Freedom in a Nutshellby
Kenneth W. Ryker
Received Freedoms Foundation
Valley Forge Honor
Certificate Award 1978
Requests for reprint permission invited.
Kenneth W. Ryker
Fort Worth, Texas
First Printing 10,000 1977
Second Printing 5,000 1977
Third Printing 10,000 1978
For additional copies of this booklet write
Freedom Education Center
Post Office Box 58
Cedar Hill, Texas 75104
Dedicated to those teachers of the philosophy of freedom who inspired this simple piece and especially to Leonard E. Read whose confidence made possible seventeen years of effort in the vineyard
And to those generous businessmen and women who made it all possible!
Kenneth W. Ryker
Kenneth W. Ryker is the Academic Dean of Northwood Institute of Texas, where he teaches the philosophic basis of American life and business and free market economics. The author of some two hundred articles and several booklets, he lectures widely on the philosophy of freedom and the threats to individual freedom in America today.
He is the Director of The Freedom Education Center on the campus of Northwood Institute, Cedar Hill, Texas. The Center is dedicated to promoting a better understanding of the philosophy of freedom and provides an extensive repository of revisionist historical material available to freedom - oriented researchers.
People act in response to what they believe. If their convictions are based on false ideas, their actions will be improper, against their own best interests.
Any rational person consciously acts in such a way as to leave himself better off after his action than before. This is a universal principle of human action. Yet every day millions of our citizens do act contrary to their own best interests and demand acts of their governments which have this effect. Why?
Because they are acting in response to convictions based on false ideas and myths. As a consequence their acts and those of the various levels of government cause their condition to become less satisfactory to deteriorate.
What then must be done to correct this situation? Obviously, it is to strive to replace false ideas with truth! But what is the truth?
Truth is that which is the self-evident and that which proceeds logically out of the self-evident.
Truth is rightness; it is correct, genuine, based on right principles. Truth corresponds to fact or reality; it is natural, and most important of all, truth is its own witness!
Some truths are known; others are still being sought as the ultimate end and purpose of knowledge.
The purpose of this booklet is to present known truths about freedom and government in the hope that it may help replace some false ideas and myths. A sincere effort has been made to distill the essence of the philosophy of freedom.
* * *
The essential characteristic of Western civilization that distinguishes it from the arrested and petrified civilizations of the East was and is its concern for freedom from the state. The history of the West, from the age of the Greek city state down to the present-day resistance to socialism, is essentially the history of the fight for liberty against the encroachments of the office-holders.(1)
Freedom is of the greatest importance to us for we have found through the great American experiment that freedom provides the best means through which to achieve whatever goals we set for ourselves.
We Americans have a tendency to believe that cur freedoms are protected by our Constitution and its Bill of Rights. This is dangerous thinking for it dulls our sense of vigilance. Note the following words of Judge Learned Hand:
Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it; no constitution, no law, no court even can do much to help it.
Over a period of many years we have observed liberty slowly dying in the hearts of our people. The inevitable consequence has been the loss of countless freedoms,(2) our constitution notwithstanding. Mr. Ed Hiles of Atlanta once wrote:
Freedom is not free and it must not be taken for granted. It was won through sacrifice and will be maintained only through sacrifice. It can be lost just as surely, just as completely, and just as permanently tax by tax, subsidy by subsidy, and regulation by regulation, as it can be lost bullet by bullet, bomb by bomb, or missile by missile.
If we are to preserve the blessings of liberty to ourselves and our posterity, it is absolutely essential that there be a new birth of freedom in the hearts and minds of our people.
There is no way of knowing how this might be achieved. It might take the form of a great "Crusade for Freedom" led by a dynamic new libertarian leader, as yet unknown. Or perhaps as a result of the philosophy of freedom being presented in a new, concise, easily understood form.
Freedom and Government: Eternal Dichotomy
The supreme issue of our time is whether government is to be the master or the servant of the people. We all know this question was supposedly settled nearly 200 years ago with the American Revolution. But here we are today concerned with the issue again.
At the heart of the matter are the different natures of man and government. The nature of man is to be free, or it might be said the nature of man is individualism. Whereas the nature of government is to govern to regulate to control, or we might say the nature of government is unity.
And there we have the eternal conflict: individualism versus unity freedom versus regimentation. It is vitally important to understand that the natures of man and government are diametrically opposed!
What gets us into trouble is that we lose sight of these contrary natures of man and government and we fail to see the fundamental principles involved. When we take our eyes off basic principles we are at sea without a rudder. Not having basic criteria by which to gauge issues, we soon find the sphere of individual liberty being compressed smaller and smaller as the governmental "cosmos" grows larger and larger and before long tyranny looms on the horizon!
On the other hand, when we do have a firm foundation based on fundamental principles, apparently complicated issues are simplified solutions become crystal clear as we analyze them in the light of our basic criteria.
The indispensable foundation of a free society is the principle of individual rights. The concept of rights is the basis of individual morality and is thus the foundation of a moral society, society being nothing more than a group of individuals.
A right is defined as "a just and proper claim," but it is more than that. A right implies not only freedom of action in the total absence of coercion, but it implies freedom of action even if coercion is present. Thus, a right isn't lost, even if coercion appears.
Additionally, a right is freedom of action morally without asking permission. If, to remain moral, the person must first ask permission from another, then he is in a state or condition of privilege. If he may morally act without permission, then he has a right.
The concept of Natural Rights was developed by John Locke in seventeenth century England and found its way into our eighteenth century political documents which enumerated our basic human rights. In order to document precisely what these rights are, let us examine some of the more important of these basic documents of American liberty in their order of development.
Declaration and Resolves of the
First Continental Congress,
October 14, 1774
. . . That the inhabitants of the English colonies in North America, by the immutable laws of nature, the principles of the English constitution, and the several charters or compacts, have the following RIGHTS:
Resolved, N.C.D. 1. That they are entitled to life, liberty and property: and they have never ceded to any foreign power whatever, a right to dispose of either without their consent.
Virginia Declaration of Rights,
June 12, 1776
. . . That all Men are by Nature equally free and independent, and have certain inherent Rights, of which, when they enter into a State of Society, they cannot by any Compact, deprive or divest their Posterity; namely, the Enjoyment of Life and Liberty, with the Means of acquiring and possessing Property, and pursuing and obtaining Happiness and Safety.
Declaration of Independence,
July 4, 1776
. . . We hold these truths to be self-evident: that all men are created equal; that they are endowed by their Creator, with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed; ...
Massachusetts Declaration of Rights,
October 25, 1780
All men are born free and equal, and have certain natural, essential, and unalienable rights; among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.
Bill of Rights,
December 15, 1791
Article V. No person shall ... be deprived of life, liberty, or property, without due process of law; nor shall property be taken for public use, without just compensation.
As we have just observed, our basic American documents of liberty clearly define our rights. The common thread running through the above preambles has been summarized by Justice Sutherland of the Supreme Court as follows:
The individual has three rights, equally sacred from arbitrary interference [from government]: the right to life, the right to his liberty, the right to his property. These three rights are so bound together as to be essentially one right. To give a man his life, but to deny him his liberty, is to take from him all that makes life worth living. To give him his liberty, but to take from him the property which is the fruit and badge of his liberty, is to still leave him a slave.(3)
Whether one attributes the source of these rights to the Creator or to Nature, the fact remains that man naturally, clearly, and demonstrably possesses the rights to life, liberty, and property and these are his only rights!
Declarations, Constitutions, and Bills of Rights do not guarantee rights; they are merely codifications of ideals and principles. If the ideals are not truly believed and practiced by the people, the documents become mere scraps of paper. It is the practice of the principles that is the key to freedom!
It has been shown that the American position holds that each individual is born free with inherent rights to his life, the enjoyment of liberty, and the ownership and control of his property. To enjoy these rights man seeks a way of life in which he feels secure. He strives to establish a society of stability and order.
Obviously, each person has the right to defend his life, liberty and property. A right is meaningless if it cannot be defended. It follows logically that he may delegate this protective and defensive function to an agency which we call government. As government thus derives its powers from those delegated by the individuals who create it, government cannot then possess any fundamental powers or authority not inherent in the individual.
Frederic Bastiat, brilliant French political economist of a century ago, beautifully expressed the relationship between man's rights and government:
Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.(4)
The sole purpose of government is to protect life, liberty, and property to serve as a common defensive force for those from whom it receives its delegated authority. In short, the only legal and moral purpose of government is to prevent injustice.
It is important to keep in mind that, reduced to fundamentals, government is purely and simply organized force. After being brutalized by it for centuries, man finally came to realize that this organized force of government would have to be limited and controlled if he were ever to be really free.
This radical idea finally found expression in the American Revolution and the ensuing Constitution and Bill of Rights, limiting the power of government being the major purpose of both these documents.
Because government is force, and force is inimical to man's nature and best interests, to what must this use of force be limited?
To defensive, never aggressive force. To protection and defense of life, liberty and property against fraud, theft, murder against depredation in general. In all other things the collective force of government must be constrained. Government must not interfere in the peaceful and creative pursuits of man so long as he does not threaten the life, liberty or property of another. The philosophy of freedom embodies the absence of coercion.
We know that each individual has the right to protect his own life. It is obvious that government police, as his agents, exercise this delegated function legitimately.
On the other hand, no individual has the right to use force or coercion to cause another to associate with him, or sell to him or provide a service for him. Thus it becomes clear the collective force of government has no legitimate authority in the so-called public accommodations areas. The misnamed "civil rights" laws are a perversion of justice and a clear example of illegitimate government action.
To pursue this point further, the terms "civil" and "rights" are contradictory. Rights are natural or inherent in each individual and are antecedent to government. We have previously demonstrated the only rights that any individual possesses are those to life, liberty and property.
"Civil" implies that government is the source of rights. Government is never the source of rights, but is often the inhibitor of rights. Government can, however, be the source of privileges, and this is what "civil rights" really are: special privileges made possible for some through government infringement on the rights of others.
What causes government to engage in activities not properly its function? Because through force, or the threat of force, people can be made to act in a way they would not act voluntarily, or they can be made to pay for something they would otherwise not willingly subsidize.
In any society there are always those who want to impose their will on others. If such people are able to seize political power, they can use government, the agency of coercion, to achieve their goals.
This perversion is made possible when people lose sight of the proper function and scope of government. The only alternative to totalitarianism as an end result is an informed citizenry, intent on limiting government to its proper role: the protection of life, liberty and property.
In addition, there are those who believe that if government does not take the initiative in a particular sector, no action will be taken. This may be true in some instances and false in others.
If willing individuals, exercising their own free choice, do not wish to undertake or support a particular activity, it probably should not be attempted. The absence of demand indicates the inadvisability of the project. When government must be used to initiate the endeavor, it means people would not do so of their own free choice, and are therefore, forced to act against their wishes.
On the other hand, the thousands of voluntary organizations and associations, charities, hospitals, and millions of individual enterprises in the market place, with the resultant high standard of living thus enjoyed, is proof that government force is not a positive factor in man's progress. Rather, it is most definitely a negative factor, inhibiting progress in every instance where it interferes with the creative efforts of man.
Consider those countries of the world where government exercises the greatest degree of control over the lives of its people; there you will find stagnation, poverty and discontent.
Then examine the countries where government intervenes least in the creative affairs of its people, and there you will find the highest degree of progress, prosperity and contentment.
Because we live in a republic which uses the democratic process to choose elected representatives and enact laws, there is a tendency to believe something is right for government to do simply because "we voted for it."
The fact that a majority of a voting group chose a particular course of action has no relationship to its Tightness or wrongness. An action is right or wrong on principle. No moral absolution takes place in a majority vote for an immoral act.
This matter is so important it should be restated: A majority vote never determines whether an act is right or wrong only whether it is legal or illegal. Any act that
is illegitimate for an individual is illegitimate for government!
Over a hundred years ago when France was moving toward socialism as America is today, the French political economist, Frederic Bastiat, wrote an essay on "The State" in which he clearly outlined the process now in vogue for some to live at the expense of others:
The oppressor no longer acts directly by his own force on the oppressed. No, our conscience has become too fastidious for that. There are still, to be sure, the oppressor and his victim, but between them is placed an intermediary, the state, that is the law itself. What is better fitted to silence our scruples and what is perhaps considered even more important to overcome all resistance? Hence, all of us, with whatever claim, under one pretext or another, address the state. We say to it: "I do not find that there is a satisfactory proportion between my enjoyments and my labor. I should like very much to take a little from the property of others to establish the desired equilibrium. But that is dangerous. Could you not make it a little easier? Could you not find me a good job in the civil, service or hinder the industry of my competitors or, still better, give me an interest-free loan of the capital you have taken from its rightful owners or educate my children at the public expense or grant me incentive subsidies or assure my well-being when I shall be fifty years old?By this means I shall reach my goal in all good conscience, for the law itself will have acted for me, and I shall have all the advantages of plunder without enduring either the risks or the odium.
As, on the one hand, it is certain that we all address some such request to the state, and, on the other hand, it is a well-established fact that the state cannot procure satisfaction for some without adding to the labor of others, while awaiting another definition of the state, I believe myself entitled to give my own here. . . . Here it is:
The state is the great fictitious
entity by which everyone seeks to
live at the expense of everyone else.(5)
Once government is permitted to stray from its proper purpose everyone will want to prosper at the expense of others, and thus does government become an instrument of injustice, rather than of justice.
In any society the lives, liberties and property of all citizens are affected by their government. If the government acts in any way except to protect these rights, it automatically becomes a violator of these rights. Such a government is obviously unjust.
There is a very simple way to test whether government has become an instrument of injustice: If government taxes away the fruits of labor of some and gives it to others to whom it does not belong, that government has become an instrument of injustice.
If government policies benefit one group of the citizenry at the expense of others, that government is perverted.
The tragedy of such perversion is that such practices mushroom. The special interest groups multiply rapidly, each demanding their "share" of the plunder. The inevitable consequences are greatly increased taxation, in the direction of total confiscation of property by the state, and inflation, the "cruelest tax of all."
When a government becomes an instrument of injustice, its people are in very real danger of ultimately losing all their liberties, as all actions of government are considered just and right simply because they are acts of the government.
Those who raise their voices in warning are labeled "reactionaries," "subversives," or at the very least, "extremists." Those who thus attempt to defend their lives, liberties and property from plunder by the state, become enemies of the statecriminals.
When government is observed infringing upon the liberties and property of some for the benefit of one special group, other special interest groups will soon organize political organizations and lobbies seeking special plunder for their group.
As a consequence today we observe the seats of government at all levels overrun by these special interest groups seeking ordinances and legislation to enable them to participate in the plunder.
Man's rights are endangered from only two sources: criminals and government!
In the early paragraphs of the Declaration of Independence we read:
... to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed . . .
"To secure these rights" means it is the purpose of government to protect man's rights to life, liberty and property from those who would threaten them: criminals.
We hear a great deal these days about certain "rights." There are claims that we have a right to medical care; a right to full employment; a right to decent housing; a right to public accommodations; a right to a "living wage," and on and on ad infinitum, ad nauseum.
Such claims are not rights; they would impose obligations on others for each implies others will be forced to provide the medical care, the jobs, the housing, and so on. The only way this can be achieved is by confiscation of the property of others to pay for such privileges.
Coercion is destructive by its very nature, consequently nothing progressive can possibly come from its use to achieve ends. Government's only means for the achievement of ends is through coercion; government is force; government is coercion!
In providing privileges for some at the expense of others government, which is instituted to protect our liberties and property, becomes the violator of these rights.
Freedom exists only in an absence of coercion. Freedom implies free choice, voluntarism, willingness. Freedom can exist only in a just society. But justice exists only in the absence of injustice!
Freedom can exist only where government is restricted to its only true purpose defense of life, liberty and property acting to prevent injustice and thus preserving justice.
Like justice, freedom is a negative condition, ft is a state which exists in the absence of coercion or molestation, when no individual coerces or molests another.
When any person uses coercion or the threat of coercion to impose his will or point of view on another person, freedom is abolished!
The fundamental economic question to be answered in any society is "Who is to get how much of what?" The competing answers to that question are embodied in the ideological struggles in which we find ourselves engaged today.
There really are only three ways to answer this fundamental question. Dr. F. A. Harper analyzed these in his book, Liberty: A Path To Its Recovery, as follows:
1. Each person may have whatever he can grab.
2. Some person other than the one who produces the goods and services may decide who shall have the right of possession or use.
3. Each person may be allowed to have whatever he produces.
These three methods cover all the possibilities; there are no others.(6)
The first is readily recognized as the law of the jungle; the second is that utilized by all authoritarian systems, while the third is the only method consistent with individual freedom.
"Who is to have how much of what?" That is the question. Communism has an answer, as does National Socialism and Fascism. The Fabians and Democratic Socialists think they have the answer. But when all these systems are analyzed, they come out the same, differing only in degree: The State will determine who is to get how much of what! This obviously means the economic questions will be answered by force and coercion.
But there is a better way: let the free market, willing exchange, profit and loss system determine what will be produced and in what quantity; who will produce it for what compensation; and who will receive it at what price.
There are really only two choices: to answer the economic questions by free choice or by coercion!
The system of economic organization under which our nation developed and flourished is capitalism, although it is known by many other names such as free enterprise, individual enterprise, the market system, etc.
It developed gradually during the Industrial Revolution and reached its peak during the "Century of Progress" 1830-1930. Since the turn of the century it has been under constant attack by those who would change the system, for whatever reason, from one of private control to one of political control, so that today it bears slight resemblance to the system under which the material welfare of our people expanded eight-fold.(7)
The fantastic standard of living enjoyed by our people has been the direct result of this market system, in spite of tremendous handicaps imposed upon it by stifling government intervention.
All the major economic problems we have experienced can be traced directly to government intervention in the market, including depressions, unemployment, surpluses, shortages, high prices, and many more. The way government causes such problems will be touched on later.
Yet in spite of the interventions of government in the economic affairs of our people, capitalism is the most just, the most equitable, the most productive, the most moral and the only economic system compatible with individual liberty.
Congressman Philip M. Crane of Illinois has stated, "Capitalism is, in its simplest imperative, freedom applied to economics."
That simple sentence states quite clearly why capitalism is the best economic system and why we must return to it!
* * *
There are three major components of capitalism, the individual enterprise system. In the order in which they will be discussed, they are: (1) private ownership and control of property; (2) the free competitive market; and (3) the profit motive. Each of these is an important part of the whole system; interfering with the free working of any one of these will produce unfortunate economic consequences affecting everyone.
Private Ownership of Property
We have seen previously that there is only one type of rights: human rights which are characterized as the rights to life, liberty and property. It will be noted that the right to life is basic, with the others really being an extension of this right.
To help understand the relationship between these rights, consider this: Who disputes that man has a right to his life? If it is conceded that he . does, then does it not follow logically that he has a right to sustain his life? This he does with the fruits of his labor.
Are the fruits of one's own labor not his property? Who else has a right to them? If we agree that they are indeed his private property, have we not also agreed that this is necessary for the very sustenance of his life?
Thus, have we not agreed that to infringe on man's right to property is to encroach on his right to sustain his life and hence to his right to life itself?
* * *
The cornerstone of our economic system is the concept of private ownership of property, which we have seen is traced directly to man's inherent right to own the fruits of his own labor.
Freedom to dispose of one's property as one sees fit is the essence of the property right. Ownership implies more than the obligation to pay the taxes on property; it implies control!
If you do not control your property, you do not in fact truly own it. Whoever controls it in truth owns it, be it government or whomsoever. And if this be the case, your property has in fact been expropriated without due process of law and without just compensation.
To the degree that you have lost the freedom of disposition or control of your property, to that degree you have lost your property rights; to that degree you are a slave.
Producers, thus robbed, develop a slave psychology and production declines. The inevitable consequence of such circumstances will ultimately be a slave society.
When considered from the viewpoint of disposition, it is abundantly clear that property rights are basic human rights.
When man has the exclusive right to his production, he is free to dispose of it as he wishes. This makes possible the principle of willing exchange. When freedom to exchange private property exists, liberty is secure. When private ownership is denied, freedom will perish. Attacks on individual liberty are always accompanied by inroads on property rights.
The Free Competitive Market
The basic idea of the free market, willing-exchange system "is that if we are left free to choose what we want most, we'll get the most of what we want." The only alternative to this system of free choice is one in which government uses coercion to compel choice.
The free market system is probably the most important element of a voluntary economy. Under such a system man exercises the highest degree of economic freedom as he guides production and consumption through the expression of his wants.
The satisfaction of the wants of consumers is the sole purpose of economic production. The finest method ever devised for guiding production is the free price system. Through this system our millions of consumers, through their purchases or refusals to purchase, actually "vote" for or against the production of all the millions of items produced in America.
The argument is sometimes advanced that our economy is so complex that we must have central planning by government. Actually this is the best reason we should leave the market alone. The more complex it becomes, the more important it is to leave economic calculation to the individual decisions of consumers in the market place.
In the free market the price is a signal to everyone involved in production of a commodity: producers, consumers and distributors.
Through their subjective value judgments, as expressed by the prices they are willing to pay, consumers determine what items will be produced and how many; who will produce them, where and how.
One of the many superiorities of the market system over socialism, or the planned economy, is its ability to allocate rationally the factors of production.
In the free market prices direct all economic production. Because there are no free market prices under socialism, there is no rational means of directing economic production.
It has often been said that under the American system the consumer is king. This is certainly true, for what customers buy or do not buy determines what will be produced, and in what amount.
These purchases also determine the prices of all goods and services, and even of the factors of production, land, labor and capital. They determine whether businessmen make a profit or a loss. Customer purchases also set the rate of interest for loans and determine the income of every individual from the bellhop to the movie star.
Yes, the customer is indeed king in the free market. As Dr. Ludwig von Mises stated in his Planned Chaos, "The Market is a democracy in which every penny gives a right to vote."(8)
Thus we see the price mechanism makes economic calculation possible. Whenever government interferes with the price mechanism it replaces consumer preferences with government orders. The result is the very antithesis of economic freedom.
This interference with market prices explains one reason for unemployment, as when government sets minimum wages at rates higher than the market values individual productivity.
It also explains agricultural surpluses which have piled up as price supports have pegged the price of agricultural products above what the market is willing to pay.
Individuals voluntarily exchanging the fruits of their own labor give rise to the free market. In simple societies the process involved was barter or trade, product for product. In our complex society, of course, we use a medium of exchange, money.
Exchange takes place in the market only when each party feels he will gain. A trade takes place only when one values what he receives more than what he gives up.
The development of money has been a very important factor in the evolution of our economic system. Originally our money was commodity money, gold and silver coins; today it is only fiat money, numbers printed on pieces of paper or base metal slugs.
Money acts as a voucher which we receive for goods and services which we offer in the market and exchange for other goods and services. Or we may choose to save and invest some of these receipts.
Money has greatly simplified economic calculation and made possible our rise above the bare subsistence level which is all that is possible under the barter system of exchange.
The only way we can ever have a sound monetary system, and halt the erosion of the value of our savings and investments by inflation, is by a return to a market-designated money, such as a gold standard.
A monetary system based on the gold standard is self-regulating, requiring only the freedom of individuals to buy, sell and use gold in exchange. The great value of the gold standard is its disciplinary power over government. When people are free to exchange their currency for gold on demand, government is limited in its inflationary tendencies. This in turn prevents broad distortions of the economy, business cycles of boom and bust, by limiting credit expansion.
The causes of such "depressions" were explained by Dr. Ludwig von Mises in The Theory of Money and Credit, first published in 1912. In a review of the latest edition of this work Dr. Hans Sennholz, noted economist and financial analyst and protege of Dr. Mises, summarized this theory as follows:
Professor Mises' trade cycle theory integrated the sphere of money and that of real goods. If the monetary authorities expand credit and thereby lower the interest in the loan market below the natural rate of interest, economic production is distorted. At first, it generates overinvestment in capital goods and causes their price to rise while production of consumers' goods is necessarily neglected. But because of lack of real capital the investment boom is bound to run aground. The boom causes factor prices to rise, which are business costs. When profit margins finally falter, a recession develops in the capital goods industry. During the recession a new readjustment takes place: the mal-investments are abandoned or corrected, and the long-neglected consumers' goods industries attract more resources in accordance with the true state of public saving and spending.(9)
As described by Dr. Sennholz in the preceding review, the Mises theory "continues to provide the only explanation of the rapid succession of booms and recessions that continue to plague our system."
It is vitally important to note that such depressions and recessions are caused by "monetary authorities," which means they are caused by the government!
A practical plan to provide for a return to the gold standard, and thereby prevent these broad economic distortions, has been formulated by Dr. Sennholz. It involves the following gradual steps: (1) return the freedom of everyone to trade and hold gold; (2) permit individual freedom to use gold in all economic exchanges; (3) guarantee individual freedom to mint coins; and (4) government establishment of unconditional convertibility of its money into gold.
Step by step the federal government has assumed control over our monetary system. It thus captured a potent source of revenue and a vital command post over the economic lives of its people. This is why every friend of freedom is dedicated to the restoration of free money which is also sound money. It is the gold standard.(10)
One of the most important lessons we must learn is "that political control over the money supply is the secret weapon of political control over the economic lives of the people. Money is only money, but freedom is, or should be, beyond price. The hand that holds the purse strings is the bond that can compel obedience. The government that must ask the people for some of their money must be the servant of the people. The government that can take the people's money through deficit spending can become the master."(11)
The use of money makes it possible for consumers to compare various goods and services by means of their respective exchange ratios which we call prices.
These prices expressed in monetary units are in fact the heart of the market system because they make possible rational economic calculation. Let's examine this process.
We have previously stated that under capitalism the consumer is king, for by the setting of prices consumers actually direct the production process. Because prices are set by the laws of supply and demand, let's analyze how this occurs.
The law of supply states that, other things being equal, the quantity of goods and services offered will vary directly with the price. If the price of tomatoes goes up, other things remaining the same, growers will attempt to produce more and the supply will increase.
On the other hand, the law of demand states that other things being equal, the quantity of goods and services purchased will vary inversely with the price. If the price of tomatoes is raised and other things remain the same, fewer tomatoes will be bought.
In a free, competitive market, when supply and demand are permitted to interact without government intervention, price is established at the point of equilibrium between the two. Supply equals demand and there is no surplus or shortage. The market is said to "clear."
If, for any reason, demand for a good or service rises, the price will rise; if demand falls, the price will fall. Likewise, if the supply of a good drops, with demand constant, the price will rise; if supply increases the price will drop.
A low price is a signal to producers to produce less and to consumers to buy more. High prices have the opposite effect.
This price mechanism is the marvelous device in the free, competitive market through which all the people, the consumers, have a direct voice in the determination of the allocation of the factors of production what will be produced, how it will be produced and who will produce it.
When government intervenes in the market by increasing the money supply, consumers have more money to offer for a given amount of goods and services. Prices will rise because total demand has increased while supply has remained constant. Each individual dollar is worth less because there are more of them. As a consequence, more dollars will be offered for a particular good or service.
When government meddles with the pricing mechanism, either shortages or surpluses will result. If the government institutes price controls, setting the price below the free market price, shortages will occur as demand will be high and supply low.
If government fixes prices above the free market price, as in the case of agricultural subsidies, supply will increase while demand decreases and a surplus is created.
Price is nothing more than an exchange ratio between the dollar and a unit of goods or services. When the consumer has more dollars, he values each dollar less. Prices then rise, not because supply has decreased, but because demand has increased more dollars being present in the market.
An extremely important point to understand about money is that money is not wealth. What makes us wealthy, or increases our material welfare, is an abundance of goods, the result of production!
Perhaps an illustration will clarify this point. We know that prices are set by the laws of supply and demand. From these laws we know that as supply is increased prices will drop, or if demand is increased prices will rise.
These same laws apply to money, only in the case of money its price is referred to as purchasing power. If the quantity (supply) of money is increased the purchasing power of its unit will drop.
The objective on which we should focus our attention is increased material welfare, or a higher standard of living. We have just observed that an increase in the quantity of money will not increase our wealth, as each unit of our money would then purchase less.
If, on the other hand, we decreased the quantity of money relative to available goods and services, the purchasing power of our money would increase. But this would have undesirable side-effects greatly outweighing the increase in purchasing power. This process is termed deflation and its consequences are as undesirable as those accompanying inflation.
There are other factors such as increasing population, more advanced division of labor, and improved banking and business practices which affect the exchange value of money. Even the attitude of consumer's toward spending or saving has a decided influence.
It should be obvious, however, that the market can operate with any quantity of money; it simply adjusts the purchasing-power of the monetary unit accordingly.
Thus far we have discussed only the money side of exchange: supply and demand for money. Now let's turn our attention to the goods side of exchange, for this is where the secret lies for improving man's material welfare.
We have seen that prices can be lowered and the purchasing power of money increased, by decreasing the supply of money, but the same result can be attained by increasing the quantity of goods and services in the market. This has all the advantages and none of the disadvantages of deflation.
When the purchasing power of the monetary unit is increased and each dollar buys more, real income goes up. Because consumers can buy more with their earnings, their standard of living increases.
Thus we see that the secret of a high standard of living is tied, not to the supply of money, but to production of goods and services. Ever-increasing production is the road to prosperity and wealth.
An additional benefit is derived from the operation of Say's Law production creating its own purchasing power.
Here's how John Stuart Mill explained it: "Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. . . . every one would have twice as much to offer in exchange."(12)
Dr. F. A. Harper puts this phenomenon this way: "... Despite the fact that some goods and services are exchanged for others, and despite the fact that money may be used to facilitate these exchanges, what is bought still equals what is sold. Just as in one exchange the buying equals the selling because the same item sold by one person is bought by another, so likewise for the total of all trade in a complex economy, all buying equals all selling.
"And this leads to the unavoidable conclusion that production creates its own buying power in a free economy. Sales equal purchases and purchases equal sales, in total for all trade as for a single trade. Only if the market is not free, only as freedom to trade is interfered with, is this not true."(13)
A major element of the free market is the principle of free competition, vital because it is the force which protects the consumer. It is at work throughout the market economy, silently looking out for the best interests of all the people.
Competition is the pressure which forces producers to offer the best possible product or service at the lowest possible price, an essential to attract and keep customers when they are free to choose.
This competing between suppliers serves the best interests of everyone. In order to be competitive, the businessman must produce efficiently, give prompt and courteous service, and provide a good product. If he does not stay competitive, he will lose his market and soon be out of business. It is in this area of competition that profits accrue to the most efficient entrepreneurs.
Is this cruel, "dog-eat-dog," as the detractors of the free market system charge? On the contrary, it is only proper that inefficient producers should be weeded out by the market, for only in this way can consumers be served best. Who will claim that the inefficient should be subsidized by the consumer, and even by their competitors?
But competition is not limited to the businessmen who supply the needs of consumers; there is competition between suppliers, competition between workers for jobs, between consumers as they compete to make their purchases. Competition permeates the entire market economy and is a healthy, wholesome, vital part of free enterprise!
Division of Labor
Were we each to produce all or most of the goods we consume, we would still be existing under a very low standard of living, as does most of the world today. Man has learned through experience that he can produce more efficiently through cooperation with others than he can as an isolated individual.
This same experience has demonstrated that division of labor tremendously increases the production per unit of human labor used. When each of us can specialize on a particular task, or a limited number of related tasks, we can do each better and faster, making possible greatly increased production.
The principle of the division of labor is based on the natural inequality in the abilities of men, and the unequal distribution of natural resources.
It was man's rational division of labor in production which made possible mechanization of these simple tasks, previously done by hand, and ultimately launched us on the way to an affluent society.
Although a highly refined division of labor is essential to a high standard of living, it at the same time places a great demand on society for responsible conduct in economic and political affairs. The higher the degree of specialization, naturally, the greater the dependency of each of us on the other. This calls for the broadest possible viewpoint in considering policies. Narrowly conceived policies may benefit one group of workers or one industry, but can have serious consequences for millions of consumers.
The principle of comparative advantage simply means specializing in the production of those things for which one is best suited doing what one does best and letting others do the same. The exchange which results always maximizes the return from resources (factors of production), and results in an increase in the standard of living for both parties to the exchange.
We generally think of the principle of comparative advantage in connection with international trade. Comparative advantage is simply the application of the principle of the division of labor to foreign trade. Because of this principle, it is always to our benefit to produce certain commodities in America, while importing others from abroad.
It is important to keep in mind, whether exchange takes place between individuals or nations, that if freely arrived at, it always benefits both parties to the exchange. Exchange takes place only when what is received is valued more than what is given.
But specializing on the basis of comparative advantage takes place not only in the area of international trade, but at all levels of exchange: national, regional, local, and even personal.
It is a little known fact that the late showman, Billy Rose, was a world champion typist and shorthand expert. Without question he could type and take shorthand better than any stenographer he could employ. But did he do his own typing? Certainly not! While a $60 a week steno was doing the typing, he could be earning $1000 as an impresario. This illustrates the principle of comparative advantage.
Free trade based on comparative advantage will maximize our standards of living, while protectionism with duties and tariffs will reduce the material welfare of everyone.
The Profit Motive
The driving force in the free market economic system is the profit motive. Consumers control the market through their purchases, which determine which producers will make a profit and which a loss. Thus, the means of production are constantly being shifted from the inefficient to the efficient producers.
Isn't it only right that he who serves his customers best should be rewarded? Profit and loss are the devices which signify to businessmen what needs of the consumers must be satisfied.
Production for profit requires production for the use of the consumer rather than the whim of an economic "planner," as only those producers who most efficiently satisfy the needs of the consumer will make a profit.
Profits indeed provide the incentive necessary to keep business prosperous and create new jobs.
The incentive for a man to work is the wages he earns; the incentive for him to save a part of what he earns is the interest the bank pays; and the incentive for people to invest in business ventures is the profit they hope that business may earn. People will not risk their savings unless there is a good opportunity to earn a profit.
Under the willing exchange market system, failure to make a profit means no new capital for new and better production tools; no tools for improved products at lower costsand no jobs. In a word, profit means everything!
What is it that induces a person to consume less than he produces to save? It is the incentive of potential interest! Only when a person expects to profit in the future will he do without save now.
Whittle away profit and people will not save and invest. If they don't invest, there will be less funds for new tools, new factories, new products, and consequently there will be fewer jobs.
The greatest benefit a company can provide its employees is to make a profit. By the same token, the worst mistake organized labor can make is to use their coercive power to cause a profit squeeze.
There are basically five costs of doing business, one of which is profit. Let's examine them briefly to see how it is possible to squeeze profit and consequently cause serious economic harm.
The first cost increment is that of supplies and services purchased from others; second is the total cost of payroll and employee benefits; third is the cost of depreciation, the provision for replacement of worn out and obsolete tools; then of course there are the ever-present taxes paid to local, State and Federal governments; and finally, if the business is efficient, there will be some profit left as payment to those who invested their savings in the company.(14)
Man finds himself on this earth in a relatively harsh environment. In very few places does he find resources in abundance; almost universally they are scarce. In any location, however, regardless of the availability of resources, man's primary concern is how to sustain life; only after this problem is solved does he concern himself with his liberty.
In sustaining and improving the quality of his life, man must produce. He has only three elements with which to produce: land, labor and capital, which are known as the factors of production. For our purposes, it will be easier to understand their function if we call these factors, natural resources, human energy and tools.
It is helpful to view these elements in the context of a formula: Man's Material Welfare equals Natural Resources plus Human Energy times Tools, or MMW = NR + HE x T.(15)
Our knowledge of the world about us tells us that natural resources are limited; so, too, is man's energy. It is obvious then that if man is to enhance his material welfare significantly, it must be done by improving his tools of production.
It follows logically then that any act which contributes to an increase or improvement of tools of production will increase man's material welfare. Conversely, anything that inhibits development of new tools cannot help but diminish his material welfare.
Man produces so he can consume. Thus he is both a producer and a consumer. It is obvious that if man consumes all he produces, his material welfare would remain constant. By the same logic, if he consumes more than he produces his standard of living would suffer. This latter situation is sometimes referred to as "eating the seed corn."
So we see that if man is to progress, he must consume less than he produces. This difference, or surplus, is called savings and is used for investment in new tools of production. Only by continually improving his capital, his tools, can man's material welfare be increased, and only through saving and investing can he improve his tools of production. Only the hope of reward or interest will induce man to save. Hence, interest is essential to economic progress.
It is obvious then that anything that contributes to savings and investment will improve our material welfare, and conversely, anything that decreases savings will decrease our standard of living.
In summary, profit (and interest) is vital to everyone in a free economy; to the owners because it means a steady income and larger dividends; to customers because it means more, better and new products and lower prices; and to employees because it means better tools and equipment, better working conditions, higher pay and steady employment.
"The spirit of truth and the spirit of freedom they are the pillars of society." Henrik Ibsen
* * *
An attempt has been made in this simple booklet to distill the essence of the philosophy of freedom in the conviction that adherence to this philosophy is essential for an abundant life as free men. Deviation from these basic principles will tend to enslave and impoverish.
History teaches that the natures of man and government are diametrically opposed. If man is to be free, if his rights are to be inviolate, government must be strictly limited to its only legitimate functionprotection of those rights.
History has also proved conclusively that capitalism is the most effective, as well as the most humane system for solving the economic problem of scarcity.
Wherever free enterprise flourishes we find abundance and affluence. To whatever degree a society stifles the right to own and control private property, the free exchange of goods and services, the profit motive, and free competition to that degree will the society suffer the problem of scarcity.
What then should be done in order that men may be free?
I would have government defend the life and property of all citizens equally; protect all willing exchange and restrain all unwilling exchange; suppress and penalize all fraud, all misrepresentation, all violence, all predatory practices; invoke a common justice under law; and keep the records incidental to these functions. Even this is a bigger assignment than governments, generally, have proven capable of. Let governments do these things and do them well. Leave all else to men in free and creative effort. Leonard E. Read(16)
1. Ludwig von Mises, The Ultimate Foundation of Economic Science (Princeton: Van Nostrand, 1962), p. 98.
2. Leonard E. Read, et al, Cliches of Socialism (Irvington-on-Hudson: Foundation for Economic Education, 1970), pp. 92-96.
3. Quoted in Dean Russell, "Basis of Liberty," Rock-ford (Illinois) Morning Star, January 7, 1962.
4. Frederic Bastiat, The Law, (Irvington-on-Hud-son: Foundation for Economic Education, 1961), p. 6.
5. Frederic Bastiat, Selected Essays on Political Economy (Princeton: D. Van Nostrand Company, 1964), p. 143.
6. F. A. Harper, Liberty: A Path To Its Recovery (Irvington-on-Hudson: Foundation for Economic Education, 1949), p. 28.
7. Dean Russell, "Economic Growth," The Freeman, (April, 1963), p. 28.
8. Ludwig von Mises, "The Supremacy of the Market," The Freeman, (October, 1966), p. 17.
9. Review by Hans F. Sennholz, "The Theory of Money and Credit by Ludwig von Mises," The Freeman, (April, 1971), p. 256.
10. Hans P. Sennholz, Inflation or Gold Standard, (Lansing: Constitutional Alliance, 1969), pp. 27-29.
11. Fred G. Clark and Richard S. Rimanoczy, "What We Can (But Won't) Do About Inflation," (The Economic Facts of Life, Vol. 20, No. 3, New York: American Economic Foundation, March, 1967), p. 3.
12. Quoted in John Chamberlain, The Roots of Capitalism (New York: D. Van Nostrand Company, 1959), pp. 194-195.
13. F. A. Harper, Why Wages Rise (Irvington-on-Hudson: Foundation for Economic Education, 1957), pp. 95-96.
14. Fred G. Clark and Richard S. Rimanoczy, How We Live (New York: D. Von Nostrand Company, 1960, 2nd ed.), p. 22.
15. Ibid., p. 49.
16. Leonard E. Read, Notes from FEE, (October 1, 1954), p. 1.
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