In their new book, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism, former Senator Phil Gramm and Donald J. Boudreaux, George Mason University professor of economics, challenge seven widely held but false views of capitalism and markets, which fuel an overreliance on government. The view that markets are riddled with failures and that government is the only genuine corrective has a long history. The political activism fueled by these assumptions began during the Progressive Era in the United States, which spanned from 1890 to the 1920s. Those ideas live on today and find an ideological and political home among modern progressives and even members of the New Right.
Among the good news found in Triumph of Economic Freedom is that even readers not well-versed in economics or steeped in stats will find this book accessible. It boasts a “just the facts” approach, taking us chapter by chapter through the myths we can’t seem to shake. Gramm and Boudreaux invoke the great Thomas Sowell on the very first page, who argues that political differences emerge from “people reasoning from fundamentally different premises … have different visions of how the world works.”
Sowell has written about the constrained and unconstrained vision of man. The realities of human nature bind man in the constrained vision; the unconstrained vision sees man as malleable, able to be shaped and formed, bent to the common good. The unconstrained vision is factually incorrect yet appealing to policymakers and anyone who desires government power. The constrained vision accurately captures man as he is, finite and fallible, operating out of self-interest rather than full-time benevolence. The American founders understood the concept of self-interest and, as such, recognized the need for limited government.
Thus, we almost always start on the wrong foot when it comes to understanding economic history, which hinders our ability to make better policy for the future. The authors point out that at the country’s founding, the government was limited in both size and scope. It took until 1918 for the federal government to spend its first trillion dollars, and up until 1900, government spending as a percentage of GDP was around 7%; today it is around 33%. Deficits have proliferated through the 20th and into the 21st century, with no end in sight.
This is an untenable path that will not end well. The authors are all too familiar with this. This book is unique in that it’s not a vitriolic rant against progressives and Democrats; there are many such books already, and they hardly change hearts and minds. Instead, this book presents a careful study of evidence that the authors argue has influenced public opinion over the past century, leading to a substantial expansion of government in both its size (what it spends) and scope (what it influences or controls).
The authors cover five of what they deem the “most disputed” episodes in American history as well as two modern issues: income inequality and poverty, along with the myths that surround them. They are the Industrial Revolution, the Progressive Era of anti-trust regulation, the Great Depression, the decline of employment in the manufacturing sector starting in the late 1970s, and the Great Recession. Each of these periods is accompanied by a narrative that blames capitalism for the nation’s economic woes and so suggests it should be constrained or, worse, eliminated. The authors argue that most Americans’ interpretations of these events determine their view of the role of government.
In each chapter, the authors present the myth as it is understood, using appropriate citations and relying on how authors and scholars have presented that myth, as well as the data that surrounds it. In each case, they find that the myth is precisely that, and a glimpse into the data can help us see that the conventional wisdom, as it is passed on in books, blogs, television interviews, and even scholarly literature, is largely incorrect. Capitalism is not perfect, but it is the most liberating and enriching economic system the world has ever known. Not knowing this is dangerous, because if we base policy on myths, we perpetuate the very problems we seek to solve.
Economics is the study of choice under conditions of scarcity and radical uncertainty. We have unlimited wants but limited means to satisfy them. We are imperfect and prone to greed; we act out of self-interest. Scarcity implies competition; we all want the same things, and without an unlimited supply, we must determine a mechanism by which to ration. The challenge is twofold: figuring out how to avoid running out of scarce resources and finding ways to create abundance, so that we can lower our opportunity costs.
Economic freedom, or capitalism, is a decentralized economic system in which rationing scarce resources is left to prices determined by the market, as buyers and sellers interact with one another. Prices are superior rationing mechanisms because they are decentralized and nimble. They act as signals and incentives, directing millions of people without a central leader, and no one can know, a priori, the information that prices convey. F.A. Hayek referred to this as the knowledge problem in his arguments against socialism and in favor of markets. This is not only an argument against socialism but also a warning to all planners, from trust busting to trade policy.
Capitalism is a bottom-up economic system based on private ownership and individual choice—a system anathema to many policymakers because it demonstrates the limits on what the government can and thus should do. And so those same policymakers must either flagrantly disregard or genuinely misunderstand history in their quest to improve economic outcomes from the top down.
Gramm and Boudreaux begin their exploration of bad economic reasoning with “the Genesis Myth,” which argues that the Industrial Revolution impoverished workers. It is hard to believe that this myth persists. Industrial revolutions are messy. They involve the entire transformation of economic and social life. We move from farm to factory to cubicle. The process alters norms and culture, and in so doing upends inegalitarian class systems. For example, for the very first time, income mobility became possible for workers previously trapped in a class cage.
The myth originated with British historians and the Victorian era of literature. The authors point to Charles Dickens and Thomas Hood, who insisted that “the urban workplace was but a prison with rations of only bread crusts for food, threadbare rags for clothes, and rented hovels for shelter. So persuasive is this grimness in Victorian-era literature, with its vivid portrayals of poverty and misery, that 21st-century French academic Thomas Piketty cites Germinal, Oliver Twist, and Les Misérables, novels from the era, as empirical ‘evidence’ that the Industrial Revolution was indeed a terrible time.”
Yes, you read that correctly. An academic who advocated for significant wealth redistribution in his bestselling 2014 book, used Charles Dickens as part of his “empirical” evidence against capitalism. You can’t make this stuff up, but that’s precisely why these myths are so dangerous. This is also the basis for the “de-growth” movement, which can only be described as misanthropic evil.
What are the Industrial Revolutionary facts? The authors take us back to the fall of the Roman Empire. From that time to the Enlightenment, economic growth and wages were stagnant, and people lived in subsistence poverty. Since the Industrial Revolution, living standards in countries like Britain and the U.S. have risen by at least 3,000%! They cite Dierdre McCloskey, who calls this “The Great Enrichment” but also support their claim with other research. We have escaped the Malthusian trap, and the bottom billion is on pace to do the same; however, the key is to embrace economic freedom, rather than control it through population design or cutting growth rates. Economic freedom is the cure rather than the source of the problem.
Another dangerous myth, almost a hundred years in the making, is that capitalism or laissez-faire economics caused the Great Depression and that government intervention was the cure. The authors dive right into conventional wisdom, which posits that the key market failures at the time were inequality and underconsumption. This is believed to occur when larger portions of the rich accumulate greater amounts of wealth but spend smaller shares of their income compared to the poor. Thus it is a problem of rising income inequality, a theme that recurs throughout the book. It is also argued that greed drove stock market speculation that led to the crash on Black Tuesday, October 29, 1929. Moreover, the myth further insists that President Herbert Hoover “did nothing” and that President Franklin D. Roosevelt’s New Deal was the only thing that offered any hope of saving American farming and industry and that could correct the economy.
Gramm and Boudreaux painstakingly take us through economic history, demonstrating that greed did not cause the economic downturn and that the New Deal likely exacerbated its severity, as America’s recovery lagged that of other nations. They show us that, before the Great Depression, the country had suffered from recessions and financial panics, all of which were shorter and less severe in nature. They resulted from “a combination of fractional reserve banking system, prohibitions on branch banking, and an agricultural economy with seasonal variations in the demand for money.” But wait, there’s more.
Most people are unaware that in 1920–21, a depression occurred, during which unemployment rose to nearly 12%, real industrial output declined by 33%, and the stock market lost 33% of its value. Yet the recovery was “so quick and so complete” that it was nicknamed “The Forgotten Depression.” The authors argue that the most remarkable aspect was that the president and Congress “did nothing” in terms of a fiscal response. Following this crisis, however, and the response of regional Federal Reserve banks, reforms were put into place in 1923 that concentrated power to conduct monetary policy in Washington, and the Fed fueled speculative markets by keeping interest rates too low.
Fun fact: At Milton Friedman’s 90th birthday party, Fed Chairman Ben Bernanke admitted that Friedman was right: The Great Depression was caused by the Fed’s failure. This, combined with Hoover’s doubling of government spending, tax increases, and a 1931 budget deficit that exceeded half of all government expenditures—all of which FDR continued—was a disaster in the making. The Great Depression was a failure of government, not a failure of the market. What ended the Great Depression was not excessive technocratic government intervention but a return to free markets in the postwar era. The authors highlight the restoration of property and contract rights following the New Deal, which helped inspire investor confidence.
Chapter by chapter throughout The Triumph of Economic Freedom, the authors take us through traumatic and tumultuous episodes in American history. There are several common themes to anti-market sentiment, including a distrust of both the American people and the market process itself. This should not surprise us. Today Alexandria Ocasio-Cortez (AOC) summons FDR with the Green New Deal to try to remake the U.S. economy in her climate-friendly image. In addition, the elites among us, including Senator Elizabeth Warren, Berkeley professor Robert Reich, and Nobel laureate Joseph Stiglitz, call for a wealth tax to reduce inequality.
Pitting the rich against the poor in the name of the middle class is nothing new—from the growing pains of the Industrial Revolution, to arguments about why we need to protect manufacturing employment (despite extraordinary gains in manufacturing output), to the calls for greater regulation of financial markets after the Great Recession, to modern anti-poverty programs, we’ve seen it before. Gramm and Boudreaux leave no stone unturned in exploring how some make the same mistakes over and over again, expecting different results.
Unironically, it is colossal economic growth that benefits the rich but disproportionately benefits the poor—and this can be attributed only to economic freedom. What is painted as the villain is the source of opulence, to use the words of Adam Smith. We need to stop biting the hand that feeds us and reject myths that stem from this same disdain for free contracts and free people. It is appropriate to end where the authors begin: “We dedicate this book to America—not the idealized shining city on a hill but, rather, an unfinished work of a free people who strive and often fail to live up to their high principles but who then learn from their mistakes and perpetually rededicate themselves to the task.” Now is the time to rededicate ourselves to economic freedom.
