 Good to see you all here, and I know that there are many watching online, too So I'm welcome to those of you that are remotely watching and we've got a new gimmick over here. I understand the 360 camera. So This is one of my One of my favorite topics to talk about at Mises you There's really just no shortage of material, right? This is like Whack-a-mole or something there's always a new objection to deal with and I've only got a few minutes here, so I can't deal with all of them and that would take hours and hours to to handle the objections serious and silly that come up to Capitalism, but let me let me start off by defining terms a bit there. There are those who object to using the term capitalism and I Respect the reasons for it. It's Perhaps best to think of this as free markets But I use the term Mises use the term capitalism He talked about the anti-capitalistic mentality and that's really what we're dealing with here It is important when you're dealing with people who object to the idea of markets To ask a few questions to figure out what exactly they're they think they mean by capitalism Because a lot of times what you find is that they mean crony capitalism What they're talking about is some sort of arrangement where businesses are able to gain advantages through Restrictions on competition from the state or they're able to gain privileges. They're able to ignore the side effects of their activities on bystanders and They're able to to basically use coercive force via the state to transfer wealth in their direction That is not what we mean here by capitalism So we're not talking about crony capitalism where special interest groups are able to manipulate the government to To get what they want at the expense of of others So the term free markets might be a preferable term in some ways. There's no ambiguity there We When we say free market we mean a market that is where people are free to act voluntarily without state Coercion so that sort of groundwork being laid here Let's talk a little bit about the first of five objections that I'll mention in previous years I had a presentation with ten and that's not I didn't shrink it to five because there are fewer It's just there are if anything more now, but I Never seem to make it all the way through so I picked some that I thought would be a Particularly salient here. So first you've heard this sort of saying the rich get richer the poor get poorer I hear this sometimes from students. It's almost a cliche And yet it's just not true That's not what we see happening So this is an sort of leveled as an indictment against Markets that markets lead to a few elites the one percent or what have you that that will Rise to the top of the economic system Stepping on the bodies of everyone else who is made poorer by their activities Now part of this may originate from a kind of a fixed view of wealth that there's only so much in the world There's only so many resources. There's only so many Goods and services that are produced and so the basic question in many people's minds is how do we distribute what's available? That is not what markets Not how markets operate. It's not how economies operate economies operate by creating new things innovation and creation so that there is more and The fundamental question really is one of production innovation and production and so you can see this if you look at Society human society in almost every country Over the last few decades and and every country over the last Century or two you can find an improvement in the standard of living across the board Today according to Matt Ridley in his book the rational optimist of Americans officially designated as poor And by the way, it's important to recognize that an American who falls Just below the poverty line would be considered rather wealthy in many countries in the world. So the American definition of poor Other definitions might be widely disparate But if Americans officially designated as poor 99% have electricity running water flush toilets and a refrigerator 95% have a television 88% have a telephone 71% a car and 70% air conditioning Cornelius Vanderbilt had none of these and I think some of these statistics are a little dated. I Was listening to a podcast on the way here One of Russ Roberts podcast and he was talking to someone who was discussing the homeless population he's and the Interviewee was saying virtually everybody in San Francisco who's homeless has a cell phone So this this is this is the product of that innovation and production that the market system generates One important question to think about is are we discussing Inequality here or are are we discussing the well-being of the poorest fraction of society? Hayek said once the rise in the position of the lower classes gathers speed catering to the rich ceases to be the main source of Great gain and gives place to efforts directed towards the needs of the masses Those forces which at first make inequality self accentuating thus later tend to diminish it you can think of a society where inequality is is Substantial, but even the lower levels of that society economically speaking are doing very well Compared to other countries and then you can think of countries where maybe there's not so much inequality, but There's a very high degree of poverty So do we want more? Poverty reduction or do we want more inequality reduction? Those two things are not necessarily the same now. We do see some forces that have Moved us toward more inequality in some in some ways and developed countries and one of these is the superstar effect We get more specialization Especially as we have an economy where people can trade with those in other parts of the world So you get an international division of labor and that increases the Superstar effect when people have a larger market that they can sell to Those individuals who are the best at what they do will tend to do very very well So that is something that's going to cause a little more inequality as some people have an opportunity to Do very well for themselves increased immigration can do this Imagine someone from a very poor country who immigrates into a very wealthy country Even without the well-being of any single individual changing in fact, even if the immigrants well-being Increases as the after they immigrate you can still see an increase in inequality in the Destination country so someone comes from a country where their her capita income is a thousand dollars a year and They migrate to the United States and their income let's say doubles to two thousand dollars a year Because you've got that two thousand dollar a year individual in the United States Excuse me that will tend to increase the inequality in the United States even though no one is really worse off So increased immigration can do this also we have matching and and mating kinds of Issues that come up that tend to increase inequality of households So today in the United States high earners tend to marry other high earners with greater frequency than they once did if you go back several decades you would find more cases where a high-income earner married a low-income earner and That would tend to average out household income much more so than you see today So that that would tend to Increase inequality note that these are not really increasing poverty and that's why it's important to make that distinction between inequality and poverty There are some other factors that are worth mentioning here and I'm only going to mention a couple To give you a flavor of the kind of thing we're talking about here, but we do see a reduction in inequality Largely because there is an elevation of the lowest income levels and lowest educational status as That group tends to improve in their standard of living You see a reduction in inequality There IQ scores As Matt Ridley has pointed out Have the spreads have shrunk Not so much because the people with the highest IQs have lost points But because those with the lowest IQs have gained points over over time British aristocrats were six inches taller than the average height in 1800 today they're less than two inches taller differences in nutrition and so forth have made an Impact there early childhood development has made powerful impact Now if we're concerned about inequality, and I'm not saying that we shouldn't be there are some government policies that have actually Increased our inequality or at least worked against reductions in inequality and one of these Would be the wealth transfer kinds of programs that we see Tanner and Hughes a few years ago pointed out that welfare can out out pay work in the United States in 35 states of this country Welfare pays more than a minimum wage job and Of course you talk to someone who's a more of a progressive on this and they'll say oh well the solution of that is to just raise the minimum wage Well, no that that's a good way to render someone unemployed and on welfare, but not typically going to help matters In 13 states welfare pays the equivalent of more than $15 an hour For many recipients they say especially long-term dependence Welfare pays more than the type of entry-level job that a typical welfare recipient can expect to find Now the problem is not well It is the absolute amount of wealth transferring that's going on But part of it is the structure of these wealth transfer programs which tends to create a kind of hurdle that Someone in poverty would have to get over in order to gain income of a substantial amount from earnings and colleague of mine at Wafford College shared this with me a few years ago. This is rather complicated diagram, so I'll try to Summarize this as well as I can but let's look at the upper diagram here This is the amount of income a person would have from their earnings and also from transfers, so you've got a Basically 45 degree line here Axes are not exactly equal in scale, but that if they relied entirely and only on their earnings Then this dark blue line here would show How much income they have if you factor in the wealth transfer programs that they qualify for at various levels of income You find and I'll just skip the light blue lines here, but the the darker blue of these Of these lines here shows what they have after they've been granted a Benefit from a welfare program and after they pay any taxes they owe on their earnings so what you see is that At low levels of income their standard of living is going to be considerably higher than their earnings would allow And at higher levels of income after we get into the kind of middle-class area here You'll find that their standard of living is going to be lower than their earnings alone would allow because they're going to be taxed on those earnings So the slope of this is not as Steep as it would be without taxes and wealth transfer programs You'll notice that for certain ranges of income like right in here This is very very flat That is if you increase your earnings your standard of living is not going to go up very much and That means that there's an implicit tax on your Earnings beyond the tax the income tax that you would pay on them. You're also losing benefits, which of course would be a feature of most any Earnings tested welfare program you earn more than the government's going to say well, you don't need as much in Assistance so we're going to cut back on the assistance as you earn more so if I earn another dollar and because I earn another dollar I lose about 30 cents of Benefits that I had qualified for then I'm My behavior is going to be influenced in a way. That's very similar to me being taxed 30% of my income, okay So if you factor in the actual taxes and then this sort of implicit tax that welfare recipient would Would pay by losing various benefits then the Implicit tax if you count both of those together and they again they act very very much the same as far as behavior of the recipient Then you get an implicit tax. It's almost a hundred percent for certain income ranges Notice that for lower incomes the tax that is the income tax plus the Lost benefits is in the 20 to 40 percent range for incomes below about $10,000 a year Once you hit about $10,000 a year you start to lose a lot of eligibility for various programs And so the implicit tax jumps up to around 70 percent and then up to close to a hundred percent So this means that if you're a person who's earning about $18,000 a year and You think well, maybe if I work harder or get some more training and get a different job and earn more Maybe I'll be better off. Well not really You won't be in fact for wide ranges of income the implicit tax is so high That the Motivation the person would have to earn more work harder work more hours work smarter, etc. Is pretty low So this means that if a person is in this low income level here Range here, and they want to be over here at sort of a middle-class lifestyle They're going to have to make a huge leap in order to get there They're going to have to face very high implicit taxes. So this means there's a hurdle as I said earlier that Induces people to remain at these very low incomes Once you're past the hurdle, maybe you get some education develops some skills and so forth And you're over here then your implicit tax is much lower But in order to get there you've got to do something pretty incredible to get past all these adverse incentives So this increases inequality you get people stuck down here you get people in here But you don't get very many people at the hurdle itself Now Backing up and looking big picture on this. There's a study that's done every year Or every other year I think it's every year by the Fraser Institute and It's called the economic freedom of the world report and I use this in my in my macroeconomics classes to to show the impact of markets on incomes and Various measures to the extent that you can measure human well-being you can measure things like life expectancy Generally, it's better to live longer than live shorter literacy rates Access to clean water and various other things and so we understand that there are problems with aggregating numbers, but I still think these are illustrative of some of the issues here if you look at the countries that Are they rank 158 countries in the last report they did in 2016 they rank countries by economic freedom levels and they look at things like How much regulation is there? What are the tax rates? How much corruption is there? What's the legal system like is it a country where the monetary system is stable or do they have a lot of inflation? Are people free to exchange currency with Exchange money with other countries Lots and lots of variables and so this is a kind of a meta index of various things that you might you might think about as relating to economic freedom So you could think of this as a kind of a rough indication of how Market-friendly a country is and they divide the countries up into four Quartile so you've got the most free the next most free the third quartile And then the lowest or fourth quartile where countries that are the least economically free would be would be located What we see is that the countries that are the most economically free That's the blue here have the lowest levels of extreme and moderate poverty 1.9% of the people in those countries That's about 40 countries are it have a State of extreme poverty and about 2.3% are in moderate poverty As you can see if you're in one of the least free economic or least economically free countries then the rate of extreme poverty is 30.6% and Moderate poverty rate is 48.1% If you look at the income share And this is looking at more of an inequality measurement if you're looking at the income share of the poorest 10% In each of these countries it really doesn't seem to make that much difference This is a slight increase here For being in one of the most free countries you get 2.75% of the total income if you're in the bottom 10% If you're in the least free countries You average about 2.45% but really there's not much of a difference however 2.45% of a Large number a large income would be a lot more income in absolute terms So if you look at the income earned by the poorest 10% If you look at how well off this poorest 10% is as well as we can measure such things You find that it's it's tremendously better to be in a country, which is more economically free now I Have a few things to say about Where the top countries are and where who the bottom countries are we'll get to some of that in a little bit Let me address another kind of inequality based Concern that people have who are opposed to Two markets and that is this CEO to worker compensation ratio And you've seen this this kind of thing before No doubt there was a lot of this when the Occupy Wall Street movement was in the headlines and You still see people bringing this up that the CEO makes X amount of dollars and the the Lowest paid workers in the firm are making a lot less and so there's this giant ratio for some firms The argument is that somehow this is making the poorer workers or lower income workers in the firm worse off Because the CEO or whoever it is in upper management is making more and this is an old fallacy That there's some sort of fixed pot that the payroll for the firm is a fixed amount of dollars And so the more you give this one person there less there is for somebody else That's not the case in fact for some Companies that may be actually the reverse When you pay a lot of money to attract a CEO you're paying for the talent that CEO is producing For the firm so if you get a very talented CEO and the firm is quite possible that that CEO is Improving the performance of the firm and therefore creating better opportunities higher incomes and and other benefits for The lower less paid workers in that firm So there's nothing about the firm that says there's a fixed payroll and more you give to this person unless they're You have left over to give somebody else But there is this kind of concern Which you can see this is From the Economic Policy Institute Always a reliable source of misinformation on economics And you can see from 1965 going up here to About the bursting of the dot-com bubble See a very high CEO to worker ratio up to close to 400 times now one important Point here is we're looking at the 350 publicly owned US firms with the largest revenue each year This is not The average firm by any means these are very large firms And you can see this ratio kind of bumping up and down here and Lately it's been going up. I don't know what it is this year But there's something about this you should know The average size of the very large firms that are in this graph increased in recent years according to a Study published by the NBER a few years ago the increase in CEO pay between 1980 and 2003 which you can see From about here to about here That increase Can be fully attributed to the six-fold increase in market capitalization of large US companies during that period The firms are bigger The CEO is managing More it's shouldn't be surprising if this person is paid more because of the higher level of skill required to administer manage these kinds of assets so It just makes sense as the average market capitalization of companies in the S&P 500 increases the average CEO pay of those firms would also increase now as for the Ordinary CEO we find their pay is really not very remarkable If this is from a publication from AI a few years ago We find chief executives. This is from 2008 chief executives I'm sorry 2013 in 2013 chief executives were making about a hundred seventy eight thousand dollars a year about the level of a dentist and People don't look at dentists and say well, you know you greedy dentist What maybe they do I mean I'm perfectly happy with my dentist and I Want my dentist to be happy and well-paid so that when this person's yanking at my mouth They're not angry and disgruntled Doesn't want to cause me any pain So this is not really an exceptional income of course this is Lumping in the Bill Gates is of the world with people who are a lot less Managing a lot less in terms of assets Let me turn to the second Concern that people have about markets and capitalism and you've all seen this before right well socialism works in Europe People are happier in Denmark So Why can't we adopt that here medicine is cheaper in Canada? I mean I'll talk about health care later in the week But this is the kind of thing that you hear again and again now here's back to that index that I mentioned earlier I've got a here's the list of the top 30 most free countries in the world Out of about a hundred and fifty eight. I think that we're on the latest index So the most free economically free country in the world Hong Kong second of Singapore New Zealand We have somebody from New Zealand here. There we go New Zealand. All right number three and has been there for quite some time if I If I remember correctly Switzerland and then a whole bunch tied for fifth Canada, Georgia, that's not the state one door over Ireland Mauritius I should give extra credit if you can find Mauritius or United Arab Emirates Australia we got somebody from Australia here. There we go two people from Australia here UK Qatar Chile Jordan lives, where's the United States? Oh number 16 We used to be right up here in near New Zealand and we've dropped in the rankings good bit in the last few years Malta Armenia, Estonia Finland Denmark, etc alright now What I want to point out here is you've got Denmark, which is always brought up as one of these countries where you know They're socialist and they're happy and therefore we should be socialist and then we'd be happy And then you've got the Netherlands number 25 now this is out of a hundred and 58 or 59 countries The distance between the Netherlands and the United States and less between Denmark and United States. It's really not all that great They're well within the top quartile of economic freedom the United States is number 16. They're 21 and 25 Now their socialism Works Relative to many other countries because they're not very consistent with it. It is diluted with a hefty dose of other freedoms The United States score. This is a one to ten score that they're using on this index is 7.75 the Netherlands And the lower the higher the number the less economic freedom you have The United States is 7.75 the Netherlands is 7.82 Denmark is 7.72 0.03 Away from the United States The Netherlands ranks and if they if you divide it up into the subcategories of economic freedom the Netherlands is number nine Out of a hundred and fifty eight on the legal system and property rights They're number four on their monetary system. They're number four on the freedom to trade internationally. It's very highly ranked In many categories, where is it? low ranked Well on the size of government the size of the government is number 154 out of a hundred and fifty actually I see now it's a hundred fifty nine a hundred fifty eight 154 So they are balancing a very large Government with regard to their welfare state and some other things with some important economic freedoms where they rank very high Denmark is the same way Denmark is 155 out of a hundred fifty nine countries on the size of government But they like the Netherlands have a number of other important freedoms that help to offset that so I would say that these countries are Prosperous in spite of the site size of their government and they are enjoying the benefits of these other freedoms By comparison the United States is number 27 on their on the legal system and property rights number 40 on our monetary system and number 60 on our freedom to trade internationally, so we have a smaller government true Than the Netherlands or or Denmark, but we have we are much lower ranked on some other Economic freedoms that are worth mentioning Incidentally the top marginal corporate income tax rate is thirty nine point one percent in the United States That's the third highest in the world and the highest among the thirty four industrialized OECD countries in the Netherlands their corporate tax rates only 25 percent So I think it's a bit inappropriate to say well socialism works in the Netherlands and therefore we should copy What they're doing the socialism looks different But it's really not that Not that far apart Here are the bottom. I think in this case. I had about the bottom 31 or 32 countries that are on the list Just so you can see Did I miss something what was Venezuela yes, well They're not they're not doing much to improve that ranking last I saw either Their inflation rates very high price controls and everything and Read a few months ago. The average Venezuelans lost like 15 or 20 pounds Because the difficulty of getting food Anyway Just to give you some perspective remember I mentioned the United States Ranked 7.75. I believe I said on the ranking Venezuela is three point two nine Argentina's four point eight one Ukraine the lowest ranked European country is six point zero zero 22 of the bottom 31 countries are African Georgia Yte who's An economist from Ghana and a president of the Free Africa Foundation says Africa is poor Because she is not free That is the key now as to this happiness thing I wanted to mention this because it comes up repeatedly There was a 1974 study by Richard Easterlin which produced something that lasted for a long time in economics and and other Disciplines called the Easterlin paradox The study seemed to show that the Wealthier countries didn't have happier people in them than poorer countries and So for decades people are citing this kind of thing. They're saying well look it's you can you can increase your GDP and so forth But you're not necessarily going to be better off Mentally for this There were two to 2008 studies that showed this paradox doesn't really exist that To the extent that you can measure happiness and I think that's extremely problematic. I'm not suggesting that these are That there's any really good way to do this But to the extent that they surveyed people and tried to figure out how happy are you and so forth The studies indicated that rich people are happier than poor people rich countries or have happier people than poor countries People get happier as they get richer. I mean pretty much every dimension you want to consider It is better for your well-being to have more income The earlier study the Easterlin study simply had samples that were too small to find any significant differences Certainly the more recent studies were problematic the Easterlin study appears to have been even more problematic This diagram has a series of bubbles corresponding to the populations these China's here India's here these United States and there's Denmark right up there and This shows on the horizontal axis the GDP per capita in 2003 adjusted for differences in purchasing power across countries and Here you've got mean life satisfaction According to their studies and so you can see that there's there's a pretty definite correlation between the two Let's look next at at this idea that capitalism destroys the environment I've got a whole talk later in the week on the environment. I think that's actually tomorrow on the environment and so I'll leave most of that for tomorrow, but Mises in his book the anti-capitalistic mentality says, you know, you really can't dismiss a Market-oriented country as being ugly there's a lot of A mockery made of of strip malls and fast-food restaurants and all of this kind of thing but and we Personally, I prefer a mountain view to looking at a McDonald's sign unless I'm hungry Most of us really enjoy the view of a McDonald's sign if that's what we want And so what markets have done is they have catered to those those needs if you compare the Sort of urban sprawl kinds of things that that are criticized to countries that are more Where the government has more intervention into the economy you get something that I You know, beauty is subjective. We understand that I I look at this and I do not see beauty. I you may Subjective value and all that I nevertheless These are those kind of Soviet block apartment buildings that were thrown up in the 40s 50s and 60s We'll talk later in my my other Talk about the environment on the BP oil spill. I don't really have time now to go into this I will point out in more detail tomorrow that Government incentives created the kind of environment in which a Company could ignore the impact that they might have on On bystanders, so we'll we'll talk about that some more Fourth on my list of five is this idea that capitalism is racist and sexist There's a lot here I will since I am short on time I will simply point you to a couple of articles on this One is called the the enemies of Jim Crow by Jeff Jacobi I think that was posted on cafe Hayek a while back and George leaf has an article which I think is on mises dot org called the economics and politics of discrimination Jacobi says in his article to summarize that if you're a streetcar owner And you want to move people around and get paid for doing so you don't want empty seats a good way to get Empty seats is to classify the seats according to a person's race and say well These seats are for African-Americans and these seats are for white people and if you do that then you're forgoing income and overriding concern of most for-profit businesses is Profit so you're not going to want to forgo revenue and have empty seats in your streetcar By creating this kind of a distinction on something other than their ability to pay for the seat So segregation ended up hurting the bottom line of streetcar owners The manager of Houston's streetcar company complained to city councilors in 1904 that to haul around This is a quotation to haul around a good deal of empty space that is assigned to the colored people and not available to both races in Quote is Is not good for his his firm In a in a study published in the Journal of Economic History Jennifer Roback an economist showed that in one southern city after another Private transit companies tried to scuttle segregation laws or simply ignored them and there is more on that as well Then there is this argument that capitalism produces the wrong stuff I had a longer headline something like capitalism doesn't produce the right stuff and Produces too much of the wrong stuff, but you've seen this before too Who's going to do the space exploration some projects are simply too big for the market that kind of thing What we actually see is that innovation technological innovation even though it may be especially though they're very significant forms of innovation are hindered by government intervention rather than improved the Wright brothers Wrote to the US government saying we have an invention here And we could you could use it for for scouting in the army for a message carrying and so forth They got a form letter back in response Their competitor who was heavily funded by the US government to the tune of something like fifty thousand dollars Which is a lot of money at the time Their competitor ended in utter failure. This is competitors playing about the crash into the Potomac River Nearly drowning the test pilot Wilbur and Orville Wright were entirely self-funded spent around a thousand dollars on materials and travel during their research As you know if you've read any of Mises and a number of other authors Following him. There's this serious calculation problem that governments face. How do they measure the cost and benefits of various? projects The Space Shuttle Classic example of something that was Extremely expensive compared to initial projections the projection was it's going to cost a hundred eighteen dollars per pound to get stuff into orbit The actual cost twenty seven thousand dollars per pound They projected we're just going to be able to have a flight every few weeks because we're going to land this thing We're going to set it back up on the launch pad and take off again A few weeks and what they actually found is every time they fly they're going to have to overhaul the thing For many months at a cost of one and a half billion dollars Every time then on the other side you get well capitalism produces too many bad things I will point you to Walter blocks two books on this defending the undefendable and then he's got a kind of a volume two on that as well If you Let's suppose that for whatever reason you think The people should not use certain kinds of recreational drugs There are first of all there are ways to Tackle what you see as a problem by trying to persuade people not to use recreational drugs So I try to try to persuade my children not to use recreational drugs. I think most parents would but I do I I If you are using that same technique With with children you have more control with adults you need to use persuasion When you try to introduce coercion into that problem you end up with all kinds of Side effects that you didn't intend the drugs get more powerful. They get more dangerous crime is associated Violence is associated with the buying and selling of these substances and so forth So Misa says certainly there are many people who smoke too much and Who smoke in spite of the fact it would be better for them not to smoke? He says this raises a question which goes far beyond economic discussion. It shows what freedom really means so the capitalistic system can be abused it Can it is abused by some people it's certainly possible to do things which ought not to be done But Misa says a disapproving person Always has a way to attempt to change the minds of his fellow citizens He can try to try to persuade them to convince them But he may not try to force them by the use of power By the use of governmental police power. I have just a couple of minutes for questions. Thank you very much for your time