I, Pencil

 Here is the classic essay I, Pencil.

 Milton Friedman wrote:

"I, Pencil" is a typical Leonard Read product: imaginative, simple yet subtle, breathing the love of freedom that imbued everything Leonard wrote or did. As in the rest of his work, he was not trying to tell people what to do or how to conduct themselves. He was simply trying to enhance individuals' understanding of themselves and of the system they live in. 

I.6

That was his basic credo and one that he stuck to consistently during his long period of service to the public—not public service in the sense of government service. Whatever the pressure, he stuck to his guns, refusing to compromise his principles. That was why he was so effective in keeping alive, in the early days, and then spreading the basic idea that human freedom required private property, free competition, and severely limited government.

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 Donald Boudreaux wrote:

There are two kinds of thinking: simplistic and subtle. Simplistic thinkers cannot understand how complex and useful social orders arise from any source other than conscious planning by a purposeful mind. Subtle thinkers, in contrast, understand that individual actions often occur within settings that encourage individuals to coordinate their actions with one another independent of any overarching plan. F. A. Hayek called such unplanned but harmonious coordination "spontaneous order."...

For its sheer power to display in just a few pages the astounding fact that free markets successfully coordinate the actions of literally millions of people from around the world into a productive whole, nothing else written in economics compares to Leonard Read's celebrated essay, "I, Pencil." This essay's power derives from Read's drawing from such a prosaic item an undeniable, profound, and spectacular conclusion: it takes the knowledge of countless people to produce a single pencil. No newcomer to economics who reads "I, Pencil" can fail to have a simplistic belief in the superiority of central planning or regulation deeply shaken. If I could choose one essay or book that everyone in the world would read, I would unhesitatingly choose "I, Pencil." Among these readers, simplistic notions about the economy would be permanently transformed into a new and vastly more subtle—and correct—understanding. 

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Milton Friedman discussing the pencil.


 Thomas Thwaites:  How I Built a Toaster--from scratch
 

Students:
 Here is the assignment (with answer key)
 Your welcome.

I, Pencil remains relevant today.
Read and Friedman use the pencil to show the folly of central planning: Nobody can possibly know enough to manage the production of pencils. And indeed, history has proven that when governments create Pencil Ministries (metaphorically speaking), they fail – inevitably and spectactularly.
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James Grant on Capitalism

“Capitalism is an alternative for what we have now – I highly recommend it”
James Grant

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Alan Meltzer’s Three Laws of Regulation:

1. Lawyers and bureaucrats regulate, but markets circumvent regulation.
2. Regulations are static. Markets are dynamic.
3. Regulation is most effective when it changes the incentives of the regulated.

Meltzer's new book: Why Capitalism?

A review of the headlines of the past decade seems to show that disasters are often part of capitalist systems: the high-tech bubble, the Enron fraud, the Madoff Ponzi scheme, the great housing bubble, massive lay-offs, and a widening income gap. Disenchantment with the market economy has reached the point that many even question capitalism itself.

Allan H. Meltzer disagrees, passionately and persuasively. Drawing on deep expertise as a financial historian and authority on economic theory, he provides a resounding answer to the question, "why capitalism?" Only capitalism, he writes, maximizes both growth and individual freedom. Unlike socialism, capitalism is adaptive, not rigid--private ownership of the means of production flourishes wherever it takes root, regardless of culture. Laws intended to tamper with its fundamental dynamics, such as those that redistribute wealth, fail. European countries boasting extensive welfare programs have not surpassed the more market-oriented United States. Capitalism does require a strong legal framework, Meltzer writes, and it does not solve all problems efficiently. But he finds that its problems stem from universal human weaknesses--such as dishonesty, venality, and expediency--which are not specific to capitalism. Along the way, he systematically analyzes the role of government, positing that regulations are static, but markets are dynamic, usually seeking ways to skirt the rules. Regulation is socially useful if it brings private costs into line with social costs (for example, the cost of taxes to hire policemen compared to that of the impact of rampant crime); if it doesn't, regulation simply invites circumvention.

Has Capitalism Failed?

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Borders Bookstore Closes

The "failure of Borders is a glorious event," and today's closing of Borders Store No. 1 gives us reason to celebrate - it demonstrates that the market forces of: a) creative destruction, b) consumer sovereignty, and c) the profit-and-loss system, are all working perfectly. To quote Anthony Gregory, "If voluntary competition should one day bring Amazon.com down, in the midst of a competing commercial success today unimaginable but even more friendly to consumers than that wonderful online store, we will again have reason to celebrate."

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Alan Greenspan, "The Flaw", Laissez-faire, and Moral Hazard

Newsweek reports:

In the fall of 2008, with the global economy in shambles and panic spreading throughout the financial system, a seemingly humbled Alan Greenspan—the former chairman of the U.S. Federal Reserve—appeared before Congress and admitted the unimaginable: there was a “flaw” in his world view that had prevented him from foreseeing the worst credit crisis in American history.

And so begins The Flaw, David Sington’s new documentary about the origins of the financial crisis. The movie, which opened in London last week, makes a compelling argument that the nature of American capitalism has changed in recent decades, giving rise to unstable levels of inequality and a mistaken belief in the self-correcting power of free markets. The Flaw focuses largely on the housing market and offers a far less blistering critique of Wall Street than Inside Job¸ Charles Ferguson’s 2010 Oscar-winning documentary. Yet in both films, Greenspan, who spoke with NEWSWEEK at his office in Washington, D.C., is cast in a similar role—as someone who personifies much of what went wrong with the economy...

Despite his 2008 mea culpa, Greenspan has largely remained steadfast in his faith in laissez faire, arguing against the government’s stimulus package and recent financial regulation. As Congress continues to fight over long-term spending and the future of entitlements, it is precisely this sort of stubborn libertarianism that has enraged Greenspan’s critics and once again cast a spotlight on his legacy.

read the article

Anthony Gregory on the meddling Fed: When All You Have is a Hammer

Murray Rothbard on Greenspan (writing in 1987)

Greenspan's real qualification is that he can be trusted never to rock the establishment's boat. He has long positioned himself in the very middle of the economic spectrum. He is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply.

There is one thing, however, that makes Greenspan unique, and that sets him off from his Establishment buddies. And that is that he is a follower of Ayn Rand, and therefore "philosophically" believes in laissez-faire and even the gold standard. But as the New York Times and other important media hastened to assure us, Alan only believes in laissez-faire "on the high philosophical level." In practice, in the policies he advocates, he is a centrist like everyone else because he is a "pragmatist."

As an alleged "laissez-faire pragmatist," at no time in his prominent twenty-year career in politics has he ever advocated anything that even remotely smacks of laissez-faire, or even any approach toward it. For Greenspan, laissez-faire is not a lodestar, a standard, and a guide by which to set one's course; instead, it is simply a curiosity kept in the closet, totally divorced from his concrete policy conclusions.

read the essay

Bourgeois Revaluation

Donald Boudreaux writes:

Economist and historian Deirdre McCloskey calls it "the Great Fact" -- the humongous increase in humans' standard of living that began about 200 years ago.

And what a Great Fact it is! It's great not only in the sense of being amazingly, resplendently good for ordinary men and women, but also in the sense of being the single most surprising and astounding change that we humans have experienced in our 70,000 or so years on this planet...

Then all of a sudden, starting a mere 200 or so years ago in northwestern Europe, boom!

Material riches start pouring forth not only into the castles and manor houses of royalty and the nobility, but into the humble homes of peasants, of hoi polloi, of human creatures who, generation after generation -- tracing back all the way to their single-celled ancestors -- lived lives poor, nasty, brutish and short.

What did our great-great-great-great-grandparents do to suddenly deserve access to new and remarkable goods such as underwear made of tightly woven cloth that could be vigorously washed without unraveling?...

Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

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Is Capitalism Cruel?

Tibor Machan writes:

Now these issues must always be dealt with comparatively – is capitalism cruel, harsh, heartless compared to what?

Some folks I know have maintained that compared to socialism, capitalism is indeed all these things but I just cannot buy it. Partly it's because I have lived under at least one kind of socialism, the Soviet version, which, as only someone who has been living in a cave for a hundred years would deny, is brutal, never mind cruel, harsh, and heartless...

A fully free market, capitalist system in which everyone must live without resorting to extorting their support from others, without getting bailed out by the government with other people's resources when they have mismanaged their financial affairs – is such a system more cruel than, say, democratic socialism?

Not really, not by a long shot. Any kind of socialism subjects the citizenry to coercive wealth redistribution and makes it impossible to accumulate wealth for oneself, one's family, one's enterprise thus impeding investment, savings and economic development. Instead people in socialist systems have to contend with being slowly bled to economic destitution unless they are savvy enough to circumvent all the damaging socialist practices (think here of George Soros). And, yes, there are quite a few people in socialist societies, even the harshest version of them, who manage to game the system. They may not openly attack their fellow citizens but because they game the system at the expense of these fellow citizens, those others are in fact – although sometimes not visibly – being seriously harmed...

Because so many people have found free market capitalism too harsh, too cruel, or too mean, the system has never been allowed to function as it had been meant to by those who considered it best for a society's economic well being, the likes of Adam Smith, Herbert Spencer, Ludwig von Mises, F. A. Hayek, Milton Friedman and Ayn Rand, among others. (Spencer, especially, got no end of grief because of sentiments like the following: "Sympathy with one in suffering suppresses, for the time being, remembrance of his transgressions. ... Those whose hardships are set forth in pamphlets and proclamations in sermons and speeches which echo throughout society, are assumed to be all worthy souls, grievously wronged; and none of them are thought of as bearing the penalties of their own misdeeds." [Man versus the State, p.22].) Instead they followed the lead of John Maynard Keynes and insisted that people who mismanage their economic affairs are entitled to endless bailouts from the government.

read the entire essay

History of Capitalism

excerpted from chapter 21 of Human Action: The Scholar's Edition

The history of capitalism as it has operated in the last two hundred years in the realm of Western civilization is the record of a steady rise in the wage earners' standard of living. The inherent mark of capitalism is that it is mass production for mass consumption directed by the most energetic and far-sighted individuals, unflaggingly aiming at improvement. Its driving force is the profit motive, the instrumentality of which forces the businessman constantly to provide the consumers with more, better, and cheaper amenities. An excess of profits over losses can appear only in a progressing economy and only to the extent to which the masses' standard of living improves. Thus capitalism is the system under which the keenest and most agile minds are driven to promote to the best of their abilities the welfare of the laggard many.

In the field of historical experience it is impossible to resort to measurement. As money is no yardstick of value and want satisfaction, it cannot be applied for comparing the standard of living of people in various periods of time. However, all historians whose judgment is not muddled by romantic prepossessions agree that the evolution of capitalism has multiplied capital equipment on a scale which far exceeded the synchronous increase in population figures. Capital equipment both per capita of the total population and per capita of those able to work is immensely larger today than fifty, a hundred, or two hundred years ago. Concomitantly there has been a tremendous increase in the quota the wage earners receive out of the total amount of commodities produced, an amount that in itself is much bigger than in the past.

The ensuing rise in the masses' standard of living is miraculous when compared with the conditions of ages gone by. In those merry old days, even the wealthiest people led an existence that must be called straightened when compared with the average standard of the American or Australian worker of our age. Capitalism, says Marx, unthinkingly repeating the fables of the eulogists of the Middle Ages, has an inevitable tendency to impoverish the workers more and more. The truth is that capitalism has poured a horn of plenty upon the masses of wage earners, who frequently did all they could to sabotage the adoption of those innovations that render their life more agreeable. How uneasy an American worker would be if he were forced to live in the manor of a medieval lord and to miss the plumbing facilities and the other gadgets he simply takes for granted!

The improvement in his material well-being has changed the worker's valuation of leisure. Better supplied with the amenities of life as he is, he sooner reaches the point at which he looks upon any further increment in the disutility of labor as an evil that is no longer outweighed by the expected further increment in labor's mediate gratification. He is eager to shorten the hours of daily work and to spare his wife and children the toil and trouble of gainful employment. It is not labor legislation and labor-union pressure that have shortened hours of work and withdrawn married women and children from the factories; it is capitalism, which has made the wage earner so prosperous that he is able to buy more leisure time for himself and his dependents. The 19th century's labor legislation by and large achieved nothing more than to provide a legal ratification for changes that the interplay of market factors had brought about previously. As far as it sometimes went ahead of industrial evolution, the quick advance in wealth soon made things right again. As far as the allegedly prolabor laws decreed measures that were not merely the ratification of changes already effected or the anticipation of changes to be expected in the immediate future, they hurt the material interests of the workers.

The term "social gains" is utterly misleading. If the law forces workers who would prefer to work 48 hours a week not to give more than 40 hours of work, or if it forces employers to incur certain expenses for the benefit of employees, it does not favor workers at the expense of employers. Whatever the provisions of a social-security law may be, their incidence ultimately burdens the employee, not the employer. They affect the amount of take-home wages; if they raise the price the employer has to pay for a unit of performance above the potential market rate, they create institutional unemployment. Social security does not enjoin upon the employers the obligation to expend more in buying labor. It imposes upon the wage earners a restriction concerning the spending of their total income. It curtails the worker's freedom to arrange his household according to his own decisions.

Whether such a system of social security is a good or a bad policy is essentially a political problem. One may try to justify it by declaring that the wage earners lack the insight and the moral strength to provide spontaneously for their own future. But then it is not easy to silence the voices of those who ask whether it is not paradoxical to entrust the nation's welfare to the decisions of voters whom the law itself considers incapable of managing their own affairs; whether it is not absurd to make those people supreme in the conduct of government who are manifestly in need of a guardian to prevent them from spending their own income foolishly. Is it reasonable to assign to wards the right to elect their guardians? It is no accident that Germany, the country that inaugurated the social-security system, was the cradle of both varieties of modern disparagement of democracy, the Marxian as well as the non-Marxian.

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Free Enterprise

Capitalism and Public Service

from Thomas Sowell:

"It was Thomas Edison who brought us electricity, not the Sierra Club. It was the Wright brothers who got us off the ground, not the Federal Aviation Administration. It was Henry Ford who ended the isolation of millions of Americans by making the automobile affordable, not Ralph Nader.

Those who have helped the poor the most have not been those who have gone around loudly expressing "compassion" for the poor, but those who found ways to make industry more productive and distribution more efficient, so that the poor of today can afford things that the affluent of yesterday could only dream about."

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Capitalism v The Free Market

Economic Liberty Lecture Series: Sheldon Richman from The Future of Freedom Foundation on Vimeo.

Bryan Caplan responds:

If Sheldon were merely saying that libertarians' noun of choice should be "the free market," rather than "capitalism," he'd have a decent case. But for libertarians to reject "capitalism" as an alternate noun is overly defensive - and to announce that we "oppose capitalism" is completely confusing.

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Stephan Kinsella responds:

I have myself for years now preferred the term anarcho-libertarian instead of anarcho-capitalist, mostly because libertarianism is about more than just free markets. But to the extent capitalism means the private ownership of the means of production–and I think this is a defensible meaning still–it is of course libertarian. We can expect any advanced libertarian society to be “capitalist” in that it would have an industrial, productive economy where the means of production is privately owned, characterized by the division and specialization of labor.

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The Economic Debate

The domestic debate, which I and many other libertarians have addressed several times in the past, involves the question of what has caused America’s economic woes.

One side — the statist side — claims that the problem lies in freedom and free enterprise.
The other side — the libertarian side — contends that our nation’s economic woes lies in the failure of the welfare-state, regulated-economy way of life that America has embraced since at least the 1930s.

The different diagnoses lead to two completely different solutions.

The statists say that since the problem is rooted in too much economic freedom and not enough regulation, the solution is to establish more government control over economic activity.

The libertarians say that since the problem is rooted in socialism and interventionism, the solution is to dismantle the welfare-state and regulatory programs (and the taxation funding them) and let genuine economic liberty reign...

What is that motivates U.S. statists to blame America’s economic woes on “freedom and free enterprise” rather than on America’s 70-year experiment with welfare-statism and regulation.

read the entire essay

Cartoon: Capitalism and Bailouts

Jacob Hornberger: Capitalism Has Not Failed

Suppose you were to give a one-question test in public schools across the country and, for that matter, to all graduates of U.S. public high schools: “True or False: The Great Depression was caused by the failure of America’s free-enterprise system.”

There can really be no doubt about what the answer would be. The vast majority of respondents would answer: True.

Yet, the correct answer is False. As Milton Friedman, Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and others have documented so well, the Great Depression was caused by the Federal Reserve, America’s central bank, a federal institution that is antithetical to free enterprise...

Alas, the deception and delusion are not limited to the Great Depression.

Today, we might well be witnessing the death throes of America’s welfare state and warfare state. Everywhere you look, the entire statist system is in crisis or chaos.

Social Security, Medicare, Medicaid, Fannie Mae, Freddie Mac, FDIC, the drug war, Iraq, Afghanistan, the dollar, federal spending, the national debt, stimulus plans, foreign aid, nationalizations, corporate and banking bailouts, and on and on.

The whole welfare-warfare system is busted, broke, bankrupt. With each passing day, it gets worse and worse, as federal officials continue to double down their bets in the hopes that somehow the system is going to come out fine.

But notice what the statists are saying: That it’s not socialism or imperialism that have failed, it’s free enterprise!

read the entire essay

Cartoon: Our New Economic Model

Cartoon: Michael Moore's Hypocrisy

Economic Contractions in the United States: A Failure of Government

Seeking 'not to let a crisis go to waste', left-leaning politicians and old-style Keynesian economists want to remedy the alleged failure of capitalism with a rising tide of big government. Let the budget deficits rip, empower the unions, socialise healthcare, increase trade protection, go green, and socialise the financial and industrial base.

The irony, as Charles Rowley and Nathanael Smith show in this timely monograph, is that the Keynesian policy prescriptions that are serving as the pretext for this programme have already been tried. Expansionary fiscal and monetary policies by the Bush administration and the Greenspan Fed were implemented to deal with the recession of 2001, and are precisely what caused the current crisis.

Applying sound economic reasoning and cutting-edge public choice theory, Rowley and Smith show that both the Great Depression and the current economic contraction were caused by failures not of capitalism, but of government. While monetary policy was the primary culprit in the 1930s, the interventionist policies of the Hoover and Roosevelt administrations exacerbated the downturn and stifled recovery. Fortunately, the monetary policy of the independent Fed is much better now (thought the Fed has unduly widened its role), but elected politicians are pursuing problems of intervention and re-regulation similar to those pursued in the 1930s. If these adverse trends are not reversed, the dynamic laissez-faire capitalism of the United States will be assimilated to the state capitalism and economic stagnation of Western Europe.

The authors outline a radical free-market approach to policy reform, designed to restore the United States economy to its stellar performance during the final fifteen years of the 20th century.

read the entire paper

Economic Crisis: Blame Capitalism or Politicians

Politicians often find scapegoats for America's economic woes. It is rare - if ever - that they point the finger at themselves. Yet, the basic cause of the current severe economic problem lies in the machinations of government.

It is clear to even a casual observer that Congress has abused its power to tax and spend. It has taxed success to subsidize failure. It has purchased votes by enacting an unending stream of entitlement programs, financed by taxation, foreign debt and a progressive degradation of the U.S. paper dollar.

This cynical boosting of consumption at the expense of production has resulted in the American consumer now accounting for some 70 percent of United States GDP. By consuming three times what it produces, America has become the largest debtor in history. The Administration now forecasts annual deficits of trillions of dollars for the next decade. This is all the direct responsibility of Congress...

No, this crisis is not a failure of capitalism, but the result of a sustained attack upon our capitalist system. If we allow it to be used as a pretext for more government control, we will endure a 'lost decade' like the 1990s in Japan.

To avoid this fate, taxes must be lowered, especially corporate rates. Instead, we are increasing taxes on businesses and individuals. The government must cease its corporate bailouts which subsidize failure at the expense of success. Instead, we are now giving away money not just to failing giants, but to reward those with less efficient vehicles - when they didn't even ask for it...

It takes years to dissect the myriad ways in which the federal government cripples the economy. After all, politicians spend most of their time obscuring their true intent. Do your own research if you have the time and interest, but at the very least, do not uncritically accept the party line. Capitalism is to blame for the government's financial crisis like a house is to blame for an arsonist setting it aflame.

read the entire essay

My thoughts: The problems the economy facces will never be solved until politicians are more concerned with peace and prosperity than power and popularity.

Cartoon: The American Dream