Excellent article...

==================================

http://www.forbes.com/2009/09/30/fact-and-comment-opinions-steve-
forbes.html

Steve Forbes
Editor-in-Chief

Fact and Comment
"With all thy getting get understanding"

Capitalism: A True Love Story

How is wealth created? Seemingly a strange question for Forbes readers, 
but the question is hardly an academic one in the wake of the credit 
crisis and ensuing global recession. It has profound political 
implications that will affect our economic future.

Clearly, a sizable portion of the assets created in recent years turned 
out to be "make believe," the result of an unsustainable, ephemeral 
bubble in housing and the churning out of increasingly exotic, 
ultimately toxic financial instruments. It's one thing for folks and 
institutions that hold suspect paper to lose out, but it's quite another 
when the process that created the stuff ends up undermining the global 
financial system and battering the lives of hundreds of millions of 
other people. The notion that wealth creation, while desirable for 
enjoying a higher standard of living, is morally suspect has thereby 
gained new ground. Consequently, the critical foundation of economic 
growth has become more vulnerable to populist politicians and expansion-
minded governments.

Even those individuals not normally hostile to free markets now hold 
suspicions that capitalism is fundamentally based on greed and is 
immoral; that it enables the rich to get richer at the expense of the 
poor; that free markets are Darwinian places where the most ruthless 
operators unfairly crush smaller competitors and where the cost of vital 
products and services, such as health care and energy, are almost beyond 
the reach of those who need them; and that capitalism unchecked breeds 
corruption à la Bernie Madoff and Enron and encourages obscene bonuses, 
excessive pay packages and unwarranted golden parachutes. Capitalism is 
also being blamed with renewed vigor for a range of social ills, from 
air pollution to obesity.

Well before the economic crisis intensified the drumbeat against "greed" 
and "free markets" on the part of the media and politicians, many 
people, including an astonishing number in business itself, didn't have 
a clear understanding of just what constitutes a "free" market. This is 
why they blame capitalism for economic disasters, such as the recent 
mortgage meltdown and the astronomical cost of health insurance, when 
those disasters have in fact been caused by the government's not 
allowing markets to function.

Let's set the record straight: Far from having failed, democratic 
capitalism is the world's greatest success story. No other system has 
improved the lives of so many people. The recent turmoil by no means 
mitigates the explosion of prosperity that has taken place since the 
early 1980s, when President Ronald Reagan enacted pro-market measures--
low tax rates and less stringent regulation--that unleashed job-creating 
capital. The result: a surging economy that produced a flood of 
innovation, from personal computers and cellular phones to the Internet. 
Not only "the rich" but people at all income levels are today doing 
better.

The success of the U.S. did not go unnoticed. Free-market economic 
reforms--especially since the fall of the Berlin Wall--have brought an 
unprecedented surge of wealth to India, China, Brazil and nations in 
central and eastern Europe as well as in Latin America and Africa. 
Capitalism has helped usher in an era of wealth and economic growth that 
foreign-aid programs have tried but failed to do since World War II. The 
current recession should be seen historically as an interruption of, not 
an end to, this extraordinary expansion.

What's getting lost in the crisis and the political turmoil is that 
capitalism is based on trust. Transactions in free markets are about 
achieving the greatest possible advantage, but that advantage must be 
mutual. To cite Adam Smith's classic example, the baker or the butcher 
sells you food in exchange for your money. True, as Smith points out, 
this relationship is based on self-interest: They provide your dinner 
because they seek your money. However, for a transaction to occur, each 
party must benefit.

How does this take place? That's the miracle of the free market--it just 
does. Free markets are spontaneous. No central planner or bureaucrat is 
needed to determine the needs of others--or how they must be met. A 
classic illustration of how the invisible hand mobilizes people and 
resources is found in the essay "I, Pencil: My Family Tree as told to 
Leonard E. Read," written by Read and often cited by the late Milton 
Friedman and other free-market economists. It should be a part of every 
school's core reading curriculum. 

The pencil narrates the story of how it came to be. It started out as a 
tree--"a cedar of straight grain that grows in Northern California and 
Oregon." The pencil goes on to describe the countless people and 
processes involved in its production--from cutting and transporting logs 
to supplying electrical power to mining graphite and extracting the 
rapeseed oil from the Dutch East Indies that is used in the process of 
making erasers.

Actually, millions of human beings have had a hand in my creation, no 
one of whom even knows more than a very few of the others. Each one 
wants me less, perhaps, than does a child in the first grade. Indeed, 
there are some among this vast multitude who never saw a pencil nor 
would they know how to use one. Their motivation is other than me. 
Perhaps it is something like this: Each of these millions sees that he 
can thus exchange his tiny know-how for the goods and services he needs 
or wants. I may or may not be among these items.

There is a fact still more astounding: the absence of a mastermind, of 
anyone dictating or forcibly directing these countless actions which 
bring me into being. No trace of such a person can be found. Instead, we 
find the Invisible Hand at work.

This is how wealth is produced in society: Countless individuals seek to 
meet their own needs by meeting the needs and wants of others. That's 
indeed the moral basis of capitalism. It is the antithesis of greed. 
Forming networks of cooperation, individuals create businesses that 
produce innovations--not just pencils but inventions ranging from 
laptops to washing machines. In the process of providing for themselves, 
people generate the capital and innovations that yield economic growth, 
improving living standards and enabling society to advance.

When there is a need, entrepreneurs--appearing seemingly out of nowhere--
will step in to fill it.

As one of the literally millions of examples, take what happened in the 
1980s, after budget cuts forced the U.S. Coast Guard to scale back on 
some of its services. The Coast Guard could no longer provide 
nonemergency marine assistance to recreational boaters. Almost 
immediately, small entrepreneurs took up the slack. In Southold, N.Y. 
Captain Joseph J. Frohnhoefer Jr. founded Sea Tow Services International 
Inc., a AAA-like organization for boaters. His small business grew from 
a single vessel into a thriving franchise network with 108 locations 
throughout the U.S., Australia, Europe and the Caribbean.

Before Frohnhoefer and other entrepreneurs appeared, government was 
thought to be "needed" to ensure recreational boater safety. But 
Frohnhoefer's private-sector business filled this need just as well as, 
if not better than, the government. The Sea Tow network is now called in 
to assist the U.S. Coast Guard in finding lost boaters, with boating 
accidents and on major emergencies--it aided in the recovery of victims 
in the crash of TWA Flight 800 and on 9/11. But the business is more 
than a private version of the Coast Guard and offers a variety of other 
services, such as boat financing and insurance.

Even those who hate capitalism are served by it--look at Michael Moore, 
who's raking in millions of bucks with his new anticapitalist propaganda 
film, Capitalism: A Love Story.

Former U.S. ambassador, noted theologian and author Michael Novak points 
out: "The capitalist economy is not characterized, as Marx thought, by 
private ownership of the means of production, market exchange and 
profit. All these were present in the pre- capitalist aristocratic age. 
Rather, the distinctive, defining difference of the capitalist economy 
is enterprise: the habit of employing human wit to invent new goods and 
services, and to discover new and better ways to bring them to the 
broadest possible public."

There will, of course, be criminals and greedy individuals in a free-
market economy, just as there are in all walks of life and at all times. 
That is where government is critical to the free market--to enforce 
contracts, protect property rights and maintain order, as it does in the 
rest of society.

Now, all this will seem self-evident to a lot of you. But make no 
mistake, these basics are not understood by many people, certainly not 
most politicians and economists. That's why there's a deep belief that 
government itself can create wealth. It can't. It can bestow wealth by 
taking resources away from others. It can redistribute wealth, but it 
can't create it as the private sector can and does. Stimulus programs à 
la President Obama's? They have rightly been compared to using a pail to 
move water from one end of a pool to another. The exercise doesn't 
increase the amount of water in the pool.

The severe credit crisis that hit a year ago enormously damaged the 
reputation of entrepreneurial capitalism, even though government actions 
brought on the disaster. Wall Street, despite its egregious behavior, no 
more caused this debacle than OPEC caused the Great Inflation of the 
1970s.

Whenever the government prints too much money, bad and strange things 
will happen. The particulars may change, but the result is always 
baleful. The housing bubble could never have grown to the size it did 
had the Federal Reserve not printed so much money and kept interest 
rates artificially low for so long. The fuel would not have been there 
to produce it. Compounding this felony were Fannie Mae ( FNM - news - 
people ) ( FNM - news - people ) and Freddie Mac ( FRE - news - people ) 
( FRE - news - people ), so-called government-sponsored enterprises that 
by the end of 2007 held some $1.6 trillion in low-quality paper. These 
two entities achieved their monstrous size and malignant and distorting 
influence precisely because they had the implicit guarantee of Uncle Sam 
and were exempt even from normal, basic reporting requirements to the 
SEC.

Mark-to-market accounting rules, which the government imposed in 2007, 
forced banks and life insurance companies to write down the value of 
their regulatory capital as if it were a day-trading account. 
Previously, capital was assessed at book value for regu-latory purposes, 
that is, at the price for which the institution bought it. Thus, most of 
the hundreds of billions of dollars of losses these financial 
institutions reported were not actual cash losses but artificial book 
losses. It's no coincidence that when mark-to-market accounting was 
modified this spring the equity markets, led by financial companies, 
took off like rockets from their lows.

The SEC's removal in 2007 of the uptick rule (which held that a stock 
couldn't be shorted unless it had gone up in price), as well as its 
failure to enforce the rule against naked short-selling (an investor is 
supposed to borrow the shares before he shorts them), increased pressure 
on beleaguered banks and insurance company equities.

Thus, what began in August 2007 was not the failure of free markets but 
the result of bad government actions: Greed and recklessness always run 
rampant during a bubble. In fact, the two biggest economic disasters of 
the 20th century--the Great Depression in the 1930s and the Great 
Inflation of the 1970s--were both the result of catastrophic government 
mistakes, not a sudden failure of free-market capitalism.

The Depression was triggered by the Smoot-Hawley Tariff Act of 1929--30, 
which imposed enormous taxes on hundreds of imports. This detonated a 
global trade war that dried up world commerce and the flows of capital. 
President Herbert Hoover deepened the economic slump with huge tax 
increases. Franklin Roosevelt's policies, which included even more tax 
increases, severely hampered recovery.

The Great Inflation of the 1970s was caused by repeated bouts of 
excessive money printing by the Federal Reserve and other central banks 
in the mistaken belief that government could eradicate the normal ups 
and downs of economic activity.

Apologists for big government make the point, for instance, that in the 
19th century U.S. railroads received massive subsidies from the federal 
government in the way of land grants and federal loans. Isn't that proof 
that government is a needed catalyst for economic progress? No, it 
isn't.

Government-aided railroads all went through one or more bankruptcies. 
The workmanship of the construction was often shoddy, and costs always 
exceeded estimates. Some historians call the creators of these railroads 
"political entrepreneurs," because they weren't the genuine article. 
Commercial entrepreneurs, such as James J. Hill, who put together the 
mighty Great Northern Railway, never took a dime in government subsidies 
and never went broke. The rails were laid, and the customers were well 
served. Hill's enterprise was a prodigy of productivity and innovation. 
Washington played no role.

Government's task should be to create a stable, hospitable environment 
for economic activities--allowing businesses to be businesses and 
entrepreneurs to take risks and invest in job creation. The government's 
policies should be devoted to ensuring that the following conditions are 
present in the economy:

--The rule of law. A vibrant economy requires that the terms of 
commercial contracts are respected and enforced and that everyone, 
including politicians and government bureaucrats, abide by those terms. 
When rights are violated, people and businesses have recourse in a fair 
and judicious court of law. The rule of law should guarantee that 
officials cannot act arbitrarily, as Argentina's government did recently 
when it seized the private 401(k)-style pensions of its citizens. 
Arbitrary, capricious government is a major reason that Argentina has a 
lagging, perennially troubled economy and that it's no longer one of the 
richest nations in the world, as it was 100 years ago.

The U.S., by contrast, has long been a magnet for foreign investment 
because its legal system assures a relatively safe haven for investors. 
Government cannot suddenly seize your property or nationalize your 
business in the U.S.

--Respect for property rights. Property rights are a critical part of 
the rule of law. If you own a business, an object, a piece of land, a 
house or a building, you should not have to fear that an envious or 
angry government might one day seize it arbitrarily. If a society 
doesn't have strong property rights, risk-taking declines. Entrepreneurs 
are then forced to protect their property by buying influence with the 
political powers that be, wasting time and resources that would 
otherwise be devoted to growth-producing enterprises.

Property rights help create prosperity because they allow people to use 
what they own as collateral. Land and buildings become not just 
utilitarian items but also sources of capital.

Several years ago noted economist Hernando de Soto calculated that 4 
billion people in the Third World and former communist nations owned 
real estate worth $9 trillion. But because of weak property-rights 
systems, this real estate was, as de Soto put it, "dead capital." 
Imagine how much of the world's poverty would be reduced if people were 
able to fully mobilize these trillions of dollars in assets.

--Stable money. A strong and stable currency is why the U.S. did better 
after achieving independence from England than the nations of Latin 
America did after breaking away from Spain and Portugal.

--A pro-growth tax system. Taxes are a price and a burden. Low tax rates 
on income, profits and capital gains foster more risk- taking and higher 
growth, bringing about a richer economy with a higher standard of living-
-along with higher government revenues.

--Ease in starting a business. We, in the U.S., take this for granted. 
Starting a legal business here is fairly easy to do, but in numerous 
other countries the process is time-consuming and expensive, requiring 
multiple licenses and procedures and the involvement of multiple 
government agencies.

Several years ago Bulgaria's new prime minister, Simeon Saxe-Coburg-
Gotha, was shocked to discover that an entrepreneur in his country had 
to obtain 17 government permits in order to start a business. One of his 
goals became making new-business formation easier through "one-stop 
shopping" for the necessary permits. Bulgaria simplified the process of 
starting a business and helped enlarge its formal economy.

--Few barriers to doing business. Politicians may peddle protectionist 
tariffs, quotas or "safety" regulations as "helping the
economy," but 
these are more often acts of political favoritism, rewarding one or 
another special interest. They raise the cost of economic activity and 
allow less of it to take place. For decades Japan was notorious for 
barring imports of U.S. beef, ostensibly on the grounds of safety, but 
everyone knew it was for political purposes.

Barriers also exist within domestic economies. The U.S. is hardly a 
paragon of virtue when it comes to states abusing licensing procedures 
to protect politically connected incumbent businesses.

So where do we go from here? Free enterprise is temporarily under a 
cloud, but remember it's just that--temporary. What we are witnessing 
now is an Administration that is doing all it can to expand government 
domination of the economy. This is the last stand of 20th-century 
statism, the idea that free-market economies are inherently unstable and 
thus must be guided or even dominated from the commanding heights of a 
powerful government.

The notion that a handful of mandarin-like bureaucrats can 
constructively guide the economy; run our health care system; provide 
old-age pensions without having accumulated reserves during our working 
lives; fine-tune our financial system; dole out student loans; and 
engage in tens of thousands of countless other activities is 
preposterous. (In the ultimate absurdity the Federal Reserve is even 
proposing that some 5,000 banks and other financial firms be regulated 
on how to compensate employees and executives so as to avoid "excessive 
risk-taking." This is beyond parody.) Experience shows that in managing 
or overseeing most things, government is suffocatingly incompetent. This 
also flies in the face of the liberating ethos of the ever-growing World 
Wide Web.

Washington's actions are generating a severe political reaction. The 
statists have overplayed their hand. The ultimate triumph of the 
principles of free-market capitalism, however, is not going to come 
without serious cost. The statists in Washington and elsewhere are doing-
-and will continue to do--immense harm before they are swept away. In 
great wars--the American Civil War, the First and Second World Wars--the 
largest casualties are suffered just before the conflicts end. We saw 
the peacetime economic equivalent in the 1970s and early 1980s, during 
which unemployment in the U.S. reached 11% and short-term interest rates 
touched 21% before President Reagan decisively broke the inflationary 
fever. His policies of stable money, low tax rates and a muscular 
military and foreign policy enabled the U.S. to quickly recover and 
surge ahead so powerfully that 20 years later the U.S. share of global 
GDP had increased.

The White House is continuing the Bush Administration's disastrous weak-
dollar policy. Federal Reserve Chairman Ben Ber-nanke is as blind on 
this as are Treasury Chief Timothy Geithner and White House economic 
czar Larry Summers. Even Bill Clinton knew that, for political reasons, 
a feeble greenback is political poison. Yet the lessons of the Jimmy 
Carter years are lost on this crowd.

Rule of law? With GM, Chrysler and home mortgages, the Administration is 
trashing it Argentina-style.

Regarding trade, Barack Obama is on his way to becoming maybe the worst 
White House occupant since Herbert Hoover. The magnitude of Obama's 
transgressions with Mexican trucking and Chinese tires are, in a narrow 
way, small. But they signal to the world that the U.S. is abandoning its 
60-year tradition of free-trade leadership. The result will be lethal: 
everyone for himself--something the world hasn't experienced since the 
1930s.

Americans are sensing that something is profoundly wrong in all of this, 
particularly with regard to the weak dollar. Occasionally I speak at 
motivational events that are attended by thousands of people, and these 
people respond resoundingly to the call for a strong greenback. You 
don't have to grasp the basics of entrepreneurial capitalism to 
understand that most of what the Obama Administration has undertaken 
will do more harm than good.

The cliché that it's always darkest before the dawn is true. So hold on. 
Just as happened under Reagan, a bright, new day is beckoning. But this 
time entrepreneurs and others will have to take on an additional task--
making sure that more people learn about the basics of our free-
enterprise system.

This and other themes about capitalism are covered in the forthcoming 
book, (Nov. 3), How Capitalism Will Save Us: Why Free People and Free 
Markets Are The Best Answer In Today's Economy, by Steve Forbes and 
Elizabeth Ames (Crown Business). 

CMPQwk 1.42-21 9999 
Democrats --  The party responsible for the housing meltdown ....

--- PCBoard (R) v15.3/M 10