JUNE 01, 1982 by GARY NORTH
©Gary North, 1982. Gary North, Ph.D., is President of the Institute for Christian Economics. The ICE publishes a newsletter, Biblical Economics Today. A free six-month trial subscription is available by writing to Subscription Office, ICE, P.O. Box 8000, Tyler, Texas 75711.
“Cut-throat competition!” I suppose that when most people hear this phrase, they think of the bankrupting of some company. Whenever a “going out of business” sign appears in the window of a local store, some people may feel that the community has lost an important asset. The downtown district of almost any city is marked by empty storefronts. The consumer may think to himself, “Stores downtown are the victims of cut-throat competition. Something ought to be done about it.”
Very often, something already was done about it. An obvious example is Federally financed urban renewal projects. The Federal government in the 1960s began an extensive program of tearing down older neighborhoods, which disrupted the residents, many of whom were forced to move out. When the Federal budget constraints subsequently hampered the completion of downtown renovation projects, some cities were stuck with gaping holes in the ground, or the scattered remains of demolished buildings.
In the meantime, giant shopping malls were being built in the suburbs, closer to the more affluent neighborhoods in the community. Parking space, always a problem for downtown businesses, was available in these residential shopping centers. Downtown businesses could no longer compete so effectively for middle-class dollars. The familiar business establishments of the inner city—pawnshops, taverns, pornographic book stores and theaters, and discount stores selling low-quality goods—began to take over the empty stores that had been vacated by those establishments that had moved to the shopping malls, or that had gone bankrupt because they hadn’t moved.
City councils attempted to retaliate. They spent money on the construction of downtown malls, renovating the fading buildings that had once been the pride of the city. They established low- cost urban transit facilities, such as buses, that were supposed to bring lots of shoppers into the downtown areas. They built benches for people to sit on and enjoy watching the pedestrians. In most instances, these tactics failed. The more successful of these experiments have been marked by private entrepreneurship, when professionals such as architects or lawyers, whose firms do not depend heavily on “walk-in” traffic, have bought or leased abandoned space, and have converted this space into office buildings. But the retail shops that cater to the middle class and upper class have not returned, despite the face-lifting operations of the renovators.
Whose fault was it? Who killed off the downtown businesses? The original town planners, who neglected to build sufficient parking space? The real estate speculators, who poured billions of dollars into shopping malls all over the country? Henry Ford, who created the initial mass- market demand for the automobiles that carried Americans into the suburbs? The designers and builders of tract houses, who made middle-class housing available to a generation of post-war buyers? Someone must have been guilty of unfair competition. Someone employed the tactics of cutthroat competition. Who was guilty?
The answer should be obvious. Consumers did it. Consumers decided that they preferred to live in the suburbs, in three-bedroom, ranch-style tract houses. They decided that they enjoyed the mobility offered to them by the automobile, rather than the limited-route, mass-transit trollies and buses. They wanted the convenience of driving to one location and walking through huge air- conditioned buildings that housed hundreds of retail establishments. They grew tired of walking in the heat, or the rain, or the cold of winter, in order to get to and from retail stores. They decided that “free” parking in a large parking lot was preferable to paying for space in crowded downtown parking lots, or worrying about putting a coin in a parking, meter every hour. (They actually do pay for parking when they make their purchases from the shops in the shopping malls, since store owners pay for their share of the parking lot costs in their monthly rental fees, and consumers make the funds available to the store owners when they make purchases. But few shoppers spend much time thinking about the hidden costs of free parking. They think of the shopping mall parking space as free. The space downtown clearly is not free, and this clarity makes a difference in the decisions of shoppers.)
We can blame the shopping mall builders for the plight of the downtown stores only by blaming entrepreneurs for making available new opportunities for consumers. The builders and lenders took risks. They believed that their malls would be profitable because consumers would enjoy the advantages of shopping in suburban locations. They might have been incorrect. If so, the first malls would have lost fortunes, and few new ones would have been built. But the malls made fortunes, and the projects were imitated by entrepreneurs who wanted to make similar opportunities available to consumers in their regions.
Kirzner vs. Schumpeter
Is a man who takes a risk and makes an opportunity available to consumers really a destroyer? Some economists have used this terminology. Joseph Schumpeter called the entrepreneurial process of innovation “the process of creative destruction.” But isn’t it misleading to discuss the role of the entrepreneur primarily in terms of the process of destruction rather than a process of making available new opportunities to consumers who might not have perceived them? This distinction is the heart of Israel Kirzner’s important critique of Schumpeter’s analysis. Kirzner writes:
. . . Schumpeter’s entrepreneur acts to disturb an existing equilibrium situation. [Note: “equilibrium” is a technical term used here to specify a hypothetical and actually unobtainable situation in which all market participants have perfect knowledge of all prices, and therefore the economy offers no profit opportunities, except through technological or organizational innovation which leads to a new “production mix” of scarce economic resources—G.N.] Entrepreneurial activity disrupts the continuing circular flow. The entrepreneur is pictured as initiating change and as generating new opportunities. Although each burst of entrepreneurial activity leads eventually to a new equilibrium situation, the entrepreneur is presented as a disequilibrating, rather than an equilibrating, force. Economic development, which Schumpeter of course makes utterly dependent upon entrepreneurship, is “entirely foreign to what may be observed in . . . the tendency towards equilibrium.” [Schumpeter, The Theory of Economic Development (Cambridge, Mass.: Harvard University Press, 1934), p. 64.]
By contrast my own treatment of the entrepreneur emphasizes the equilibrating aspects of his role. I see the situation upon which the entrepreneurial role impinges as one of inherent disequilibrium rather than of equilibrium—as one churning with opportunities for desirable changes rather than as one of placid evenness. Although for me, too, it is only through the entrepreneur that changes can arise, I see these changes as equilibrating changes. For me the changes the entrepreneur initiates are always toward the hypothetical state of equilibrium; they are changes brought about in response to the existing pattern of mistaken decisions, a pattern characterized by missed opportunities. The entrepreneur, in my view, brings into mutual adjustment those discordant elements which resulted from prior market ignorance.
The entrepreneur is anyone who struggles with the problem of uncertainty. Anyone who tries to predict the future and then acts in terms of his prediction is an entrepreneur. He sees opportunities for profit that others miss. He can “buy low” and “sell high” because others do not recognize the existence of a higher-than-normal price spread between wholesale and retail. They do not perceive that “producer goods” are underpriced in relation to what some consumer will be willing to pay for the “final product” in the future. (Of course, the “producer good” may be identical physically and technically to the “final product”—land, for example, or a gold coin, or an antique—but the purchase price for the entrepreneur is lower than what he expects to be able to sell it for in the future.)
This means that entrepreneurs are not innately a separate class of people within the economy. Every person is to some extent a speculator, since we all make predictions about the uncertain future, and we all act in terms of our perception of that future. There are those people, however, who are so adept at predicting the uncertain future, and acting in terms of unexpected (by others) future consumer demand, that they can become specialists. They become full-time speculators, in the sense that other people are full-time manual laborers or full-time accountants, or whatever.
Entrepreneurs deal in opportunities—specifically, opportunities that are not perceived as such by competitors. The entrepreneur is like a person who knows where a rare gold coin is lying in a gutter. He then makes plans: to walk to that gutter, bend down, pick the coin up, put it into his pocket, take it to a coin shop, sell it for cash, take the cash to a store, and make a purchase with it. He also hopes to do this without calling attention to himself, so that someone else who is physically closer to that gold coin than he is will not take action sooner. He also has to plan for the possibility that a robber will steal it before he can spend it. He must plan for “unforeseen con tingencies.”
Consider this question: Is the entrepreneur engaged in cut-throat competition when he picks up that gold coin, sells it for cash, and then goes out and spends it? After all, anyone could have picked it up. All he had to do was to shout to a passerby: “Hey, buddy, look down in the gutter. Yes, that gutter. See that gold coin? Can you think of anything you could do with the money it’s worth? You can? So can I. So why don’t we both go down to the coin shop, cash it in, split the money, and go our own ways?” Would you call attention to the gold coin under such circumstances? And if you would, do you think the passer-by would call out to a third person, and would that person call out to a fourth, and so on, until “cut-throat” competition becomes “friendly” competition, by mutual—let alone universal—agreement?
If you think it would be foolish to call attention to the coin lying in the gutter, but you also think it would be immoral to pick it up for your use, since this would mean engaging in cut-throat competition, you could leave it in the gutter. But who benefits? Not the person who lost it. After all, since you have decided to leave it in the gutter, you are in no position to call the police and tell them that you found a coin in the gutter, and ask them to inform you should someone report the loss. And even if you did this, as you should, what if no one claims it? Then what do you do? You refused to call attention to it as it sat there in the gutter. Should you give it to the State? Should you give it to charity? Should you put it back in the gutter? Who benefits now? Maybe it will be washed down a drain and out to sea. Maybe it will be found by a criminal who will use the money to buy a gun and rob someone. In short, once you know about an opportunity, you cannot escape from the responsibility of taking advantage of it or misusing it.
This is true for every entrepreneurial possibility. Anyone who sees an opportunity to enrich himself must make a decision about taking advantage of the situation. Question: Is taking advantage of a situation the same as taking advantage of a person? If you refuse to call out and tell a passer-by about the gold coin in the gutter, have you taken advantage of him? After all, the advantage was “within his grasp.” He simply failed to recognize it. But if you refuse to call out, and you also refuse to pick up the coin, you are very possibly passing along the opportunity to someone else. Furthermore, if you miss this opportunity, and so does everyone else, and the coin washes down the drain, then you are responsible for not having offered the coin dealer the opportunity of making available the coin for purchase by his customers. No matter what you do, you are going to “take advantage” of someone, even if you only take away his option of taking advantage of the situation himself (e.g., the coin collector’s opportunity to add to his collection).
What do we mean when we speak about “taking advantage” of someone? If we argue that by acting to benefit ourselves, we have hurt all those who might have made the same use of the economic resource in question, then the concept becomes ethically useless. Did my wife “take advantage” of all unmarried women when she married me? (My ego tells me it must be so; my mind sends out a warning against this approach to the question.) After all, she removed a tremendous opportunity—in my view—from the “market.”
If the mere personal use of a scarce resource is understood as “taking advantage” of anyone or everyone else, then life as such is morally questionable. Those who are living above a subsistence level are “taking advantage” of those on the margin of life. When I eat, a starving person is not eating. When I turn up the heat in my home, I amusing fuel that might have saved a poor person whose fuel is gone. In fact, we, the living, are responsible, in this view, for the deaths of all those whose lack of funds or medical attention (at whatever price) led to their demise.
This is not a hypothetical example. Consider the words of theologian-historian Ronald Sider, whose best-selling book, Rich Christians in an Age of Hunger (1977), has be-come one of the most influential books on seminary and Christian college campuses all over the United States. His introduction to the book sets forth the problem:
The food crisis is only the visible tip of the iceberg. More fundamental problems lurk just below the surface. Most serious is the unjust division of the earth’s food and resources. Thirty per cent of the world’s population lives in the developed countries. But this minority of less than one-third eats three-quarters of the world’s protein each year. Less than 6 per cent of the world’s population lives in the United States, but we regularly demand about 33 per cent of most minerals and energy consumed every year. Americans use 191 times as much energy per person as the average Nigerian. Air conditioners alone in the United States use as much energy as does the entire country of China annually with its 830 million people. One-third of the world’s people have an annual per capita income of $100 or less. In the United States it is now about $5,600 per person. And this difference increases each year.
Production and Consumption
I can remember reading textbooks written in the 1950s that affirmed the wonders of American capitalism, and that pointed with pride to the fact that 6 per cent of the world’s population produced 40 per cent (or 33 per cent) of the world’s goods. But that argument grew embarrassing for those who proclaimed the supposed productivity of socialism. Socialist nations just never caught up. So the socialist critics now complain that 6 per cent of the world’s population (Americans) annually uses up one-third of the world’s annual production, as if this consumption were not simultaneously a process of production, as if production could take place apart from the using up of producer goods. This is word magic. It makes productivity appear evil.
It is true that Westerners eat a large proportion of the protein that the world produces each year. This has been used by vegetarian socialists to create a sense of guilt in Western meat-eating readers of socialist literature. You see, our cattle eat protein-rich grains. “Corn-fed beef” is legendary—or notorious, in the eyes of the critics. Because of this, argues Sider, the “feeding burden” of the United States is not a mere 210 million (the number of human mouths to feed), but 1.6 billion. “No wonder more and more people are beginning to ask whether the world can afford a United States or a Western Europe.”
The psalmist proclaimed a poetic truth about God’s ownership of the world, by identifying these words as God’s: “For every beast of the forest is mine, and the cattle upon a thousand hills” (Psalm 50:10). But “liberation theologians” are not impressed. You see, Sider informs us: “The U.S. Department of Agriculture reports that when the total life of the animal is considered, each pound of edible beef represents seven pounds of grain. That means that in addition to all the grass, hay and other food involved, it also took seven pounds of grain to produce a typical pound of beef purchased in the supermarket. Fortunately, the conversion rates for chicken and pork are lower: two or three to one for chicken and three or four to one for pork. Beef is the cadillac of meat products. Should we move to compacts?” He would apparently prefer to rewrite the words of the psalm: “For every chicken of the forest is mine, and the soybeans on seven thousand hills.” (With the seven-to-one ratio in effect.)
Changing Just One Thing
Unquestionably, Third World populations sometimes suffer protein deficiencies. But any program of “social salvation through protein exports” is going to encounter problems that the wealth-redistributionists never consider. People’s food is fundamental to their culture. Trying to stay on a diet has confounded millions of Americans. Eating habits are very difficult to alter, even when the eater knows that he should change. An education program to get Third World peasants to change their diets is going to be incredibly expensive, and probably futile. “Rice-eating people would often rather starve than eat wheat or barley, which are unknown to them,” writes biologist Richard Wagner.
This problem goes beyond mere habits. Sometimes we find that people’s diets have conditioned their bodies so completely that the introduction of a new food may produce biological hazards for them. This is sometimes the case with protein. Wagner comments:
Another even more bizarre instance was seen in Colombia, where a population was found with a 40 percent infestation of Entamoeba histolytica, a protozoan that generally burrows into the intestinal wall, causing a serious condition called amoebiasis. However, despite the high level of Entamoeba infestation, the incidence of amoebiasis was negligible. The answer to this puzzle was found in the high-starch diet of the people. Because of the low protein intake, production of starch-digesting enzymes was reduced, allowing a much higher level of starch to persist in the intestine. The protozoans were found to be feeding on this starch rather than attacking the intestinal wall. If this population had been given protein supplements without concurrent efforts to control Entamoeba infestation, the incidence of amoebiasis would probably have soared, causing more problems than the lack of protein.
Cultures are “package deals.” When a foreign culture introduces a single aspect of its culture into the life of another, there will be complications. Changing people’s eating habits, apart from their understanding of medicine, costs of production, agricultural technology, risks of blight, marketing, and an indeterminate number of other contingent aspects of the recommended change, is risky when possible, and frequently impossible. The Third World peasants recognize the implications of this “cultural wedge” perhaps better than the Western “missionary”: it may have a far-reaching impact on the culture as a whole—an impact which traditional peasants may choose to avoid. Unless the opportunity being offered by the innovator is seen by the recipient as being worth the risks of unforeseen “ripple effects,” the attempt to force a change in the recipient’s buying or eating habits may lead to a disaster. Or more likely, it will probably lead to a wall of resistance. Missionaries, whether Christian or secular, whether sponsored by a church or the Peace Corps, had better understand one fundamental principle before they go into the mission field: You cannot change only one thing.
The Sub-Sahara Sahel Famine
One of the classic horror stories that illustrates this principle is the Sub-Sahara Sahel famine of the 1970s. For 25 years, from the early 1950s through the mid-1970s, the West’s civil governments poured hundreds of millions of dollars into this region. Yet between the late 1960s and 1974, several hundred thousand people starved, along with 20 million head of livestock. Why? As with most agricultural tragedies, there was no single cause. But one factor stands out. The area gets little rain: perhaps 25 inches in its southernmost regions, tapering off to an inch per year the closer you get to the Sahara. The nomads needed water for their herds, as they had from time immemorial. The West gave them water. It destroyed them.
Beneath the rock and clay and sand, there is water. A subterranean lake of half a million square miles underlies the eastern end of the Sahara. Mechanical rigs can hit water at 1,000 or 2,000 feet down. These boreholes were drilled with Western foreign aid money, at $20,000 to $200,000 apiece. About 10,000 head of cattle at a time can drink their fill. Therein lies the problem. Claire Sterling describes what happened:
The trouble is that wherever the Sahel has suddenly produced more than enough for the cattle to drink, they have ended up with nothing to eat. Few sights were more appalling, at the height of the drought last summer , than the thousands upon thousands of dead and dying cows clustered around Sahelian boreholes. Indescribably emaciated, the dying would stagger away from the water with bloated bellies to struggle to fight free of the churned mud at the water’s edge until they keeled over. As far as the horizon and beyond, the earth was as bare and bleak as a bad dream. Drought alone didn’t do that: they did.
What 20 million or more cows, sheep, goats, donkeys, and camels have mostly died of since this grim drought set in is hunger, not thirst. Although many would have died anyway, the tragedy was compounded by a fierce struggle for too little food among Sahelian herds increased by then to vast numbers. Carried away by the promise of unlimited water, nomads forgot about the Sahel’s all too limited forage. Timeless rules, apportioning just so many cattle to graze for just so many days within a cow’s walking distance of just so much water in traditional wells, were brushed aside. Enormous herds, converging upon the new boreholes from hundreds of miles away, so ravaged the surrounding land by trampling and overgrazing that each borehole quickly became the center of its own little desert forty or fifty miles square.
In Senegal, soon after boreholing became popular, around 1960, the number of cows, sheep and goats rose in two years from 4 million to 5 million. “In Mali, during the five years before 1960, the increase had been only 800,000. Over the next ten years the total shot up another 5 million to 16 million, more than three animals for every Malien man, woman, and child.” It is not just Americans and West Europeans who raise and eat “protein on the hoof.”
The traditional nomad way of life is dead. Western specialists know it; the nomads know it. They live in tent camps now, dependent on handouts from their governments, which in turn rely heavily on the West’s foreign aid programs. The West and the nomads forgot to honor (and deal with) the principle: You cannot change only one thing.
The goal of charitable organizations that deal in foreign aid should be to bring the culture of the West to the underdeveloped nations. This means that these organizations cannot be run successfully by cultural and philosophical relativists. They should seek to impart a specifically Western way of looking at the world: future-oriented, thrift-oriented, education-oriented, and responsibility-oriented. This world-and-life view must not be cyclical. It must offer men hope in the power of human reason to understand the external world and to grasp the laws of cause and effect that control it. To try to bring seed corn to a present-oriented culture that will eat it is futile. With the seed corn must come a world-and-life view that will encourage men to grow corn for the future.
It does no good to give these cultures Western medicine and not Western attitudes toward personal hygiene and public health. It does no good to send them protein if their internal parasites will eat out their intestines. The naive idea that we can simply send them money and they will “take off into self-sustained economic growth” cannot be taken seriously any longer. To attack the West because it is some-what less willing today to continue to honor the tenets of a naive faith in foreign aid—a faith in the power of confiscation, in the power of using Western tax revenues to prop up socialist regimes in Third World nations—is itself immoral.
P. T. Bauer has made the study of economic development his life’s work. He has emphasized what all economists should have known, but few acknowledged until quite recently, namely, that attitudes are more important for economic growth than money. His list of what ideas and attitudes not to subsidize with Western capital is comprehensive. No program of foreign aid, public or private, should be undertaken apart from an educational program to reduce men’s faith in the following list of attitudes:
Examples of significant attitudes, beliefs and modes of conduct unfavourable to material progress include lack of interest in material advance, combined with resignation in the face of poverty; lack of initiative, self-reliance and a sense of persona] responsibility for the economic future of oneself and one’s family; high leisure preference, together with a lassitude found in tropical climates; relatively high prestige of passive or contemplative life compared to active life; the prestige of mysticism and of renunciation of the world compared to acquisition and achievement; acceptance of the idea of a preordained, unchanging and unchangeable universe; emphasis on performance of duties and acceptance of obligations, rather than on achievement of results, or assertion or even a recognition of personal rights; lack of sustained curiosity, experimentation and interest in change; belief in the efficacy of supernatural and occult forces and of their influence over one’s destiny; insistence on the unity of the organic universe, and on the need to live with nature rather than conquer it or harness it to man’s needs, an attitude of which reluctance to take animal life is a corollary; belief in perpetual reincarnation, which reduces the significance of effort in the course of the present life; recognized status of beggary, together with a lack of stigma in the acceptance of charity; opposition to women’s work outside the home.
A long sentence, indeed. If the full-time promoters of Western guilt understood its implications, there would be greater hope for both the West and the Third World. What is remarkable is the extent to which these guilt-manipulators have adopted so many of the very attitudes that Bauer says are responsible for the economic backwardness of the Third World.
Yes, the West continues to eat. The Third World finds it difficult to grow sufficient food. But Christians in the West are complacent. They are well-fed, while their “global neighbors” go hungry. It appears that the Christians and rich Westerners in general were very smart: they all moved to those regions of the world where food is abundant. The plains Indians, before the white man came on the scene, experienced frequent famines. There were under half a million of them at the time. Yet, somehow, the Westerners arrived just in time to see agricultural productivity flourish. They now consume more than their “fair share” of the food, and their only excuse is that they produce it. This, it seems, is not a good enough answer—certainly not a morally valid answer. The West needs to come up with a cure for the hungry masses of the world, but not the one that worked in the West, namely, the private ownership of the means of production.
Professor Sider (he teaches at a Baptist theological seminary) has a cure—if not for the world’s hungry masses, then at least for the now-guilty consciences of his readers, not to mention the not- yet-guilt-burdened consciences of the American electorate. “We ought to move toward a personal lifestyle that could be sustained for a long period of time if it were shared by everyone in the world. In its controversial Limits to Growth, the Club of Rome suggested the figure of $1,800 per year per person. In spite of the many weaknesses of that study, the Club of Rome’s estimate may be the best available.” And which agencies should be responsible for collecting the funds and sending them to the poor in foreign lands? United Nations channels. Private charity is acceptable—indeed, it is better than the United States government, which sends food and supplies to “repressive dictatorships”—but not preferable. We need State-enforced “institutional change,” not reliance on charity, because “institutional change is often morally better. Personal charity and philanthropy still permit the rich donor to feel superior. And it makes the recipient feel inferior and dependent. Institutional changes, on the other hand, give the oppressed rights and power.” But if the United States government is not really a reliable State to impose such institutional change, what compulsory agency is reliable? He conveniently neglects to say. But the one agency he mentions favorably in this context is the United Nations.
The Zero-Sum Economy
A zero-sum game is a game in which the winners’ earnings come exclusively from the losers. But what applies to a game of chance does not apply to an economy based on voluntary exchange. Unfortunately, many critics of the free market society still cling to this ancient dogma. They assume that if one person profits from a transaction, the other person loses proportionately. Mises objects:
. . . the gain of one man is the damage of another; no man profits but by the loss of others. This dogma was already advanced by some ancient authors. Among modern writers Montaigne was the first to restate it; we may fairly call it the Montaigne dogma. It was the quintessence of the doctrines of Mercantilism, old and new. It is at the bottom of all modern doctrines teaching that there prevailed, within the frame of the market economy, an irreconcilable conflict among the interests of various social classes within a nation and furthermore between the interests of any nation and those of all other nations . . . .
What produces a man’s profit in the course of affairs within an unhampered market society is not his fellow citizen’s plight and distress, but the fact that he alleviates or entirely removes what causes his fellow citizen’s feeling of uneasiness. What hurts the sick is the plague, not the physician who treats the disease. The doctor’s gain is not an outcome of the epidemics, but of the aid he gives to those affected. The ultimate source of profits is always the foresight of future conditions. Those who succeeded better than others in anticipating future events and in adjusting their activities to the future state of the market, reap profits because they are in a position to satisfy the most urgent needs of the public. The profits of those who have produced goods and services for which the buyers scramble are not the source of losses of those who have brought to the market commodities in the purchase of which the public is not prepared to pay the full amount of production costs expended. These losses are caused by the lack of insight displayed in anticipating the future state of the market and the demand of the consumers.
The “Montaigne dogma” is still with us. The economic analysis presented by Ronald Sider assumes it. He can be regarded as a dogmatic theologian, but his dogma is Montaigne’s. Consider for a moment his statistics, such as the Club of Rome’s assertion that $1,800 a year would just about equalize the living standards of the world. The capita] of the rich in the West—roads, educational institutions, communications networks, legal systems, banking facilities, monetary systems, manufacturing capital, managerial skills, and attitudes toward life, wealth, and the future—cannot be divided up physically. Furthermore, there is little evidence that it would be sufficient to produce world-wide per capita wealth of this magnitude, even if it could be physically divided up and redistributed.
Redistribution Is Temporary
If we divided only the shares of ownership held by the rich—stocks, bonds, annuities, pension rights, cash-value life insurance policies, and so forth—we would see a market-imposed redistribution process begin to put the shares back into the hands of the most efficient producers. The inequalities of ownership would reappear, rapidly.
The Club of Rome assumes tremendous per capita wealth in the hands of the rich—so much wealth, that a program of compulsory wealth-redistribution could make the whole world middle class. The important issue, however, is the Montaigne dogma. It views the world as a zero-sum game, in which winnings exactly balance losses. Then how do societies advance? If life is a zero- sum game, how can we account for economic growth? A free market economy is not a zero-sum game. We exchange with each other because we expect to gain an advantage. Both parties expect to be better off after the exchange has taken place. Each party offers an opportunity to the other person. If each person did not expect to better himself, neither would make the exchange. There is no fixed quantity of economic benefits. This is not a zero-sum game.
We understand this far better in the field of education. For example, if I learn that two plus two equals four, I have not harmed anyone. In the area of knowledge, we all know that the only people who lose when someone gains new, accurate knowledge are those who have invested in terms of older, inaccurate knowledge. Could anyone seriously argue that the acquisition of knowledge is a zero-sum game (except, perhaps, in the case of a competitive examination)? Would anyone argue that we should suppress the spread of new, accurate knowledge in order to protect those who have made unfortunate investments in terms of old information?
Sadly, the answer is “yes.” There are people who advocate policies that do suppress new knowledge. They argue that it is immoral for one man to “take advantage” of specialized knowledge in order to reap a return on this knowledge. They want the civil government to impose restrictions on profits—“obscene profits,” they are sometimes called—that one man or a firm can reap. But this restricts the spread of the information that benefits consumers, and which they are willing to pay for. The existence of profits alerts other profit-seeking entrepreneurs to the existence of specialized knowledge that had previously been ignored. Profits tell producers that an opportunity is available—an opportunity that they can take advantage of by entering the producer goods markets, buying up producer goods, restructuring them (if necessary), and selling them, in the form of “final” goods and services, to consumers. The lure of making profits is the control mechanism by which consumers get producers to serve them efficiently.
High profits, in a free market economy, are normally associated with low prices and high wages. The classic example is Henry Ford’s Model T. He offered wages of $5 per day—unheard-of in 1913, when hourly wages were as low as 15 cents—to lure men onto Ford’s assembly lines that were producing cars that middle-class families could at last afford to buy. (When men said “afford” in 1914, they meant “a Ford.”) He made his money the same way Sears, Roebuck had made its money, and which Ford may have used as a production model. He used mass-production techniques, capturing a huge market by means of price competition. This had been capitalism’s distinguishing trademark from the 1600s, but Ford’s implementation of the high- wage version created a revolution. Drucker describes it:
Before Ford changed the whole labor economy of the United States with one announcement, labor turnover at the Ford Motor Company had been so high that, in 1912, 60,000 men had to be hired to retain 10,000 workers. With the new wage, turnover almost disappeared. The resulting savings were so great that despite sharply rising costs for all materials in the next few years, Ford could produce and sell its Model T at a lower price and yet make a larger profit per car. It was the saving in labor cost produced by a drastically high wage that gave Ford market domination. At the same time Ford’s action transformed American industrial society. It established the American working man as fundamentally middle class.
What if the Federal government had passed a windfall profits tax on automobile production in 19127 Would Ford have taken the risk of this revolutionary experiment? And if he had taken it, and the Federal government had extracted its tax, would this revolutionary innovation have been imitated by Ford’s competitors? Fortunately for the American worker, and unfortunately for Ford’s competitors in the automobile business, the Sixteenth Amendment had gone into force only that year, 1913, and the top rate of extraction was only 6 per cent on all income above $500,000. There were no “windfall profits taxes” then.
The Ford Formula
Did Ford “take advantage” of all those people who had invested in auto firms that were bankrupted by Ford’s successful experiment? Or did he simply make a better offer to workers and automobile buyers? How can anyone distinguish “taking advantage of” from “making a better offer to”? There is little doubt that Henry Ford’s offer to workers represented cut-throat wage competition to all other buyers of labor services. There is also no doubt that his price- competitive Model T represented a devastating blow to the producers of hand-crafted, high- priced autos. Was Ford immoral in making his offer to consumers? And was he immoral in making a billion dollars—in pre-New Deal purchasing power—as a direct result of his grand experiment? Should we condemn the “greedy consumers,” who bought Ford cars in preference to those produced by his competitors?
The success of Ford’s grand experiment drew imitators. How did they know that his experiment had been successful? By the astronomically high profits that his company was making. And how did they know in the late 1920s that the experiment was incomplete, and that his old offer—“You can get a Ford in any color you want, just so long as you want it in black”—was no longer competitive? By the losses Ford Motor Company sustained, and by the massive profits made by General Motors, which was in the process of creating a managerial revolution almost as significant as Ford’s labor revolution.
Another form of information-suppression is the popular government expedient of price controls. These can be price “floors,” such as minimum wage laws, or price “ceilings,” such as the rent controls or the ceiling on the price of natural gas. Price floors create “gluts”: more supply of a particular item offered for sale than the market can absorb, at the legal, artificial price. Price ceilings produce shortages: more demand for a particular item than the market can provide, at the legal, artificial price. The artificial, State-enforced prices give off misleading signals that con fuse both potential buyers and potential sellers—“potential” at the artificial prices.
Walter Wriston offers an important insight into one implication of price controls: their effect on the communication of vital knowledge.
Prices and wages represent an essential form of economic speech; money is just another form of economic information. When the freedom of this economic speech is restricted, we are not only penalized, we are misled . . . . Prices enable consumers to communicate with producers and tell them what they want or don’t want. If prices are censored, or frozen, they cannot tell producers what goods or services people want or don’t want to purchase.
The spread of consumer-satisfying information is enhanced by the lure of profits. The modern stock market is probably the most efficient and rapid communicator of new knowledge in the history of man. When civil governments attempt to put restrictions on profits, they necessarily restrict the consumers’ access to information, and the economic results of information, that they, by their demonstrated preferences, are willing to pay for in the marketplace. The “marketplace for ideas” is not limited to newspapers, television news rooms, and college classrooms, although some intellectuals employed by these organizations would have us believe so. The marketplace for ideas, above all, is found in the competitive interplay of market offers and market responses.
Competition as Substitution
When a person offers another person an opportunity to spend money, or trade goods, or whatever, the initiator is asking the second person to alter his existing pattern of expenditures. He is asking that person to take money that would have been spent or invested in one way, to spend or invest it differently. The initiator is asking the second person to substitute a new expenditure pattern for the previously dominant pattern.
Competition invariably possesses this element of substitution. The prospective worker asks an employer to hire him, even if this should mean that another person in the employment line is not hired. It may even mean that someone already employed by the firm gets fired, or demoted, or transferred. He may offer the prospective employer an intriguing offer: “Hire me for less than you are paying somebody already on the production line.” Or: “Hire me, and I will work during hours that everyone else complains about.” Or: “Hire me, and I will guarantee in writing that I will not join a labor union.” Or (in a “union shop”): “Hire me, and I will guarantee in writing that I will join a labor union.” In short, hire me. “Substitute me for someone on the production line or in the employment line; substitute me for the money that the firm intended to spend on labor- saving equipment, or advertising, or managerial bonuses. It will pay the company to substitute me for any of those other possible expenditures.”
Does anyone ever complain about “cut-throat substitution”? As a slogan to call revolutionaries to the barricades, it lacks something. What about “cut-throat opportunities”? That one is even worse. It makes the process sound beneficial to consumers. Better stick with “cut-throat competition.” That one gets legislators concerned about the terrible damage being done by “ruthless exploiters” (another top-flight incantation in the word-magic business) against innocent suppliers. It is not easy to get legislation “in the public interest” against cut-throat opportunities.
So when we hear the phrase, “cutthroat competition,” we should think twice. Whose throat is being cut? The consumer’s? Not very often. The supposed cutthroat—in pirate’s garb, a knife in his teeth—is usually just someone who offers the consumers a better opportunity. No doubt, he is resented by his competitors, who are unwilling or unable to offer the consumers a comparable deal. But this should not send us rushing to the barricades, or into the halls of Congress, to demand action against these anti-social “cut-throats.” Legislation against cut-throat suppliers re duces their freedom of action, and it ultimately reduces our freedom, as consumers, to respond to offers that we might have accepted. Legislation against cut-throat competition results in the cut throats of consumers: reduced opportunities.
Therefore, when we hear the phrase, “cut-throat competition,” let us mentally substitute the word “opportunities” for “competition.” It reminds us of what we are being asked to destroy through legislation: “New Opportunities: Void where prohibited by law!” 
4. Ronald Sider, Rich Christians in an Age of Hunger (Downers Grove, Illinois: Inter-Varsity Press, 1977), p. 18. This book was co-published by the liberal Roman Catholic publishing house, the Paulist Press. Unquestionably, it represents an ecumenical venture. Inter-Varsity is perhaps the largest campus organization of the “neo-evangelical” branch of Protestantism.
12. W. W. Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge: At the University Press, 1960). This was a best-seller of the early 1960s. For a critique, see the essays by several economic historians in Rostow (ed.), The Economics of Take-Off into Sustained Growth (New York: St. Martin’s, 1963).
20. For a critical analysis of Sider’s views, see David Chilton, Productive Christians in an Age of Guilt-Manipulators: A Biblical Response to Ronald Sider (rev. ed.; Tyler, Texas: Institute for Christian Economics, 1982).
29. Frederick C. Klein and John A. Prestbo, News and the Market (Chicago: Regnery, 1974). On the ill-effects on the spread of information as a result of the government’s attempt to restrict “insider trading,” see Henry Manne, Insider Trading and the Stock Market (New York: The Free Press, 1966).
The “vulgar calculus of the market place,” as its critics have described it, is still the most humane way man has yet found for solving those questions of economic allocation and division which are ubiquitous in human society.
By what must seem fortunate coincidence, it is also the system most likely to produce the affluent society, to move mankind above an existence in which life is mean, nasty, brutish, and short. But, of course, this is not just coincidence. Under economic freedom, only man’s destructive instincts are curbed by law. All of his creative instincts are released and freed to work those wonders of which free men are capable. In the controlled society only the creativity of the few at the top can be utilized and much of this creativity must be expended in maintaining control and in fending off rivals. In the free society, the creativity of every man can be expressed—and surely by now we know that we cannot predict who will prove to be the most creative.
Benjamin A. Rogge,
“The Case for Economic Freedom”