"Tearing Down The Wall Of Economic Ignorance And Moral Indifference"
Dr. Thomas C. Rustici
Good morning ladies and gentlemen! I want to thank Chris Cardiff, Mallon McKenzie and the rest of the excellent team at the Koch Foundation for their formal invitation to speak with you today. It is my great honor to be surrounded by so many bright people interested in economics, freedom and the fate of our world.
I want to discuss with you some of the most basic, yet profound principles relating to the economics and ethics of freedom. I also promise to do this without using graphs, mathematical proofs or incomprehensible economic jargon. I know what you are probably thinking: Economics without math; how is that possible? Let me do this through a few stories from my life experience. Economics is your life!
When I received my graduate degree in Economics at George Mason University in 1987, my mother Celestine Rustici asked a simple but extraordinarily difficult question to answer. My mother said, "Tommy, you are now an economist, Im so proud of you." She went on, "But, can you explain to me what it is an economist actually does?" "I never went to college so I dont know." This question truly scared the hell out of me! So I sat my mother down, got a pencil and legal pad and proceeded to outline and graph supply and demand curves, the law of comparative advantage, exchange, the profit-loss system etc. I then got into the heat of the moment and half an hour later I was putting it all into equations, using calculus and started solving a wide variety of complicated mathematic proofs. My mother, having not said a word for an hour screamed, "STOP! Tommy, stop please, if you love me stopno more, no moreenough!" I was stunned by my moms reaction. She went on, "And you actually like all these lines and numbers, you like all this mess?" She then said to me, "Tommy, let me see if I understand what you are doing here. It seems to me all this mess says two things: freedom works it is practical, and we need each other." She asked, "Am I right son?" I thought about it for a few seconds and said, "Mom, you are exactly right! That is it, thats it! You are right mom." My mom then said, "And you went to 8 years of college to learn that? I could have told you that, and I never went to college." Look, Ive had the best professors in the worldI took classes with a Nobel Laureate in Economics. Yet, never did it get put so wellso clearly as my mom did. She taught me the two most profound lessons: Freedom works and we need each other. An experience from my childhood better explains these points.
When I was a young boy, I often played catch with the baseball in my backyard. As happened all too often, I missed the ball and it would roll past me all the way to the wall between our yard and our neighbors. (Im teaching economics not playing center field for the Baltimore Orioles.) As I reached down to pick up the ball, I always found the urge to look at the light shining through the crack in the wall. An amazing thing immediately occurred, as my eye moved closer and closer to the little hole in the wall, the world on the other side grew bigger and bigger! The crack in the wall became a window to the world. The world on the other side of the wall looked very different from the surface of the wall in front of me. From a distance, my world was my backyard, but up close another world appeared, something I couldnt see from a distance: the neighbor kids and their yard. Everything in life is what you see and what you dont see.
Economics is the science of civilization, of seeing the unseen and logically tracing out the unintended consequences of human action. Economics is a way of looking past the wall to understand the practical and moral: freedom works and we need each other.
Freedom works! Where non-economists only see random chaos, economists see social order. The free market process is a marvelous symphony of economic production. Imagine the task carried out by the musical conductor in the symphony. The various musical instruments are harmonized by the conductor. There is rhythm and order when each instrument is synchronized with all other instruments. Instead of random chaos that wreaks as "noise", our ears pick up Beethoven, Mozart, or Tchaikovsky. Patrons of the philharmonic rightly marvel at the conductors ability to create order from seeming chaos.
Economic order is like this symphony only that the grand conductor of economic life is the price system. The system of relative market prices inspires the economists sense of awe because you and I are the instruments in the production symphony. We are the economy! Six billion different instruments play their own song we do our own thing, yet random chaos does not follow. Why? The economic clockwork is synchronized by the competitive price system. Market prices are the reflection of human values in a world of scarcity. Prices are not just numbers to an economist, they represent concentrated information. They are the notes we play as musical instruments in the symphony of life.
Economists study unplanned social order harmony from seeming chaos. Adam Smith called it the "invisible hand", while Nobel Laureate Friedrich von Hayek, labeled it "spontaneous order". You can understand spontaneous order by looking at an ordinary pencil.
No one person the face of the Earth knows how to make a trivial pencil. In fact, the only reason we have pencils is because we dont have to know how to make them! For the moment, I want you to reflect upon the amazing amount of social cooperation occurring without our conscious awareness. We come into direct contact with only a few hundred or thousand people each week; yet we are always indirectly coordinating our actions with 6 billion people every day!
The graphite comes from Sri Lanka. How many pencil buyers know where Sri Lanka is located in the Indian Ocean? How many can speak Sinhala or Tamil? How many pencil buyers know the value of the Sri Lankan rupee? Sri Lanka has starkly different religious and cultural norms from America. Yet, our ignorance of each other does not prevent us from coordinating our values through trade to produce pencils.
The Sri Lankan graphite is mixed with clay from Mississippi to make the lead. Do pencil buyers know what grade or variety of clay is needed? There are hundreds of possible variations yielding different types of lead pencils. And few people in Mississippi know anyone in Sri Lanka.
At one time, the pencils wood was a 10 foot diameter tree, probably found in Northern California. Then we do the best thing you can ever do with a tree after you grow ityou cut it down to make pencils and other goods. The log is processed in a lumber mill were it gets cut into small thin strips to make the pencil. How many pencil buyers have ever run or organized a lumber mill? Used bark strippers, table saws, band saws, routers?
The eraser is made from rape seed oil that comes from Indonesia and pumas from Italy. The rape seed oil is carried in tankers across the Pacific Ocean, where it gets mixed with pumas and then chemically transformed from a liquid to a solid. Few pencil buyers know how to navigate an ocean freighter or the technical details of chemical engineering.
A thin tin band holds the eraser on the pencil. Do pencil buyers know the tin comes from Bolivia, Malaysia or Rwanda? How many know anything about tin mining or metallurgical science?
The paint is made from petroleum found in the Middle East. How many pencil buyers know how to drill for oil? Refine oil? Do geological surveys?
Seen through the economic crack in the wall, the very existence of pencils boarders on the miraculous. The market process bringing pencils into existence is one of pervasive division of labor and division of knowledge. We do not have to know how to make pencils in order to get them. Yet, we take it for granted that pencils will always be there when we want them. Just like freedom, we take it entirely for granted. It takes the talents of millions of people to bring a pencil into our life.
Now this poses a very interesting question. If no one knows how to make a simple pencil, how do really complicated problems get solved? How does New York City get fed everyday? What prevents 15 million people from starving to death within a matter of weeks? Who is responsible for feeding New York City?
Who brings food to your kitchen table? Who makes the clothes you wear? The house you live in? The car you drive? Who provides your heat in the dead of winter? When was the last time you lost sleep at night because your very survival depends on everyone else in the world? It is our brethren of this world performing such important tasks. Freedom works! The free market works with such stellar brilliance, we willingly place our life in the hands of millions of complete strangers. We trust that the food we eat will always move from the Kansas farm to our own table. Think about it. Would you be able to sleep if for even a split-second if you doubted the general migration of food from around the world to your kitchen table?
We are all involved in one large global complex of indirect production and indirect exchange. This interdependent process connects virtually every human being on the planet. Understanding how complex human civilization exists and functions is the first lesson in economics. Recognizing the principle that we need each other is the second lesson.
We Need Each Other
Harmonizing the need we have for one another requires a variety of social and moral institutions. The moral trinity of the free society includes: private property rights, contractual relations and limited government under the Rule of Law. Let me discuss each in turn.
The free society rests upon a foundation of private property rights. Property rights are human rights! They are the moral/social sanctions to own, possess and control wealth created from our own productive efforts. Property rights are virtuous in that they forge bonds of respect for the rights held by other people. Property rights are the only practical solution to the chaos and conflicts inherent over the un-owned commons. By delineating that property which I own, automatically places boundaries on that which I do not own (your property). On the un-owned commons (or socialized resources), each individuals appetite is for everything he sees. Human relations on the commons, reduces to the lowest denominator. Steal or be stolen from -- forcibly take other peoples wealth before they take yours. Without private property rights the rule is the war of all against all, the Hobbesian jungle with a vengeance.
Where property rights are enshrined, voluntary cooperation, mutual reciprocity and human respect logically guide social arrangements. Human relations based on coercive violence or fraud; demolish the foundation of free markets and any semblance of a humane society. Property rights barricade human beings from their most barbarous and destructive inclinations. This fact makes free market capitalism the most ethical economic system in world history. Property rights institutionalize the biblical injunctions "Thou shall not steal" "Thou shall not bear false witness" "Thou shall not covet".
The free market operates under a regime of self interest. And entrepreneurs and economists should stop apologizing for that fact. Producers do not manufacture and create wealth because they love the consumer. Private property rights in the marketplace force the producer to serve the consumer in the pursuit of their own advantages. As Adam Smith shrewdly observed two centuries ago:
It is not of the benevolence of the butcher, the brewer or
the baker, that we expect our dinner, but from regard to
their own self interest. We address ourselves not to their
humanity but to their self-love, and never talk to them about
our necessities but of their advantages.
Rational self-interest creates a symbiotic relationship and mutual reciprocity between the producers and consumers. Both sides, of the market "gain from trade" or voluntary exchange ceases to exist. Property rights turn raw human greed into a meritocracy where individuals are rewarded for their productive contribution in the service of other people. Profits are gains from merit, yet, profits have a bad name. President Carter once called profits "obscene" on national television. If profits are bad, are economic losses and bankruptcy good? Whats obscene is economic ignorance because profits earned from productive enterprise are the moral symbol of human growth. Im proud of every profit Ive earned in my life. I always teach my children to nevernever ever be ashamed of their honest achievements in this life.
Accomplishing the goal of social harmony requires an elevation of contract to the apex of social relations. Force and fraud demolish the foundation of the contractual society and are inconsistent with free enterprise. Successful business requires a recognition and respect for the property rights of others. In a contractual society, bargaining replaces violence and domination in moral and legal standing. And every time a contract is properly executed, honesty and integrity gets validated reinforcing human character. Prosperity and social harmony naturally reign from property rights and free contractual relations.
The "moral consensus" implied by contract channels unbridled human greed into socially beneficial outcomes. The market then becomes a win-win process, not a zero-sum win-lose game of mercantilism, where the victors plunder the losers in their acquisition of wealth. Both parties to the transaction must gain or voluntary social cooperation ends.
In a system of voluntary exchange, each side gives up something they value less, to get the goods they desire more. In fact, the rise of human civilization was the progressive application and substitution of peaceful exchange in place of zero-sum coercive violence. Once people stop stealing and killing, they trade they enter the market place of peace. The free market is institutionalized peace.
Yet, most people are trapped in an ancient belief that trade is somehow zero-sum, where one persons gain is by definition another persons loss. For most of human history, people got ahead by the swordnot through trade. In the ancient world, pharaohs, kings and aristocrats acquired their wealth through pure violence, expropriation, slavery and conquest. The zero-sum theory of mercantilism makes perfectly logical sense in pre-capitalistic times. In the mercantilist world, the rich acquired wealth by using coercion against their brethren. In a zero-sum world, there is also zero morality.
Capitalism is entirely different. Capitalism is based on the principle of contractual relations, where individuals trade goods and value. The free market institutionalizes respect in place of barbarity. Thus, the ancient "take system" of mercantilism is replaced by a free markets "give and take" system of exchange for mutual gain. The market requires both competition as well as cooperation. Competition is the dynamic running the economic engine and cooperation is the rivets holding it all together. In a free market you have to serve others. When entrepreneurs create wealth they enhance other peoples lives. To get rich (barring force or fraud), means creating new goods, new technology, more productivity, lower prices, etc. Entrepreneurs have to see potential opportunities no one else sees. As a wise philosophy has it, "in crisis there is risk as well as potential opportunity." Success requires thinking past the wall of the conventional. Economic intelligence requires we know there is a difference between a wealth creator like Thomas Edison and a thief like John Dillinger.
Americans enjoy a standard of living unparalleled in the world, but it is not because we work harder than other people. Rather, our prosperity was created by great business entrepreneurs of yesteryear. Where would America have been without the "greed" of Eli Whitney (interchangeable parts); John D. Rockefeller (oil refining technology); Thomas Edison (electric lights, phonograph, and motion pictures); Alexander Graham Bell (telephone); Henry Ford (assembly line-automobiles); Sam Walton (mass retailing). Our lives were changed forever and for the better because of their quest to earn profits. Yet, government policies based on envy always take for granted the fruits of entrepreneurial creativity believing it will always just "be there."
Finally, the free market creates international peace. After the Napoleonic Wars and during most of the 19th century the world came closest to a free-trade regime, including goods, capital and human migration. Compared to all centuries before, the 1800s experienced unprecedented world peace and economic growth. By 1900, most countries were on a gold/silver standard and the world economy progressively integrated. Once countries began freely trading and investing within each others borders they formed a vested interest in the peace and stability of their neighbors. Your interests are always connected with your investments. International investors are always the true peace makers in this world. Greedy people preoccupied with earning money usually have little time to engage in the political mass murder euphemistically called war. That is unless their ignorant politicians get their way.
Limited Government under the Rule of Law
The efficacy of property rights and contractual relations is predicated on limited government subject to the Rule of Law. The Rule of Law descending from the Magna Carta in 1215 AD required all laws be prospective in their enforcement. This prevented arbitrary retroactivity in legal punishments (no ex post facto laws). The principle was established that the agents of the King were under the same legal rules as ordinary civilians. The Rule of Law eliminated the ancient double-standard of guaranteed injustice. In short, the Rule of Law puts government under the constraints of law!
The free society requires the police power be limited to enforcement of individual rights in order to sanctify person, property and contract. The hallmark of the original American system of Constitutional government was the idea that government had definite moral and economic boundaries. The legitimate functions of government were primarily seen by the founding fathers, as police, defense and courts of law. The founders of America emphatically rejected the philosophy of Louis XIV, "Letat cest moi" (I am the state) and the philosophy of Louis XVI, "Cest loi parce que Je l espere" (It is legal because I wish it). Unfortunately, the Constitution is little more than an historical artifact in the National Archives, a "museum piece" for show, not an actual restraint on the capricious use of arbitrary state power. Politicians do not honor the highest law in this country.
The need for a government is obvious, men are not now, nor ever will be angels. However, agents of the state are not angels eitherthus we should recognize Leviathan as potentially corruptible police power. Didnt James Madison put it best in Federalist Paper 51, when he said, "If men were angels, no government would be necessary. If governments were made of angels, auxiliary precautions (ie. Constitutions) would be unnecessary." Americas founders viewed the state as an evil, "albeit a necessary evil at its best and an intolerable evil at its worst." It is always smart to remember George Washingtons words, "Government is not poetry, eloquence or reason; it is force. And like fire, it can be a dangerous servant or a fearful master." The fire can burn you fatally if it gets out of control.
The twentieth century has reversed this wisdom. Throughout the world, the state has been too often viewed as, something more than angelic; the state has been romanticized, glorified and defied, becoming the official and most successful religion in all of world history-- unfortunately. The mass murder of over 260 million people in the 20th century by socialist governments is testament to the hell politicians create when there are no limits on their power to do "good". As British historian Lord Acton correctly pointed out, "Power corrupts and absolute power corrupts absolutely".
Fixation on the Zero-Sum Wall
While freedom works, understanding how it works requires seeing the unseen, seeing whats not so obvious the other side of the wall. We must see that the benefits in our life come from other peoples skills and talents. We must see that greed channeled through property rights and competition is beneficial to all. We must see the state in realistic terms as dangerous police power. Tragically, everything in modern culture focuses on the immediate, the visible, only the seen. This means most people have no clue how freedom works, they only see the zero-sum wall. The three institutions most responsible for transfixing America on the zero-sum wall include: the media, the educational system, and the political system.
We are all aware of a liberal or welfare-state bias in the mainstream news media (especially network television). While there are some notable exceptions such as John Stossel at ABC, Fox News, as well as talk radio, on the whole, the electronic and print news media slant solidly to the left. Didnt the February 16, 2009 Newsweek cover story read, "We are all Socialists Now". Really? Really? Who do they mean by "We"? Is it the people in this room? Is your name "we", mine sure as hell isnt! I think they mean themselves, the Washington Press corps? Oh, whats news here? Is this some earth shattering revelation! And journalists are Socialists only "Now"? "Only Now"? I believe Mark Twain was right when he said, "If you dont read the newspaper you are uninformed, if you do read the newspaper you are misinformed." This is especially true for the New York Times.
This should not be surprising. The media is fixated on only what can be seen, what is visible. The media only sees the wall, whats on the other side of the wall (whats not seen) gets no attention. It takes too long, is too complicated, and unexciting. Thus, the media reduces the complexities of an economic system to pure fallacies and logical absurdities. Try explaining on national television the negative effects of a government policy when Joe Six Pack has finger on the remote button, and that defines his attention span. If all you see is the wall, and dont ask whats behind it, surface appearances reduce thought processes to the lowest common denominator. A media watchdog group recently reviewed network television and 12 cable shows from January 25 through February 15. They examined Sunday talk show experts that commented on the "Stimulus Bill." Of the 722 experts, only 6% or 41 were actual economists, 681 had NO CREDENTIALS as economists, but they were still all over the airwaves. Furthermore, "When was the last time the nightly news anchor didnt talk to you like you were their 8 year old child?" When was the last time the Washington media and press corps did not act as prime apologists for Big Government and propagandists for the welfare state? With the few exceptions mentioned earlier, when has the media ever criticized the visible hand of government regulation as a cause of social and economic problems? Very, very rarely.
In the mass media, everything is portrayed in a purely zero-sum framework because zero-sum theory requires zero analytical thought. In place of simply reporting the facts, journalists construct a zero-sum wall using the brick and mortar of the publics ignorance about economics and the results from the latest snapshot public opinion polls. In this environment, feelings and surface emotions count more heavily than reason and factual analysis. Instead of being a guardian of freedom as our founding fathers envisioned, the media ends up as its chief antagonist.
The Educational System
More scandalous than media bias is the nonsense prevalent in the American educational system. In the 1950s Rudolf Flesh informed us "Why Johnny Cant Read". Today, Johnny cannot read, write, perform simple math, or employ rudimentary scientific understanding. Having taught in 8 different universities for over 17 ½ years, I can testify to an even more disturbing problem. In fact, Johnny with a high school diploma cannot think rationally, and refuses to think morally. Incoming freshmen are well equipped only with 12 years of incessant indoctrination in a zero-sum ideology.
Instead of training students to be scholars that can ask fundamental questions about their world (whats on the other side of the wall) public schools are nothing more than "labs" socially experimenting with the trendiest fad consistent with political correctness. We have replaced the old 3 Rs (reading, writing and arithmetic) with the new 3 Rs (racism, reproduction and recycling). When studies consistently demonstrate that the majority of high school students cant identify which century the Civil War was fought, locate their state on a map, or know who drafted the Declaration of Independence, how can we expect them to know how an economic system based on freedom works?
The universities are no better here. Most professors, probably 80-90% of those in the humanities and social sciences are somewhere politically to the left of Fidel Castro. These tenured post-modern radicals deny any concepts called truth or objective reality. Because of this nonsense, moral relativism dominates most elite universities, not just among faculty, but among students as well. A recent survey of freshmen at a prominent Ivy League university illustrated that a very large fraction of students refused to agree with the statement that the Holocaust was something "morally wrong." The political correctness of situational ethics prevented these students from wanting to appear "too judgmental." I could have told these idiots they have little to worry about here, because you have to be able to think before they could ever judge.
Back in March at George Mason University there were a lot of activities and celebrations on the "significance of socialism to our world." This was the lead up to our honored guest visiting the university, Mikhail Gorbachev, the former dictator of the Soviet Union. I received an invitation to have a private dinner with the former dictator for a small $1,000 donation. Look at the ironies here. A former communist dictator getting $1,000 per person at George Mason Universitya university named after the father of the Bill of Rights! Can you guess what my response to this was? Me, Tom Rustici, constitutionalist libertarian celebrate socialism and Gorbachev for $1,000? What kind of mind altering narcotics are these people taking in mass quantities?
The Political System
The failure of the media and the educational system show up in the political system. The government is a zero-sum force because all public policies involve changes in distributional outcomes. Outside the proper Constitutional boundaries, public policies often destroy creative thinking. The 700,000 pages of new mind-numbing Federal Regulations this decade alone tend to be all or nothing zero-sum mandates and edicts. Virtually everything can be criminalized under some existing regulatory rule or interpretation of those arbitrary rules. You cant escape this Leviathan even if you want to be left alone. As Pericles of Athens in 430 BC noted, "Just because you dont take an interest in politics, doesnt mean politics wont take an interest in you." The etymology of the word politics actually goes back to the ancient Greeks: "Poly" which means many; and "ticks" which means blood sucking parasites." Arent elections just advanced auctions on other peoples property? Politics with over 5,000 permanent special interest lobbying groups headquartered in the Washington DC Capitol Region today, means everyone ends up grabbing something from the pockets of their neighbor through politics. We now have come full circle, we take what is not ours through government, we forget there are 5,000 hands in our back pocket. Everyone steals from everyoneyet everyone wants to come out ahead. This is pure lose-lose negative-sum game.
Zero-sum demagogues always try to exploit this situation and economic ignorance for their own political greed. Take the case of the minimum wage. Candidate Jones uses economic analysis to explain his opposition to raising the minimum wage because of its dis-employment effects for low-skilled low productivity teenagers and handicapped workers. The law is counterproductive and hurts the very people it is claimed to help. Jones points to the overwhelming mountain of econometric studies proving this point beyond the shadow of a doubt. His rival, Candidate Slime plays class-warfare and zero-sum games with the visible. "Jones does not care about the poor; he does not want to give you a raise, I do." Given the media bias and sound-bit reasoning, guess who always has the advantage in the game governed by these rules?
Conclusion: Getting Past the Wall
Ronald Reagan once told the communist dictator Mikhail Gorbachev to "tear down this wall." The wall was the Berlin Wall. The Berlin Wall symbolized an ideology incompatible with human freedom, a monument to pure evil. If people only see the wall, their leaders can erase any notion that another world (a world of freedom) exists on the other side (a world of justice and prosperity). The Berlin Wall came down in November 1989. However, the ideology that built the wall to cage in people as slaves of the state is still alive and well, thanks to the media, the educational system, and political demagogues.
Ghanan economist George Ayittey tore down my wall.
I had the great fortune to attend a development economics conference in Washington DC in 1986, as a graduate student from George Mason University. At that conference many prominent professors gave speeches about economic development problems in the Third World. Then Dr. George Ayittey gave a lecture entitled, "Economic Atrophy in Africa". It was the most brilliant 50 minute lecture I ever heard in my academic life. After his speech, me, and about 200 other conference attendees rushed to the stage to speak with him. As he came off of the steps, I was in front and I shook his hand and said, "Dr. Ayittey I have to tell you that was the greatest, most insightful economic analysis Ive ever heard! It was great!" He looked at my name tag, and said, "Tom, why are you so silent?" I moved in closer and shook his hand again raising my voice, "Dr. Ayittey Im trying to tell you it was a great lecture, Ive never learned so much!" He looked me again and said, "Tom, I cant hear you? Why are you silent?" I was puzzled, I moved in closer and raised my voice further shouting, "Dr Ayittey Im trying to tell you " Then it dawned on me it had nothing to do with decibels.
He said, "Tom, on the continent of Africa last year, 500,000 blacks were murdered by their own governments. I didnt hear you or anyone else. If that were 500,000 zebras or 500,000 giraffes slaughtered I would have heard you and everyone else loud and clear. You would have been in vocal student protests in front of African National Embassies. You would have burned their national flags in the streets. These werent zebra or giraffe they were 500,000 innocent people slaughtered so they dont count. Why dont they count Tom? They are not as important as zebra or giraffe? Why are you silent man! While cant I hear you?!
I was devastated. He was right. If that were zebra or giraffe, he probably would have heard me. I told Dr. Ayittey, "You are right. I have been silent. These were not zebra or giraffe they are MORE IMPORTANT than that, these are my brothers and sisters in life they are my family. I give you my word that till the day I die, you will hear me loud and clearcount on voice."
We must be silent no more. Whats at stake is more than efficiency and a little more money. Whats at stake is the very legacy our forefathers sacrificed their sweat, blood, and lives to give us individual freedom. And as Dr. Ayittey reminds us whats at stake is our family. Professors are there to "profess something." Im here to proudly profess that freedom works and we need each other.
I want to thank each person here today from the bottom of my heart. I thank you for your own efforts in tearing down the zero-sum wall of economic ignorance and moral indifference in your own ways.
I believe all human beings are part of my true family. Alone we can not even make a trivial pencil; we need each other for our economic survival, for the joy in life, and the hope of a better tomorrow. To survive as true brethren, we have to tear down the walls of economic ignorance and moral indifference. Freedom works and we need each other. If we learn and teach this lesson well, maybe we can all live and grow like true brethren in peace and prosperity.