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Imprimis, On Line -- September, 1993
IMPRIMIS (im-pr¡-mis), taking its name from the Latin
term, "in the first place," is the publication of
Hillsdale College. Executive Editor, Ronald L.
Trowbridge; Managing Editor, Lissa Roche; Assistant,
Patricia A. DuBois. Illustrations by Tom Curtis. The
opinions expressed in IMPRIMIS may be, but are not
necessarily, the views of Hillsdale College and its
External Programs division. Copyright 1993. Permission
to reprint in whole or part is hereby granted, provided
a version of the following credit line is used:
"Reprinted by permission from IMPRIMIS, the monthly
journal of Hillsdale College." Subscription free upon
request. ISSN 0277-8432. Circulation 475,000 worldwide,
established 1972. IMPRIMIS trademark registered in U.S.
Patent and Trade Office #1563325. For more information
on free print subscriptions or back issues, call 1-800-
437-2268, or 1-517-439-1524, ext. 2319, or write
Imprimis, Hillsdale College, Hillsdale, MI 49242.
---------------------------------------------
"Three Cheers for Capitalism"
by Malcolm S. Forbes, Jr.
Editor-in-Chief, Forbes
---------------------------------------------
Volume 22,
Number 9
Hillsdale College,
Hillsdale, Michigan 49242
September 1993
---------------------------------------------
Preview: This month's Imprimis issue by Malcolm S.
Forbes, Jr. promotes understanding capitalism as a
moral as well as an economic system. He observes that
central planners and politicians always underestimate
the power of the free market and of individual
decisions. Mr. Forbes' remarks were delivered at
Hillsdale's Shavano Institute for National Leadership
seminar, "American Perestroika: Returning Public
Services to the Private Sector," in Atlanta before an
audience of nearly 500 business and community leaders
in May 1993.
---------------------------------------------
Living in the 1990s, we are uniquely able to judge what
the American economy has achieved in the 20th century.
For this reason, we ought to give three cheers for
capitalism. By the term, I mean "democratic
capitalism," which is as fundamentally different from
the "managed capitalism" of modern-day central planners
as it is from the "state capitalism" of old-style
fascists, socialists, and communists.
Capitalism works better than any of us can
conceive. It is also the only truly moral system of
exchange. It encourages individuals to freely devote
their energies and impulses to peaceful pursuits, to
the satisfaction of others' wants and needs, and to
constructive action for the welfare of all. The basis
for capitalism is not greed. You don't see misers
creating Walmarts and Microsofts.
Think about it for a moment. Capitalism is truly
miraculous. What other system enables us to cooperate
with millions of other ordinary people--whom we will
never meet but whom we will gladly provide with goods
and services--in an incredible, complex web of
commercial transactions? And what other system
perpetuates itself, working every day, year in, year
out, with no single hand guiding it?
Capitalism is a moral system if only because it is
based on trust. When we turn on a light, we assume that
there will be electricity. When we drive into a service
station, we assume that there will be fuel. When we
walk into a restaurant, we assume that there will be
food. If we were to make a list of all the basic things
that capitalism provides--things that we take for
granted--it would fill an encyclopedia.
How to Become Successful Capitalists
How do we become successful capitalists? The answer
sounds simple, but it is often overlooked in places
where you would think they would know better. (I am
referring, of course, to government, the media, and our
most elite business schools and economics departments.)
We succeed as capitalists by offering goods and
services that others are willing to buy. Many
capitalists do not make correct assumptions about what
to offer and fail, but that is as it should be. There
is no guarantee of success in any area of life,
including business--there is always risk. The
particular advantage of capitalism is that failed
businesses don't necessarily equal a failed economy;
they make way for successful businesses.
But even the most successful businesses can't
afford to forget about market principles. AT&T is a
case in point. In the 1970s, fiber-optic technology was
available, but AT&T decided that it would delay fully
converting for perhaps 30 to 40 years. It wanted to
fully depreciate its old plants and equipment, and,
because it enjoyed a virtual monopoly over its
customers, it saw no reason to spend a lot of money on
a new long distance calling system. But then an upstart
company, MCI, raised a couple billion dollars through
the much-maligned "junk bonds" market in order to set
up its own fiber-optic network. AT&T had no choice but
to keep up with its competition, and, as a result, the
U.S. experienced an enormous advance in communications
that has put it ahead of its foreign competitors and
that has benefited hundreds of millions of consumers.
About twenty-five years ago, the federal
government filed an antitrust suit against IBM because
it had grown so successful that its name had become
virtually synonymous with the computer industry. But
the would-be trustbusters underestimated the vitality
of an open marketplace. IBM's dominance of mainframe
computers, microchips, and software did not prevent the
rise of rival companies such as Digital Equipment,
Apple Computer, Sun Microsystems, and Microsoft. Today,
IBM's very existence is in jeopardy.
Around the same time, John Kenneth Galbraith wrote
The New Industrial State, in which he argued that
though the Ford Motor Company was no longer the biggest
of the auto companies (GM had roughly 50 percent of all
sales), Ford was so large that it did not have to pay
particular attention to its shareholders or its
customers. Apparently, Japanese automakers did not read
John Kenneth Galbraith, or the reports of countless
other "experts" who claimed that it was impossible to
compete against Ford, GM, and Chrysler. They even
ignored their own early failures to storm the U.S.
market in the 1950s and early 1960s. Finally, after
years of trying, Japanese automakers succeeded--and
succeeded to an extent that no one could have
predicted--in challenging the hegemony of the "giants"
in Detroit.
Then there is Sears & Roebuck. What more mundane
business could there be than retailing? Yet, around the
turn of the century, Sears made retailing truly
exciting, reaching out to millions of people with new
marketing methods and new products. By the end of the
1940s, it dwarfed all competitors. In the last several
decades, however, the company lost its way and became a
self-serving, insulated bureaucracy. Now it is closing
its doors on numerous stores. Its market share has
plunged--and its profits have almost disappeared.
Why, by contrast, has another retail firm,
Walmart, achieved its phenomenal success? Not because
its founder Sam Walton used to ride around in a pickup
truck visiting his stores, though that was good
publicity. It was because he recognized the importance
of computer technology and had systems devised that
help store operators respond to inventory information
on a weekly and even daily basis. Sam Walton knew that
success, even once it was achieved, was something that
couldn't be taken for granted.
What should be clear from each of these examples
is that capitalism is not a top-down system--it cannot
be mandated or centrally planned. It operates from the
bottom up, through individuals--individuals who take
risks, who often "don't know any better," who venture
into areas where, according to conventional wisdom,
they have no business going, who see vast potential
where others see nothing.
Often, these individuals literally stumble across
ideas that never would have occurred to them if they
were forced to work in a top-down system. And they take
supposedly "worthless" substances and turn them into
infinitely valuable ones. Look at penicillin. Whoever
thought that stale bread could be good for anything?
The same goes for oil before the invention of the
gasoline engine and the automobile and for sand before
the invention of glass, fiber-optics, and the
microchip.
There is another important thing to remember about
capitalism: Failure is not a stigma or a permanent
obstacle. It is a spur to learn and try again. Edison
invented the light bulb on, roughly, his ten-thousandth
attempt. If we had depended on central planners to
direct his experiments, we would all be sitting around
in the dark today.
Open vs. Managed Competition
This leads to the next question regarding capitalism:
What is the market? Central planners don't like the
word; they prefer to say, "market forces," as if
describing aliens from outer space. But nothing could
be further from the truth. The market is people. All of
us. We decide what to do and what not to do, where to
shop and where not to shop, what to buy and what not to
buy. So when central planners trash "market forces,"
they are really trashing us.
Unfortunately, they are the ones who seem to be
calling the shots today on a number of issues that
should be left up to the market, i.e., up to us. One
such issue is the spiraling costs of health care. Not
surprisingly, central planners advocate a top-down
approach to reform. With unconscious irony, they call
it "managed competition."
But we have already tried managed competition; in
fact, it is managed competition that has caused so many
problems in the health care industry in the first
place. Specifically, the tax code penalizes individuals
who want to buy medical insurance by making them pay
for it with after-tax dollars, even if they are self-
employed. Only 25 percent of their premiums are
deductible. But companies may buy health insurance with
pre-tax dollars. So they, instead of their employees,
have become the primary purchasers of insurance. This
drives a wedge between the real customers and the real
providers and obscures the real costs of such features
of the system as low deductibles. Imagine if every time
you went to the supermarket you gave the cash register
receipt to your employer, who then submitted it to the
insurance company for a claim. What would happen to
food prices? They would skyrocket, because you wouldn't
care whether a bottle of soda cost $10, $100, or
$1,000.
The problem doesn't stop there. Growth in demand
and improvements in technology--key ingredients to
success in any other business--have instead led to
crisis in the health care industry. More people are
receiving better treatment than ever before and leading
longer, healthier lives, but perversely this has sent
costs up rather than down and has overloaded the
delivery system.
If we want genuine health care reform, we must
return to open competition. The tax code must be
revised so that individuals can buy health insurance
with pre-tax dollars and set up medical IRAs for their
families that can be used to finance routine medical
expenses. There is no doubt that a majority of
Americans would choose this option. They want to have
control over their own health care decisions. Many
would choose policies with higher deductibles. Premiums
would go down and so would paperwork. Physicians and
hospitals would see their patient load come under
control and would be induced to offer competitive rates
and services. The potential benefits are enormous.
A couple of years ago, Forbes Inc. faced yet
another round of steeply rising costs for health care.
We wanted to do something that enabled our employees to
police those costs in a way we, the employer, were
unable to do. So we gave them a stake in the process.
We offered them a bonus: They could keep the difference
between their claims and $500--and we would double the
amount. Thus, if they went through a calendar year
without filing any health claims on the insurance
company, we would pay them as much as $1000, tax free.
What happened? Suddenly, every employee became
cost-conscious. On major medical and dental expenses,
claims went down 30 percent. These savings financed the
bonuses and our total health care costs went up zero
percent last year. This was not because we compelled
millions of people to participate in some "managed
competition" scheme, but because we let a few hundred
individuals make their own health care decisions.
Letting Individuals Make Their Own Decisions
Letting individuals make their own decisions is what
capitalism is all about, but virtually all central
planners (now in their heyday under the Clinton
administration) and a good many members of the U.S.
Congress (Republicans as well as Democrats) fail to
realize it. They do not, for example, realize that it
is the decisions of individuals that really decide how
much tax revenue the government collects and how well
the economy prospers. Between 1982 and 1986, the
American private sector created well over 18 million
new jobs, including a record number of high-paying
positions. Of these, 14 million were created by new
businesses. But, in 1987, Congress raised the capital
gains tax to one of the highest levels in the
industrial world. What happened? New business and job
creation declined sharply. The nation was hit with a
recession. And tax revenues, which were supposed to
rise, went down. All this occurred because individuals
made the decision not to invest. Today, there is almost
$7 trillion of unrealized capital gains that is going
begging because of high taxes. If Congress lowered the
capital gains rate, it would mean more not less tax
revenues. It also would overwhelm any stimulus package
Washington could concoct for revitalizing the economy.
Central planners also tend to be big fans of
"industrial planning," whereby government picks the
"winners" in the marketplace through subsidization of
select companies and technologies. They ignore the fact
that this will obliterate incentives for companies to
remain competitive, breed corruption and special
interests, and penalize the small businesses that are
the backbone of the economy.
And they want to micromanage the monetary system,
knocking down the value of the dollar against the yen
or raising it against some other currency in closed-
door meetings with bureaucrats from other
industrialized nations. They do not realize that one of
the most important functions of money is to serve as a
constant, reliable measure. A ruler is supposed to be
12 inches long, but they want to change it to 11 or 13
inches whenever it suits their political strategy. You
and I might call this a swindle, but in Washington it
is called sophisticated economic management.
Even such a simple word as "change" takes on a
whole new definition in Washington, meaning change
directed from above by well-intended central planners
and politicians who think that they "know better" than
most people when it comes to making decisions. But, in
truth, the most revolutionary sweeping agent of change
is capitalism. Look at what has happened in Eastern
Europe, the Soviet Union, Latin America, and Asia. When
people are free to make their own decisions, they have
a stake in the economy, and when they have a stake in
the economy, they have a stake in serving others, and
when they have a stake in serving others, they have a
stake in fighting for freedom.
Capitalism is the real enemy of tyranny. It stands
not for accumulated wealth or greed but for human
innovation, imagination, and risk-taking. It cannot be
measured in mathematical models or quantified in
statistical terms, which is why central planners and
politicians always underestimate it. As I noted at the
outset, it is up to us, then, to give three cheers for
capitalism. Who knows? If we cheer loud enough, perhaps
even they will listen.
---------------------------------------------
Malcolm S. Forbes, Jr. is the president and chief
executive officer of Forbes Inc. and editor-in-chief of
Forbes magazine, which, with a paid circulation of
approximately 750,000, is the world's largest business
journal. Also chairman of Forbes Newspapers Inc., Mr.
Forbes serves on the boards of numerous civic, business
and educational organizations, including the Ronald
Reagan Presidential Foundation and the Foundation for
Student Communication. From 1985 to mid-1993, he also
chaired the Board for International Broadcasting, which
oversees Radio Free Europe and Radio Liberty.
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