Economics

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Most wealthy Americans achieved their affluence not by inheritance or real estate speculation but by starting and managing profitable businesses.

Most of us don't have the time, the investment capital or the experience necessary to found and run a successful business, but we can still own a piece of one through the quintessential expression of capitalism: the stock market.

With even a modest amount of money, an individual can accumulate a stake in many of the world's great businesses. And it's easy.

A click of the mouse - and a seven-dollar commission - and you're in. Another click - another seven bucks - and you're out. (Compare that to your typical real estate closing.)

And owning a piece of a company is a whole lot simpler than running one. You don't have to sign personal guarantees, hire or fire employees, grapple with an avalanche of federal mandates and regulations, pay lawyers and accountants, or even show up for work. How great is that?

Some Americans today obsess over the issue of fairness. But the stock market shines here, too. If I own shares of Microsoft, for example, my gain over the next year will be exactly the same as the nation's richest man, Bill Gates. Sure, he may own a few more shares than I do, but our percentage returns will be the same.

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In short, over the past few hundred years, capitalism has vastly improved our quality of life and standard of living. Milton Friedman understood this.

He evangelized about it, sharing his conviction that personal freedom is the supreme good in economic, political, and social relations.

And he was never angry or mean-spirited about it. When he took down his debate opponents, he did it with a smile. (This exchange with talk-show host Phil Donahue is typical.)

Friedman generally started by questioning the premises of his sparring partner, often to devastating effect. That's why former Secretary of Labor, Treasury and State George Shultz once joked that "everybody loves to argue with Milton, particularly when he isn't there."

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For some today, the advantages of free markets are so evident that a champion seems unnecessary. But that wasn't the case when Friedman began making a name for himself in the 1950s.

Intellectuals and academics were enthralled by the possibilities of central planning and government control. Experience - and Milton Friedman - taught them otherwise.

When he died in 2009, The Economist described Friedman as "the most influential economist of the second half of the 20th century ... possibly of all of it."

His wife Rose - a fellow economist and co-writer - died three years later. In their memoir Two Lucky People, they chose not to dwell on the bestsellers, the honors and prizes, their material success, their public service, or even their Foundation for Educational Choice:

"Our life has surpassed our wildest expectations: two wonderful children, four grandchildren, rewarding professional careers, and a loving partnership. Who could ask for more?


Source: Spiritual Wealth

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Why Are Economists So Bad at Forecasting Recessions? By Barry Ritholtz

The obvious answer is that extrapolation of current trends into infinity fails in any data set that is cyclical .

http://www.ritholtz.com/blog/2012/11/wh ... ecessions/?

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The Other Freedom Document of 1776 by Alexander Green

As every American kid learns in school, the United States began as a political experiment, our creed proclaimed in the Declaration of Independence.

Yet, coincidentally, another set of documents – also published in 1776 – helped launch a global economic miracle to rival the political one. I'm referring, of course, to Adam Smith's Wealth of Nations.

Smith (1723-1790) was a Scottish moral philosopher and a leading Enlightenment thinker. And Wealth of Nations, his magnum opus, is rightly venerated.

British historian Niall Ferguson calls it one of the foundational texts of Western civilization, setting it alongside the works of Isaac Newton, John Locke, Edmund Burke and Charles Darwin.

To appreciate why the book had such a profound impact, we have to understand the economic thinking of his time. Gold, land, and agricultural output were regarded as the only real "wealth."

And so the British government granted royal charters for monopolies, imposed protective tariffs on imported goods, and regarded trade as a zero-sum game among countries for an economic pie that could not be expanded.

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Smith changed that, exposing the flaws in this view and demonstrating through rigorous arguments that:

• Competition ensures a steady fall in prices and a rise in the quality of goods.
• Specialization – the division of labor – is the original source of economic growth and increased productivity.
• Free trade creates pricing mechanisms that allow supply to meet demand.
• Any definition of liberty not based on property rights – including the right to keep the fruits of your own labor – is meaningless.
• Government interference to protect favored interest groups hurts most business owners, workers and consumers.

His key insight, however, was that no external force, no coercion, no violation of freedom is necessary to produce economic cooperation.

Trade is about voluntary exchange for mutual benefit. Yet buyers and sellers aren't the only ones who profit.

Smith showed how individuals, pursuing their own self-interest, are led as if "by an invisible hand" to promote the public good.

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In their quest for greater profits, businesses innovate and increase efficiencies, forever creating products that are better, cheaper and longer lasting. No one benefits more than the consumer.

The resulting economic growth favors employees, too. After all, the best and most reliable protection for a worker is the existence of many employers.

Their demand for his services makes it in the self-interest of his own employer to pay him the full value of his work.

Adam Smith understood that economic ideas matter. A lot. You need only compare the astonishing prosperity of Hong Kong, a tiny island with few natural advantages, to the former Soviet Union, a country stretching across 10 time zones and blessed with bountiful resources that couldn't produce a reliable car or even a decent pair of blue jeans.

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Leonard Read (1898-1983), founder of The Foundation for Economic Education, explained why in a famous essay, "I, Pencil."

In it, he illustrates how the free-enterprise system enables millions of unconnected people to miraculously come together to create a product.

There's nothing special or unusual about a pencil, of course, a simple object made of wood, lead, metal and rubber that costs less than a penny to make. Yet not one individual on Earth can create one, or even knows how.

Think about it. Trees must be harvested. The wood must be cut, transported and milled (in a factory containing millions of dollars of equipment). The lead – actually graphite – must be mined, mixed with ammonium hydroxide, cut, dried and baked.

The wood receives six coats of lacquer, which requires growing castor beans and refining them into castor oil. The bit of metal – called the ferrule – is brass. That requires other laborers and craftsmen to mine zinc and copper and process them into sheets.

The eraser is a rubber-like product made with rapeseed oil from the Dutch East Indies and sulfur chloride. These are just a few of the hundreds of steps necessary to make an ordinary pencil.

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No one sitting in some central office orders these people around, commanding them to do their part to create pencils.

They live in different lands, speak different languages, practice different religions, and may even hate one another, yet they cooperate to produce the pencil, without most of them even realizing it was an end product of their labor.

What inspires these creative human energies? How do millions of tiny "know-hows" naturally and spontaneously come together to meet our desire for an endless array of products and services?

Smith provided us with the answer more than two centuries ago. As Nobel Prize-winning economist Milton Friedman notes in Free to Choose, "Adam Smith's flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers and sellers could coordinate the activities of millions of people, each seeking his own interest, in such a way as to make everyone better off.

It was a startling idea then and it remains one today, that economic order can emerge as the unintended consequence of the actions of many people, each seeking his own interest."

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Of course, Smith could never have imagined the technology, medicines or standard of living we enjoy today.

Yet his Wealth of Nations explains exactly how it came to be, why tens of millions in the private sector work and innovate for our benefit without any threat of force or coercion.

Many – perhaps most – Americans still don't get this, and can occasionally be heard grumbling about what a shame it is that our economic system is "based on selfishness."

To them, it seems intuitive that a bunch of smart, committed, well-intentioned people – call them central planners or "public servants" – making disinterested decisions on behalf of the rest of us should be able to create a better, fairer economic system than a bunch of unenlightened vendors hustling for personal gain.

But it simply isn't so. No system based on anything other than economic self-interest can produce the kind of prosperity we enjoy today. (Just ask the Chinese.) Smith was the first to recognize and articulate this.