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Why Free People and Free Markets Are the Best Answer in Today's Economy

Written by Steve ForbesAuthor Alerts:  Random House will alert you to new works by Steve Forbes and Elizabeth AmesAuthor Alerts:  Random House will alert you to new works by Elizabeth Ames

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Synopsis

Has capitalism failed?
Is it fundamentally greedy and immoral, enabling the rich to get richer? Are free markets Darwinian places where the most ruthless crush smaller competitors, where vital products and services are priced beyond the ability of many people to afford them?
Capitalism is the world's greatest economic success story. It is the most effective way to provide for the needs of people and foster the democratic and moral values of a free society. Yet the worst recession in decades has widely—and understandably—shaken people's faith in our system. Even before the current crisis, capitalism received a "bad rap" from a culture ambivalent about free markets and wealth creation.  This crisis of confidence is preventing a full recognition of how we got into the mess we're in today—and why capitalism continues to be the best route to prosperity.

How Capitalism Will Save Us transcends labels such as "conservative" and "liberal" by showing how the economy really works. When free people in free markets have energy to solve problems and meet the needs and wants of others, they turn scarcity into abundance and develop the innovations that are the foremost drivers of economic growth. The freedom of democratic capitalism is, for example, what enabled Henry Ford to take a plaything of the rich—the car—and transform it into something affordable to working people.

In the capitalist system, economic growth doesn't mean more of the same—grinding out a few more widgets every year. It's about change to increase overall wealth and give more people the chance for a better life.


From the Hardcover edition.

Excerpt

Chapter One

"Is Capitalism Moral?"

The Rap eCapitalism is an amoral, dog-eat-dog system founded on greed and the survival of the fittest.

The Reality eCapitalism is the world's most humane economic system, promoting the democratic values of a free and open society: hard work, cooperation, generosity, charity, and devotion to the rule of law.

Is capitalism moral? The question has been debated since before the days of Karl Marx. But it has more relevance today than ever in the wake of the recent financial crisis and recession.

Capitalism's critics insist that evidence of its "immorality" is everywhere—from the collapse of Enron in the early 2000s to the "predatory lending" that helped bring on the subprime-mortgage meltdown and subsequent recession to investment adviser Bernard Madoff's mammoth $50 billion Ponzi scheme that wiped out personal and institutional fortunes around the globe. These and other events, they say, demonstrate that the free market is a winner-take-all jungle, a place where the most ferocious and dishonest triumph, where nice guys finish last, where greed rules and people get ahead by exploiting others.

No doubt there can be bad behavior in a capitalist system. There is bad behavior in any society. However, when viewed as a system, capitalism is more moral than any and all alternatives.

Capitalism has produced the world's highest standard of living by promoting the moral values of cooperation, democracy, and free choice. Nobel Prize–winning economist and noted free-market advocate Milton Friedman frequently made the point that capitalism's foremost historic contribution has been its moral influence.

As we started to discuss in the introduction to this book, capitalism is not about selfishness, but about the needs and wants of others. Former U.S. ambassador, noted theologian, and author Michael Novak makes this point:

The capitalist economy is not characterized, as Marx thought, by private ownership of the means of production, market exchange, and profit. All these were present in the precapitalist aristocratic age. Rather, the distinctive, defining difference of the capitalist economy is enterprise: the habit of employing human wit to invent new goods and services, and to discover new and better ways to bring them to the broadest possible public.1

Adam Smith explained in his classic work The Wealth of Nations that the exchange of goods and services in a market takes place only if both sides benefit. Such mutually beneficial exchanges, multiplied by the hundreds of millions, form what Smith referred to as "the invisible hand." The classic example of the pencil illustrates how these exchanges spontaneously allocate resources in a way that benefits more and more people.

To see the benefits of the Invisible Hand, one need only look around at the profusion of entrepreneurial businesses in most American communities. The vast array of goods and services generated by our vibrant democratic capitalist economy is unequaled: from 24-hour gyms and copy centers to supermarkets with countless varieties of food to even day spas in airports. The open markets of democratic capitalism meet needs that people don't even realize they had. Who ever would have imagined, for example, that we would need social networking sites such as Facebook? Or that you'd want to get a massage at an airport? Millions of Americans—and people around the world—now use Facebook and other similar sites every day, and they benefit from an Internet industry that began in the United States.

Free markets don't just meet the needs of the majority. If there's something people want or need, entrepreneurs in an open market will figure out a way to provide it—from size 22 shoes to hard-to-find spare parts for home appliances.

Since the emergence of democratic capitalism in the last three hundred years, humankind has made more advances—in incomes, standard of living, social mobility, and longevity—than in all the previous centuries put together.

Those who buy into capitalism's bad rap fail to see the moral significance of democratic capitalism's ability to provide for people's material well-being. And yet, would anyone question the immorality of regimes such as Venezuela, North Korea, and the former Soviet Union, where restrictions on personal and economic freedom have caused citizens to suffer extreme deprivation, food shortages, and even famine?

Democratic capitalism is moral precisely because it gives people the greatest latitude to meet their needs and desires by serving those of their fellow citizens, and, through doing so, it generates broad-based prosperity.

Many people today have forgotten that, for centuries, China was technologically ahead of Europe in metallurgy and shipbuilding. Both Europe and China, for example, developed the compass. But Europeans were the first to use it in navigating and exploring the earth. Why? Because Europe had a religious belief in the necessity of progress that eventually became a key underpinning of capitalism.

Milton Friedman wrote that capitalism is about being "free to choose."2 That's why free markets have caused people around the world to move in the direction of democracy. Michael Novak has observed: "Every democracy on earth that really does protect the human rights of its individual citizens is based, in fact, upon a free capitalist economy. Empirically speaking, there is not a single contrary case."3

Free markets are about people expressing their desires, saying yes or no to a product or service by essentially voting with their money. Economist Walter Williams has written that, in contrast to state- dominated societies, capitalism respects "the sanctity of the individual" and is "rooted in voluntary relationships rather than force and coercion."4

In a democratic capitalist economy, people interact in networks of cooperation that teach discipline and moral lessons—from the importance of showing up for work and handling money responsibly to the value of teamwork. Americans take capitalism's moral ethos for granted. Cynics may ridicule chirpy fast-food servers who greet them with "Have a nice day." But this etiquette reflects an emphasis on meeting the needs of others that is not present in other societies.

For example, twenty years after the fall of the Soviet Union, visitors to Russia still complain about the sullen customer service. That's because Russia's formerly communist society was run by a repressive government that controlled all resources and imposed its agenda on citizens. People had to accept what they got, take it or leave it. The idea of freely meeting people's needs—and being polite to them—in an open market was largely alien to this culture.

Russians are only now learning customer-service values from Western businesses like McDonald's that have managed to gain a foothold in the country's difficult business environment. The story is often told that when McDonald's started in Russia twenty years ago, company trainers had to overcome the famously dour attitude of service personnel whose attitude was "We've got the hamburgers. The customers don't."5

The value capitalism places on meeting the needs of others doesn't stop with the marketplace. It has made America a more charitable nation. No citizens give more of their income and time than the American people. According to New York University professor Claire Gaudiani, the U.S. gives twice as much as the next most charitable country—about $300 billion each year. This generosity extends throughout all income levels and is not limited to domestic charities. Americans have sent hundreds of millions of dollars overseas to help those in need after natural disasters ranging from the Burmese cyclone to the Asian Tsunami.

To fully appreciate the morality of democratic capitalism, it helps to have lived in other societies. Author and human rights activist Ayaan Hirsi Ali was born in Somalia, spent time in Saudi Arabia, and later lived in the Netherlands, where she served as a member of parliament. She now lives in the United States. Having experienced a repressive terror state, a Middle Eastern feudal society, and a European social welfare system, she believes that the moral standards of American free enterprise "are far higher than those of history's other great powers."

Why? Because, she says, democratic capitalism is a "meritocracy" that offers people the greatest opportunity to pursue their own goals, to innovate and excel, both in their business lives and at home in their communities. Not only does Ali believe democratic capitalism to be more moral than the oppressive systems of the former Soviet Union, prereform China, and Saudi Arabia. She writes that it is also superior to the welfare states of Western Europe, whose statist economies "corrode" individual responsibility by encouraging dependency.

In a free-market society, where liberty comes first, individuals tend to be more creative and to innovate; in welfare states that assign priority to equality, the natural resourcefulness of human beings is perverted. To become successful, you must learn how to "work the system" rather than how to develop a better product. Risk is avoided, and individual responsibility is thwarted. Although superficially the system may appear fair, it promotes mediocrity and a sense of victimhood, and it discourages those who want to excel.6

Ali believes that the innovation and open exchange of ideas that are part of a free-market society make democratic capitalism best equipped to fix its flaws. For example, she says moral debates about issues such as pollution are conducted only in free-market societies. Based on her experience living in widely varying societies, she believes that democratic capitalism's entrepreneurial capitalists solve problems more efficiently than the bureaucrats of any government.

Ali readily acknowledges that our system of democratic capitalism is far from perfect—"There are many wealthy, decadent, and vapid people in America." However, she warns that the quest for moral perfection in a society can itself have immoral consequences:

In the course of history, the search for perfect societies—that is, the failure to acknowledge human imperfection—almost always ended in one or another form of theocracy, authoritarianism, or violent anarchy. But for those who seek to work with human flaws of every stripe, and to increase the sum total of individual happiness, the free market, combined with political freedom, is the best way.7

We wholeheartedly agree.

Q. But don't free markets rely on greed?

A. Free markets rely on trust.

Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms—greed for life, for money, knowledge—has marked the upward surge of mankind."

That's how Gordon Gekko, the iconic Wall Street financier in the 1980s film Wall Street, famously—and cynically—summed up a widespread view of the free market economy—a place where all economic transactions, for good and ill, occur because of greed, the darker side of human nature.

Modeled on the notorious corporate raiders of the 1980s, Gekko was a fictional character. But his belief is shared by numerous individuals who see capitalism as immoral and based on greed.

Those who equate capitalism with greed will sometimes quote from the eighteenth-century Adam Smith classic The Wealth of Nations: "Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens."

True, Adam Smith's brewer and baker give you dinner for a self- interested reason: they want your money. But self-interest isn't greed.

One of the seven deadly sins, greed means taking too much of something that you may not rightfully deserve. That is what Bernard Madoff was accused of doing, and that is why he went to jail. But his behavior, like that of any criminal, is an exception. People don't get ahead in a democratic capitalist economy by taking what they don't deserve. They may for a while, but, as the story of Bernard Madoff shows, sooner or later they pay the price.

Most of the transactions that take place every day in free markets are actually based on the opposite of greed: millions of people exchange goods and services in mutually beneficial transactions based on verbal promises or written agreements, cooperating with one another in "webs of trust."

We rely on this trust each day: The knowledge that the overwhelming majority of customers will pay. Or that we will get a paycheck from our employer every two weeks. Or that the dry cleaners will return our clothing cleaner than it was before. Without this kind of reliability and predictability, our economy couldn't function.

A prime example of capitalism's "web of trust": the auction site eBay, where customers buy and sell to one another anonymously, based on little more than a thumbnail product profile, a seller rating, and a credit card number.

EBay's sellers and buyers are not always honest. But most often they are. Without this expectation of reliability there could be no commerce. People would not be able to buy, sell, and create wealth—not only on eBay, but in any market.8

Trust, not greed, was the reason why so many people were duped by Bernard Madoff. Few people could anticipate his over-the-top villainy because such a willful violation of the rules is relatively rare. Madoff's annual returns to clients also appeared reasonable.

The idea that capitalism is based on greed is belied when taking a closer look at the great fortunes of the people on the Forbes 400 list of wealthiest Americans. Number 33 on the 2008 list, Jeff Bezos, founded the hugely successful Internet bookstore Amazon.com, which has since become an online megastore selling virtually anything. He built his $8.7 billion fortune not because of greed, but because he correctly saw the potential of emerging Internet technology to do a better job selling books than bricks-and-mortar retailers.

And what about Oprah Winfrey (number 155 in 2008, with a net worth of $2 billion)? Her story is well-known: born in Mississippi, she rose to become a TV talk show host, actress, producer, publisher, and owner of a media empire. Her productions and publications promote positive values of self-improvement. She has also built her fortune by bringing wealth to others, launching the media careers of personalities like Dr. Phil and Rachael Ray. As if all of this were not enough, she has donated millions to charity, including starting a school for girls in South Africa.

Henry Hillman (number 134 in 2008, with a net worth of $3 billion) was not self-made. He inherited his family's steel fortune. But he, too, has been anything but greedy. He has invested in real estate, medical technology, and other high-tech companies. Hillman has been one of Pittsburgh's most active philanthropists—a heavy supporter of medical and computer research. He has given some $20 million to cancer research and recently gave $10 million for a new computer science research building at Carnegie Mellon University.

Number 68 on Forbes' 2007 list was James Sorenson. The inventor, who passed away a year later at age 86, made a $4.5 billion fortune from medical devices, including a patented plastic catheter and a disposable surgical mask. Sorenson had more money than he could ever spend and nothing to prove. Yet he started another new venture, Sorenson Forensics, in 2006, shortly before his death. The company's genome-based technologies have helped solve cold-case murder mysteries. Asked why he risked his capital so late in life to start yet another new business, the habitual entrepreneur replied, "It soothes the soul to help people."

John Drummond isn't on the Forbes 400 list. His business, Unicycle.com, started out as a hobby. Drummond discovered that the unicycling he'd loved as a child could help him take off weight.

Yes, Drummond had a self-interested reason for building his business— he had been laid off by IBM and needed a job. But he also wanted the sense of personal fulfillment that comes from bringing something good to others. Drummond felt that people would enjoy unicycling and appreciate its unique, if quirky, value as a fitness workout. He succeeded because he was an innovator: he made a hard-to-find product more easily available over the Internet.

Today Drummond's business has franchises in eight countries, and he recently started another business, Banjo.com.

The claim that capitalism is based on greed is often used by politicians to sell solutions to economic problems that are supposed to be more moral—from taxes on windfall profits to government health insurance. These government-imposed remedies are supposed to deliver greater morality and fairness. But as we will show repeatedly in this book, they generally do neither. That's because political solutions are not developed to serve the Real World needs of people who make up a market but the narrower concerns of those who happen to be in power. They're frequently less fair, and less moral, than grassroots market solutions.

If greed is the one-sided taking of what does not belong to you, then what does one call pork-laden stimulus packages and other legislation that channel taxpayer money into things like "low bush blueberry research" and a water taxi service in, yes, Pleasure Beach, Connecticut —politicians' personal projects that produce few if any economic benefits. Whatever you may call them, such "solutions" divert capital that could have been put into productive innovations that would have created more wealth for more people. Is that moral?


From the Hardcover edition.
Steve Forbes|Elizabeth Ames|Author Q&A

About Steve Forbes

Steve Forbes - How Capitalism Will Save Us

Photo © KAROL DUCLOS PHOTOGRAPHY

STEVE FORBES is chairman, CEO, and editor in chief at Forbes Media and an internationally respected authority in the worlds of economics, finance, and corporate leadership. He campaigned twice for the Republican nomination for the presidency. His previous books include Flat Tax Revolution, A New Birth of Freedom, and the New York Times bestseller Power Ambition Glory.

About Elizabeth Ames

Elizabeth Ames - How Capitalism Will Save Us

Photo © KAROL DUCLOS PHOTOGRAPHY

ELIZABETH AMES is founder of BOLDE Communications, which advises corporate and individual clients on communications strategies. Her work as a writer and journalist has appeared in a variety of magazines and newspapers.

Author Q&A

HOW CAPITALISM WILL SAVE US

Why do you think books and movies critical of capitalism -- like Michael Moore’s movie Capitalism: A Love Story – resonate with so many people?

We’re just been through a historic economic trauma, the likes of which we haven’t seen in decades. Most people alive today were not around during The Great Depression. Events like Bernard Madoff’s multi-billion dollar scam and the collapse of Lehman Brothers, Bear Stearns and Morgan Stanley were also momentous. It looked like the system had failed.

Even before the meltdown, our culture has long been ambivalent about capitalism and free markets, for reasons we discuss in our introduction. The events of the past two years fed on those emotions and created a full-blown crisis of confidence in our economic system.

So, you don’t think capitalism has failed?

Just the opposite.  No system has been more effective than capitalism in turning scarcity into abundance. Since the early 1980s – when pro-market reforms were instituted in the U.S. and around the world –up until the financial crisis that began in 2007, we saw an unprecedented explosion of prosperity. Tens of millions of people a year worldwide were joining the middle class. Between 2003 and 2007, the growth of the American economy alone exceeded the size of the entire Chinese economy.

Ironically, one reason for the enormity of the crash is that the amount of wealth created by our system is so immense. As economies become larger and more wealth is created, it’s no surprise that the scandals and the scope of losses would be larger. There’s no Lehman Brothers, for example, to collapse in North Korea. And Bernard Madoff would have no one to rip off in that country because no one has any money. Socialism and communism are no protection against economic turmoil – just ask the late Soviet Union, which collapsed into economic ruin.

Aren’t you suggesting that capitalism encourages the kind of excesses that caused the crash?

Not at all. A key point we make is that the economy’s worst historic failures have – in every case – been caused by massive policy errors by government. Not only the recent financial crisis, but the Great Depression, and the economic stagnation and inflation of the 1970s, were anything but the result of normal business cycles. Only regulations and policies affecting the entire national economy can produce the kind of trauma we’ve just seen.
 
Two examples: the Smoot-Hawley Tariff which brought on The Great Depression and the monetary policies that inflated the housing bubble that brought on the 2008 financial crisis and “Great Recession.”  We’re not saying that the government was entirely to blame for that meltdown, but its actions and policies helped inflate the real estate bubble and fueled the mania in the financial markets.
 
So what do you think is the biggest misconception people have about capitalism?

In the book we look at a series of longstanding misconceptions that make up what we call “The Rap” on capitalism. A central one is that capitalism is driven by “greed.” Politicians, for example, just love using the G-word.  In fact, the self-interest that drives entrepreneurs to meet the needs and wants of others in a democratic capitalist economy is the furthest thing from greed.

Far from being about greed and “exploitation,” democratic capitalism is about people coming together spontaneously in open markets to meet the wants and needs of others – and, in doing so, generating ever higher levels of broad-based prosperity.  The freedom of America’s open markets – what we call its “iPod Economy” – is why the U.S. has consistently outpaced other nations in technology, job creation and opportunity.

Ok, I can buy the fact that capitalism creates jobs. But are you really serious when you state that capitalism is the ”most moral economic system”? What about all those layoffs and the rich getting richer. What’s so moral about that?

We discuss these and many other questions in the book.  Regarding layoffs, they are undeniably painful. But if companies were unable to downsize in bad times, many would end up going out of business. Far more jobs would be lost. The flexibility of our system is why the U.S. has traditionally been a better job creator and --until the financial crisis – has had lower unemployment than European nations with rigid labor laws. As for the morality of the “rich getting richer,” we explain that the rich are society’s innovators and investors. They don’t just create wealth for themselves, but for everyone else.  Societies that have banished or otherwise impaired their commercial class have seen their economies slide.  Everyone loses. Is that moral? Besides, the rich are not a fixed, permanent group. Individuals are constantly gaining and losing substantial wealth.

Who loves capitalism more – Republicans or Democrats?

We provide examples of both Democrats and Republicans who have violated – as well as embraced – pro-market economic principles.  Not only Ronald Reagan, but John Kennedy, Bill Clinton and George W. Bush, stimulated the economy through substantial cuts in tax rates. Richard Nixon and George W. Bush, both Republicans, violated free market principles by attempting to artificially boost the economy by printing too much money. In both cases, their meddling produced disaster. In Nixon’s case, such policies led to the stagflation of the 1970s. George W. Bush’s monetary policies helped produce the housing bubble that exploded, bringing on the financial crisis.

Isn’t government needed to solve problems like healthcare?

One of the surprises of this book is the counter-intuitive observation that government has exacerbated problems in healthcare, just as Fannie Mae and Freddie Mac helped create the housing crisis. The tax code and government involvement have led to today’s distorted system of “third party pay,” where corporations and not individuals are the primary buyers of healthcare. The system gives the illusion that much of healthcare is “free,” which stokes demand without increasing the supply, and inflates prices. Medicare and Medicaid also underpay doctors and hospitals to the tune of $90 billion  – costs that are shifted to private patients.
 
Government solutions are generally sold by politicians as being “fair.”  But more often what you get is politicization of a market – where certain groups, such as unions or corporations with savvy lobbyists, are favored.
In contrast, markets where there is less government intervention – for example, in food, clothing, and technology – you see the greatest abundance, the lowest prices. There’s the least dysfunction and the most fairness.
 
That’s why we called this book, How Capitalism Will Save Us. Allow the millions of people in free and open markets to harness their creative energies, and they always come up with ways to save us  -- solutions that even the smartest bureaucrat would never dream up.




From the Hardcover edition.


  • How Capitalism Will Save Us by Steve Forbes and Elizabeth Ames
  • June 21, 2011
  • Business & Economics
  • Crown Business
  • $15.00
  • 9780307463104

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