By Michael Smith
As Edmund Burke once remarked, “The Age of Chivalry is gone; that of sophisters, economists, and calculators has succeeded.” Clearly, a conflict now exists between the “sophisters” and conventional economists. The invalidity and inherent sophistry of several criticisms of economics as a discipline, and of the free market in general, are disturbing. These misconceptions, and, in some cases, harmful sophisms, advanced by protectionists are fundamentally flawed, and lack validity. Harmful socialistic solutions such as protectionist tariffs, living under a “ruthless authoritarian government” as Arnold Toynbee once proposed, and, ultimately, expanding the size and power of government are impracticable, although certain social concerns are legitimate. In the end, both attacks and defenses of the free market and conventional economics have immense philosophical implications; they rest on certain values and assumptions about human nature, which must also be explored.
A host of invalid fallacies and misconceptions have been disseminated by sophists over the past several centuries. Willis Harman’s contention that “one of our main problems is our capacity to over-produce” is based on the very same principle as T. R. Bugeaud de la Piconnerie’s statement: “Let bread be dear, and the farmer will be rich.” If bread is to be dear, it must be scarce. The lower the supply of bread, the higher the demand will be for bread, and, consequently, the cost of bread, and, in turn, the farmers’ profits. And as Ronald Reagan once noted, “No one has yet found a way to repeal the law of supply and demand,” it is generally accepted that when a product is scarce, it sells at a high price; thus, the producer earns more for his labour. If the product is abundant, however, it sells at a lower price, and the producer earns less for his labour. Thus, insofar as we are all producers, scarcity enriches us and abundance ruins us, and this is the protectionist justification for restrictive policies such as tariff walls that cause a scarcity of all goods, in addition to a fear of “overproduction.” As we are all consumers, however, we all become richer as we buy products at lower prices, and as prices are lower in proportion to the abundance of the products, abundance enriches us and scarcity ruins us. Little more than common sense is required to choose the most logical of these two approaches; is it the scarcity of products or the abundance of products that is desirable for society as a whole? But the fallacy that scarcity is more desirable than abundance still thrives on confusion regarding the concept of exchange in a free market, a confusion which Frederic Bastiat has brilliantly alleviated:
| There is a fundamental antagonism between the seller and the buyer. The former wants goods on the market to be scarce, in short supply, and expensive. The latter wants them abundant, in plentiful supply, and cheap. [Protectionist] laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance. They operate, if not intentionally, at least logically, on the assumption that a nation is rich when it is lacking in everything. |
This concept, as illogical as it may be, is defended constantly by the “sophisters.” Consider Arnold Toynbee’s suggestion: “A society that is declining materially may be ascending spiritually. Perhaps we may be going to return perforce to the way of life of the first Christian monks in Upper Egypt . . . The loss of our affluence . . . may be a blessing in disguise.” Thus, he believes that people are rich when they are lacking in everything. There are, of course, more plausible justifications for limiting supply and ensuring the scarcity of products, namely: (1) free trade between nations will result in less domestic labour and the loss of jobs as they “disappear to Tennessee or Mexico,” (2) the use of new, more efficient technologies will result in less human labour and the loss of jobs, as “the entrepreneurs of mechanized industry secured ‘growth’ at the expense of their own employees,” and (3) conventional economics and the free market are “ecologically destructive,” in the words of David Suzuki. In the first two cases, we must acknowledge that human labour is never left idle. To satisfy our desiderata ad infinitum, our unlimited needs and wants, we must employ human labour. The “sophisters” err when they evaluate imported products and new, more efficient technologies according to their immediate and temporary effects instead of their ultimate long-term consequences:
| The immediate effect of an ingenious machine is to make a certain quantity of manual labor superfluous for the attainment of a given result. But its action does not stop there. Precisely because this result is obtained with less effort, its product is made available to the public at a lower price; and the total savings thus realized by all purchasers enables them to satisfy other wants, that is, to encourage manual labor in general to exactly the same extent that it was saved in the particular branch of industry that was recently mechanized [or opened to foreign competitors]. The result is that the level of employment does not fall, even though the quantity of consumers’ goods has increased. |
Thus Arnold Toynbee’s concern that “the unmechanized industries of Asia, such as spinning and weaving, were put out of action by the competition of mechanically produced western manufactures,” and Willis Harman’s concerns about the dangers of “excesses of efficiency and competition,” are not really valid. While such competition, generated by either imports or new technologies (or both), may result in temporary economic dislocation, it also removes the need for “spinners and weavers” and provides more efficient ways to allocate human labour, which will, as a result, increase the abundance of things. One of James Strock’s executive lessons is: “Do only what your subordinates cannot do.” Let us modify this slightly, and apply it to everyone: “Do only what machines and imports cannot do.” Now that the “spinners and weavers” are no longer needed, for example, these people can become merchants, flight attendants, waiters, or car salespeople. The general decline in the primary (extraction of natural resources) and secondary (manufacturing) sectors of human employment and growth in the tertiary (marketing) sector of human employment illustrates this long-term, evolutionary process of the reallocation of human labour. It is a process which Arnold Toynbee and other sophists, perhaps because it results in “excesses of efficiency,” do not hesitate to attack as well: “The economy [must] be put in irons. Some economic activities—for instance, stock-broking and real-estate ‘developing’—[must] disappear.” The notion that “the goals of economic growth and desirable environment are in fundamental conflict” is also fallacious. As David Crane noted, “It is only by creating wealth that a society is able to improve its standard of living. . . [and] protect the environment.” It is therefore not surprising that, according to Rush Limbaugh, “less-developed cultures are not necessarily more pure or kinder to nature than technologically sophisticated civilizations. In fact, the reverse more often is true.” The mathematical relationship that Willis Harman suggests exists between economic productivity and pollution he represents with this set of equations, which he believes illustrate that “the goals of economic growth and desirable environment are in fundamental conflict”:
Economic Product = Economic Product x Workforce/Workforce
Pollution = Pollution x Economic Product/Economic Product
In the first equation, however, the workforce variables cancel each other, and in the second, the economic product variables cancel each other. What we are left with are two truisms: the economic product does indeed equal the economic product and pollution does indeed equal pollution. But, unequivocally, there is no mathematical relationship between economic growth and pollution. And, to the extent that a relationship of some kind does, in fact, exist, it is an inverse, not a direct relationship. As David Crane conceded, economic growth is quite essential if legitimate environmental concerns are to be addressed. We must differentiate, at this point, between legitimate environmental concerns and alarmism. Life magazine has claimed that “in ten years, city dwellers will need gas masks to breathe,” Edwin Newman has claimed that “in a decade, America’s mighty rivers will have reached the boiling point,” and the famous environmentalist Paul Ehrlich has claimed that “in ten years all important animal life in the sea will be extinct. Large areas of coastline will have to be evacuated because of the stench of dead fish.” The problem with these predictions is that they were all made on or before the first Earth Day, in 1970. These alarmists, and environmentalists like them, are not credible. Concerns, however, about the depletion of natural resources, and a desire for clean air, water and land at the local level, are quite legitimate. But these concerns will only be seriously addressed during periods of economic growth. The goals of desirable environment are not “in fundamental conflict” with economic growth; rather, the goals of desirable environment are dependent on economic growth. When the facts are examined, it becomes clear that conventional economics and the free market have been vindicated in the face of relentless sophists.
Harmful socialistic solutions that ultimately expand the size and power of government are impracticable, although certain social concerns are legitimate. Arnold Toynbee’s proposed solution of a “new way of life” imposed by a “ruthless authoritarian government” in 1974 is one of the most extreme solutions, to be sure. What was needed to end the recession, which Toynbee wrote was going to be “continual,” and lead to anarchy, famine and pestilence? No, not “a scale of differential subsistence payments . . . for all trades and classes,” “a new way of life . . . imposed by a ruthless authoritarian government,” or even “the abolition of free enterprise on the economic plane of life.” What was needed was a cut in the top marginal tax rate to spur economic growth. When Ronald Reagan became President of the United States in 1981, the top marginal rate was 70 per cent, which he reduced to 28 per cent by the time he left office in 1989. Despite Arnold Toynbee’s contention that “continual economic growth is going to be replaced by continual economic recession,” from 1982 through 1990, the United States experienced ninety-six continuous months of economic growth—the longest peacetime expansion in history. Critics of conventional economics have condemned the 1980s, and the Reagan presidency in general, a period during which the American economy grew by about one-third, as the “Decade of Greed.” They allege that “traditional economics assumes people are motivated entirely by selfishness and greed,” but what actually disturbs them is that conventional economics defines the average person as an egoist, rather than an altruist, that actually promotes the public welfare (without ever intending to do so) to a greater extent than any altruist ever could. Adam Smith uses the “invisible hand” to explain the operation of the free market in The Wealth of Nations:
| Every individual endeavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. |
To illustrate this principle, let us compare supply-side and demand-side public policies. Supply-side cuts in marginal tax rates spur real economic growth, whereas demand-side policies that artificially increase the demand for certain products or services through government intervention do not create real economic growth. Supply-side policies are based on Jean-Baptiste Say’s Law: “Supply creates its own demand,” and the belief that a higher productivity level, that is, supply, leads to increases in demand, and, ultimately, real economic growth, whereas demand-side policies are based on the notion that demand can be manipulated by governments to produce economic growth via artificially stimulating the demand for certain products or services. In general, supply-siders like Ronald Reagan give people the freedom to act as the typical egoists Adam Smith describes, and then let society’s interests, such as the enhancement of our standard of living, be promoted naturally, whereas demand-siders attempt to remove this freedom by removing the incentives for production, that is, supply, and artificially increasing the demand for certain products or services to promote society’s interest directly, a policy which many conventional economists and free-marketeers, led by Adam Smith, have said will have the exact opposite effect (as it is based on the flawed assumption of producers that the scarcity of products, rather than the abundance of products, is beneficial to society as a whole). Economic indicators such as the gross domestic product (GDP), attacked by articles such as “A Call For New Measures Of Progress,” clearly show this to be true. Empirical evidence clearly shows that high levels of economic growth cannot be sustained in countries that are plagued by excessive government interference in the economy. Thus, a new way must be found to “measure progress,” one that will prove conclusively that “facts are lies, lies are facts” as in the world of George Orwell’s Nineteen Eighty-Four, one that will show economic growth is harmful, and economic decline is actually more desirable, or more “spiritually ascending,” in the words of Arnold Toynbee. Ultimately, any effort to create an indicator such as the “genuine progress indicator” (GPI) that takes into consideration factors as ambiguous as “social and ecological concerns” would not be accurate; that these variables are subjective is a huge understatement. Certain social concerns, however, that the proposed GPI would account for are very legitimate (though they should not be considered when determining a country’s GDP, a purely economic indicator), such as the depletion of natural resources and inequalities between the rich and poor. But it is only through economic growth, the subsequent evolution of the economy and reallocation of human labour that problems such as the depletion of natural resources can be addressed and new, more efficient and environmentally-friendly ways of using and recycling resources can be developed. While economic inequality is a serious concern, imposing a “scale of differential subsistence payments . . . for all trades and all classes,” as Arnold Toynbee suggests, is not the solution. This reaction is based on the false notion that the free market is the cause of such inequalities. Milton Friedman, a prominent economist (and winner of the Nobel Prize) has examined this belief:
| Everywhere in the world there are gross inequalities between the poor and the wealthy. Few can fail to be moved by the contrast between the luxury enjoyed by some and the grinding poverty suffered by others. In the past century, a myth has grown up that free enterprise capitalism increases such inequalities, and that it is a system under which the rich exploit the poor. Nothing could be further from the truth. Wherever the market economy has been permitted to operate without interference, wherever anything approaching equality of opportunity has existed, ordinary people have been able to attain levels of living never dreamed of before. Nowhere is the gap between the rich and poor wider, nowhere are the rich richer and the poor poorer, than in those societies that do not permit the market to operate without government interference. That is true of feudal societies as in medieval Europe, and much of South America. |
Arguments of the “sophisters” that free enterprise capitalism increases such inequalities are surprisingly weak. For example, allegations that the rich got richer as the poor got poorer during the Reagan era are completely unfounded. Thus, an element of dishonesty and ignorance of the facts are required by the sophists to portray the 1980s as a “Decade of Greed.” In “A Call For New Measures Of Progress,” it is written that “during the 1980s alone, the richest 5% of households increased their real income by almost 20%.” This statement is quite misleading if no context is provided, perhaps due to a misconception that the amount of wealth is generally static and that it cannot, much like energy, be created or destroyed. If the rich gain, many assume that the poor must be losing, but this is not always the case. The context is essential: Federal Reserve data shows that families with annual incomes between $10,000 and $50,000 actually experienced a higher percentage of growth in net worth than those in the top-one-fifth income group during Reagan’s presidency. And amid charges that “economic growth was supposed to create jobs, but the real thrust has been growth with fewer people,” it is interesting to note that during the Reagan era, a period of almost unprecedented economic growth, the US unemployment rate dropped from 9.7 per cent in 1982 to 5.5 per cent in 1989, when Reagan left office. According to the Cato Institute, from 1981 through 1989 the US economy produced 17 million new jobs, or roughly 2 million jobs each year, and “this reduction in joblessness was a clear triumph of the Reagan program.” Protectionist solutions that have been offered are impracticable; they are doomed to fail, and every time they do, we all lose.
Criticisms (and defenses) of the free market and conventional economics have immense philosophical implications; they rest on certain values and assumptions about human nature, which must be considered as well. The protectionists (or “sophisters”) are generally collectivists and altruists. They believe that we are all responsible for the well-being of others, and thus conventional economics that “tells us self-interest is best” is unacceptable to them. Moreover, altruists demand sacrifice; a multimillionare who gives $50,000 to a local charity is not acting altruistically, whereas a homeless person that gives $50 to the same charity is, in fact, acting altruistically. Egoistic and individualistic free-marketeers reject this, and assert their own principle: we are each responsible for our own well-being. Egoists recognize an ethics of non-sacrifice, and believe that everyone should take responsibility for their own life and happiness. Dishonesty and exploitation are not tools of egoists, as the truly “selfish” know that happiness and self-esteem cannot be stolen from others: they must be earned through hard work. Dishonesty and exploitation, however, are frequently used by the altruists, who we have called the “sophisters,” to advance their cause. Several justifications of redistributionist policies have been offered by the critics of conventional economics. Some are meant to mislead, others are fallacious, and others are based on principles that are fundamentally flawed, but they all share the same goal: the equalization of economic outcomes, the abolition of the capitalist, free market system, and the abolition of private property. Since collectivists see society, not individuals, as the agent of production, they believe that all wealth belongs to “society,” rather than individuals. Thus, they see no problem with redistributing wealth according to their own versions of social justice. Another fundamental problem is that many of their predictions and solutions are based on the misconception that the amount of wealth in a society is static. They argue that “life is not about consuming or even producing; it’s about learning,” and hope that everyone will become “an educator or a minister of religion or an artist or a poet [rather than] the manager of a nationalized business enterprise or a worker in an assembly line for manufacturing mechanized vehicles” in their various utopian societies. Such reasoning is explained best by the fictional character John Galt in Ayn Rand’s Atlas Shrugged:
| What is the nature of that superior world to which they sacrifice the world that exists? . . . Their non-material, non-profit worlds are realms where rivers run with milk and coffee, where wine spurts from rocks at their command, where pastry drops on them from clouds at the price of opening their mouths. On this material profit-chasing earth, an enormous investment of virtue—of intelligence, integrity, energy, skill—is required to construct a railroad to carry them a distance of one mile; in their non-material, non-profit world, they travel from planet to planet at the cost of a wish. |
Life is about producing and consuming, and if we do not produce, we will indeed (whether we wish to or not) return to the way of life of the first Christian monks in Upper Egypt. Or worse. These philosophical implications, such as the conflict between altruism and egoism, and therefore conventional economics, cannot be ignored.
The invalidity of several criticisms of conventional economics, and the free market in general, are quite disturbing. A host of misconceptions, and, in some cases, harmful sophisms, advanced by protectionists are fundamentally flawed, and lack validity. Harmful socialistic solutions that expand the size and power of government are impracticable. Although certain social and environmental concerns are legitimate, there is no better system than the capitalistic free market in which to address those concerns. Leftist, altruistic and collectivist “sophisters” have declared war on the conventional economics of the rightists, individualists and egoists. It is not yet clear which side will be victorious, but what is now clear, as President Reagan once said, is that “there is no such thing as left or right. There is only an up or down.” Our future depends on the direction we choose.