Why Free Markets Matter

0:00All right, for our closing act today, we have a senior fellow at the Mises Institute, holds a bachelor's degree from Harvard, PhD from Columbia, has written a number of books. He had a New York Times bestseller and a politically incorrect guide to American history. He wrote the 33 questions about American history you're not supposed to ask. Church in the Market, and of course last year he hit the New York Times bestseller list again with Meltdown. He's got a new book coming out called Nullification that I understand is going to be his hottest book yet. He has conveniently changed the title of his speech. So if you were hoping to hear about applying economics to American history, you will not hear about that, but you will hear about Tom Woods's Perfect World, I think, more or less.

0:54Please help me welcome Mr. Thomas Woods.

1:06Okay. Thank you very much. Yeah, I am sorry about changing the topic at the last minute, but this is the exact, that's the exact topic I spoke about at the last one of these. So if you're dying to hear that, you can go to YouTube and type in, you know, Applying Economics to American History Which may be the dullest title of any topic ever given But actually it turned out okay Actually it was one of the better ones So you can watch it But today we're going to talk about something different Basically what I want to do, since I've got you guys here Is sort of say the sorts of things that I would say If I had the attention of the whole world for a half an hour If I wanted to talk to them about the market economy in particular, what would I say to them? I got half an hour, and that's all they're giving me. What would I say?

1:54Well, I want to start off by, first of all, considering what exactly is the free market economy? This is an easy question to answer, but the so-called experts try to make it difficult for us. So that is to say, a lot of people going through school get very much caricatured definitions of what a free market is. The free market economy is simply defined. Free market is simply the sum total of voluntary exchanges bounded by private property rights. That's all it is. It's just individuals freely exchanging one thing for another. And very often one of those things is money, money for some good.

2:41That's all it is, just people making voluntary exchanges. And yet, these voluntary exchanges give rise to extraordinary things. Dr. Thornton told you this morning about the miracle of the freaking pencil, for heaven's sake. A pencil, a dumb little pencil requires this extraordinary structure of production all over the world, in the world coming together at just the right moment and just the right quantities and there are no surpluses or shortages and this all occurs spontaneously without the need for any global pencil planning board and earlier this week I was at an investment conference and I was giving an example like that and I said isn't it amazing that we can get through our lives without you know a man's hat planning board in the world and somebody in the audience said well not yet anyway and I thought yeah unfortunately This seems to be the way things are going. Before you know it, there will be a planning board. We don't need it. That's the point.

3:38The free market suffices to bring about these miracles on a daily basis. Murray Rothbard was fond of giving the example of the ham sandwich. If you look at all the different stages of production that go into the production of a ham sandwich, think about having a storefront that sells ham sandwiches. Well, what does that storefront need? It's got to have refrigeration units. So right away, what does a refrigeration unit require? Well, it's going to be made out of steel and rubber and other things, and those have production processes of their own. All kinds of things are necessary just for the storefront. The ham is going to be brought to you, it's going to be transported from a wholesaler, who's going to get it from a meatpacker, who gets it from a slaughterhouse, who gets it from a farmer, who has to feed his pigs with corn grown somewhere else. And this is just the level of the ham, forget about anything else on the sandwich.

4:26all these things by all these independent suppliers who are not owned by the same firm typically and who are not centrally directed. Nevertheless, all this stuff occurs without the need for any central coordination. And in fact, when you think about it, there is no human being on earth who would even... even if he wanted to follow all those steps necessary for the ham sandwich, there isn't a single person on earth who would have the technological expertise in all the necessary fields. Who knows about mining, and also knows about putting refrigeration units together, and also knows about building construction? No one has that kind of knowledge all in his one head. So the free market allows us, even though we have puny heads as individuals, to take advantage of the knowledge contained in everybody's head.

5:16We can all put it together, and it's far greater than the mere parts. Now, you would never guess that the free market system, first of all, is socially desirable, based on what we learn about in school. You would be inclined to think that the free market system is a system in which little kids have to work in mines all day and get their limbs blown off, and that's the end of it. I mean, we all got that in school, or maybe some of you folks might have been able to to avoid it but that's the sort of thing that we get and it's just horrific and so that's sort of what I'm talking about today is to try to dispel some of this so that we understand the free market correctly and also to point out that any any derogation from the free market anytime we move away from the free market involves violence necessarily involves violence the free market is an arena of peace peaceful interaction among people and if you interfere with it but then by definition you're introducing violence or the threat of violence into the equation so here's a

6:19Here's a little useful mechanism, a device when you're listening to a political speech or presidential speech, doesn't matter what party. When you hear the president make a promise, I will do thus and so, I will increase the number of thus and so, mentally add the words, with a gun, to the end of each sentence. Because that's ultimately what it is. Every promise that is being transmitted to you involves the use of a gun. In effect, the president is saying, I'm going to set aside the free results of voluntary interaction between rational human beings, and I'm instead going to introduce violence. Now, I know my mother taught me violence never accomplished anything, and violence is the tool of the ignorant, so why don't we turn this back on our politicians when they so eagerly introduce it?

7:11You'd also never guess that world poverty has declined dramatically in direct proportion to the spread of market institutions around the world. Now over the course of the past half century we have seen economic liberalization, liberal in the best sense of that word, in many parts of the world. Now to be sure we haven't seen enough of it, it hasn't been extensive enough, but nevertheless Yes, we have seen it, and as a result, we have seen extraordinary progress against poverty. And these are statistics, I'm about to give you, these are statistics that you can get from the World Bank mainstream sources that are easily consulted. These are not coming from the Tom Woods Wicked Free Market Statistical Fund. These are easily consulted, and yet we don't hear about them at all.

7:59That in the past 50 years, we've seen more progress against poverty around the world In 1820, the percentage of people who lived in what economists call absolute poverty was 85 percent. By 1950, it was 50 percent. By the early 1980s, it was down to 33 percent. In the developing world, the rate of poverty has gone, again, absolute poverty has gone It's gone from the early 1980s, went from about 40% to in the early 2000s down to 21%. In the world as a whole, it's gone from 33% to 18% over that same two-decade period.

8:44Now this is the first time in history that we have seen a two-decade period in which not just the percentage but also the absolute number of people living in absolute poverty has declined. We've seen since the 1960s that the caloric intake on average in the developing world has increased by 30 percent. We've seen life expectancies increase again very substantially to the point where they're beginning to catch up with life expectancy in the developed world. And this is happening every single day and we hear nothing about this. I mean, you'd think this would be like somebody would write one article about it in the New York Times, right? I mean, it'd be something, but by and large nothing. I mean, to the contrary, this is the opposite of what we're led to believe. The rich get richer and the poor get poorer.

9:29Well, that's not true. I mean, well, some of the rich are getting richer because they're jerks who have political connections and they're looting the rest of the population. I don't support that. But the poor are managing to escape poverty at a rate never before seen. Now, it could be that that's just a coincidence, that we had these market reforms and then poverty declined, but maybe the two things have nothing to do with each other. These are entirely unrelated, but here I want to suggest that they are related, and I want to do so by using a thought experiment that I used at the last one of these events, but it's important and I do want to do this just this one additional time. Let's imagine what would happen if we lived in a world in which all the machines we used to produce things were ferreted away by Martians.

10:15So they're all gone. We have no assembly line machinery, no capital equipment, nothing. Everything we used for transportation is all gone except horses. You can ride on horseback. And everything we used for communication purposes is gone, other than the telegraph. I will grant you the telegraph, given that 99% of us have no idea how to use it, the thing. And now you've got to go and try and produce. Go ahead and produce with your bare hands. You and your telegraph and your horse and see how much you can produce. Well, you plus Plus lots of machines equals lots of output. You plus nothing equals very little output. That's the difference. This economy is not going to be able to produce a tiny fraction of the goods we used to have.

11:02And there will be whole classes of goods we won't be able to produce at all. Try producing a flat screen TV with your bare hands from beginning to end. Cannot be done. Now in that environment, we would be poor. We would all be poor. For our capital, there would be so few consumer goods produced for each of us to use because the economy is simply not physically productive enough to produce them. It would not be that there are some rich people in the world who are hoarding all the flat-screen TVs for themselves and refusing to share them with us. No, there are no flat-screen TVs in this world. So we understand the problem in that world would not be that our bosses are wickedly depriving us of the fruits of our labor. labor and if only they would we could enforce a minimum wage on them then we could all enjoy steak dinners and flat-screen TVs and automobiles. Now it doesn't matter how much you make them pay the dollar bills won't be able to

11:53buy you things that don't exist or things that can be produced only in very very limited quantities. So we would have to maybe triple the amount of hours we work we have to go from 40 to 120 hours and even tripling our hours with With our crummy bare hands, it would still have a negligible effect on output. So we'd be working an exhausting schedule for a pittance. Now if this were junior high school, this would be where your teacher would come in and say, you see, isn't that terrible that on the free market people have to work constantly and they just get a lousy pittance? Isn't that terrible? But you see, that's not the free market's fault. That's the fault of the fact that somebody took all our machines away. Well, imagine an economy in which that wasn't some nightmare scenario that we just woke I'm going to look up to find the machines taken by Martians, imagine that's reality.

12:40Well that was the economy 250 years ago, that was reality. That was what people lived in, and yes they did earn very little, but again not because short men with white mustaches running around carrying sacks of money with dollar signs on them were keeping all the money. It was because the economy was not physically productive enough to allow us all to enjoy that level of goods that we're accustomed to today. So how would we get out of that scenario? How do we get out of the rotten scenario where all we've got is the telegraph, the horse and our bare hands? The answer is the free market because on the free market businesses make profits and they take the profits and they don't just go blow them on yachts, they invest the profits. They invest them in buying capital equipment to make their production process more physically productive so they can produce more goods at lower cost and the existence of an abundance The abundance of goods is going to push those prices down so that when we spend our paychecks we'll be able to get in return for those dollars a lot more goods because they'll exist in such great abundance.

13:42This happens automatically on the free market. It's in the interests of businessmen to want to expand their production capacity, to want to invest their profits in the expansion of that capacity by investing in capital equipment. That's how it happens. That occurs on the free market when you don't tax this process. If you tax this process, then in effect what you're saying is, I'm an enemy of mankind. I don't want to see mankind improve its standard of living. I don't want to support the one process that allows society as a whole to become wealthier and enjoy a higher standard of living. No, I am so full of envy that I would rather see us all starve to death than make that sort of advance. That's kind of implicitly what you're saying. Maybe you don't totally realize that's what you're saying, but I'm trying to let people know that is kind of what you're saying if you're doing that.

14:31As Frederic Bastiat said, in a single day, under the miracle of a market economy, the average worker consumes more than he could himself produce in ten centuries. So, everyone benefits, and we also see that this idea of the survival of the fittest is also nonsense. That the free market is the area of the survival of the fittest. Only the fittest survive. Well, it seems to me the free market makes it possible for a whole lot more people to be alive in the first place. A whole lot of people who, if they were living in a primitive pre-market society, Society, and had to fend for themselves to provide food and clothing for themselves would probably be dead.

15:20The free market produces enough wealth that we can support all these people. So it's not the survival of the fittest at all, it's the survival of everybody. Here's George Reisman, an economist I like very much, speaking on precisely this. He says, totally unlike lions in the jungle, who must compete for a limited supply of animals such as zebras and gazelles by means of the power of their senses and limbs, producers Manufacturers under capitalism are in competition for a limited supply of dollars in the hands of consumers, which they compete for by means of offering the best and most economical products their minds can devise. Since such competition is a competition in the positive creation of new and additional wealth, there are no genuine long-run losers as the result of it.

16:06There are only winners. And he goes on, The competition of farmers and farm equipment manufacturers enables the hungry and weak to eat and grow strong. That of pharmaceutical manufacturers enables the sick to recover their health. The competition of eyeglass and hearing aid manufacturers enables many who otherwise could not see or hear to do so. So far from being a competition whose outcome is the survival of the fittest, the competition of capitalism is more accurately described as a competition whose outcome is the survival of all, or at least of more and more, for longer and longer and ever better. The only sense in which only the fittest survive is that it is the fittest products and the fittest methods of production that survive, until replaced by still fitter products and methods of production.

16:58Now let's consider the alternative. Instead of investing in capital equipment so that we become wealthier, why don't we just steal from the rich people, like wouldn't that be a lot quicker? I mean, they have to sleep sometime, right? So we just go in and grab their stuff and then just hand it out to people. Well, Reisman anticipates this, too. He says, all right, imagine you've got a society, this would be very typical, primitive economy, and one out of every thousand people is a rich capitalist. He says, let's imagine this. One out of every thousand people eats twice as much and has 20 times the furniture as the average person. He says, now, what would happen if we took this rich person's greater than average consumption, of Consumption. Divided it by 999 and then redistributed across the society. Nobody's even going to notice the difference. Oh, wonderful. I have one fortieth of a table leg. What a contribution to my standard of living. No one would even notice the difference, number

17:51one. So just on practical grounds, it wouldn't work. Apart from the moral question of maybe stealing we probably should avoid doing, but just practically. There isn't enough stuff that they own for this to work. Secondly, they're probably not going to keep working And I'm wondering if they know that every time they stop working and go to sleep, people take their stuff. They'll just go to sleep and become takers themselves. And so much for wealth creation. But also, and not only does it lower capital formation, because there'll be less saving, less investment if we do this, but also it feeds on itself. And what I mean by that is a lot of times we'll read articles in which people will say, You know, it would cost only X billion dollars to give every American, fill in the blank, whatever it is, a free Cadillac, whatever the benefit is, it would cost only X billion dollars to give every American below a particular income level, fill in the blank.

18:45The problem with that line of reasoning is that once people realize that if I get below this level, I get a free Cadillac, what do you think they're going to do? It becomes more attractive to put yourself in the situation that entitles you to the benefit. So the initial cost estimate will always be too low, because it'll turn out, oh, wait a minute, there are a lot more people than we thought who qualify for the Free Cadillac. Oh, well, you don't say. And so what winds up happening is that a larger and larger group of people clamoring for free stuff is being supported by an ever-shrinking pool of productive human beings who are the suckers who are pouring all the wealth in that makes this possible. So again, it undermines the path to prosperity that occurs without violence on a free market.

19:33You may have noticed that we sell t-shirts with economists' faces on them here at the Mises Institute. I don't know if anybody else does that, doesn't make it bad. My own wife, I think, feels a little funny about this. She has not really given me too much grief about it, but I think the understanding is is that I am just about hitting the level at which the dorkiness is to the point where she just can't tolerate it anymore. She's been more than reasonable up to now. But the economist on the t-shirts, but one of the t-shirts I have is the Frederic Bastiat t-shirt. I love it because it says on it economic harmonies, which is one of his works. And I love that work, and I love that phrase because precisely he is saying that in the economy we do not does not have natural antagonisms, that the market economy, properly understood, does not have natural antagonisms, not between employers and workers, not between lenders and borrowers.

20:26The market is a peaceful arena of large-scale social cooperation. You need large-scale social cooperation, as we've seen, to produce even a pencil or a ham sandwich. And we see this occurring all the time, voluntarily, on the market. And we likewise perceive a natural order of things, which if we interfere with it, if we interfere with these harmonies, we get problems. If we introduce a gun into this peaceful environment, we get problems. So for example, prices. Now you all know if you interfere with prices, you're going to wind up with either surpluses of goods or shortages of goods, depending on how you interfere. So let's imagine that we want to push the price of something lower. Let's say it's lumber. Lumber is too expensive. Let's push the price lower. What's going to happen?

21:14Well, what's going to happen is fewer people are going to supply lumber because it'll be less profitable to do so and a lot more people are going to demand it. People who wouldn't have wanted to build a birdhouse before, but now they see lumber is only half as expensive, saying, well, you know what, maybe I will build a birdhouse. Why the heck not? You know, I'm a loser. I might as well build a birdhouse. Sure. I don't know why I said that. It's perfectly fine. I'm perfectly fine to build a birdhouse, just filling in some space there. But you notice what's going to happen is, okay, everybody wants it, nobody's supplying it. That's going to be the problem. Now, you see, now a lot of people sort of get that today, but you will nevertheless see if they'll say there's a hurricane that hit some place and people's houses have collapsed and suddenly lumber prices will shoot up. People will say, gosh, that free market, the free market with those greedy people there,

22:03those raising prices, that's terrible. We should push prices back down to just the way they were before. What's the result of that going to be? People are trying to rebuild their houses, and now you're going to have a million people demanding lumber at that price, and no one in his right mind is going to want to supply it at that price, in that amount. And so most people are going to have to go without houses at all. And somehow this is supposed to be more humane than the market saying, look, right now, see, we did just have this hurricane, so you'll understand there's a little bit of a strain going on on the lumber supply. So we're all going to have to understand here, we've got to move with caution on the lumber. If the lumber price stays high, you know, I'm some guy in Auburn, and just so as to rehabilitate the birdhouse builders, let's say I'm a birdhouse builder, okay?

22:48I'm building a birdhouse, I may decide when I see that the lumber price is high, I may decide, nah, you know what, the birds can fend for themselves, right, they've been around a long time, they know what they're doing, deck with it, I'm not going to waste my money at this time. That decision on my part to relinquish my right to build a birdhouse releases lumber for somebody else to use to build an extremely tiny house for himself. But you understand the point that the price makes me economize on the existing supply. And it makes sure that I use that existing supply only for the most serious and urgent purposes. That I don't use lumber to build a doghouse at a time when people are homeless. that it makes sure that things go to their most highly valued ends. Or during the 1970s, during the oil crisis, people, through the price system, could not indicate the relative urgency of their various needs for oil and oil products.

23:42And the result was that some trucks carrying shipments of food a lot of times didn't want to drive to bring food to South Florida because they were afraid they wouldn't be able to get the fuel necessary to make the return trip Because artificially low prices meant there was huge demand, shortages, and so here we have probably the most important thing of all, bringing food to people, and yet they can't outbid some other people who might be engaged in more trivial uses, they can't outbid them for the resource, they can't use the price system of the free market. This is one of my favorite examples. Oil rigs themselves, off the coast of Louisiana, the continuing functioning of oil rigs themselves was jeopardized because of the price control.

24:29So here we are trying to presumably get out from under this oil crisis. We're making it difficult for oil rigs themselves to get enough oil products to produce more oil. Oil, I mean it's that perverse, that's the consequence of interfering with the market. Now if you interfere with money, as Professor Salerno pointed out, if a central bank interferes with money and artificially pushes interest rates low, there are consequences to that. Namely you get the business cycle, which we understand the Austrian theory of the business cycle is being discussed quite a bit these days in light of the crisis that we've been and Enduring and you can learn an awful lot about that through the Mises Institute. Now Murray Rothbard spoke in Man, Economy and State, his great treatise.

25:17He spoke of the beautiful order of the market and what's notable about this is that if you've read a lot of Rothbard's popular writings aimed at the general public, he can be really feisty and polemical and you can almost hear him talking coming through the page. So when you read his great treatise, Man Economy and State, his style is much more restrained and sober and scientific, relentlessly so. But yet even there, he can't restrain himself on several occasions from pointing out the beautiful order of the market as he's covering production theory and factor pricing, pricing of the factors of production and the structure of production and how it all interlocks and interweaves again spontaneously without the need for any central direction.

26:02This is beautiful, it's elegant, it works on its own. This is what we mean by the natural order. And this is why Ludwig von Mises said that dictators hate economists. Well they hate good economists, we'll correct Mises slightly, because after all John Maynard Dr. Keynes once said that his system was perhaps more suited to a totalitarian state than to a free one. So maybe they might sort of like that. But what Mises meant is that the economist is always telling you that there are costs. And there are costs in particular of intervening in the free market. When you override the natural order, you cannot do so costlessly. There will always be consequences. No matter how great a dictator you are, you cannot override the laws of the free market.

26:52No dictator wants to be told this. Why? I'm the dictator. My will is law. Okay? But just in the same way that a dictator can't jump off a cliff and start screaming at the law of gravity to allow him to have a soft landing, likewise, he can't interfere with money, interest rates, prices, or any of the other aspects of the market economy without tears. Finally, Austrian economics is value-free. We say it's value-free. That means that Austrian economics, strictly speaking, is purely scientific. It is positive rather than normative, and all that means is that it's descriptive rather than prescriptive. It explains to you how the world works. It does not say, therefore, you should do A, B, C and D.

27:38It simply describes how the world works, strictly speaking. Now, as a human being, who also happens to be an Austrian economist, you could then turn around and say, oh, by the way, as a human being, I think we should do this and we shouldn't do that. But strictly speaking, as an Austrian economist, all you're doing is describing the likely consequences. But we can move from the one to the other because we realize, when we study Austrian economics, we come face to face with this natural order. We come face to face with the theory of it and we perceive it in our daily lives, in reality. And we realize that when we work to undermine it, we bring about impoverishment. When we allow it to occur, to take place unhampered, we get wealth and prosperity. And so since we don't hate the human race and we want wealth and prosperity, therefore we do favor these various things.

28:30We do favor free exchange among peoples and so on and so forth. So what we learn from Austrian economics, even though the discipline itself is value-free, can influence our values. We can learn from it that the parasitic behavior of the so-called public servants that we're all taught in our schools to revere in fact impoverishes the productive sector and hampers if not reverses the process of wealth creation for all classes. We can learn that central banks are unnecessary, that money always emerges as a commodity on the free market. We can learn that the whole apparatus of coercion on the part of the state of violence that tries to overpower the market is the greatest scam ever perpetrated on mankind.

29:21And finally, we can learn that human beings interacting peacefully and without coercion, without hangmen and torturers, can establish a society of peace, freedom and prosperity, the likes of which the world has never seen. Thank you very much. Thank you, Tom. Well, for those who have been held here against their will and hated every minute of it, you have made it to the promised land. The program has concluded. I would like to thank Jerry and Helen Davis for their sponsorship of this event. They made it all possible. I'd like to thank our speakers and the staff of the Mises Institute that make these events go off so seamlessly. And I especially want to thank you. I know many of you spent a lot of time in the car getting here. But you know, you're going to inherit the world here soon and you can make it a better place. And we think free Free Markets and Liberty can do that.

30:36So that's my challenge to you. I want to thank the parents for caring so much about their kids to bring them here today. Thank you and travel well.