What economic system should the United States have?
Really, the answer is none. The Constitution does not directly specify a particular economic system, although, as I’ll show below, it implies that the government cannot interfere with economic transactions. Two common terms are used to describe economies in which people are free to engage in whatever economic transactions they choose: “free enterprise” and “free-market economics”.
It is common to refer to our economy as a “free-market system”, even though it is not a system, because it is not defined or controlled by anyone, nor by the government. It’s just another aspect of freedom. That said, I won’t quibble with those words, and I’ll even use them.
Having free-market economies essentially means that the means of production are privately owned, and that buyers and sellers of goods and services can freely interact, as long as the interaction is voluntary and informed i.e. not coerced or fraudulent.
What about the term “capitalism”?
That term is frequently used, but I don’t particularly like it because a) it is not as descriptive as the ones given above, and b) Karl Marx used the term “capitalism” pejoratively. And since Marx came up with Communism, the worst of all economic systems, why use his terminology? But most people do use the word to mean free-market economics; I just wish they wouldn’t.
Why “free-market economics” and not just “free markets”?
Free markets should refer not only to free markets in the trade of goods and services (free-market economics), but also free markets of religion, speech, the press, friendship, etc. In order for us to be personally responsible, freedom is essential, otherwise someone or some group or the government will force us to do their bidding. Even God does not do this.
It is useful to think of free markets in this manner, because then it is easier to understand why the Constitution does not specify an economic system. Because our country is founded on the principle that its people should be free, the Constitution does not limit freedom, i.e. it does not limit free markets of any type. Thus, people in the U.S. are free to choose their belief system, are free to choose their friends, are free to speak and write about whatever they wish, are free to educate their children as they see fit (as long as they have the money to choose their own school). So free-market economics is just another aspect of freedom.
So are we free to murder or defraud someone out of their money?
Of course not. As always, when I use “free markets” or “freedom”, I always mean the freedom to live in peace. A person is not free to violate the freedoms of another. Thus, laws with respect to murder, stealing, rape, slavery, fraud, coercion, etc., are appropriate because someone who violates these laws violates another’s freedom. Similarly, reasonable laws with respect to protecting health and safety are also appropriate. Also reasonable environmental laws are appropriate, because if someone harms the environment, this could result in harm to others.
Is free enterprise the best economic system?
In the United States, thankfully, free enterprise is the only system that is allowed, because not allowing it would violate our freedom to live our lives as we see fit. It just refers to the fact that people are free to trade goods and services (including money) with whomever they want.
This also means that the Amish, for instance, are free to form a community, and to determine the rules for that community. If they wish to share equally among all goods produced, that is there right. But is also the right of an individual to leave the community if they don’t wish to be there any longer. So free enterprise implies the right to form a group that is socialistic or even Communistic. But no laws can force someone to do such.
(Just to be absolutely clear, laws that protect our freedoms – those that protect our life, liberty and property – are fine. For example, a health insurance company that fails to pay a covered claim is guilty of fraud, a form of theft. This is, and should be illegal. Also, laws that require a health insurance company to have the financial wherewithal to pay its claims are also good laws, since they protect individuals from paying for health insurance and then not getting the benefits they paid for. This also is a form of theft).
Another way to look at free-market economics is to compare it to free-market religion. The Constitution prohibits government from dictating one’s religion or any other beliefs. This is the only way for a good government to function. After all, why should the government (or anyone else) tell you what to believe or how to practice your religion? Similarly, why should the government (or anyone else) tell you whom to do business with, what business to do, or how to do it? If you and a hair salon agree that you will get a haircut for $12 or $500, that is no one else’s concern.
So, yes, free enterprise is the best economic system, because it is the only one that is in harmony with our right to be free. Really, that should be the end of the discussion. But it would be nice to know how free-market economics compares to other systems.
And how does free enterprise compare to other economic systems?
As is always the case, freedom in any area gives the best results overall. To be sure people make bad economic decisions, as they do in all areas of life. Yet, when government tries to protect us from ourselves by dictating what system to use, it always ends up being worse.
Many have said that free-markets economies are not perfect, and this is certainly true. This results from the fact that people are not perfect; thus, no system will be perfect. That said, free enterprise with a moral people results in the best economic system.
Even with people as imperfect as we are now, free-market economics is the best economic system. Here is the proof.
The people of the Soviet Union were no different than those in other countries, yet its economic system, Communism, created poverty for all but a few, who essentially took their money from those that worked for it.
Even more telling is that in the process of attempting to force communism on the world, Korea was split into North and South Korea, and Germany into East and West Germany. In 2009 the Gross Domestic Product (GDP) of communist North Korea was estimated to be about $1,800 per person, whereas the GDP of South Korea was estimated to be about $15,000 per person. The suffering of the people of North Korea continues to this day, all as a result of the (now defunct) Soviet Union.
Similarly, the GDP of communist East Germany was estimated to be about $21,000 per person when it merged with West Germany in 1990, whereas the GDP of West Germany at that time was estimated to be about $45,000 per person. (These amounts are both given in 2008 dollars).
These figures all show that free markets, are much better for its citizens than Communism/Socialism.
What is it about free enterprise that results in the most prosperity for the most people?
Free enterprise gives people the ability to choose which person or company they wish to buy their goods and services from. This results in a competition among sellers in order to gain buyers. And the only way to gain buyers in the long run is to provide better goods or services. Thus, free economic markets give rise to an ever increasing standard of living for those who are fortunate enough to live in a country that protects them. Even countries that have close to free economic markets, and don’t even have democracy, such as China, have seen their standard of living dramatically increase.
It is truly sad that the word “competition” has negative connotations in the minds of many Americans. Being free means being able to do as one pleases as long as such is done in peace. And this freedom results in competition, because anyone is free to start a business and sell their goods or services to whomever wishes to buy them. Competition ought to be regarded as something that makes life better for all those who are willing to work for the goods and services they receive.
Another example shows how important competition is. For most mammals, it is either the strongest males who can choose their mates, or it is the females who choose the fittest males to mate with. This competition among animals results in a hardier species. If nature uses competition to make it better, should we not consider it as something to be imitated?
Even among humans, young men and women compete for mates all over the world. What man or woman does not wish to have the best mate possible?
Of course, people often choose poorly when choosing mates, and they often choose poorly when buying goods and services. Nevertheless, free markets correct these problems better than any other system.
Good government protects our right to life and liberty and our right to our peacefully obtained possessions. When this happens, prosperity ensues.
What is in the Constitution that relates to economics?
Our Constitution implicitly assumes a free-market system. Mainly, this results from the fact that the Constitution limits the powers of the federal government to what is enumerated there. And nowhere does it give the federal government the power to control economic activity.
Also, Article I, section 10, clause 1 of the Constitution provides that “No State shall … pass any Law impairing the Obligation of Contracts.” In the early years of the nation, the Supreme Court's interpretations of this clause constrained state action, especially actions seeking to redistribute wealth.
And the “takings clause” required that when property was taken by the government, it can only be taken for “public use” and that just compensation be paid to the owner.
What are some examples of bad laws that restrict our economic freedoms?
There are many federal and State laws that restrict economic freedoms. They should have been ruled to be unconstitutional.
Some examples of these bad laws are laws that restrict competition in order to protect those who are already in a particular business. There are laws in many States that restrict who may sell funeral caskets, and some specify funeral casket requirements. Such laws do protect the health and safety of others; they protect the profits of the funeral homes who currently sell these caskets.
There are laws requiring a cosmetology license to braid hair. There are laws to require florists to get a license. There are laws to prevent new taxi companies from starting (even if the drivers have passed a taxi driver exam). In many states, even an individual who has passed the taxi driver exam, and who has a taxi that meets the State’s safety requirements, must still get a license to do business.
All of these laws were originally made by businesses lobbying for laws that limit competition. Some of these laws are finally being declared unconstitutional as the result of a number of fine charitable organizations, such as the Institute for Justice.
Give us (economic) liberty or give us a dead economy.
1) What about the natural resources of a country? Can individuals or companies do as they wish with them?
The natural resources of a country need to be dealt with in a special way, since they do not initially belong to anyone, because they were created by Nature. Such natural resources include land, minerals, oil, etc. Thus, they should be considered to be the property of all. The government may sell them or rent or lease them to private individuals or businesses, as it deems best. This means that the people as a whole are compensated for the private use of such resources. For land, a monthly land-use fee would be appropriate. For extractable resources such as oil, a reasonable tax per barrel of oil extracted would be fair.
Laws such as land-use laws, deed restrictions, and environmental laws can all be appropriate.
For more details about the best way to handle a country’s natural resources, see my blog entry devoted to this topic.
2) Should the government be the developers and extractors of our natural resources?
Government doing this would not violate economic freedom because it owns the natural resources. But history has shown that private business extracts natural resources more efficiently and more cheaply than does government.
For instance, Pemex, the oil company owned and run by the Mexican government, is a disaster. Mexico has a huge amount of oil, yet the company is in debt in excess of $42 billion in 2010. This has resulted in a lack of investments in adding adequate refining capacity. While exporting crude oil, Mexico imports expensive gasoline. Because of this, Mexico’s current president, President Calderon, made clear at the beginning of his presidency that he would try his best to open up the oil sector to private investment.
So, a good government should sell or lease its natural resources to private individuals or companies, regulate how they are used, and then tax them, so that all may benefit.
3) What about the collapse of the housing market? Didn’t greedy businesses give out mortgages that should not have been given in order to profit from them?
It’s certainly true that greed and unethical business practices occurred. But guess what was at the root of the problem? I’m sure you’re shocked to hear that it is the government. First, organizations started and controlled by the government, such as Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), provided mortgage insurance to the private mortgage companies who gave individuals’ mortgages. This alone was a mistake because there are and have been private mortgage insurance companies. So this is an example of the government interfering in the economy for no good reason.
But here’s the kicker: the federal government wanted to do some more social engineering. They wanted “the poor” and others who wouldn’t qualify for a mortgage in a free market, to be able to buy a home. So they passed laws telling the above government-controlled companies to give mortgage insurance for mortgages that no sane mortgage company would grant. And who pays when these mortgages go bad? Yes, you guessed correctly. You do.
Here is a specific example. A person could (at least before the housing market collapse) get an FHA insured mortgage by putting only 3% down! And even that could be a gift. And as time went by, the ratio of the cost of the mortgage to the income of the buyer was allowed to go up, sometimes over 40% of income. Finally, some of these mortgages required little documentation of income, or good credit. This was great for the mortgage companies who were profiting from all the mortgages they were providing. And laws made it so that they had to underwrite such bad mortgages if they wanted government-backed mortgage insurance. So of course the mortgage companies gave out loans to people they knew were bad risks – they had to.
This is yet another example of how government involvement in business is frequently disastrous. After, they don’t need to make a profit. They just need to get votes.
If you had extra money to invest, and you wanted to provide mortgages to people, how much of a down payment would you require so that you felt you made a good investment? I would require at least 10%, and would give a lower interest rate for 20% down. Furthermore, I’d make sure that the home buyer had enough income to pay the mortgage, and had good enough credit to prove that they would pay the mortgage. This is common sense to all, except for those who want the vote of those who couldn’t get a mortgage in a free market.
Did you hear the government blame itself for the collapse?
4) How should the government deal with man-made pollution?
By definition, man-made pollution consists of harmful substances. They are either released into the atmosphere, or enter the land or oceans. Since they are harmful, they should be dealt with by legislation. Laws should either restrict the amount of pollution, or tax it, or both. Click here for more information devoted to this topic.
5) We currently subsidize, among other things, schools and health care. Do you think we should stop doing this?
No, but we should subsidize them differently than we do now. Essentially, they should be subsidized in such a manner as to allow the recipients to have as much choice as possible, so that the benefits of free markets will manifest. I've already written about the best way to subsidize education. A future blog post will deal with a cost-effect way in which to provide health care for all.
Tim Farage is a Senior Lecturer in the Computer Science Department at The University of Texas at Dallas. You are welcome to comment upon this blog entry and/or to contact him at email@example.com.
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