Hornberger's Blog

Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
Here's the RSS feed or subscribe to our FFF Email Update to receive Hornberger’s Blog daily.

Libertarianism 101: The Three Keys to Economic Prosperity

by

I delivered my second lecture this morning via Skype to the Liberty and Entrepreneurship Camp 2014 in Ghana. (And see here as well.) Just like my first lecture on Monday, it was a fantastic and fun experience given the obvious interest in and passion for libertarianism among the people in the audience. My thanks to Africanus Kofi Akosah for inviting me to participate. It was truly an honor and a pleasure for me to share ideas on liberty with you and your friends.

My talk focused on the three keys to a dynamic, prospering society, especially for those at the bottom of the economic ladder. I told the audience that if any society were to adopt these three principles, it would lead the world out of the statist morass in which the world is mired.

1. Free trade and free enterprise.

What do I mean by these terms? Trade and economic enterprise that is totally free of government control, regulation, and interference. A total separation of economy and the state, much as Americans have separated church and religious activity from the state.

People have the fundamental right to engage in economic activity without state interference. This fundamental right is known as economic liberty. It is as critically important as religious liberty and other aspects of freedom.

In every economic exchange, both sides to the exchange benefit, from their own, personal, subjective perspective. That’s because both sides are giving up something they value less for something they value more.

That means that people can raise their standard of living through the simple act of exchange.

Consider a person who has 10 apples and another who has 10 oranges. They exchange 9 apples for 1 orange. A statist would cry: “That’s an unfair trade. The only fair trade is 5 apples for 5 oranges. Call the government!”

Not so. When a person gives up 9 apples for 1 orange, he is saying that he values the 1 orange more than the 9 apples. The other person is saying he values 9 apples more than 1 orange. Both sides to the exchange have improved their economic position, from their own subjective perspective.

That means that whenever some law or regulation interferes with trade or enterprise, it is infringing on the right of people to improve their economic well-being.

That’s what economic regulations do, as well as licensing laws, permit requirements, and all the other economic regulations that interfere with trade and enterprise.

In fact, these laws are actually nothing more than protection rackets for the rich and privileged. Big businesses love regulations because they know that they prevent new firms, which lack the resources to comply with the regulations, from starting up and competing against the already established firms. Licensing blocks countless poor people from competing in numerous occupations simply because of the expense associated with getting the license. Permit requirements for new businesses prevent the poor from starting up new businesses.

One of the most disastrous economic regulations is minimum-wage laws. They lock out of the labor market everyone whose labor is valued at less than the state-established minimum. That’s why here in the United States there is a 40 percent permanent unemployment rate for African-American teenagers. They would be willing to work at, say, $2 an hour in order to learn a trade, a business, a work ethic, skills, etc. But the law prevents them from doing so, thereby condemning them to unemployment. Many of them end up in the illegal drug trade and ultimately in a jail for 10 or 20 years.

2. Capital.

Capital is key to a growing economy. It involves equipment, tools, computers, and other such things that make workers more productive. With more productivity, there is a higher level of wealth in society.

Consider a farm that produces 1000 bushels of wheat that sell for $10,000. The workers are paid, say, $100 a year. It’s a very poor society. One day the farmer decides to purchase a tractor. That’s capital. It makes the workers more productive. The next year the farm produces $100,000 in wheat. That enables the farmer to pay higher wages to the workers.

Do the workers need to depend on the benevolence of the farmer for higher wages? No! Other farms in the area are doing the same thing. So, they start bidding for more workers. If the farmer doesn’t match the rising wage, he loses his workers. By the same token, other businesses are opening up, say in town, in response to the higher standard of living. A car dealership might open up because people are now able to afford to buy a car. It needs new workers and announces higher wages to attract workers from the farm. The farmer, if he wants to keep the workers, must match the offer.

So, it is in the interests of workers to have an economy in which there are lots of businesses—a dynamic economy in which lots of new businesses are constantly opening up.

How does capital come into existence? Through savings. As workers earn more money, they tend to save some of it. They deposit their savings into banks. The banks lend the money to the farmer to buy his tractor.

How do savings come into existence? By people being free to keep everything they earn — that is, no income tax. By the same token, no government welfare. Leave people free to decide what to do with their own money, including matters relating to charity.

As people are free to keep everything they earn, the amount of savings increases, which means the amount of capital increases, which means productivity increases, which means higher profits and higher wages. Everyone benefits, including consumers, who are offered an ever-growing array of products and services from entrepreneurs.

3. Sound money.

Statists believe that all that is necessary for a prospering economy is to have the government flood the economy with newly printed paper money. That’s ridiculous. If it were that easy, every nation on earth would be wealthy. Look at Zimbabwe. The government there massively inflated the money supply and succeeded in making the country poorer than ever.

Sound money provides the financial stability that a growing and prosperous economy depends upon. The price system is a very intricate system, one that people look to in making their economic and financial decisions.

The government’s inflation of the money supply destroys the intricate system of communication that a price system provides to consumers, producers, and entrepreneurs.

In fact, a government’s paper-money system, backed by a central bank, is nothing more than a sophisticated way for governments to plunder and loot people. Inflation, which is caused by government, is just another tax, albeit a very clever one because lots of people don’t realize what the government is doing to them. They just see rising prices and blame the problem on “greed.” But the problem is not greed. The problem is government’s debasement of money through its inflation of the money supply.

When the United States was established, the American people, through the U.S. Constitution, established gold coins and silver coins as their official money. They rejected paper money. It was that system of sound money, combined with no income tax, no immigration controls, and few economic regulations that, decade after decade, established the foundation for the high standard of living experienced by the American people.

The gold standard, however, is only the second-best way to achieve sound money. (The worst is a government-imposed fiat money standard–i.e., paper money in the form of notes promising to pay nothing.) The best idea is the one recommended by the Nobel Prize Winning libertarian economist Friedrich Hayek. In his essay “The Denationalization of Money,” Hayek said that we should just leave the concept of money to the free market. A total separation of money and the state, a free-market monetary system in which the state would play no role.

Unfortunately, in the 20th century, the American people, like the rest of the world, abandoned their founding principles of economic liberty and ended up endorsing socialism, through the welfare state, as well as imperialism, militarism, and interventionism through the warfare state. It has been an absolute disaster in terms of economic prosperity, especially for the poor.

So, those are the three keys to economic prosperity, a dynamic economy, and rising standards of living, especially for those at the bottom of the economic ladder: free trade and free enterprise, capital, and sound money.

Perhaps the people of Ghana will lead the world, including the United States, to economic liberty.

 

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.