Political Means of Transferring Wealth

Transformation takes place at the intersection of culture and economics. Where any of the economic components, e.g., land, labor, capital, and the entrepreneur intersect with such components of culture, e.g., traditions, institutions, the family, or individuals, you will probably find transformation taking place. In fact, you can, no doubt, predict that transformation will take place at that intersection. The American farm policy example, between the 1930s and the present, fits the Cultural Economics matrix perfectly:

Land use was intersecting with traditions. Traditions were intersecting with labor. Components of capital were intersecting with institutions; families were intersecting with everything, etc. This transformation was taking place on no less than six million family farms in America and affecting twenty-five percent of the voting population of the country. By the 1990s, less than two percent of the families still lived on the farms. It seems appropriate to ask, why did they leave? Where did the people go?

Some of the farmers simply got sick and tired of the government’s interference and moved on. Another reason for leaving the farms was that the small family farms had been an easy and convenient entry threshold and starting point for newcomers to America. As other American resources began to be developed, new job opportunities opened up that lured folk away from the family farm.

At the same time agricultural land values began to increase. As soon as the government began offering to pay for crops that farmers didn’t plant, many farmers began offering to buy their neighbors’ acreage so that they could ‘not plant crops’ on their ground, also . It only made economic sense. Then investors began to formalize corporations and purchase lots of fertile ground to qualify for the strange program in a larger way. Competition to purchase the ground began to drive the land prices even higher, making it a good time for the small farmers to grab their chance to sell, take their proceeds, and find a place in town close to a good paying job.

Land prices got a boost from another odd set of circumstances. Earl Butz was the Secretary of Agriculture from 1971 to 1976 under Nixon and Ford. It was his intent to drastically change America’s farm policies and reengineer some of FDR’s socialistic farm support plans. He soon abolished some of the programs that were paying the farmers to not raise crops or livestock. He was bent on expanding and increasing farm production and allowing the farmers to have a say in what crops they would plant. His exuberant theme to the agriculture business community was to “get big or get out.” He also beat the drum for the farmers to plant their crops “from fencerow to fencerow,” to increase their yield rather than cut back on production. (1)

That message was all that the corporations needed to hear. It sounded a lot like a policy shift back to the direction of a free enterprise agricultural model. It was a green flag to the land consolidators to increase in size and scope their involvement in the agriculture opportunities. Land prices surged and more small farmers grabbed the opportunity to make a profit by selling their land and leave the farm. Agriculture Secretary Butz proved to be a poor choice, however, to represent the Republicans’ attempt at farm policy reform. After two separate incidents of reprehensible verbal gaffes, Butz was pressured to resign his cabinet post in 1976. Later, he pleaded guilty to federal tax evasion. But the big corporate farms were there to stay.

From that point, however, the progressive, centralized government folk unleashed tremendous pressure to stymie any such free enterprise encroachment in the agricultural administration. And as we learned last session, The Freedom to Farm Act was sufficiently gutted, and the Farm Act of 2002 reinstituted the direct-payment provisions, and the “automatic emergency aid” provisions of the law were guaranteed annually whether there were any emergencies or not. That which had started out towean the farmers off unnecessary subsidies ended up entrenching the farm controls even deeper.

The government began to realize that having the corporations on the farm land could be far more politically advantageous than dealing with the individual farmers, especially where the individual farmers had been virtually marginalized by dwindling numbers. The government simply continued the subsidies and above-equilibrium price programs. The government and the new corporate farm operators became strange bedfellows. Together, they were able to utilize the rich fertile earth to produce big money for each institution, instead of just food crops for the nation. Hand in hand they walked together, reaping enough money to supply both the corporate institutions as well as the enormous agricultural bureaucracy. The land was now growing money, and not just food crops, through price controls and the ability to raise billions of dollars in tax revenues from the massive numbers of non-farm citizens.

To simplify this issue, let me tell you about what the economists call Public Choice Theory:

Farmers producing a particular crop (or, for that matter, this can be true for labor unions or any other group in an industry) can use political means to transfer income or wealth to itself at the expense of another group or of society as a whole. It is also possible for a small group to receive large benefits at the expense of a much larger group whose members individually suffer small losses without really ever realizing it.

For example, a group of grape growers or sugar beet farmers would organize and establish a powerful and wealthy political action committee (PAC).The purpose of the PAC would be to transfer income or wealth to the group through their efforts of promoting or soliciting government programs. One of their methods would be to aggressively lobby senators and representatives for their vote on price supports, tariffs, or quotas that affected the group’s products. Once the PAC secured the legislator’s vote, the PAC would reciprocate by doling out large political contributions to the participating politicians, who would otherwise have had nothing to do with the grape growing or sugar beet industries.

It is also possible for a special interest group to vigorously lobby and increase its own income at the expense of the ordinary citizens. Very large sums of money desired by the special interest groups can be collected from each individual citizen through collected taxes. Those citizens may never even become aware of being taxed. Busy taxpayers are not likely to be informed about the costs of government programs for the sugar beet industry if they have no formal connection with it. The taxpayer, subsequently, doesn’t even know enough to object about his legislators agreeing to support subsidy measures for a certain commodity. The special interest PAC group would receive little or no objection to their solicitations.

Let me quickly share one more political means of transferring wealth of a nation to groups that benefit at the expense of a much larger group, whose members individually suffer small loses. Trading of votes on governmental policies and programs is referred to by politicians as Political Logrolling. It is designed to perpetuate government programs and subsidies by special interest manipulation. For example, one senator agrees to vote for a subsidy program that benefits another senator’s voters. That senator then returns the favor by voting for a measure that benefits the first senator. One politician may vote for expanding the school lunch program and proffer his vote for a direct payment or subsidy for sugar beet growers, even though no sugar beets are grown in his state. The vote trade may not benefit his constituents, but have a lot to do with financing his next campaign to get reelected.

Companies that supply agrochemicals, farm machinery, farm insurance programs, and hundreds of other farm industry items are willing to support PACs as well as lobby for a generous menu of government subsidies and direct benefits to the farmers, be they individual or corporate. It furnishes them with more money to purchase farm related goods. Additionally, the tens of thousands of people who are employed by the government to service and administer the Department of Agriculture and its subsidiaries are highly supportive of political means of transferring wealth from the taxpayers to their monthly paychecks. Over sixty million dollars are spent for just agribusiness people to lobby our legislators each year. (2)

Those practices help to explain why farm subsidies are so entrenched and why the food stamp program, for example, expanded for so many years. But the simple fact remains that misappropriated natural resources and the loss of free cultural and economic choice make a nation poorer rather than wealthier.

Next Week: The Improbable Experiment

 (Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Recent Farm Financial Philosophy

No, I am not picking on the farmers of America. I have personally worked on farms, I grew up in Idaho completely surrounded by farmers, and when it came to picking someone to marry I chose the prettiest and smartest farmer’s daughter I could find. I have chosen the example of the government farm policies of America from the 1930s to the present as one of the kindest and simplest examples of government encroachment upon our free enterprise system. I recall here our observable objective that, to the same degree that a government manipulates a redistributive outcome of an economy, the right of economic and cultural free choice is taken away from the constituents. And to the same degree that the free choice is high jacked from the people, resources of the nation are misappropriated and that nation becomes poorer rather than wealthier.

Because of past governmental intervention in the farming industry, the constituents now pay two to three times what would be necessary for basic items such as milk and sugar. In addition, just as a result of unsound decisions, greed, and inefficiency of the leaders, the constituents pay on April 15th each year billions and billions of unnecessary taxes to cover the inappropriate expenditures.

No, the government’s intrusion and intervention of the free market aspects of agricultural products in America did not result in supplying Americans with more abundant and cheaper food products over the past eighty years. And if errant farm policies bother you, a little investigation into free cell phones, government contracts, free healthcare coverage, and other exorbitant giveaway programs of the government, aimed directly at procuring votes, will likely make you downright angry.

So, what is happening now with the farm financial philosophies? In the 1930s, when many of the major farm policies were established, the farmers represented about twenty-five percent of the total population of the nation. That was a very large portion of the voting block and political consideration. Following the Reagan administration, there were questions raised regarding a reexamination and revision of the economic farm policies. The farm population had dwindled from a full 25% to less than 2% of the population. Farm families had sold their acreages to large corporate agribusinesses and found other employment. Urban congressional representatives now constituted a 10-to-1 majority over the rural representatives. And by that time some of the farmers themselves had come to resent the involvement of the federal government into their farming affairs.

In 1996, Congress passed the Freedom to Farm Act that radically overhauled the previous seventy years of farming. People began to say that it was time to wean the farmers off their subsidies and cease giving the above-equilibrium crop prices. In real-world-language that meant that, with less than 2% of the voting population, the farmers were not that important any more to the election process. It was no longer necessary to buy their votes in order to get elected. It almost sounded like a consensus for a move back to free enterprise, where the farmers had a choice as to what crops they wanted to plant and how many acres they wanted to plant.

In order to ease the transition and wean the farmers off the dole, the Freedom to Farm Act and the Bill Clinton Congress provided to the farmers declining annual transition payments from 1996 through 2002. They set aside $37 billion to cover the payments to the farmers that were to be based not on the current levels of crops but on the production levels of the old system. That meant, for example, that a farmer who had previously raised wheat would receive a cash payment from the government for seven years regardless of the current price of the wheat or amount of wheat presently grown. So much for reform!

In 1998 and 1999 the reform measures completely fell apart. The government ultimately ended up supplementing the direct payments in what they called “emergency aid” to the farmers. The agriculture subsidies for 1999 through 2002 actually cost more than before the passage of the Freedom to Farm Act. How does a thing like that happen?

When the Freedom to Farm Act expired, a new law was passed called The Farm Act of 2002. You probably guessed it: it included the direct-payment provision (direct payment subsidies are provided without regard to the economic need of the recipients or the financial condition of the farm economy) and, additionally, set aside another $118 billion for “automatic emergency aid” to be paid whether there was an emergency or not. The law was a direct slap in the face for any intent to move toward any semblance of free enterprise. In the 1996 Act, the payments were intended to decline over the years to wean the farmers off subsidies and price supports. But the new payments do not decline from one year to the next; by law the payments are a permanent part of the subsidy program.

Another strange and counter-productive feature of the present law is called themarketing loan program. At the heart of that program is provision for the qualified farmer (or more likely an agribusiness) to receive a loan from a government lender. Should the crop price be higher at harvest time than the loan price (the amount agreed upon when the loan was taken out), the farmer can simply pay off his loan with the agreed upon interest and own the crop. But if the crop price should be lower than the loan price the farmer can simply wash his hands, keep the money, and walk away from the crop. There is no risk. There can be no loss. The government lender (the tax payer, i.e. you) pay all the losses. I called the program strange and counter-productive. Why would the government guarantee an end value and then wipe out any initiative or incentive for the farmer to be a good steward and invest and manage well the future crop? He has already struck his deal.

Allow me to introduce next week’s discussion regarding the enigmatic farm politics over the past eighty years by raising a question: “Whatever happened to all the farm families who were living on the 6,000,000 family farms when FDR thought it so necessary to go after their votes to keep him in office forever? They represented twenty-five percent of all the voters in America. All of the subsidies and above-equilibrium crop prices were to guarantee the farm families as a U.S. institution protected forever as an American way of life.

But somehow, as smooth as a seamless piece of fabric, we look around and the farm families are gone from their farms, and without any fanfare the farms have morphed into huge sections of land owned by gigantic agricultural corporations. But the farm policies all stayed the same just as if the little farm families were still living in the white painted farm houses with red barns and tall stuccoed silos. Ironically, even though the existing farm folk now made up only one to two percent of the voters, the corporations were still being coddled as an endangered American way of life. Did Washington, D.C. not know that the individuals had disappeared? Had they not seen? Why would the corporations continue to receive the same nanny affection when it came to politics and the system of economic redistribution?

Next Week: Political Means of Transferring Wealth

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

© Dr. James W. Jackson  

Permissions granted by Winston-Crown Publishing House  

Well, Try Messing With the Demand

Roosevelt’s objective seemed simple enough in the beginning. It had worked for his friend John Maynard Keynes in England: use borrowed federal money and tax revenues to buy the vote of the farmers. The redistributed monies would pay above-equilibrium prices for the farmers’ crops and additional subsidies for their unique farming lifestyles. They would be hooked. That was the plan.

But they failed to see that in the process they were running roughshod over the economic law of supply and demand. The farmers began investing their newly gained subsidies into their operations. That resulted in increased production and surpluses. Even a novice should have known that when there are surpluses the prices naturally go down in order to clear the market. But the government had to artificially keep the prices up to the consumers in order to pay the farmers. They had painted themselves into a corner, but could not admit it for fear of losing the farm votes. That was when they decided to start paying the farmers for not planting crops or raising livestock.

Of course, the matter worsened, and the surpluses kept growing. When it dawned on the planners that they could not manipulate and control the supply side of the equation, they came up with another brilliant idea. If they could get rid of the surpluses then there would be a demand for the products left, and the people would gladly pay the higher price for scarce products. If they played it right, they could dispose of the surpluses and buy yet even more votes through promising more redistribution and subsidies to new groups of voters.

April 20, 1939, the Food Stamp program was launched. “Food Stamps, the latest in Roosevelt’s administration plans to reduce the farm surplus, came off the presses today at the Bureau of Engraving and Printing . . . will be able to cash each one dollar stamp for food worth a dollar and fifty cents.”(1)

Of course I will continue to vote for someone who will just give me food, especially if the one dollar stamp will buy me one dollar and fifty cents worth of my items at the corner grocery store.

Congress frequently revisits the Food Stamp program to enhance it and expand it. In 1974, it was expanded into every state. The 1977 Food Stamp Act made broader accessibility. By 1988, the Act introduced the issuance of a debit type credit card called an Electronic Benefit Transfer (EBT) card. (You may have heard of the recent problem with folks here in Colorado swiping their cards at the ATM machines, then taking the cash to purchase marijuana with the taxpayers’ money.) The program now assists well over thirty million recipients per month. The Food Stamp situation is a whole other issue that is open for your own further research.

After the death of President Roosevelt, the legacy continued. On June 4, 1946, President Harry S. Truman signed the National School Lunch Act into law. Its purpose was to “provide a market for agricultural production . . . and to improve the health and well-being of the nation’s youth . . . the raw materials come from USDA as donated commodities.”(2)

The real story was that the donated commodities from the United States Department of Agriculture had just come from the commandeered tax monies that were used to buy the votes of the farmers who had just raised the commodities.

On July 10, 1954, the Agricultural Trade Development and Assistance Act was signed and became Public Law 480. The law created the Food for Peace program, “to promote the economic stability of American agriculture, to make maximum use of U.S. surplus agricultural products.”

The politicians could not cover the funds used to procure the support and votes of the farmers by trying to curb the supply of the expanding surpluses, so it was necessary to create a demand for the commodities by giving the farm products to those whose votes could additionally be procured.

One of the more recent endeavors of the U.S. Department of Agriculture to manipulate the demand for the government’s surplus crops was the production ofgasohol, a blend of gasoline and alcohol (ethanol) made from grain. Additionally,biodiesel, a fuel made from soybean oil and other vegetable oils, has been greatly subsidized in another effort toward demand enhancement.

Is it any wonder that the corporate and private exploration and development process of our own natural resources of oil has been so bitterly opposed? Why is the Federal Government tinkering in all of this?

I think I hear a voice of sanity and reason from somewhere hollering, “stop, Stop, and STOP all this tragic silliness. Why are we paying billions of dollars each year in individual subsidies to farmers, plus billions of dollars in above-equilibrium crop prices, and billions of dollars in administration costs to run a program that we are told is for our own good and we should be ashamed of ourselves for questioning any part of it? For all these expenditures we receive the privilege to pay at least two to three times the normal market price for such commodities as milk and sugar at the grocery store today, plus the privilege to pay additional billions in tax dollars on April 15th each year for what? . . . just for the securing of a vote that brings with it entitlement and power to promote and enact such waste and violation of public trust? What price greedy power and control?” Of course, that voice is ruckus and radical! Pay no heed.

There is already a simple solution to the Farm Policy problem that has already been set into motion and is today available. It is called free enterprise. There is no need for the Gosplan gurus to try to figure it all out with acreage allotments, long division, and stubby pencils.

Let the politicians earn their own votes on a platform of creativity, expansion, and production rather than manipulation, taxation, and redistribution. Wealth only comes through growth and economic production, not redistribution. Redistribution constricts, production expands. Let the farmers decide for themselves what they want to grow and to whomever they wish to sell. If they want to sell their crop at a discount to hot lunch programs, or even donate them of their own goodwill, then let them. Family farmers are very intelligent, caring, and industrious businessmen.

If their personal research tells them that the production of rice or oats will be short next year because of the floods caused by late snow melt or excess rain, let them grow those scarce crops on their own land and live with the expectation of abundant monetary reward because they took the risk to change their regular growing program to take advantage of the coming demand. If they mess up and miscalculate and fail to reap their expected return, they can adjust their crop choice the next year and be the wiser for it in the years to come. But if they make a good decision and they are rewarded handsomely, then they should be respected for being a creative part of solving real problems with their own investigation and initiative.

The free market will send immediate signals and distribute necessary information for all parties to make good decisions as they freely choose what is best for them. The results of all those free choices in the market will bring about the best good for the greatest number of people. Greed and manipulation of centralized economic systems, based on the concept of governmental redistribution, simply cripple creative efforts of the constituents and steal the justified wealth of nations. How a nation handles the concept of free enterprise, with its economic and cultural freedom to make and pursue individual choices, is the determining factor why some nations are poor and some nations are wealthy.

Global transformation takes place at the intersection of culture and economics.

Next Week: Recent Farm Financial Philosophy

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Farm Policy

If you eat, you are a part of America’s agribusiness. I have chosen to use the agribusiness system to demonstrate our often discussed maxim that transformation takes place at the intersection of culture and economics. It is also my intention to share here, just as an example, how our government’s political habit of intervention into our systems invades and destructively interferes with our basic economic principle of free enterprise.

Along the way, we may even discover that the further we wander from the simplicity of the market forces, the further we move away from effective and responsible allocation of our economic resources. Marx never got it right, and FDR couldn’t get it right. A centralized governmental economic system of redistribution, quite simply, has never been successful.

Our government has subsidized agriculture since the 1930s with farm policies that include: (1) propped up farm prices, and subsidized incomes, (2) agriculture-related research, (3) farm credit, (4) water and soil programs, (5) crop insurance, and (6) giant subsidies on the sales of farm products into world markets.

Roosevelt’s Agricultural Adjustment Act of 1933 was predicated on the assumption of the parity concept: if a farmer could take a bushel of corn to town in 1912 and sell it for enough money to buy a shirt, he should be able to sell a bushel of corn on any day and buy the shirt. The security of that logic really appealed to the farm families. They would vote for FDR forever. The relationship between the prices received by farmers for their output and the prices they must pay for goods and services would always remain the same. If the price of shirts tripled over time, then their price of corn would be guaranteed to triple also.

That bought Roosevelt the votes, but it didn’t buy him a Nobel Prize in economics or logic. Economists through the years have uniformly rejected the parity notion. There is no sound reasoning in the proposition that if a bushel of corn could buy a shirt in 1912, it should still be able to buy a shirt several decades later. The relative value of goods and services is established by supply and demand. When technology changes, or new resources or products come to the market, or styles or tastes change, those relative values also change over time.

In the 1980s you could buy a modestly-equipped, new automobile for the same amount of money that it would take you to purchase a well- equipped computer. But a decade later everything had changed. Certainly, neither the computer company nor the car company would vote for the parity concept.

It did, however, require the government to arbitrarily set price floors on farm products. Those minimum prices were called price supports. Just like Russia’s Gosplan, that approach failed miserably. So, our government simply established above-equilibrium price supports for farm products. That means that the government just ignored what the real world would pay for the products and went ahead with paying the farmers the hyper price. Oops. That really didn’t work.

The farmers dug in and began producing in excess because the government guaranteed that they would get paid for all they could produce at the ballooned prices. They now had money the government had paid them to place more of their land into production, excavate their land so that it would produce larger yields, buy fertilizer and better seed. Meat growers, milk producers, and poultry farmers could improve their operations so they could all produce more.

Huge surpluses were created. In the real world of economics when there are surpluses of a product the prices fall, consumers purchase the excess production at a reduced price, and the market quickly levels out. But, the government was obligated to pay the farmers not only the above-equilibrium price, but had to pay for transportation to move the crops around. They also had to pay for storage of the surplus . . . and there were more and more excessive harvests coming on!

The government was then forced to go to the public and raise taxes to cover their own ignorance. The government’s administrative costs exploded as they endeavored to manipulate the programs. The farmers formed lobby groups to protect the good thing they had going. The marginal costs of the extra production far exceeded the marginal benefit to anyone in the society because the product price to the consumer could not be lowered even though there was surplus going to waste.

Since the product price could not be lowered, the U.S. consumers were paying a premium. That made our agricultural markets very attractive to foreign producers, who enjoyed getting in on the premium amounts being paid. The U.S. then had to quickly impose import barriers, tariffs, and trade quotas.

So the Roosevelt Gosplan came up with a brilliant idea. They could save millions of dollars of administration, transportation, storage, and other program-support costs if the farmers would simply stop growing so many crops. But it was impossible to simply stop the whole craziness and let the free enterprise system straighten out the mess. They could not run the risk of making the farmers angry and lose a full twenty-five percent of the national vote. So, they decided to pay the farmers to not grow the crops, and the payments would be based on what they had been growing the past year. Oops.

In return for guaranteed prices for their crops, the farmers had to agree to limit the number of acres they planted in that certain crop. That was referred to as acreage allotments.

(I’m terribly sorry, but I must share with you the picture I am seeing in my mind. I am chortling to myself as I write this piece. We are so critical of Marx, Lenin, and Joseph Stalin and their Gosplan, but in this scene all the same people are sitting around all the same tables, with their heads all pointed into the group. They don’t have computers or calculators so there are reams of paper on the floors and on the tables as they try to figure out the Gosplan formula by using long division and multiplication with short, stubby pencils. The difference is that some are dressed in green Russian military uniforms and some are in ties, nice dresses and suits. Some are in Moscow, and some are in Washington, DC. All have a disdain for cultural and economic free choice, all are obsessed with the craze to totally control the economy, and all are running madly away from the concept of free enterprise.)

The policy designers of the U.S. Department of Agriculture had to estimate the amount of product the consumers would buy at the supported price. They then had to translate that amount into the total number of acres the farmers would have to plant to provide that farm product. The total acreage then had to be apportioned among states, counties, and down to the individual farmers. Oops! They could never make it come out right, because all their planning did not reduce the surpluses. The acreage reduction did not result in proportionate decline in production. Some farmers would include their worst land in the allotment and save out their best land to continue to grow their crops. Now they had even more money to purchase better seed, take advantage of pesticides and enriched fertilizers, and buy the newest farm equipment. All of that increased and enhanced their output per acre. It did not shrink the surpluses. Additionally, farmers who did not go along with the subsidies stayed out of the program and bought up more acreage and planted more in anticipation of the artificially increased overall prices that would be paid. The surpluses continued to grow.

Oh, what’s to be done? What’s to be done? The surpluses continued to build and the payments used to not grow crops kept increasing. Octave Broussard and his friend Bordeau continued to make money for not raising hogs and money for not growing corn that was not fed to the hogs that they were not raising!

Governments that ignore basic economic principles like supply and demand; scarcity, choice and cost; and the efficiency of the free market, in order to manipulate a nation’s culture for their own greed, have a difficult time making the intended results all come out right. Eventually, those governments step on the neck of the goose that has been laying the golden eggs of the economy.

Next Week: Well, Try Messing with the Demand

(Research ideas from Dr. Jackson's new writing project on Cultural Economics) 

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Not Raising Hogs

Occasionally my exuberance is misunderstood regarding the straight line that runs between Runny Meade, England, and King John’s signing of the Magna Carta, and the signing of the Declaration of Independence in Philadelphia. Sometimes the sense of pride with which I write concerning free enterprise and the greatest cultural and economic experiment in history is misinterpreted.

When I speak about free enterprise and freedom of cultural and economic choice, my friends sometimes think that I am inferring that the United States of America actually has that kind of economic system today. The truth is this: we did, but we don’t. And, to the same degree that we have been losing our freedom of choice and free enterprise, we have been losing our position of wealth: try seventeen or twenty-five trillion dollars in debt for size!

I have determined not to allow these articles to become add- upon reiterations of examples how the Marxist progressives have eroded the historically unique example of the free enterprise economic system. Readers can find at least a thousand of those web sites speaking to that. But I do want to give a clear, historic setting in order to follow how our economic and cultural thinking has moved through the ensuing years. The end of these writings is intended to be enlightenment and hope for tomorrow.

Our system started getting jumbled around the time of the Great Depression, beginning about 1929. Eventually, the cozy relationship between President Franklin D. Roosevelt of the U.S. and English economist John Maynard Keynes moved our country toward Marxist socialism and a centralized economic system by leaps and bounds.

We began falling for the same voluptuous temptation that snared Marx, Engles, Lenin, and Trotsky. It is possible to buy the souls and the support of the citizens for a mess of pottage. It can be accomplished by promising to redistribute the wealth of the czars or the assets of the nation to the common citizens for their vote and political support. It becomes the great mirage, where everybody believes that they can live at the expense of everybody else.

Following the Great Depression, Keynes continued to press Roosevelt to take direct control of America’s economic system and assets. He chided him for lagging in taking over the housing industry. He then turned to the subject of utilities. He told Roosevelt, “Personally, I think there is a great deal to be said for the ownership of all the utilities by publicly owned boards.” Regarding the railroads, Keynes told Roosevelt to “nationalize them if the time is ripe.” By the government owning and controlling everything, it could dole out a bit at a time to the citizens and thus guarantee their support and democratic vote.

During the 1930s, the farm population was about twenty-five percent of the general population in America. A twenty-five percent voting block of the nation was far too ripe to ignore. Roosevelt intended to be President for the rest of his life . . . and he was. He was never defeated in a presidential election.

The case was then built that the “farm family” was a fundamental U.S. institution and should be nurtured as a way of life. Additionally, it was portrayed that farm families were subject to extraordinary hazards like floods, insects, farm accidents, and droughts. Surely, there was no way the “farm family” could exist without government help. To make certain farmers never had to risk the plight of low income levels, they would receive higher prices for their products and income subsidies through public assistance. “And thank you for your continued vote so that these amenities will not have to be taken away from you.”

Over the years some almost unbelievable programs have been introduced under this subsidy umbrella. It would have made the Marxist Gosplan downright proud. During my graduate program, I ran across this letter from Octave Broussard of Louisiana to Ezra Taft Benson, who was the Secretary of Agriculture for two terms during the 1950s. I include it here just to demonstrate how recipients of subsidy move to the position of entitlement with ease and expectation. Once a recipient begins to receive subsidy, it is almost impossible to break that addiction.

If buying the votes had not been the real issue, the free enterprise system would have informed the farmers in mere seconds what crops to plant, how much to plant, where to buy the seed, and where to sell at the exact and right price. Next week we will briefly check in on where we are in the agriculture industry today.

Next Week: Farm Policy

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House 

Systems Matter Part 12: Wages

Thank you for all your kind responses to our taking the time to simply review the heritage we have in our free enterprise system. Systems do matter. I am amazed at how many people in the United States have no foggy idea how our system works, why it has allowed us to experience more wealth than any other country in history, or how it compares with less efficient systems used in other nations of the world. We just presume that the benefits have always been here and will always actively remain in place to keep us wealthy. That is not true. 

In the more than 150 countries where I have traveled and worked, I have listened to the heart cry of the people who would give almost anything to enjoy the cultural and economic advantages we enjoy. But almost as sad is the realization, when I return home again, that our own citizens know so little about our country, cannot explain how our systems came to be, or are unable to relate to how easily we could, and are, losing those economic and cultural advantages. 

Our people have no basis for comprehending that each time government entities impose another layer of regulations limiting our historic freedoms of economic and cultural choices, and each time there is imposed another impediment of higher taxation, fees, duties, and permits, we lose to the same degree the magic and efficiency of free enterprise, and eventually we lose the wealth and strength of our nation. 

The key to wealth of a nation is new production and growth and the ability to increase income. Everybody has to end up better off. Our economic system has always been based on freedom of economic and cultural choice. Our national success has existed largely because of our system of free enterprise. 

In the last few sessions, we have discussed the highly efficient way that the free enterprise system freely collects, measures, and distributes signals and information of all kinds to the necessary decision makers within the economic system. No centralized system of committees or Marxist Gosplan could ever come close to matching such efficiency or accuracy. The basic signaling components of the system include prices, profits, losses, and wages. 

We will now focus our discussion on the concept of

  • Wages: The compensation resulting from the labor of a person is usually referred to as wages. In the beginning, the whole result of labor belonged to the laborer. But eventually the laborer had to deal with a landlord because he didn’t own the land. The amount of rent payable to the landlord for the use of the land then had to be subtracted from the laborer’s gross compensation. The laborer eventually had to subtract out additional amounts for capital improvements, like tools, transportation equipment, and, perhaps, livestock.
The person who tills the land doesn’t usually have the means to cover his living expenses until he harvests and sells a crop, so he hires out to a landowner who agrees to advance him enough to cover his necessities during the year. Now, the landowner or farmer who employs him has no interest in doing so unless the capital he has put out is returned to him, plus a profit. That profit becomes another deduction that the laborer has to recognize from the production of his labor on the land. That scene and sequence is played out in nearly every other example of manufacturing or industry. The workman needs someone to cover his necessities until the product is manufactured and sold. 

The laborer ends up with his share of the endeavors, and that becomes his profit. The owner subtracts all the costs of the endeavors from the amount he receives from the sale of the goods. That amount becomes his profit. Adam Smith wisely perceived that 
“A man must always live by his work, and his wages must at least be sufficient to maintain him.”(1) 
“What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.”(2)

Ultimately, wages are dependent upon productivity. There is a positive correlation between the value of what is produced and the wage paid to produce it. The information from those signals moves silently and quickly. A firm that pays a wage that exceeds the value that the laborer produces is quickly out of business.

But what signal tells the firm that it is paying too little or less than the value that the laborer has produced? It is the beautiful and efficient concept called competition. This concept is also foreign to the Marxist socialist system. But the free enterprise system operates here in fairness so that in the system everybody ends up better off.

If a business is paying a worker ten dollars per hour, but the worker is producing goods in excess of twenty-five dollars per hour, another like-kind business is going to snatch up that worker and offer to pay him nearly twice as much as he is presently earning. Guess what the worker is going to do? Wages in a competitive market reflect the productivity of the labor.

Two of the factors that triggered the ranting and raving of Karl Marx and Friedrick Engles were profit and capital. They believed that there should be no such thing as profit. If the workers owned everything, produced everything, and distributed everything, then there would be no need for profit, and all the workers would have more. They also totally misunderstood the concept of capital, and wished to eliminate every capitalist and everything having to do with capitalism.

Communism tries hard to fan the hatred between the classes. The workers were pitted against owners. Capital has to do with more than just money; it simply has to do with “stuff.” Economists refer to human capital, for example, as the additional sets of skills and experiences that a worker brings to the marketplace. Human capital can be increased by a person through years of experience in a certain field, through additional formal education, or advanced training.

As related to wages, any kind of capital, including human capital, that supports the worker increases his ability to produce at a higher level, thus increases his likelihood of a higher wage. The higher level of productivity that comes with a construction worker who has appropriate tools for the job increases his wage earning value in the marketplace. Marx simply didn’t get the concept that the stock of capital that supports the worker increases his productivity and his possibility for increased wages. Terms like, capital, capitalist, and capitalism really should have had nothing to do with the argument of class struggle or revolutionary war cries. That mantra was a political spin needed to fan the flames of the Bolshevik Revolution

Business owners find that by investing capital into their ventures they can greatly boost the efficiency and profitability of their enterprise. The capital infusion increases the productivity and the higher productivity leads to higher wages. The higher productivity can also result in higher distribution possibilities that can increase profits and allow for additional infusions of capital. Everybody ends up better off.

When impediments are placed on the businesses through additional regulations, restrictions, or higher taxes, there is less growth, fewer profits, less money for capital infusion, less productivity, fewer increases in wages, fewer distribution possibilities, and fewer wealth possibilities for both the individuals and the nation.

Wages and the economic subsets of competition, capital, and production, along with the other components of prices, profits, and losses, are incredible sources of information and signals that guide the efficiency of the free enterprise system.

Contrary to the economic philosophy of the Marxist socialists’ model, reason seems to bear out that what is good for the capitalist is also good for the worker.

Next Week: Not Raising Hogs

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Systems Matter Part 11: Profits and Losses

Repeatedly we have asked why some countries are poor and other countries are rich. Our discussions keep bringing us to the conclusion that the countries that are wealthy, or becoming wealthy, are those that are capable of producing higher levels of income. Those higher levels of income are generated from successful production of goods and services based on the effective use of the country’s natural resources. 

In order to make the best and most productive use of the natural resources in a country, the individuals within that country must experience cultural and economic freedom. They must be free to pursue their own interests and be allowed to make choices that they personally determine will result in their ending up better off. When those freedoms exist, the individuals are allowed to generate higher incomes by creating new wealth to be enjoyed by themselves and their country. To the degree that those freedoms are denied or restricted, the country will be less wealthy. 

It is good to remember that profits are absolutely necessary to the existence of enterprises. Not very many people would run the risks of ever establishing a business without the possibility of making a profit. Without businesses, we wouldn’t have the goods and services we enjoy and to which we have become so accustomed. But let’s take a deeper look at the function of profit.

  • Profit: The phenomenon of profit is the indicator of growth. It is the mechanism that sends the message that growth is being experienced in the economic system. Profits inform us of the positive value that has been added to the country’s economy, sometimes referred to as the gross domestic product (GDP).
A technology company in the Silicon Valley of California might take a measure of sand and transform it from the recognizable sand granules into a highly desirable and useful computer chip. They may sell the computer chip to another manufacturing company or to an individual. The expense required to transform the sand into a marketable product would be considered their cost. The money received from the purchaser of the computer chip would be their sales price. The difference between the chip manufacturer’s costs and the sales price would be the company’sprofit. When the company registers its newly generated profit, it simultaneously records that the wealth of the nation has just increased by the same measure. That wealth represents brand new just- created riches that up until that time had neither existed nor been recorded.
Effectively built into the free enterprise economic model are inherent signals and guidelines that work for increased success and growth. No one specifically designed the model to offer such signals . . . it just functions that way. But those signals and responses all happen so quickly and so silently, even without any individuals or committees in control of the signals. As a result of the simple market forces, individuals are guided to use the nation’s natural resources in the best and most efficient way. That is all possible because the consumers, as well as the business folks, act with the same cultural and economic freedom of choice in the specific areas oftheir self-interest. They also believe that their choices will make them better off in the end.
When the consumers buy goods and services, their collective purchases direct resources to businesses that are meeting consumer wants. Their actions also direct resources away from businesses that are not meeting consumer wants. If the consumers purchase enough of a certain product to create a profit for the business, then the business can receive and rely on the signal that it should continue to offer that product for sale.

Adam Smith saw all of those seemingly instant and automatic signals coming out of the existence of the free enterprise economic model, and referred to the anomaly asthe invisible hand. That invisible hand utilized all the unintended consequences of all the individuals who were simply acting with cultural and economic freedom of choice while pursuing their own operations of self-interest. 

Even high profits send an important signal and serve a necessary function. High profits attract other players into the industry. As new businesses come in, the competition increases. It is the competition of the new firms that forces prices and profits down, thus increasing the efficiency of the total economy. It is interesting that profits encourage the very competition that keeps profits in check. 

The inherent signals coming from the components of prices, profits, losses, and wages, determine not only which industries continue to exist but also which products survive. Only profitable industries, firms, and products survive. That also makes for a more efficient economy. 

  • Losses: The concept of losses plays an equally important role in sending signals to the economic marketplace. Businesses must match their production choices with the consumer choices or face losses and eventual bankruptcy. In the system, profits seem to be the rewards and losses seem to be the pain. But in the long haul, even the pain of the losses serves to bring about rewards. Losses send the signal that something must change because the natural resources are not being used for the highest and most efficient means.
Just as high profits in a certain industry will send signals for new businesses to get involved in the same activity, so also do losses send a strong signal for others to pack up and get out. Those negative signals are strong and equally important. 

When a business incurs costs that exceed profits, it is in trouble. It is time for it to change its approach and use its resources some other way. That is a hard lesson to learn. But failure in a business simply means that the business is not making other people better off. When that failure occurs, the resources that the business was using can now be used for other purposes. Other managers can now have a go at managing those resources. It is hoped that they will be successful in making people better off, and, as a result, make a profit from redirecting those resources.

 It is important that we ask why some countries are wealthy and others are not. It is likewise important to ask why some countries were wealthy and are presently becoming less wealthy. It is important to investigate at what level the individuals of a country are presently experiencing cultural and economic freedom as they access a country’s natural resources. It is still important to observe if the individuals are allowed to generate higher incomes by creating new wealth to be enjoyed by themselves and their countries. 

Let’s keep observing and asking questions. Let’s keep discovering! 

Next Week: Wages

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Systems Matter Part 10: The Magic of Free Enterprise

By the early 1990s, I was spending a lot of time in the Marxist/Communist countries of the world: Cuba, Russia, North Korea, Romania, and even the philosophically tainted countries of South America. In the Soviet Union, members of the average household spent nearly forty hours per week standing in lines attempting to procure just the basic necessities for the family. 

In places like Ukraine I would occasionally stand in lines with my new friends just to see what it felt like to participate in the economic debacle of Marx, Engles, Lenin, and Trotsky. We would line up behind the old faded blue military flat-bed trucks, draped with a swatch of gray canvas, and wait our turn to have a government comrade hand down the loaves of bread or canned vegetables . . . if they still had any left. 

Marx and Lenin had not only scoffed at, but had officially outlawed, anything that even smacked of free market, free enterprise, or portrayed the slightest capitalistic nuance. With that stance they negated any advantage of market-generated information that would have helped guide them with their economy. 

There was no concept of economic growth or production. They had squelched any intrinsic market signals and had shut off any built-in factors for motivation and incentive to help the economic system run smoothly. They had locked themselves into a system that glorified mediocrity and stymied excellence. That was the price they were paying so that they could retain absolute control over a centralized economic system of redistribution. They really believed that they could figure it all out by themselves and control the attitudes and actions of millions of individual workers in their centralized system. But, they could never get it right.

  • The flash of genius regarding the magic of prices had been observed and written down by Adam Smith, and it had been available to the socialists for a hundred years. Its efficiency had been well documented and not hidden at all from the public. Smith had recognized that the prices that emerged from individuals entering into voluntary transactions in a free market could silently coordinate the activities of millions of people almost immediately. Each individual would be seeking the area of his own interest, but his actions would result in an experience of unintended consequences where everybody ended up better off. Those transactions sent silent signals out to the entire economic system. Those signals guided the actions of the other individuals in the economic system so that they could make enlightened decisions on their own without the necessity of any politburo or centralized Marxist Gosplan telling them what to do.

In Milton Friedman’s bestselling book, Free to Choose, he brilliantly explains the three elements of Prices: Prices perform three functions in organizing economic activity. First, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product – the distribution of income. These three functions are closely interrelated. (1) 

Prices are the nervous system of the free enterprise economy. Individuals like to buy at the lowest price possible, and sell at the highest price possible. At some point there is a mark where the seller is willing to sell his product and the buyer is willing to buy the product, and each feels that he is coming out of the deal better off. If that mark cannot be struck, then the deal fails to be consummated. If agreement is made, then price for the product or service has been established. Additionally, the successful transaction encourages the individuals to pursue yet more transactions in order to feel better off again and again, thus expanding the total economy. 

In experiencing the Gosplan in action in the old Soviet Union, I observed that there were constantly surpluses of the wrong things and shortages of the things needed. In Armenia, my new friends at the shoe factory pointed out that the Gosplan would try to figure out how many comrades needed to plant enough hectares in hay to feed enough horses and cattle to provide sufficient leather hides to be delivered to the shoe factory for the making of military boots. They always got it wrong somewhere along the line. They would experience a drought (that was always one of their favorite excuses for failure) where there was not enough water to grow sufficient hay for feed, or they would grow so many tons of hay that it would spoil or mold and have to be discarded. 

In a free enterprise economic system we do not observe many incidents of surplus or shortage or inconsistent availability of products. Prices make that happen. That is because prices balance the demand for goods and services with their supply. The quantity that the consumers want to purchase is assured to match the quantity producers want to sell. The balance between supply and demand is no accident. Prices make it come out right each time . . . unless there is interference by some control-seeking government entity. Even in times of economic upset or disaster, goods and services are available at the present market price. 

To pursue our shoe factory example, let’s return to the Soviet Union’s Gosplan and see how it differs from an economic system of free enterprise. If a retailer needs to purchase from the open market certain numbers and styles of shoes in order to advertise and sell them from his spring shoe catalogue, he may contact a shoe manufacturer and enter into an agreement to purchase said shoes to be delivered to a certain location by a certain date for a certain price. Each party is free to enter into such an agreement. As soon as the shoe manufacturer commits to fill the order for the retailer, he immediately secures the necessary leather to fill the order. 

But, let’s say the manufacturer is dilatory and waits for a period of time to purchase the leather. And in the meantime there is a drought, (or some other kind of impediment in the leather supply). Immediately information goes out into the marketplace regarding the shortage of leather, and the cost of the remaining available leather supply goes up. But leather is still available at the new price. The cattle growers in Texas receive the free information and may decide to not sell the entire cow to their beef steak market in Japan, but, rather, butcher the cattle in Texas and save the leather hides to sell to the shoe industry, and just send the custom steaks to Japan that year. The cattleman’s neighbor hears of the leather shortage and decides that next year he will switch his ranch operation from growing sorghum to raising cattle, because the selling price of leather has increased sufficiently and he now has an opportunity to make a handsome profit. 

The prices of shoes for the spring season are going to go up. There will not be a shortage of shoes, but the potential customers will have to make a decision as to whether or not they want to pay a higher price. Since the company with the spring shoe catalogue has a firm contract with the manufacturer for the leather products at a lower price, he stands to make a better profit from raising his shoe prices, or he has an edge on the market and can afford to sell his shoes faster at a lower price than his competitors who had to increase all their prices because of the increased leather costs. 

But the manufacturer now has to scramble and find some leather available at the price that existed when he signed his contract with the retailer, or he will experience a sad loss. 

The manufacturer grabs the Wall Street Journal and turns to the commodity price page in search of leather. All this information is free and available in the open marketplace. He locates a leather supplier in Brazil who is willing to sell him the leather at the previous year’s price and even assume part of the shipping costs. The manufacturer has covered his potential losses and can fulfill his contract with the spring shoe catalogue. All that information exchange and human initiative happened almost instantaneously, without needing to be gathered, sorted, and distributed to everybody in the economy. Everyone had access to all the information, but those who did not have a personal interest in the leather or shoe industry could simply ignore the information and go on with their own interests. There is no way in God’s green earth that all that could have taken place under Gosplan! 

Of course, all the cattle ranchers who jumped in to raise more cattle and sell the leather at the increased prices, now have the prerogative of going back to raising sorghum. But everybody in the system had the right to pursue his or her desires to become better off. Everybody in the system had instant and pertinent information available making it possible to pursue those free choices. 

Nothing has ever been designed to match the efficiency of free enterprise. That is because nobody designed the free market. Nobody manages the free market. Nobody controls the free market. It is a phenomenon that registers thousands of personal preferences in a nanosecond. 

It can deliver information that can peg the market value of a million different products all at the same time. It can inform people in every corner of the earth what to produce, when to produce it, how much to produce, and how much to buy at any given time. It can even let you know where to go to search out job opportunities within your scope of interest. If none of that information is pertinent to you . . . you can simply ignore all of it! 

All of that instant information is not mined, gathered, filtered, stored and made available by one individual or one big box superstore of technology. All that collaborative wisdom is freely made available and is the result of millions of individuals working in union with one another while seeking to be better off within the scope of their own interest. 

The anomaly tagged as free market that operates within the phenomenon of free enterprise just simply exists in all of its sophistication wherever individuals exist who have been granted freedom of choice in areas of culture and economics. Those are the individuals who have a deep desire to end up better off. That phenomenon of free enterprise is a precious gift to the world! 

Next Week: SYSTEMS MATTER Part 11: Profit and Loss

  •  Profits
  •  Losses
  •  Wages

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Systems Matter Part 9: Essentials of Free Enterprise

So, what’s the big deal about the free enterprise idea? Civilizations over the centuries seem to have bumbled along just fine utilizing economic systems directed by dictators, despots, and greedy socialists . . . haven’t they? 

Please recall that the whole reason behind this discussion is the valid and penetrating question, why are some nations rich and other nations poor? We have concluded that the reason is not because of the difference in the people. I have observed in my lifetime of travels that the people of the United States are precious and wonderful, but they are not necessarily more clever or skilled than those in other venues of the world. 

A supply of natural resources doesn’t necessarily guarantee that a nation will be wealthy either. Japan has almost no natural resources, yet it is relatively wealthy. Brazil is larger than the continental U.S. and is rumored to be blessed with more natural resources, but it is still considered a developing country and poorer by far than the U.S. India and North Korea have resources in abundance, but they are not wealthy. 

We have certainly validated in our previous discussions that just because a country cranks up the presses and prints more money, it does not make that country wealthier. In fact, printing more money relative to the amount of goods in a country’s economic system simply sets that country on a course of bankruptcy through inflation. 

Production of goods and services is the established reason for nations being wealthy. Income is created through production. Discourage or destroy production and you take away income. Take away income and you have a nation of poverty. Let industrious people be allowed to keep for themselves the fruit of their individual and corporate labors and they will realize prosperity. Allow a dictator or a corrupt government to steal the fruits of conscientious labor through excessive taxation or greedy manipulation and coercion, and you will experience not just resentment and rebellion but unemployment, want, and increased crime. 

Cultural and economic decisions set into motion individual and national consequences. Cultural and economic systems are the means of transportation that carry out those predictable consequences. Cultural and economic systems make all the difference in the world. 

If the individuals of a nation are allowed to experience a system of freedom of economic and cultural choices within a framework of legal fairness and rule of law, they will spontaneously use their God-given talents and abilities to jointly utilize the available resources to produce needed and desirable products. That production will then materialize into individual and corporate income. The end result will be a wealthy nation. 

I have noticed an interesting economic irony in my international travels. In Great Britain, some parts of Europe, and especially in the United States, the country may have started out with an economic system built on freedom of economic and cultural choice. Production flourished, industrial revolutions took place, income was generated, and the country became wealthy. 

But then the governments began tinkering with the formula of free enterprise. Myriads of special-interests groups decided to vie for pieces of the profits. Labor unions decided to build their empires of closed shops, quotas, regulations, dues, and manipulation. Politicians began to see that the exercise of increased taxes could deliver monies not only directly into their own endeavors, but also make it possible to garner votes necessary to seize additionally desired control. 

This tinkering did not take into consideration that there is a direct and positive correlation between stifling the freedoms of economic and cultural choice and the net wealth of a nation. They somewhere forgot that the secret of a wealthy nation was an economic system that allowed individuals to create wealth. The more onerous the restrictions, the less would be the production. The more extortionate the taxation, the less would be the income and money for reinvestment. 

In 1776, there seemed to be a straight line running from the 1215 signing of the Magna Carta at Runnymede, England, directly to Thomas Jefferson and his friends in Philadelphia. Individuals would be allowed not only personal freedom, but economic freedom as well. By the 1930s and the Great Depression, that straight line seemed to be running directly from London and John Maynard Keynes to Franklin D. Roosevelt at the White House in Washington DC. From that time until the present the economic system has changed from one of growth and production to one of outrageous politics, unbalanced budgets, burdensome regulations, programs with gargantuan deficits, and a prevailing economic philosophy that truly believes it is possible to spend one’s way out of seventeen trillion dollars of federal sovereign debt and tax one’s way into prosperity. 

All that having been said . . . let’s look at the bright side and discuss the five essential factors necessary for realizing a successful free enterprise system:

  • The right to own property is the fundamental basis for free enterprise. Ownership includes the individual’s exclusive possession and also the right to transfer that ownership to someone else. Individuals must be free to agree with other individuals to voluntarily enter into contracts. There must be the possibility to personally succeed in the endeavors and also the possibility to fail. The property is not just limited to real estate or land, but also to any personal property or capital. Perhaps the most important resource that you own is your labor. You have the right to exchange your labor for income or other benefits. 
  • Free enterprise is based on the freedom of cultural and economic choice. But, it is not anarchy or lawlessness. In order for free enterprise to work, there must be an established and recognized government. The fact that two individuals are entering into voluntary agreements presupposes that there is going to be some kind of establishment with the authority to enforce those agreements. There must be a fair and enforceable rule of law.

Next session we will discuss the absolute magic of the Free Enterprise System when we look at the last three essentials: Prices, Profits, and Losses.

  • Prices 
  • Profits
  • Losses

Next Week: The Magic of the Free Enterprise System

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House

Systems Matter Part 8: Self-Interest vs. Selfishness

When Adam Smith introduced the verbiage of “self-interest” into his economic and cultural reporting he laid himself wide open to misunderstanding, misinterpretation, and criticism.

A person of a different economic ilk, wanting to end all arguments regarding the intent and integrity of Adam Smith, and dismiss him as a greedy scoundrel, would only need to portray him as the champion of selfishness. Such a person needed only to claim, “Smith is the epitome of the bourgeoisie capitalist interested in only grabbing, at any cost, the wealth of this world at the expense of the poor and downtrodden.” The verbal assassination would have pretty much been accomplished at that point.

Instead of indulging in the semantics game, let’s stop and examine just what Adam Smith was saying:

. . .the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty in the attempting to perform, which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and in directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to, three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain, because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.(1)

Adam Smith presumes that every person wants to end up better off in life. If left to pursue voluntary transactions of business and barter with other free individuals, the only transactions that will be successfully completed are those transactions where both free trading partners end up better off. A system that promotes that freedom where everybody ends up better off not only encourages additional such transactions but greatly increases the total volume of successful business.

But the human desire to end up better off could be, but is not necessarily, selfish. To possess the desire to make good decisions and end up better off in life displays the admirable qualities of accountability. Good stewardship of life and of those things we possess reveals our willingness to accept and practice personal responsibility.Selfishness is the attitude and spirit where an individual insists on his or her own arbitrary demands on other people regardless of consideration or cost. It is the whole idea of me first . . . it’s all about me. That spirit of selfishness is counterproductive to good business because both parties do not end up better off.

That is why Adam Smith insisted that the government must not be greedy or selfish either. The greedy intentions of the government, or the individuals who control the government, are also counter-productive to the positive growth of an economy, because when they are greedy all parties involved do not end up better off.

Smith tried to build into the system checks and balances to control the selfishness and greed even of the government or Sovereign by saying that their reach and function should be limited to (1) protecting their citizens from outside danger or oppression, (2) the rule of law where the citizens are protected from other individuals within the country, and (3) the establishing and maintaining of certain institutions or services that could not be offered by a single person or a small group of individuals, e.g. courts, recording of public documents, road systems, etc.

The very government itself has the power and opportunity to induce its constituency, by promises of largesse, to believe that the government can exclusively make the citizens better off through receiving favors, grants, and subsidies from it. Those promises are based on a delusion that the government of the nation envisions, generates, and controls all the wealth of that nation, and has the right to distribute that wealth to whomever is willing to totally acquiesce to the government leaders making those promises. The government does not earn any of the money it promises to give away, but, rather, has to take the money away from individuals who have already earned it. Those promises of favors, grants, and subsidies are a form of buying-off the constituents.

When the government promises to take away from those constituents who have earned wealth in order to redistribute that wealth to those who did not earn the wealth, they are appealing to the selfishness of the recipients who would enjoy receiving largesse gained from the efforts of others rather than from their own efforts. A government or Sovereign may have the power to manipulate a model of redistribution through coercion, but, obviously, all the individuals in the deal do not end up better off. At that point the economic model moves into a model of contraction rather than an economic model of growth and production, and over the long haul it cannot remain sustainable.

As we will see later, the free market system depends on the possibility of voluntary and free political and economic choices within the framework of a fair and just rule of law. Throughout history there have been very, very few occasions where cultures and civilizations have experienced the phenomenon of the combination of political and economic freedom at the same time. Great Britain and the United States experienced that kind of exceptional freedom.

The resulting economic system did allow for the observing of what could happen if that political and economic freedom could come together and function successfully. There had never before been such a model created of economic growth, production, and expansion, and to think that the successful experiment had been realized in such a relatively short amount of time.

The exceptional results of the American experiment are largely due to the thinking and writing of several men of common ancestry divided by a large body of water called the Atlantic. They were able to compress, condense, and consolidate the dreams and the desires of the millions of people throughout the centuries who had longed for the opportunity to experience economic and political freedom.

In America, Thomas Jefferson was writing about a new nation that would be the first in history established on the principle that every person is entitled to pursue his or her own values. On the other side of the ocean, Adam Smith was writing about the possibilities of a free market where individuals could pursue their own objectives of voluntary transactions. Both believed that the role of the government should be that of an umpire and not a participant. Each believed that the pursuits of one’s own values and interests were not necessarily greedy or selfish, but necessary for everyone to end up better off.

Those men of creative vision believed that an entire group of people could move forward and achieve the goal of personal as well as national wealth. It was possible to pursue self-interest without being selfish or greedy, and the end result would be a unique model where everybody ended up better off.

Next Week: Essentials of Free Market

(Research Ideas from Dr. Jackson's writing project on Cultural Economics) 

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House