherical Model defines wealth as the accumulation of the results of labor.” Why shouldn’t someone who labors and accumulates the results be able to choose how to spend it?

Then Mr. Prager begins his second main point, the other moral argument:

Socialism and all of the doctrines of the left make people, generally speaking, more selfish and in many other ways morally worse than they were before.

Let me give you the biggest single example. Let me read to you a statistic. Americans give more charity per capita per income than any other people in the world. OK? Let me read to you.

This is the Comparative Non-profit Sector Project at the Johns Hopkins Center for Civil Society[i]. It compiled a ranking of private philanthropy in 36 countries from 1995 to 2002. Based on giving alone, the United States comes first. Giving 1.85% of GDP, followed by Israel at 1.34%.

By the way, isn’t it interesting that the two most hated countries in the world are the two most generous countries in the world? Isn’t that fascinating? It shows you how sick anti-Americanism and anti-Zionism are. I have that in my book… my book on anti-Semitism has a whole chapter on anti-Americanism.

Next, one fact stands out. This is Forbes, December 26, 2008. “Among developed nations, those with higher taxes and bigger social safety nets tend to have lower rates of giving.” You hear that? The countries with higher taxes and bigger social safety nets produce cheaper people. Produce less generous human beings. I’ll explain why in a moment.

In charitable giving as a percentage of GDP, nations with cradle-to-grave welfare systems rank far down the Johns Hopkins list. Sweden 18th. France 21st, Germany 32nd. Why? Here’s the answer. In American history—before socialism caught on—in American history, this was the belief: I have to first take care of me; then I have to take care of my family; then I have to take care of my community; and then I have to take care of my whole society. That was the belief.

Socialism kills all four. The state will take care of me; the state will take care of my family; the state will take care of my community; the state will take care of my society.

Which produces finer people? It’s so obvious that it is indeed a rhetorical question. If you think that you’re morally obligated to take care of people, you are a better person than the person who thinks, “The state will take care of my mom; why do I have to?” And that’s the way they think in much of Europe and in all of these other cradle-to-grave welfare places. Indeed, I don’t have to take care of me.

Today, a lot of your generation—indeed, I shouldn’t say your generation, ten years older than you—still live with their parents, playing video games in the basement. “Mom and Dad will take care of me, and if they don’t, the government will. The rich will take care of me.” And this is considered a moral idea. Well, it obviously isn’t.

There’s nothing more beautiful than taking care of yourself, and taking care of your family and community.

And a minute later he adds,

As government gets bigger, we get smaller.

He means small as in small-minded, small as opposed to great or generous.

There’s a lot we know about socialism. It has been tried elsewhere (like Denmark or Venezuela), so we can extrapolate the outcomes. We would be less well off by every measure: less freedom, less prosperity, less civilization.

Yet the pro-socialists are gaining purchase. Our next presidential race will probably include a Democrat who gladly proclaims he’s a socialist, along the lines of Bernie Sanders. They use the appeal of the argument, “It’s unfair that there’s inequality.” They promote coveting.

screen shot from here

This can be countered by education—although I don’t think we can expect our schools and universities to provide it, since they’ve been failing to teach principles of freedom, prosperity, and civilization for many decades now. My Spherical Model project is an attempt to help educate.

But the trend must also must be countered with better morality—standing up for real morality, and calling out fake morality such as unfair income distribution. 

Better moral teachings are going to require adherence to the outcomes of the Ten Commandments, honoring God, life, family, truth, and property. That last one relates both to “Thou shalt not steal” and “Thou shalt not covet”—both of which are sins socialism is based on.

Capitalism, on the other hand, is always moral. I wrote about that in a four-part piece called "Anything Evil about Capitalism?: Part I, Part II, Part III, Part IV, in the first month of this blog, back in 2011. And I also wrote about it here and here.

---

[i] I found this here: http://ccss.jhu.edu/research-projects/comparative-nonprofit-sector-project/ .

Defining Socialism

We spent some time recently defining conservatism, which is a path to freedom, prosperity, and thriving civilization. I thought it might be useful to define the opposite: socialism.

It goes by other names: liberalism, progressivism, communism. There may be some slight flavor differences among these, paid attention to by those who prefer a certain appellation over another. But in Spherical Model terms, they are all southern hemisphere: some far away authority decides how to spend the wealth created by individuals, and may decide what work individuals may do. In some varieties (USSR Communism, for example) private ownership and private means of production (business ownership) are eliminated.

The Soviet Union fell about 2 ½ decades ago. That means that young people have grown up unaware of what that enemy of the United States (and enemy of freedom around the globe) meant. Now, here we are with a democrat party choosing a nominee who will be either an Alinskyite covert socialist calling herself a progressive or a curmudgeonly old guy who boldly labels himself a socialist. And they are treated by media as if they are mainstream.

So maybe we need a lesson. Let’s be clear: socialism is incompatible with freedom, prosperity, and civilization. Socialism will—it always has and always must—lead to tyranny, poverty, and savagery.

And then this hypothetical conversation happens.

“No, no,” you say; “We just want to even things out, so the system is fair for everyone.”

You want freedom, you say, equality before the law?

“Well, but the way things are, there are people who game the system, and the little guy gets screwed. That’s why there’s such an income gap.”

And by income gap, you mean that’s a bad thing, that people should have the same amount of money?

“Yes, pretty much. The rich are only rich because they’ve exploited other people.”

And poor people are only poor because…?

“Because they haven’t had the same opportunities. Everybody should get the same education advantages, and good job opportunities, and health care so they don’t get wiped out by some accident or illness.”

OK, so, no poor people are poor because they do less valuable work than people who make more money?

“Are you trying to blame the poor?”

No, I’m just asking. So, what if you’re someone with a valuable skill, and you think up something really brilliant that everyone wants. Should you be allowed to profit from it, or share any profits equally with everyone else who didn’t think it up?

“You’re just not getting it.”

No, I’m not. Because I’m aware of how much misery a controlled economy has caused in the world.

“That’s just because it wasn’t done right. We would do it right.”

And how is it you can be sure of that?

“We just would. We’re smarter.”

Umm.

Among the current Berners (Bernie Sanders fans), they fail to think of forced labor camps, rationing toilet paper (happening in Venezuela currently), the millions starved to death, not to mention the millions killed outright for being unwilling to submit, or trying to escape. No, they think about northern European socialist countries, like Sweden or Denmark, which they think is a utopia we should emulate.

They seem unware that those countries are becoming less controlling—because they have run out of money. As Britain’s Margaret Thatcher accurately said, while opposing socialist in her own country, “The problem with socialism is that you eventually run out of other people's money.”

And how do you make money? Or build wealth? You create something of value beyond what is necessary for survival. Someone needs to do the wealth building, the work.

Recently I came across a piece written by a young man in Denmark, sharing what free stuff feels like there.

Denmark, photo from here

It starts out,

I have noticed a lot of well-meaning Americans praising Denmark for our happiness and our welfare system. We’re praised for our free education, free healthcare, free childcare, short workweek and all the other things that the goodness-industry is proclaiming to define us Danes.

Then he goes on to talk about what “free” means:

“Child- and healthcare is free and students are paid to study in Denmark!” That’s a line I’ve heard a lot. It’s a truth that needs a lot of modification. A lot!

If by ‘free’ you mean ‘paid for by someone else’ you are right in the assumption that healthcare, childcare and education are almost free of charge.

He spends the rest of the article talking about where the money comes from.

Denmark, he points out, built up original wealth from Viking plunder and slavery. So they had a wealth base to draw on. And the rest of the “free” stuff comes from taxes. It’s not a simple thing to just say everyone pays X% in taxes. It depends on a lot of variables. But the writer takes us through a basic example of an ordinary working class Dane who makes $25,000 DKK a month (about $4,000, which would be $48,000/year).

Income tax is deducted automatically, before you see your money (like our withholding). These include 8% Arbejdsmarkedsbidrag, loosely meaning “labor market.” You pay this amount because you’re in the labor market. That’s 2,000 DKK.

Then subtract bundfradrag, or “bottom deduction.” This is, if I’m understanding, a tax on the part of your income that isn’t taxed. This differs year to year, but in 2015 was 41,400, which is 3,433 monthly. You subtract this from the 23,000 DKK you have left to spend in the month, which is 19,567 DKK.

Now come the Communeskat, or county tax. Counties differ, but the average is 24.9%. Which means you take away 4,872.18 from 19,567, leaving you 14,694.81 DKK.

Then comes Topskat, or “top tax bracket.” This is on over 37,000 DKK per month, or an additional 15% on anything over 449,100 DKK per year. Our example doesn’t have to subtract this, since the gross is 25,000 DKK per month.

Next comes the Sundhedsskat, or “health tax.” It changes annually, but in 2015 was 4%. That’s 782.68 in our example, leaving 13,784.32 DKK.

That’s the total of the “income tax,” that is deducted before you see your money. Our example paid 11,215.68, or about 44%.

Then come the many other taxes from various places.

Every time you pay a bill, you pay the government 25%. That means, if you buy something for 100 DKK, it will cost you 125 DKK, for the government to allow you to make the transaction. But you don’t really notice, because the price would read 125, with the tax already included, and the vendor collects and pays the tax, paying quarterly.

In essence, sales taxes, direct and indirect, mean you pay 25% of your remaining income. That’s 3,446.08 in our example, leaving 10,338.24.

Utilities have an additional Afgift, or tax. The writer’s recent 3-month electric bill was 994.64 DKK. Of that bill, 111.96 was what the electric company charges for 358 kilowatt/hours, and 30 DKK for membership (membership?), and a sales tax of 176.33 DKK. There are sales taxes involved to make the exchange, and additional taxes for use of the state-owned network, which I think is the electrical grid. In the end, out of 994.64, 853.58 DKK goes to the government—divided by 3 for 284.53 per month.

We’ll subtract that, leaving us with 10,053.71 DKK.

If you buy a TV, phone, computer, or radio, you can do so—with the usual 20% tax. (The writer sometimes says 20% sales tax, and sometimes 25%, so I’m confused, and that will mess us our numbers. But we’ll plow ahead and try to get an estimate anyway.) But if you own a device that can access some kind of transmission, you pay a Licens, or license to use Dansmarks Radio, the government-controlled media. If you own a device and don’t use it, someone will come to your door and force you to register the device. The license is 205 DKK per month. (It’s unclear to me whether that’s an additional 205 DKK per device, or a single license for all devices in the household.)

The writer refuses to own anything that needs licensing; he uses his mother’s computer and his friend’s phone. But for our purposes, let’s say you pay the license fee. That leaves you 9,848.71 DKK.

That is 39.39% of your original. You have paid 60.61% of your income. If you were wealthier, you would add 15% earlier in the process. Not far off from what Bernie Sanders thinks those terrible rich people ought to be paying here. But note that in Denmark everybody pays, no matter how little they make.

Socialism isn’t about getting free stuff; it’s about spending 60%  or more of your income on those “free” things, without market choice. Everyone pays it. There’s no getting away from it. If you’re healthy and would rather pay for minimal health care, so you can save up for a down payment on a house, you don’t get that choice. If you want faster internet or more media options than the single media company offers, you don’t get that choice.

But for all the lack of choice, you work until mid-July or later for the government and can only use what you make the rest of the year to support your food, shelter, clothing, transportation, and entertainment choices.

Meanwhile, the government is telling you how happy you must be, because of the good way the government takes care of you.

That’s the utopia. It’s also the country where Islamists went on a rampage because someone drew some cartoons they didn’t like.

Sweden has similar stories, as I wrote about in January. The solution seems to be to turn away from overtaxing and turn toward free market. Otherwise these utopian economies will collapse.

The real way to avoid tyranny, corruption, unfairness, and other aspects of oppression is to go in the exact opposite direction from socialism. Like we have in our US Constitution, guaranteed God-given rights, with free market economics, among a righteous people that take care of each other, rather than depending on government to do what charity should.

I had planned to write this piece on socialism for a couple of weeks. But this morning I found there are plenty of others who think it’s time we did some informing on the subject. One, linked today by Glenn Beck, is this 37-year-old video of economist Milton Friedman telling TV host Phil Donohue the difference between socialism and capitalism in under three minutes:

It includes this key point:

In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade.

If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

Another piece that showed up today is this post by United Families International, giving a primer on the difference between socialism and capitalism. It offers this summary:

Socialism is the Big Lie of the twenty-first century. While it promises prosperity, equality, and security, it delivers poverty, misery, and tyranny. Equality is achieved only in the sense that everyone shares equal misery.

Socialism does not work because it is not consistent with fundamental principles of human behavior. The failure of socialism in countries around the world can be traced to one critical defect: it is a system that ignores incentives.

All I can do here is skim the surface of the definitions. You might also read this post and this post, and it’s second part.

The deceived young people seem unaware that voting for socialism is voting to place yourself under tyranny of elected elites and their appointed bureaucrats. They need to be informed. Now. While there is time.

There’s growing data showing the failure of the so-called successes in northern Europe. There are books full of details about socialism. If you haven’t read Animal Farm since you were assigned it in school, it might be time for a reread, now that you’re old enough to understand it. And pass it along to someone who hasn’t read it yet.

No one should be allowed to vote for a socialist if they’re still so uninformed that they think it’s all about being social and about getting free stuff. The rest of us don't deserve to suffer because of their ignorance.

Interference and Consequences

Last week’s Economics 101 lesson (week 6, through Hillsdale College, online for free) was on “Incentive and the ‘Information Problem.’” There were several points worth repeating.

Hillsdale Courses online

Early on, lecturer Gary Wolfram, asks the question, why can’t centrally planned systems provide wealth for the masses?

Market Capitalism, Wolfram tells us, solves a number of problems:

·        Information Problem—how can a central planner possibly know what all the Americans are going to want for breakfast tomorrow, or what they’ll want to read seven months from now? Market capitalism answers this through the price system.

·        Incentive Problem—innovation requires risk taking, and without an incentive to take risk, producers don’t innovate; they do the safe or easy thing.

One example he gives about the incentive problem, near the end of the lecture, is a caveman example—because economists like to demonstrate principles with simple societies. Suppose you’ve got a caveman, and he comes up with the idea of a stone axe. He has to form the axe head out of stone. He has to fashion some kind of handle, and figure out how to attach the axe head to the handle. All this is going to take time—time that he could have been spending grubbing for roots and berries. That’s his opportunity cost.

Suppose then, some other big ol’ caveman comes and takes it from him, because there are no property rights. It wasn’t worth the risk of time and effort, if he couldn’t guarantee that he could keep what he’d made for his use. Without property rights, there’s no incentive to innovate.

There are two types of systems that fail to protect property rights. I’ll give you a clue: on the Spherical Model, they are both southern hemisphere. There’s the anarchy side, like in the caveman example. And there’s the statist/government control side.

The pleasant alternative is the northern freedom zone. In economic terms, it’s where you find free markets. And, he agrees with the Spherical Model, that political freedom and free market systems go together.

Wolfram offers comparative examples between free market capital systems and centrally planned systems. Think about where you’d rather be planted, if you were destined to be poor. Always it’s better to be poor in a market-based economy, rather than an authoritarian ruled system. Think about, if you had to be poor, but could choose anywhere in the world to be born and live, where would it be.

As he points out, “Nobody says, ‘Send me to North Korea.’ They all say, ‘Send me somewhere that’s a market economy. Send me to Australia. Send me to the United States. Send me to Canada….’” We know centrally planned states cannot produce wealth for the poor. Only market capitalist states can do that. [31:30 into the video]

He referred to studies comparing economic freedom across the globe, done by the Fraser Institute and the Heritage Foundation—the Index of Economic Freedom, and compared countries in the to 25% of economic freedom—Hong Kong, Singapore, Australia, New Zealand, Switzerland, Canada, Chile, Mauritius, Denmark, and the United States—and the bottom 25% of countries, including Iran, Turkmenistan, Equatorial Guinea, Democratic Republic of Congo, Burma, Eritrea, Venezuela, Zimbabwe, Cuba, and North Korea.

The average per capita income of those in the top 25% countries is $36, 691. The per capita income of the bottom 25% countries is $5,188. If you’re in those top 25% countries—the ones most like market capitalism and least like authoritarian centrally planned—you’re seven times wealthier on average than those countries in the bottom 25%. [34:00]

It’s even clearer when you compare the poorest of one set of countries to the poorest in another. The poorest 10% in those freer countries make on average $11, 382 (per capita income). Or more than double the average per capita income of those in the centrally controlled countries. Worse, the poorest 10% in those controlled countries make on average $1,209. The poor in market system countries are nearly ten times wealthier than the poor in controlled economies.

Wolfram says, “It’s not a matter of theory; it’s a matter of fact. Governments that rely on central planning simply can’t produce wealth for the masses.” [35:00]

Why is that? Why are centrally controlled governments/economies such abysmal failures at providing wealth? One of the problems is the ever-increasing unintended consequences of interference. He referred to Ludwig von Mises, in his 1927 book Liberalism [a term that refers to freedom the way our founders thought of it, rather than the way the word has been co-opted by central controllers since then].

Once government begins to intervene in a system, intervenes in a market, it’s going to create these unintended consequences…. When it creates these unintended consequences, what happens is we get further government intervention, because there’s a political clamor. “Oh, now we need to deal with this problem.” So the government intervenes again. More political clamor as it creates more unintended consequences. With Mises arguing that eventually you end up with central planning. The government continually intervenes, creates more problems, intervenes again, creates more problems, intervenes again—until it’s intertwined with our economic system in such a way that markets aren’t allocating resources anymore; the political system is allocating resources. [35:30]

If we were to look at current events, and try to come up with some example of this happening, what could it possibly be? Oh yeah, Obamacare.

He gives us the  history, in more detail than I’ve done in the past. (The transcript of that section more than doubles this blog post length, so I’ll summarize, but, really, you should listen to the whole 40-minute speech, and especially this example, from about 36:00 to 44:00.)

·        There was a labor shortage during WWII, with labor resources going to the war effort.

·        Government didn’t want the price of labor to rise, so it set price controls on labor, which guaranteed greater shortages.

·        Someone who wanted to attract manufacturing labor came up with the idea of supplementing wages with employer-based health care insurance—as additional pay for labor that wouldn’t count as higher wages.

·        Employer-based health care insurance separated the receiver of care from the payment, thus causing a rise in demand for health care.

·        A rise in demand for health care increased costs of health care.

·        In 1954 the IRS ruled that employer-based health care insurance did not count as income, which was a way for employees to receive higher payment without paying the exorbitant (91% top margin) income tax.

·        This meant that employer-based health care insurance became more widely used, raising demand for health care from people who weren’t paying for it, and thus raising health care costs.

·        In 1965 government stepped in to help those who were retired or not employed, who could no longer afford to pay the artificially high health care costs without insurance, and government created Medicare and Medicaid.

·        So of course, with more people getting health care they weren’t paying for, health care costs rose further.

·        Eventually government intervenes with the Affordable Care Act, which forces employers to provide health care coverage, forces insurance companies to provide insurance for pre-existing conditions, and forces healthy young people to purchase health care insurance they wouldn’t otherwise purchase, and forces everyone to purchase a standard of plan the central planners decide, rather than the individuals making the purchases.

·        Results of the interference: higher health care costs, lower quality of service, bankruptcy for insurers, devastating costs and fines for people who can’t afford the new standards.

We have this system of health care insurance tied to employment. We don’t have that connection for car insurance, or homeowner’s insurance. The only reason health care is tied to employment is government intervention, followed by unintended consequences, followed by clamor to fix the new problems, followed by more government intervention, then more unintended consequences, and on and on.

It looks like it might be a good idea to just get rid of government. But that’s not the solution either; remember the caveman anarchy problem? What we need is just enough government to protect us—our lives, liberty, and property. In economic terms, government is there pretty much just to protect our property rights: with contract laws, police, armies, courts for settling disputes.

Wolfram gives this rule of thumb:

So when we look at a law, we ought to decide, does that law in making it easier for markets to work, or does it make it harder for markets to work? And fundamentally, is that law expanding our property rights? Is that law expanding our ability to act according to our own plan? If it is, it’s a good law. If it’s making it harder for markets to work—if it’s infringing on our property rights—if it’s making it harder for us to act according to our own plan, then that law ought not be there.

I think that’s pretty much what the writers of our Constitution had in mind when they delineated limited government.