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Capital Idea

How the market economy is to everyone's advantage.

Nov 24, 2008, Vol. 14, No. 10 • By MICHAEL TAUBE
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A World of Wealth

How Capitalism Turns Profit into Progress

by Thomas G. Donlan

FT Press, 240 pp., $24.99

Capitalism has played a crucial role toward greater influence and respect for private ownership, trade liberalization, and free market economics. At the same time, there are few economic ideas or concepts that have historically had the ability to generate such raw emotion. Karl Marx declared that his "object in life is to dethrone God and destroy capitalism" and Upton Sinclair wrote that "fascism is capitalism plus murder." George Bernard Shaw once noted, "With the exception of capitalism, there is nothing so revolting as revolution."

Today, you can still find the occasional radical standing on a soapbox at Speakers' Corner blasting away at capitalism. But he or she is not alone--especially in the midst of the current financial crisis. The list of doubters includes economists, small business owners, large corporations, and a surprising number of so-called conservative thinkers.

What's the beef? It seems to be pretty wide-ranging. There are business leaders who will only cheer for capitalism when it works in their favor. There are individuals who don't trust an economic concept they perceive only helps Big Government, Big Oil, and Big Tobacco. There are anti-globalization activists who believe in conspiracy theories of a small cabal of capitalists controlling the levers of the global marketplace.

With so much misinformation about capitalism available for public consumption, it's important to dispel the wide-ranging myths and reemphasize the virtues. And few people are in a better position to discuss the benefits of capitalism than Thomas G. Donlan. Donlan is the editorial page editor at Barron's National Business and Financial Weekly and for 15 years has written one of the most thought-provoking columns on economics and politics that you'll ever find. He's a conservative by modern definition, and his appreciation for classical liberalism always shines through. His writing is straightforward, articulate, and not blinded by partisan loyalty. Donlan will criticize Democrats and Republicans who have strayed away from the principles of small government and free market ideology. (And by way of disclosure I've written a couple of columns in Barron's under his stewardship.)

In A World of Wealth Donlan sets out to prove that "free markets are effective" and "capitalism provides superior solutions to most of our looming problems." He wisely refrains from the temptation to concoct a response of academic proportions, and uses simple language and real-world examples such as taxes, health care, and the environment. Donlan takes on capitalism's critics at their core values: the issues that matter most to them, and the issues they perceive that capitalism has destroyed. To his credit, he succeeds both in promoting capitalism and debunking its many myths and detractors.

For example, when it comes to buying and selling energy, the capitalist should always favor higher prices rather than cheaper rates. Why? "A high price for energy reduces demand by punishing waste," writes Donlan, while a "low price does little to make people want to use energy frugally."

It's quite logical, really. While lower prices might make us feel better in the short run, they increase the temptation for people to overuse energy sources and waste this valuable resource. As Donlan points out, "nothing in capitalism demands that we waste resources and labor," and capitalists by nature support market-driven strategies to determine the "lowest possible cost" of an item. With a higher cost for energy at a market-driven price level, an energy shortage is far less likely.

What about free trade? While the Patrick Buchanan School of Protectionism certainly has its base, today's capitalists would more likely support open trade borders and the free exchange of goods. Donlan correctly notes that there is a long history of American protectionism--including the protective tariffs introduced by Alexander Hamilton, and North-South struggles over trade and tariffs in the 1820s--but Americans who view free trade as a "painful form of foreign aid" are missing the real benefits: expanded creativity and efficiency, economies of scale, technological spillover, and import competition. Real free trade leads to new economic opportunities, more domestic and international jobs, and more freedom of choice.

The capitalist take on taxes is clear and simple: Keep them low and equal. Donlan describes the benefits of George W. Bush's reduction of top marginal tax rates: This strategy enabled high-income earners to acquire more money and shoulder a greater percentage of the tax burden. Hence, "lower tax rates produced higher tax takes" and, by 2007, "higher economic growth and lower tax avoidance covered the loss of revenue from lower rates."

At the same time, Donlan decries the Robin Hood principle since it is "unjust to tax a dollar of income differently depending on who earned it." So Donlan supports the notion of a simpler tax system--and a flat-rate tax based on either income or consumption--to create fairness rather than the "progressive" system currently in place.

On health care, Donlan rejects universality and supports a market-based model that supports choice and price competition. Capitalists should be naturally offended by universal health care, which is neither efficient nor free, and is inefficient and unaffordable since it will "limit available drugs and treatments or force patients to wait for them." The more responsible strategy would be to have "national competition in health insurance." As he envisions it:

Imagine hundreds of companies competing for business on the basis of price and service, as if they were selling homeowners' insurance or investments. To keep costs low, they could work with groups assembled by churches, social clubs, neighborhood organizations, credit unions, banks, professional group assemblers, and, yes, even employers. Can everybody afford such a system? At least as well as they can now--and probably far better. For those who cannot afford it, government welfare departments could subsidize premiums directly or put cash in the hands of those capable of making their own choices.

One of the more impressive chapters in this impressive volume deals with the essential elements of capitalism: investment and invention. Donlan examines aspects of some 200 years of economic progress in a mere 12 pages, including the dawn of British wealth in mining and milling, the manufacturing of cost-effective iron and steel, the birth of money and finance during the Industrial Revolution, technological progress, and Thomas Edison's second greatest invention after the light bulb, "the system for generating, distributing, and selling electricity." He also explores capitalism's creative component, "that neither material things nor money are enough to create wealth. .  .  . Commerce is the constant conversion of things into money, and money into things."

Capitalism has proven that the invention of new products, combined with investment opportunities and strategies, has made our society stronger. While there may have been initial concern about prosperity and population growth, it has turned out that "prosperity converts people into consumers, increasing the market for goods, and enough prosperity creates security and reduces people's desire for large families." In Donlan's view, this capitalist "strategy" has changed the face of Europe, North America, and Japan, and is starting to have economic effects in China and India.

My guess is that there will be a handful of people who will whip through these chapters, skim reviews like this one, and say, "Why should I read the whole thing? We already know this." Well, yes and no. Most individuals know why they believe in capitalism, but very few produce supporting arguments in favor of it. In a society like ours, if we are going to defend the ideas that matter to us--capitalism, democracy, liberty, free speech, free markets--it's important that we grasp what they mean, what they do, and how they benefit us. Thomas Donlan's is a spirited defense of all that is good about capitalism. It will fortify its supporters, and challenge critics to put their beliefs to the test.

Michael Taube is a former speechwriter for Canadian prime minister Stephen Harper.