Why Political Correctness and Economics Don’t Mix

Why learn economics? To know economics is to understand how the world works. Multitudes of people know nothing about the subject, and that is very sad. Economics relates to everything we do. Without that understanding, much of the operation of society will remain mysterious.

Not only do you want to be the smartest person at the cocktail party, but your health and happiness are at stake. Maybe you’ve cracked open a few economics books, but quickly dozed off as the author sedated you with theory.

What you need is a book that combines solid theory applied to today’s real-life problems. That book is Kel Kelly’s The Case for Legalizing Capitalism.

Mr. Kelly is not an academic preaching from atop the ivory tower. He works in the real world. He spent over 15 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm.

Kelly is a devotee of Austrian economists like Ludwig von Mises, F.A. Hayek, and especially Mises student George Reisman. Reisman has the rare distinction of having studied directly under Mises and philosopher and author Ayn Rand. The value that Kelly brings to the reader is analyzing today’s issues using theory from the great thinkers of the Austrian tradition.

This is not a book you have to read cover to cover. If you are interested in a particular topic, you can simply head to a particular self-contained section. It’s the type of book that allows you to skip around.

If you do wish to take on the book in linear fashion, Part 1 starts with “The Foundations of Our Economy,” which is divided into chapters on labor and trade. Part 2 has chapters on inflation and regulation. Next, Kelly explores “Government Control Versus Free Markets,” and so on.

Kelly doesn’t sidestep any issue, and he is not politically correct. For instance, Hurricane Katrina didn’t flood New Orleans; the government’s levees broke. The author points out that the Big Easy should be a small port, except that the government subsidized flood insurance, stepped in with FEMA, and constructed, but didn’t maintain, a large levee system that private enterprise would never pursue.

The author tells us in Chapter 1 that sweatshops and child labor should be embraced. To intervene with government is to make these workers poorer. Groups like Press for Change denounce athletic-wear company Nike for making lots of money and paying low wages in Asia. Nike CEO Phil Knight was called a “corporate criminal” by filmmaker Michael Moore.

However, Kelly makes the point that whatever we in America think, Nike’s working conditions are an improvement for these workers.

“In fact,” writes Kelly, “the supposedly greedy and exploitive multinational companies we hear that conduct sweatshop operations in undeveloped countries usually pay about double the local wage.”

Child labor is needed in developing countries. People forget that once upon a time, America was developing and child labor was common. As more families prospered, children didn’t have to work to support the family anymore. Child labor only became terrible when unions sought to ban child labor for competitive reasons.

Kelly devotes a chapter to demystifying banking and inflation. The author writes that virtually every problem in the modern economy can be traced back to the government’s printing of money. Government is the primary beneficiary of inflation, because it receives the money first and can spend it before prices rise.

Writing in the wake of the 2008 meltdown, the author explains that government could not finance its deficit without central bank money creation. He probably couldn’t imagine to what level the Fed would take its debt purchases. As Ben Bernanke tries valiantly to revive the economy doing the only thing he knows how, the Fed is now buying 90% of newly issued Treasury debt.

Bernanke is buying every bond in sight because the thought of deflation keeps him and other Keynesians up at night. Kelly explains that this fear is “misguided.” The money supply must collapse for there to be deflation. In reality, if price inflation is zero, as Kelly notes, there is actually inflation. Prices would fall due to efficiencies and competition if excess money wasn’t being created. “Therefore, the amount of money that is printed in order to keep prices unchanged still has the same negative effects on the business cycles and financial markets…”

For those sympathetic to government regulation, Kelly’s chapter on regulation will give you pause. Always and everywhere, government claims that business is regulated to help and protect customers. Unfortunately, it never works out that way. Kelly leans on the work of Dominick Armentano to point out that in the “55 most famous antitrust cases in U.S. history, in every single one, the firms accused of monopolistic behavior were lowering prices, expanding production, innovating, and typically benefiting customers.”

No good deed goes unpunished.

I heard a couple friends saying recently that they are worried Google and Amazon may become monopolies. Kelly lays that myth to rest, pointing out that the only monopolies are government-sanctioned monopolies. There are no such things as “natural monopolies,” where single providers are more efficient.

The author relates how RCA Corp. was prohibited from charging royalties to American licensees and instead licensed to Japanese companies. This gave rise to the Japanese electronics industry that ended up outcompeting American companies. There might be a Pan American World Airways (Pan Am) if the government would have allowed the international airline to obtain domestic routes. Instead, with no domestic flights feeding its overseas flights, the company went bankrupt.

And as we prepare to descend into the brave new world of Obamacare, it will be useful to read through Kelly’s considerable section on health care. While America does just the opposite, the author explains that only the free market can solve the health care crisis. If costs and access are the problem, more supply is the answer, along with having patients pay for medical services, rather than third parties. Nobody controls costs that they never see.

People are living longer and healthier than ever, and the reason is, where it is allowed to thrive, capitalism. We hear plenty about evil corporations and exploited workers. Some academics claim that businesses are gaining at the expense of customers. However, where there has been some semblance of capitalism, it has “prevented starvation, eradicated diseases, led to the development of sanitation systems and products, made us stronger, healthier, and longer-living, built cities with all the modern conveniences and luxuries we enjoy, and continues to do so to this day.”

When gas prices spiked in 2011, President Obama criticized oil company profits because they were affecting his business. “My poll numbers go up and down depending on the latest crisis, and right now gas prices are weighing heavily on people,” said Obama.

Just last week, Congress hauled in Apple CEO Tim Cook and berated him for his company’s legal tax avoidance. Never mind that Apple is America’s largest taxpayer, paying $2.5 billion in federal taxes in 2011 and $6 billion in 2012.

Today, corporations are supposed to be kinder, gentler, and socially responsible, forgetting the bottom line and accommodating the needs of stakeholders (whoever they are!) and the environment. However, profits are the only real measure of success that matters. Profits are dictated by customer satisfaction. Profits provide capital. Capital is needed for further investment. Investment leads to prosperity.

If Apple and the oil companies are earning big profits, they must be satisfying customers. In fact, during the Apple questioning, when it was Sen. John McCain’s turn to ask a question, all he wanted to know was how to upgrade the apps on his iPhone.

Kelly lays waste to the irritating bromide that the successful should “give back to society.” The rich and successful already pay the most in taxes, and besides, these are the people who create the products we love and the jobs we need. “It is the rest of society who should give back to the rich,” writes Kelly.

The author has lengthy chapters questioning environmentalism and the war on terror. He ends the book with a complete critique of Keynesian economics and addresses provocative political quotes and news items in an interesting final chapter.

The sweep of Mr. Kelly’s book is massive. At the same time, his pithy writing style and the book’s organization make it a pleasure to read. It is more than an economics book. The Case for Legalizing Capitalism is a book that mows down common misconceptions and will help you see the world a little more clearly.


Doug French

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