Introduction

The financial system is collapsing, the stock market is crashing, and retirement funds are evaporating. The auto industry verges on extinction. Home prices have spiraled downwards. Gas prices recently were the highest they have ever been. Jobs are being lost rapidly and unemployment is shooting up. Healthcare costs are reducing some to bankruptcy and even death. Wages are not keeping up with inflation, which until recently has been increasing rapidly. There is fear of a second Great Depression. What in the world is happening?

The answer is simple: Our government is sabotaging the economy. These, and most other economic maladies, are human-made. Specifically, in its attempts to “help” us, the government has managed and regulated the economy and passed laws that sounded constructive, but in fact hurt the economy and us. Political economic reality is replete with the law of unintended consequences. Our economic problems, in sum, are the natural result of political forces, not the natural result of (supposedly evil) market forces. We have voted our current problems into existence by having chosen politicians who promised to help us by means of economic intervention and regulation.

For example, we want the government to raise the minimum wage to help the poor, but that only makes the poor too expensive to hire and puts them out of work. We want the government to guarantee competent healthcare and therefore license only a subset of all would-be doctors. Further, we want the government, employers, and insurance companies to pay for most of our healthcare costs. The result is reduced supply and increased demand for healthcare, thus raising prices and making healthcare less affordable year by year. Another example: We want the government to regulate the banking system to prevent depressions like the one in the 1930s. The result, however, is that the government’s central bank creates too much money, causes economic booms and busts, financial and real estate market booms and busts, and puts many companies out of business and people out of homes. Similarly, regulations promoted as preventing monopolies in fact prevent competition, allowing some companies to benefit at the expense of others and the general public. The examples go on and on.

Our leaders are supposed to uphold laws that protect our property and insure our freedom; but the regrettable reality is that they do the opposite. The actual activity of politicians is to interfere with or outright appropriate the property of one group in order to benefit other groups. This, after all, is how they get elected! Further, even if politicians had the sincere desire to help everyone, they could not. First, regardless of whatever expertise they claim, they have little or no accurate understanding of the workings of money and credit, capital investment, production processes, productivity improvements, wages and prices. They are no better informed on these matters than the proverbial man-in-the-street. Second, it is inherently impossible for a finite group of bureaucrats to direct and constructively shape outcomes of entire economies — the actions of millions of people and millions of tools, machines, and factories — as their regulations and controls are intended to do. No supercomputer has yet been invented that can make decisions and calculate optimal outcomes more accurately than can the combined effort of millions of individuals working together, who coordinate their interactions by using market prices that reflect the needs of buyers, the amount sellers should therefore produce, and the price that should be charged. In truth, it’s outright arrogant for politicians (or even economists!) to think, and to have us believe, that they can somehow so much as lend a helping or guiding hand to the national economy. The only genuinely helpful thing politicians can do is to undo their previous policies, the ones that have restricted rapid economic growth, distorted market outcomes, and caused thereby a destruction of wealth. As this book will demonstrate, real economic growth and prosperity can come only from free markets.

But perhaps you thought we had free markets? We have no such thing! This is true regardless of the fact that politicians of all stripes claim that we do. The government has its hand in every company and every industry in the nation. There are tens and even hundreds of thousands of pages of government regulations that dictate what can and cannot be produced, how things should be produced, what prices can or cannot be charged, what workers should be hired and at what prices, and what requirements, approvals, licensing, and reporting must be undertaken or performed for each type of business, product line, or transaction. There are subsidies, tariffs, quotas, tax incentives and disincentives, implied threats, and actual threats that severely alter the actions both companies and individuals would otherwise take. On top of these things, both federal and local governments confiscate portions of the earnings of companies and citizens directly through income taxes, as well as through license taxes, annual tag fees, passport fees, other fees, property taxes, import tariffs, inheritance taxes, capital gains taxes, environmental-affecting taxes, consumption taxes, excise taxes, tolls, retirement taxes, hotel occupancy taxes, payroll taxes, transfer taxes, airport taxes, security taxes, value added taxes, surcharges, commercial rent taxes, etc., as well as by the taxes the government takes by printing money at our expense (the inflation tax). By contrast, a free market is one where anyone is free to live and to do business as they wish — both socially and economically — as long as they do not initiate force upon others or their property. Free markets are not an imaginary utopia — they would exist today if they were not being prevented by law.

Though it may shock you, since you no doubt perceive yourself to largely support democratic capitalism, these types of intervention in the marketplace, which we desire and which are performed presumably on behalf of society for the purpose of protecting society and helping to reduce inequality between various social groups, are in fact socialism. Full socialism is defined as the control by the state of the means of production (companies, and individual producers, and their tools). Partial state control of the means of production (as described above) therefore constitutes not free markets but partial socialism! Additionally, any forceful taking of money by one group (taxes) for the purpose of spreading it around to others constitutes the essence of socialism. Thus, since most people believe that the state needs to intervene in the economy to achieve a better outcome, most people in America promote some degree of socialism, and that is what we implicitly demand of our politicians (see footnote¹ below for my definition of socialism).

This constant “helping” of society through attempting to “manage” it has resulted in a constant decline in our ability to produce real wealth and improve our standards of living. As it is now, we are seeing a consistent increase in the wealth of the rich, a moderate improvement in the wealth of the middle class, and stagnation in the living standards of the poor. But there is indeed a better way, a way that has seldom been taken in world history, but, when it has, has succeeded in improving the lives of all involved — rich, poor, black, white, man, or woman. It is called capitalism. Only capitalism, with its true free markets and true freedom for individuals can solve our problems and bring prosperity. (Note: I will henceforth use “capitalism” and “free markets” interchangeably.)

Understand that by “capitalism” I don’t mean the right-wing, crony capitalism, corporate welfare economy, or the anti-rich, wealth-redistribution social welfare economy that we have today. In a truly capitalist society businesses never receive money or special privileges from government: they succeed if they please consumers in offering them what they want, and they fail if they do not. Analogously, in a truly capitalist society, individuals never receive special privileges or transfer payments. Instead, they have an abundance of jobs and of wages commensurate with the value of people’s work (more than a “living” wage). Under free market capitalism, it is virtually impossible for things like inflation, shortages, booms and busts, recessions, unemployment, starvation, and unaffordable healthcare to exist. Why? Because competition and the threat of competition serve as iron-clad shackles on companies, preventing them from underpaying, overcharging, or under-supplying and guaranteeing the safest, lowest-priced, highest-quality products that can possibly be produced at any particular state of technology and development.

Decade after decade our politicians, both Republicans and Democrats, have continuously implemented more of the same policies that have increasingly slowed our economic progress. Both ancient Greece in the fourth century B.C., as well as the Roman Empire of the second century A.D., through relatively free markets, reached a state of development that brought them close to an industrial revolution similar to that which ultimately occurred in Britain in the late 1600s. But ever-encroaching socialism (i.e., military warfare, class warfare, crushing taxation, inflation, and regulations) ate away at and economically reversed these advanced societies; Rome dwindled into nothingness, into absolute poverty, where most people produced and consumed, if lucky, the minimal necessities of a day-to-day subsistence. It was more than a thousand years before civilization again reached a state of improving standards of living. Similarly, the Western world today is on the verge not only of no longer progressing but even of retrogressing. The policies we have voted for have had the unintended consequence of increasingly restricting our ability to accumulate, and keep capital — savings that become factories, machines, tools, computers, etc. — the sole means by which we can produce and create wealth. Without essential changes — and soon — we will begin (or continue, as the case might be) sinking slowly into an economic abyss. The decline will not be noticeable, as it will be gradual, since things that change subtly and slowly are not noticed day by day or even decade by decade.

Consider this remarkable irony: we citizens put our faith in government — the entity that steals from us, causes wars, imprisons and starves innocent citizens, and is an absolute monopoly — to provide for us and keep us safe. At the same time, we see businesses — which have eradicated diseases and starvation,² engaged in peaceful exchanges instead of war, are fully restrained by hungry competitors (in free markets), produce virtually everything we currently own and enjoy, and pay us our wages and provide capital for us to improve our productivity — as our enemies from whom we need protection. These commonly held but irrational prejudices form the very foundation of the political arguments espoused by professional anti-capitalist “thinkers.”

Most economists, especially those associated in any capacity with government, subscribe to one or the other variations of non-free-market economics³ — despite the economic ills, including the Great Depression, caused by these policies over the last hundred years. Their economics, primarily Marxist and Keynesian and, to a lesser degree, supply-side economics, and even Milton Friedman’s monetarist school, are in many cases, despite their differences, fundamentally flawed in their shared belief that markets can be profitably managed by the government. They fail to grasp that the success of markets is a function of their freedom. Therefore they promote theories to “fix” things, assuming that the current economic problems were caused by insufficient, instead of too much, outside intervention. Since these mainstream economists devise government intervention, or benefit from it in other ways, I will hereafter call them “mainstream” or “government” economists.

It may seem outrageous for me to propose that numerous Ph.D.-certified, Nobel Prize-winning university professors do not understand correctly how economies progress and produce in a synchronized manner, but this is in fact the case. I don’t intend to be pompous, for these economists are very intelligent people. It’s just that they have learned incorrect explanations of economic cause and effect, even if their schools of thought are the most common and popular worldwide. Likewise, the scores of journalists and authors who claim that we currently have capitalism and that it has failed us are outright ignorant of what capitalism actually is.

The most prominent of the early incorrect theories came from Karl Marx,⁴ who most proposed that workers were exploited and forced by capitalists to a subsistence level of existence,⁵ the remedy being state ownership of the means of production. Then, during the Great Depression, John Maynard Keynes incorrectly identified the crises as stemming from “animal spirits” and from a failure of markets to work properly, when in fact it was brought on by previous government intervention. He thus channeled his personal socialist feelings into thinking up, on the spot, his theories of how markets fail and of how government can fix them.⁶ Since his theories seemed to make sense, and since they gave government the green light to intervene in the economy, the theories caught on like wildfire. Today we have multiple variations of these two dominant theories, along with plenty of new ones. But none of these economic schools, unlike the free market school, explain how an unhampered economy can progress effectively. They only explain (incorrectly) how things can go wrong and how markets can be manipulated for the better so as to protect citizens. But it is precisely markets free of interference that actually do protect citizens.

When our current government-managed economy experiences problems, there is huge pressure on government to “do something.” It is a difficult-to-accept truth, however, that the best action is no action —i.e., to allow the market to self-correct. But politicians pursue the easy and popular course of intervention, instead of the correct course of being hands off — as there used to be in the 1800s (and even in 1921) when recessions were thus fleeting. In the face of any current crisis, they feel compelled to implement new “policies,” which necessarily become the seeds of the next crisis about which they will soon have to once again “do something.” It is understandably difficult to accept the notion that nothing should be done when millions are suffering during economic downturns. But the quickest road to recovery is not to interfere with the corrective processes markets undertake. Better yet, we should abolish the policies that cause financial crises and recessions.

The economic achievements of today’s society came from capitalism, while the recessions, inflations, unemployment, and lack of increasing real wages came from anti-capitalistic interventions in the market. This book aims to prove these assertions by explaining the relationship among human action, labor and the production of goods, and money in accessible terms that require no previous study of economics. An economic whistleblower for the many, I will disabuse readers of false notions about the causes of economic prosperity, and provide them instead with an understanding of markets sufficient to enable them to vote themselves into increasing standards of living.

In this undertaking, I am indebted primarily to the works of David Ricardo, John Stuart Mill, and Jean-Baptiste Say (generally associated with the British Classical School of economics), and even more so to the works of Eugen von Böhm-Bawerk, Carl Menger, Ludwig von Mises, Friedrich Hayek, and Murray Rothbard, among others, who represent the Austrian School of economics. Economist George Reisman, who represents both schools, has had the most influence on my economic understanding. It is these economists’ fundamental insights into the nature of the economic common good that underlie the material and arguments of this book.

By giving readers an easily understood presentation of these various brilliant economists’ combined insights, this book seeks to change the general public’s view of the pervasive incorrect assumptions about the sources and causes of economic well-being and to do so by addressing the social and economic issues most relevant to the average voter in our world today.⁷ I do this by explaining cause and effect through logic and deductive reasoning; for the most part I leave aside statistics, since they can complicate the story and confuse readers, and because they can be easily manipulated to tell whatever story one wants them to. My hope is that if people understand the logic of how free markets bring prosperity and benefits to all of us, they will vote for politicians who will allow markets to be free, or else demand it of them.