How Capitalism Saved America and How Government Is Destroying It

0:00I thought that since we have such a big topic, freedom versus big government, it would fit right into one of my books, How Capitalism Saved America, and so I'm not going to talk about the whole book, of course, in a half hour. But one of the themes of this book is that government has always relied on a system of lies and myths about itself and about the civil society in order to solidify its power. The private enterprise system is rapacious, it's monopolistic, it's polluting. You need government to save you from it. And the same is true for the civil society. It's never adequate to help poor people or to help people who need food. You need government to do all those things.

0:46And as Murray Rothbard wrote in a number of his books, it's not just the government itself who spreads these myths and tall tales. It always relies on a band of court historians, propagandists, and excuse makers in the rest of society. That's why people like Paul Krugman, for example, have jobs as New York Times colonists. That's basically their job. And economic misinformation has always been a part of this. It's always been a part of this. If you read the latter chapters of Human Action by Ludwig von Mises, he addresses this very and very specifically after completing his great masterpiece that economic misinformation is a big part of what keeps the state alive and growing.

1:34And so I'm going to give a few examples of this based on how capitalism saved America despite the myths about capitalism in early America. And then in the last 15 minutes, I'll explain how government is destroying America. That's my job for 25 minutes, I guess. But it began at the very beginning. At the very beginning of the American Republic, an expression of the so-called free rider problem was enunciated by none other than Alexander Hamilton, the first treasury secretary, who made the case that in order to build roads and canals, private capital would never be sufficient for that, and so he was the first champion of what we today would call pork barrel spending. You know, they had to put a picture of Hamilton, instead of having his picture on the And so this was part of the real big economic policy debate of the early 19th century, where you had all the statists lined up, people like Hamilton and his followers, and then there was great opposition, you know, from Jefferson to Madison to Monroe, and so on, and so on, and so on.

2:41and his followers. And then there was great opposition, you know, from Jefferson to Madison to Monroe to Andrew Jackson. And Andrew Jackson said one of the greatest achievements of his presidency was he vetoing pork barrel spending programs that were called internal improvements. But the governments finally did get around to that state and local governments finally did get around to, to spending a good bit of money on The Financial Situation was Alarming, No Works Were Finished, Nothing Was Finished, Little People or no income was derived from them, interest in the bonds increased day by day, and no means of paying it, saved by taxation, remained.

3:48It was such a debacle in state after state after state that by the time you get to 1850, every state except Massachusetts had amended its constitution to make it illegal for tax dollars to go to any corporation for any reason whatsoever, but it was primarily the road Wood Building and Canal Building Subsidies that today we would call this stimulus spending. But it was such a catastrophe, they didn't just pass laws, they amended their constitutions to make it even more difficult to bring back this thing. And it was quite the catastrophe all around the country. And here's one example, as Doug mentioned, I've written a couple of books on Lincoln, and he was the Illinois champion of this. William Herndon said about it, The gigantic and stupendous operations of the scheme dazzled the eyes of nearly everybody, but in the end, it rolled up a debt so enormous as to impede the otherwise marvelous progress of Illinois.

4:44The burdens imposed by the legislature under the guise of improvement, and the

5:20for Every State, and but in the meantime, the private sector was quietly going along building roads and canals and doing it profitably and successfully and efficiently. There's an economist named Daniel Klein who wrote an article some years ago in an economic journal about what happened in the first several decades of the 19th century with private sector road building. The Private Road Building Movement built new roads at rates previously unheard of. Over 11 million was invested in turnpikes in New York, 6.5 million in New England, over 4.5 million in Pennsylvania between 1794 and 1840. There were 238 private New England turnpike Turnpike Companies alone built and operated 3700 miles of road. New York led all states. New Jersey companies operated 500 miles by the year 1821. Then between 1810 and 1845 over 400 private turnpikes were chartered and built.

6:28And so from the very beginning of the republic you had this myth all of a sudden that the private sector cannot build roads. The government must take it over. Exactly the opposite of what actually happened. The private sector actually produced. It actually built the roads and did a very good job of it. And the government sector made a big mess of everything it touched. Even the Erie Canal, the famous Erie Canal that was profitable did make money for many years. But of course, who can't make money when the taxpayers are coerced to pay all your infrastructure spending and all your capital expenses? And so the defenders of this, even to this day in the academic world point to the fact that it made money. Well, yeah, well, in one of my academic papers that I'm working on now, I point out what seemed to me to be the obvious fact is that it was built at around the same time where railroads were coming into being.

7:21And one of the arguments that modern economists make about why the market fails is they say it's sometimes in the marketplace, inferior technology is locked in by the free market for whatever reason, and we're all forced to suffer for decades with this inferior technology. Well, think about this, the Erie Canal, how to transport goods from the Midwest to the New York area. You put your grain on a barge and you have donkeys drag it through a ditch across the state of New York. At the same time, they're building railroads. So what was locked in was the donkey dragging barges when at the same time we had railroads. and of course eventually the railroads superseded the Erie Canal, but that's another example of how even modern economists who study the history, American economic history, seems to me have it backwards again, where they praise the Erie Canal for being a marvelous success when in fact it did lock in an inferior technology, donkey driven barge dragging compared

8:24to the locomotive that was being used, and they unfairly competed with the locomotives in New York State at the time also. And so another example of this is the building of the transcontinental railroads that I've written about. And the same argument was made that private capital would never be sufficient to build the transcontinental railroads. Well, a man named James J. Hill proved that wrong. He built the Great Northern from Minnesota to the West Coast. And he built the most efficient route, the quickest route, shortest route, whereas the The government subsidized transcontinentals that were beginning in the Lincoln administration, the Central Pacific and the Union Pacific.

9:09They were building the roots there. If you look at a map of their roots, it looks like a cobweb because every politician all the way out from the Midwest to the West Coast made the argument that in return for my vote for the subsidies, you have to run a line to my district, to my area. And so it looked kind of like this, rather than a straight line from Minnesota to California, it looked kind of like this, like a cobweb, and it was extraordinarily inefficient. And if you read the history of this, also, it's a dramatic contrast between the efficiency of James J. Hill and the gross inefficiency and then eventually corruption of the government-run on Railroads, even to this day we're told that the free rider problem made it necessary for government subsidies.

9:58Here's in a biography of James J. Hill, the biographer Burton Folsom wrote, Hill's quest for short routes, low grades, and few curvatures was an obsession. Well, he was a businessman, he went the quickest route to the West Coast. In 1889, Hill conquered the Rocky Mountains by finding the legendary Marias Pass. Lewis and Clark had described a low pass through the Rockies back in 1805, but later no one seemed to know whether it really existed or if it did, where it was. Hill wanted the best gradient so much so that he hired a man to spend months searching Western Montana for the pass. He shortened his route by almost 100 miles, and so James J. Hill was the kind of businessman who left no rock unturned and he built the greatest transcontinental railroad.

10:45And if you can compare this to the government-subsidized railroads, which was just a carnival of inefficiency, my favorite story about this was how the government-subsidized roads actually, they were subsidized per mile by the U.S. government. And so they built railroad tracks on the top of 10 feet of ice pack at the beginning of the winters in the Rocky Mountains. And then when the ice would melt in the spring, it's all good because they get paid again. and then they would rebuild the track and they would get paid twice for the same track. That's how they made their profits. And so that's the second example I would offer of the myth building that occurred in early America about the evils of the civil society and private enterprise system and the need for government to intervene and take over.

11:35And of course there's the myth of the robber barons. Now, there were real robber barons, and I would hold out an example of Leland Stanford, the man who, the founder of Stanford University, he was the United States Senator and Governor of California, and he used his political connections to make it illegal for anyone to compete with his railroad in the state of California. And even a college professor like me could make money if I was in a business, a legitimate business and it was illegal for anyone to compete. I could make money for a while anyway, at least until golf season arrived, as far as that goes. So he was a real robber baron, but others in the same industry like James J. Hill were not, and neither was Rockefeller, neither was John D. Rockefeller in his oil business.

12:26Back when Microsoft was being prosecuted by the US government, the judge in the case, his name was Thomas Penfield Jackson, and he was eventually kicked off, he was eventually by the three federal judge panel that hired him in the first place because of his bias. He gave an interview to I think it was Atlantic Monthly Magazine where he compared Bill Gates to Al Capone and that was a little too much, that would be like the judge in the O.J. Simpson murder trial just flippantly saying to the Los Angeles Times, yeah O.J. he's a murderer before the verdict came in. And so he was kicked off of there. But before that, he gave an interview saying that Bill Gates was just like John D. Rockefeller.

13:12He compared Microsoft to the old standard oil business of John D. Rockefeller. And one of my articles I wrote years ago on Mises.org said he's right. He's absolutely right about that. Because how did Rockefeller make his money? Well, here's basically how he made his money. His chief critic was a woman named Ida Tarbell, I'm sure one of the famous muckraking journalists and her brother what was the treasurer of the pure oil company which was driven from the market by the lower price standard oil so she had she had a grudge and but even Ida Tarbell described the standard oil as quote a marvelous example of economy in her book she wrote a book called a history of the standard oil company and here's our Rockefeller made his money the price of refined petroleum fell from 30 cents in 1869 he founded his Company in 1866 to 10 cents by 1874 and 5.9 cents in 1897. So he caused the price of refined petroleum to decrease from 30 cents to about six cents in 1897. 1898, he's sued by the federal government for violating the antitrust laws. And during that time, his market share peaked in 1890, around the time he was sued at 88%. But by the time

14:32The verdict finally came down on the antitrust suit, the year 1911. He still had over 300 competitors, and his market share was 11 percent. And so he was anything but a monopoly. But this was a classic case of how antitrust usually works. It demonizes a successful entrepreneur for cutting prices for decades and cutting costs and improving products and inventing many new products, too, you know, Vaseline and The Theory of Money and Credit and the first week of this idea that they won't be able to make a lot of money at the end of the end of the end of the end This drill that costs us $50 to manufacture, let's start selling it for $10. It might take 10 years, but we'll eliminate everybody else from the world market for drills and then we'll really make a killing.

16:11And of course they said I would be fired on the spot. There's no way I would keep my job if I was giving that kind of advice. And yet that's what people believe about John D. Rockefeller because this demonization of private enterprise has gone on to this day about this. One more example of the backwards history that I'll give about this is how the Great Depression ended. A lot of you know this. I guess a lot of you know the untruth. Probably more of you know the untruth about how the Great Depression ended. World War II did not end the Great Depression. World War II ended unemployment because when you had five million people unemployed and you draft 11 million men and send them to war that's a pretty good way of ending unemployment isn't it but of course those men lived a very different life in the military in Europe and Asia than they would have lived back at home returning to their families every night after work and so yeah unemployment

17:12ended but but the consumer part of the economy the private part of the economy was actually worse during World War two because of all the resources that were The Great Depression was the demobilization of the army after World War II, when the federal budget was reduced from about $95 billion in 1945 to $35 billion in 1947. There was a two-thirds cut in the federal budget in absolute dollars in two years. And as a result, 1946 was the most successful year of the American economy ever in the private sector. Private sector spending, consumer and investment spending increased by about 15% in one year.

18:02And it's probably the most successful year ever in American history. But most people have never heard of this because it totally blows out of the water the idea of Keynesianism. The idea that a massive spending cuts reduce aggregate demand and therefore the economy will go into a depression. That didn't happen. The opposite happened about that. And so this is just an example of the things I write about. I guess the first part of my talk here is an advertisement for my book, How Capitalism Saved America. But the reason I wrote this book was right after the Enron scandal. You might remember the Enron scandals of some years ago, the accounting scandals. My publisher at Random House called me up and said, you know, Michael Moore and people like that are going to be writing books arguing that this is inherent in capitalism, that this crookedness and corruption is inherent. It's not just Enron, it's everywhere. And sure enough, And so he recommended to me that I write a book sort of a defense of capitalism, sort of similar to Ayn Rand's old book, Capitalism, the Unknown Ideal, but using historical examples of how capitalism did save America.

19:16So that was the genesis of that as far as that goes. And so, you know, the second half of my topic that I gave Doug to talk about is how government is destroying America. And, well, we could talk all day about that, couldn't we? How government is destroying America. But I decided I'd just mention two things. The current boom and bust and government employee unions. So the current boom and bust, of course, the Austrian view, which I believe is the correct view, is that the Fed is the main culprit here. here. And of course the first thing Alan Greenspan did is to blame the whole thing on the fact that people in Asia save too much of their money. They don't spend enough. They save too much.

20:03I'm not making this up. He said this in one of his numerous autobiographies that they drove down the world interest rates by saving too much. And of course that's bogus. It was the Fed that the housing bubble, which has now burst, and not only that, at the same time that we had the housing bubble, we were in the middle of about a 15-year period where the U.S. government was doing everything it could do to pressure or even extort banks and mortgage lenders into making bad loans to unqualified borrowers. This began in the 70s with the Community Reinvestment Act, which essentially did that, forcing banks to make dubious loans that they would not normally have made.

20:50But that act was greatly strengthened during the Clinton administration. And then it was people like Barney Frank and other members of Congress who instructed Fannie Mae and Freddie Mac to purchase trillions of dollars of these bad loans and bundle them and securitize them, so-called, and sell them. and sell them and of course with an implicit wink-wink government guarantee because it was a quasi-governmental operation, Fannie Mae and Freddie Mac. And Doug mentioned, I testified at Ron Paul's hearing a couple weeks ago, Barney Frank himself was there and he was still bragging about this, he was bragging that we increased home ownership from 60% to 69% in America and pat themselves on the back for this thing and this is just is Evil.

21:38And so among the methods they use for this is if you want to see what they did, go online and Google Boston Fed Closing the Gap, Boston Fed Closing the Gap. You'll find a report by the Boston Federal Reserve Board instructing mortgage lenders in how to close the housing gap. That is, there's a gap between people who can afford a house and people who cannot. And so the Fed said, we're going to close that gap. And among their recommendations to mortgage lenders, if it's low income or minority borrowers, they said, don't ask for income requirements. Don't ask for a pay stub. Don't do a credit check, unnecessary.

22:23If they're enrolled in a credit counseling program, that's fine. And I would think by definition, if you're in credit counseling, you've had problems Counseling over credit. No assets to back up the loan. Don't worry about that also. And also, if the appraisal on the house comes in with the wrong number, see us. The Fed will find another appraiser for you. I was always told that you can get in trouble by doing that, maybe even go to jail. That's a fraud. But here's the Fed doing this. And And then, at the same time the Fed is publishing this, this very same publication threatens mortgage lenders with class action lawsuits if they don't do these things. And so, at the same time, when the bubble bursts, the Fed comes out and says, we've got to do something about all this systemic risk that is created by the free market out there.

23:22You know, if this sort of thing, you know, strong arming mortgage lenders to make bad loans to unqualified borrowers, if that doesn't create systemic risk, what does? And so, but of course, the Fed uses this as government always does. It uses a problem that it created to justify and rationale giving itself even more powers. And that's exactly what it did. and so that's that's you know how the example number one and how government is destroying America with the boom-and-buzz cycle and it was it was surreal to see Barney Frank and his fellow Democrats on this congressional committee literally congratulating themselves for a job well done and and refusing to accept any criticism of any kind of what the Fed did they're not the least bit interested in that they would do the same again tomorrow if they The State and Local Government Mess The Wall Street Journal reported that state and local governments have about $3.5 trillion in unfunded pension liabilities, and that's in addition to everything else, that's just unfunded pension liabilities.

24:36And this really brought to mind what I've learned and written about for years about government employee unions and the power. Some of you may remember or read about when Ronald Reagan fired the air traffic controllers. I think the union, the acronym for the union was PATCO. And the reason he fired them was that there's a federal law that made it illegal for them to go on strike. In return for a monopoly on air traffic control, the government said no striking. You can't go on strike because you can close the whole country down in terms of air travel. That's tremendous power. If a union has the ability to shut down an entire industry like that, it has tremendous leverage to cause a tax increase, a tax increase to finance its wage demands.

25:25Demands. That's why it goes on strike. And so essentially it transfers the power to tax from the taxpayers, the voters, to the labor union. It gives them grossly disproportionate power over what the taxes are to be. And that was really the rationale for making it illegal for Patco to go on strike. And so all Reagan did was say, I just took the oath of office to enforce the laws. This is against the law. You're fired. And he hired replacement workers. And of course, this is true in government employee unions everywhere. It's not true that it's illegal for them to strike, but it's true that they have this disproportionate power, whereas when the teachers' unions go on strike in a city, they can shut down all the schools, whereas if a grocery store, the employees of a grocery store go on strike, well, you can just shop at another grocery store, and the store owner has the freedom to hire replacement workers.

26:19And so compared to that, you know, the teachers go on strike, they shut down the whole school system and civil service regulations usually make it impossible to hire replacement workers for government bureaucrats or if the garbage collectors, the city garbage department, collecting department goes on strike, the whole place is a mess. This used to be called the British disease back in England in the 70s when the British economy imploded and we're seeing the British disease in America now. And this is a big reason why the late Milton Friedman referred to government bureaucracies as economic black holes, where normally with an economic relationship, greater inputs lead to greater output. You hire more people for your business, why do you do that?

27:06Because you think you have more orders, more customers, you're going to produce more stuff and sell it. With government, the more inputs, the less is the output, more often than not. The more money we spend on public schools, the dumber the kids get. The more money we spend on poverty programs, the more poverty there is, and on and on and on. And so Friedman, he said this in an essay called Input and Output in Medical Care, which is published online by the Hoover Institution, where he did a study of, as government has taken over more and more of the health care sector, he said, we began to see this. is more inputs, more money, more beds, more doctors, but lesser health care, and he made that case.

27:52And so that's one of the reasons we're in trouble with the state and local government, it's the incentive system that exists with government employee unions. And another problem that they create is that, think of the incentives here, if you're the If you're the mayor of a city, or even the governor of a state, and you have a government unionized workforce, and they're demanding more money, as they always do, they're demanding more money, if you give them a pay raise today, you're going to have to raise taxes, somehow. That loses votes. So it makes you unpopular, you the governor, the mayor, whoever it is, you're unpopular, you lose votes. You win the support of the union, but you lose votes. It's not great. However, if you offer them modest wage increases, but promise them the moon with retirement, that's the perfect recipe, because when the bill comes due, you the governor or the mayor will be long retired, maybe even dead.

28:50So it's the perfect recipe for deferring or delaying the cost of selling out to the unions and avoiding a strike, avoiding the schools shutting down, avoiding the garbage not being

29:30I used to write in the area of labor economics, and there's an economist named Sharon Smith that I can remember, 30 years ago, she was publishing in some of the big economic journals, the wage premium that government employees were getting, and on average, even then, they were being paid, and according to her research, as much as 40% more than equally educated, equally qualified private sector employees, and these things change year by year, so it's been the point I'm making, it's been a loan known for a long time, And of course, another thing that's an element of the incentive system with government employee unions is because of civil service regulations, it's very difficult, if not impossible, to fire a government bureaucrat unless some extraordinary crisis occurs like in Wisconsin today, and so what do you do if you can't fire a government bureaucrat?

30:20It's very difficult, if not impossible, to fire a government bureaucrat unless some extraordinary crisis occurs like in Wisconsin today. And so what do you do if you can't fire the government bureaucrat? To fire this person, the union will immediately follow lawsuits. That's what they do because the unions are all about maximizing dues revenue. That's what they maximize. They don't maximize. That's their profit. The more union members, the more revenue. Fewer union members, less revenue. And so they'll fight in the courts when you try to lay off a government bureaucrat. And so if you're a manager of a government enterprise and you really want to get rid of this person, what do you do? Well, you offer them a pay raise and a promotion.

31:05In the case of teachers' unions, that might mean get the math teacher who can't add and get her some job or him some job in the central administrative office and give them the duty of administering the whole school system along with the other teachers who can't teach. And that's why in big cities all over America you have these gigantic bureaucratic monstrosities, the centralized administrative office, and that's who's there. It's all the teachers who are so horrible that they would go, not everybody, but they would go from school to school to school, parents would complain bitterly, my math teacher can't add and subtract, and so forth. and so forth, and then finally the superintendent would give up and can't fire them, they have tenure, give them an administrative job.

31:51And so unlike the private sector, failure is actually rewarded with regard to employees. And also unlike the private sector where you have an incentive to minimize the number of employees that are on the payroll to do a job, In the government sector, the incentive is to maximize the number of employees because every government bureaucrat is worth at least two votes. You can count on every government bureaucrat to get a spouse or an adult child or a friend or a brother or sister to vote for the guy who gave you the job. And so to a mayor or a governor, patronage jobs, so what you used three people instead of two on the garbage truck to collect the garbage like the private sector does. and the way that the private sector does, for example.

32:38It's all good to the politicians because it's more votes and more patronage jobs. So there's a built-in incentive to use more people than you're necessary to do the job. That's why, one of the reasons why all these studies that have been done comparing private and government sector service provision have come up with what economist Thomas Borcharding calls a bureaucratic rule of two. from the private sector to the government sector, on average, it will double the per-unit cost, and quality will probably go down, too. And this, of course, is one of the reasons that this happens. So the government unions are champions of feather-bedding. And of course, the final purpose of the government union is that they are relentless propaganda machines Friedrich Bastiat pointed this out in his famous essay, The Law, which is probably for sale out back.

33:54The socialist of his day, this is the 1840s, he pointed out in one part of this book that they were making the same argument in his day when he was saying that things like a minimum wage law wouldn't work or laying out the economic reasoning, he was accused of hating poor people. and so if he was making the case against high tariffs and in favor of free trade well he must hate workers in general because they're being protected by protectionist tariffs supposedly in his day so this is not a new argument but I'm sure everyone here if you think about it you've probably have heard that argument somewhere along the line in that how uncaring you are if you oppose their particular program and that's what they do and as von Mises wrote in Human Action Labor unions in general have always been probably the principal purveyors of anti-capitalistic propaganda because it serves their purpose. It serves their purpose to tell people that capitalists and business people are out to harm you

34:58in every way imaginable, therefore you need a union to protect you. That's in their economic self-interest to do that. And so they've always been that way for the most part, although there have been some exceptions. and so those are the two examples I thought I'd give contemporary examples of how government is destroying America but the Fed and its antics and and the public employee unions and I can't predict what's going to happen but but it was fun I have to admit it was fun I watched on television yesterday where these government bureaucrats were screaming their heads off in Wisconsin at at the state legislators who voted to sort of end the gravy train for them and and I could see the vein and the neck is bulging and the necks were all red, the faces were red and sputtering and spitting and chanting, that's basically what they do.

35:48We have a few people from Baltimore here. A couple years ago, since I'm on unions, every time I'd go downtown, like at the lunch hour, there was a group of people walking in a circle chanting something. And finally I got close enough that where I was doing business was near where they were. And for a year, the same people walking in circles, this was during the housing boom, this was before the bubble burst. And I finally went over there and they're holding signs. I knew it had to do something to do with labor unions because they're walking in circles and yelling. And so if you see a group of people walking in circles and yelling, you can bet it's probably organized by some labor union. and so that's it sure enough they were they were yelling no pay no low pay no way low pay no way and just walking by them I think made me legally to have too much of a high blood alcohol content did you get in my car and drive back to work

36:45just just breathing in the air as I walked by them and and it turns out a Baltimore Sun reporter that went up to these people and asked who they were in Baltimore. They were mostly homeless people that were paid by the Carpenters Union to protest that the carpenters were only being paid $20 an hour to build houses in Baltimore. And the reporter asked the union guy, well, why aren't there any actual carpenters here? And this was during the housing boom. And they said, well, the business is booming. They can't afford it. They're making too much money, you know, working. The opportunity costs, they understand opportunity costs, it was too high. So they hired bums at below minimum wage. They actually found out they weren't even paying the minimum wage to walk in circles and scream, low pay, no way.

37:32And they should have been protesting the union, paying them less of the minimum wage rather than this. But that's the spectacle that we see in Wisconsin and elsewhere, so enjoy it while it lasts. And that's about all I have time for.

37:52Thank you very much.