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The Keys to Economic Development:

  • VIDEO: The Keys to Economic Development [April 6, 2004]

    Dear FFF Supporters,

    I just returned from Porto Alegre, Brazil, where I delivered a speech entitled “The Keys to Economic Development” to a conference sponsored by the Institute of Entrepreneurial Studies, one of the most prestigious free-market organizations in Latin America and the world. The conference was IEE’s annual “Liberty Forum” and was held in a huge auditorium at Catholic University. Attended by more than 3,000 attendees, it was covered by major Brazilian newspapers and was also carried live on the Internet by one of the local television stations.

    IEE is unusual in several respects: One, it is composed entirely of young men and women from all walks of life, primarily because as soon as a member reaches the age of 35, he must retire from the organization; the current president of the organization is 25 years old. Two, while there are always large numbers of men and women vying to join the organization, it is extremely difficult to be selected as a member. Three, most of the IEE members, year after year, are pure, no-compromise advocates of free-market principles; in fact, one member told me that the current crop of applicants is going to be subjected to a rigorous study program involving free-market economics and an exam at the end of the process. Four, IEE members meet every Monday evening to discuss free-market principles.

    This was actually the third time that IEE had invited me to Porto Alegre to share ideas on liberty. About 10 years ago, IEE invited me to deliver a speech on education at the Liberty Forum, which was attended by about 1,000 people. The other speaker on my panel, a Brazilian government official, went first and began telling the audience that the solution to Brazil’s educational woes lay in copying the educational system of the United States. I turned to the panel moderator, Roy Ashton, who was the IEE member who had extended the invitation to me, and whispered to him, “Roy, you do know what I’m going to say in response, right?” Roy whispered back: “Why do you think we invited you?”

    About 5 years ago, IEE invited me back to Porto Alegre to deliver a series of lectures to new IEE members on economic liberty, the rule of law, and the role of a constitution. Roy Ashton said that they were inviting me back to help lay a groundwork in the pure principles of economic liberty and free markets for the new IEE members.

    Those new IEE members I addressed five years ago are the ones now in charge of the organization and are the ones who invited me to address the recent Liberty Forum, which has grown in reputation and prestige all over the nation. In fact, during my visit this week, I was interviewed by two of Brazil’s major newspapers about my talk.

    The Brazilian officials who spoke at the conference, not surprisingly, talked about the need to reform Brazil’s economic system. I said to the IEE members, “You do know that my speech is not about reform but about a shift to an entirely different paradigm of economic liberty, right?” Their response was, “Why do you think we invited you?”

    Yours for liberty,
    Jacob G. Hornberger

    In the year 1776, there occurred one of the most monumental revolutions in history. It was not a revolution of violence; it was not a revolution of arms. It was a revolution that involved simply the expression of an idea. The idea was expressed in a book entitled An Inquiry into the Nature and Causes of the Wealth of Nations, written by a Scottish philosopher named Adam Smith.

    Prior to the time that Smith expressed this revolutionary idea, it was commonly believed that the king and his government officials had a legitimate duty to take care of the poor people in society. For example, there were laws against speculators — people who buy low and sell high, because it was commonly believed that high prices hurt the poor.

    There were laws against what were called “middlemen” — people who went to the outskirts of a village on market day to purchase crops from farmers coming to market with the intent to resell the crops in the village marketplace at a higher price — which hurt the poor, it was commonly believed.

    There were price controls, which protected the poor from high prices.

    There was government direction of production of essential items; after all, if government didn’t direct the production of jackets, for example, there existed the possibility that everyone would forget to produce jackets and, thus, some of poor could freeze to death.

    The government also helped the poor by providing them with food, housing, clothing, and other essential items.

    It was commonly believed that all this was the way to combat poverty.

    Then, along came Adam Smith and, with the expression of his revolutionary idea, turned the world upside down.

    Smith asked a question that most of us ask: What are the causes of poverty? But he understood that poverty is the natural state of mankind — people have always been poor. Smith went further and asked a much more important question, one that very few people today ask: What are the causes of wealth? The answer that Smith came up with shook the very foundations of the political world — and continue to do so today.

    It is very nice to be here in Porto Alegre to share ideas on liberty with you. This is actually my third visit to Porto Alegre — at the invitation of what I consider to be one of finest and most excellent organizations in the world — o Instituto Estudos Empresariais (the Institute for Entrepreneurial Studies). I also want to express my appreciation to your country’s former finance minister, Mr. Pedro Malan, who has graciously permitted me to share this panel with him. I know that Mr. Malan is held in very high respect and high esteem by the people of Brazil and so I would like to express my appreciation to him. Obrigado, Senhor Malan! (Thank you, Mr. Malan!) Also, I would like say that it’s a big honor to follow the speech by your country’s former President Cardozo, not only because of his eloquent speech but also because he has left us such a large audience of nice people for our panel.

    Before you send in your written questions for the discussion period, please don’t send any in that ask me what the solutions are to the problems of Brazil, because my answer will be a simple one: “I don’t know.” Unlike the U.S. State Department, I don’t travel to different parts of the world to tell people how to live their lives or solve their problems. The problems of Brazil are best left to the people of Brazil. Thus, my focus will be on the United States — and the problems we are facing in our country, but perhaps you will be able to apply some of the principles I discuss to the problems of your country.

    Having said that, however, I must express that I am extremely disappointed with something that I learned about the people of Brazil here at this conference — that not everyone in Brazil knows how to dance Samba!

    I grew up in the poorest city in the United States — Laredo, Texas. My mother was Mexican-American; my father was German-American. I was raised on a farm on the Rio Grande, which is the river that separates Mexico and the United States. During the 1950s, when I was a child, Laredo had the lowest per-capita income in our nation. The poverty was absolutely appalling — people were living in shacks with cardboard on the walls and no electricity or running water.

    Yet, whenever I crossed the river to visit Nuevo Laredo, Mexico, it was easy to see that as bad as poverty was in Laredo, it was 1,000 times worse in Nuevo Laredo. And I could not figure out why. Why was there such a disparity of wealth and poverty in one big metropolitan area, separated by a river?

    I reached the same conclusion that many young people reach today — that the reason there was more poverty on the Nuevo Laredo side was that the Mexican government was not doing as much for the poor as the U.S. government was doing for the poor on the Laredo side.

    Then, I discovered that revolutionary idea expressed by Adam Smith some 200 years ago — and amplified by economists such as Milton Friedman and Friedrich Hayek, both of whom won the Nobel Prize in economics, and perhaps the greatest economist ever — Ludwig von Mises — and that idea shook my world.

    For, you see, the revolutionary idea that Smith expressed was that the reason that mankind had remained mired in poverty throughout the ages was because governments had waged war on poverty. The key to wealth to wealth and rising standards of living was for people to prohibit their government officials from helping the poor with economic laws, rules, regulations, licenses, permits, subsidies and the taxation to pay for it all. Smith’s idea was both revolutionary and counterintuitive.

    Smith’s idea came to be known as “economic liberty,” a principle that evolved to mean that people have the right to engage in any business, occupation, or enterprise without political permission or interference. That people have the right to enter into mutually beneficial trades and transactions with anyone anywhere in the world without governmental interference. And that people have the right to accumulate the fruits of their efforts and then decide what to do with them.

    Why is economic liberty the key to wealth and higher standards of living? Three reasons: trade, capital, and opportunity.

    1. Trade. Whenever two people enter into a trade, both of them benefit from their own perspective. For in every trade, people give up something they value less for something they value more. If you have 10 apples and I have 10 oranges and you give me 5 apples and I give you 5 oranges, both of us have raised our standard of living through the simple act of exchange because we have both improved our position as a result of the trade. Now, multiply that phenomenon over millions of people engaging in millions of trades. Thus, through the simple act of exchange, people are able to raise their standard of living.

    The corollary of this principle, then, is that to the extent that government rules and regulations interfere with or frustrate people’s right and ability to trade, to that extent the government is reducing the standard of living of people, including the poor.

    By the way, because of liberalization of trade between Mexico and the United States, my hometown of Laredo, Texas, is now one of the most prosperous cities in our nation. Does this mean that free-trade agreements such as NAFTA are a good thing? Not necessarily. What some of us say in the United States is that our government doesn’t need to negotiate complex trade agreements involving thousands of pages containing thousands of rules. All it needs to do is set us, the American people, free by unilaterally eliminating all tariffs, import restrictions, and subsidies to businesses. We are saying: Set us free to travel and trade with anyone we want, including the people of Cuba. Our freedom does not depend on negotiations and agreements with foreign regimes.

    2. Capital. Capital is key to rising standards of living and a wealthy society. It is the only thing that can cause wages to rise — real wages, not inflationary ones. Thus, even though people might be free to trade, if government is confiscating massive amounts of capital to fund its grandiose programs, people might not see a significant increase in the standard of living.

    In my country, the national government has minimum-wage laws purporting to help the poor. However, the result is the exact opposite — minimum-wage laws are actually a tremendous attack on the poor because they lock out of the labor market those people whose labor is valued in the marketplace at lower the government-established minimum.

    Why is capital key to rising wages? Consider an example. Suppose there is a farm where the farm owner is having his farm hands plant and harvest the crops with manual tools. The total production is, say, 1,000 bushels, out of which the farmer pays his workers, say, 300 bushels.

    One day, the farmer buys a tractor, and production increases to, say, 5,000 bushels. That means that the increased productivity enables an increase in wages to be paid to the workers.

    Do we need to depend on the benevolence of the farmer owner to pay higher wages out of the increased productivity? On the contrary! An open, competitive market means that other farms are buying tractors and increasing productivity, which enables them to start bidding away workers from adjoining farms by offering higher wages. Or the bidding for workers comes from the companies selling the tractors. Or the ones repairing the tractors.

    Where does the capital come from? From savings, both from the workers, who are putting their money in the bank, which then lends it the farmer to buy his tractor, and from the farm owner himself who uses his saving to make a down payment on the tractor.

    Thus, contrary to what the Marxists claim about there existing an inherent conflict of interest between employers and employees, the truth is that there is actually a harmony of interests, one in which both workers and owners have a vested interest in the success of their enterprise.

    The corollary to this principle is that to the extent that government is confiscating capital by taxing income and savings, to that extent government is impeding the standard of living of people from rising, especially for the poorest people in society.

    3. Opportunity. In a society in which people are free to open businesses, free to trade, and free to accumulate capital, the poor have the opportunity to compete against established businesses. That’s why big established businesses often enter into coalitions with the state to suppress competition — in order to maintain their privileged position in society.

    So, the corollary to this principle is that to the extent that the state imposes burdensome rules, regulations, permits, and licenses and confiscates capital, to that extent the poor are kept down and prevented from competing against big established businesses.

    “But, Mr. Hornberger,” you might say, “there is no society in the world that embraces these principles — not even the United States. In your country, there is massive taxation and confiscation of capital, and many economic rules and regulations, and there are social welfare programs such as Social Security—old-age retirement, government-provided health care for certain sectors of society, public schooling, and assistance to the poor.”

    And you would of course be right, which is why the economist Milton Friedman gave the following wise advice to an audience in Mexico City some years ago: If you are interested in achieving higher standards of living in your countries, whatever you do, do not copy the direction that the United States is taking.

    In fact, for the nation that desires higher standard of living, especially for the poor, the model society to consider was the American society that existed, say, in 1890. This was the most unusual society in history, in large part because of the principles of economic liberty it embraced. Set aside the issue of whether the principles they embraced are old—many old ideas remain good ideas. Simply ask yourself: Were they right or were they wrong, and what were the consequences of their ideas? Consider:

  • No taxation on income. Our Constitution prohibited it. People were free to accumulate unlimited amounts of wealth and there was nothing our government could do about it.
  • No Social Security.
  • No Medicare or Medicaid.
  • No welfare for the poor.
  • No drug war.
  • No gun control.
  • No immigration controls.
  • No central bank—they didn’t trust the state with its irredeemable paper money, which is why they established a gold standard.
  • No passports, fingerprinting, or other travel restrictions.This is what it once meant to be an American. This is what it once meant to be free. This was a society that embraced the principles of economic liberty.The result? The most prosperous period in history, especially for the poor, many of whom were flooding American shores from nations whose governments were charged with taking care of the poor, coming to a nation where the government did not take care of the poor. Many of them were going from poverty to riches sometimes in one generation — and also the most charitable.

    I would like you to know that just as there are excellent free-market organizations promoting freedom and free markets in Latin America, such as the IEE, there are also several organizations doing the same thing in the United States. While the focus of each of them is different, all of them are about trying to change the world in a positive direction, especially by changing the direction of our country, making it more peaceful, prosperous, harmonious, and free. That means that we are opposing not only the domestic policies of our government but also its foreign policy and specifically its policy of invading, waging war, and occupying foreign countries. Here are the websites of some of the major educational free-market foundations in my country, and each of them has links to many more:

  • The Future of Freedom Foundation, where I work;
  • The Ludwig von Mises Institute;
  • The Cato Institute;
  • Reason Foundation;
  • The Foundation for Economic Education;
  • Laissez Faire Books.I have also compiled a list of ten great free-market books for your consideration. If you read all of these books, you will know more about how to lift people out of poverty than 99 percent of government officials in the world.
  • Economic Policy by Ludwig von Mises
  • Socialism by Ludwig von Mises
  • The Law by Frédéric Bastiat
  • Economic Harmonies by Frédéric Bastiat
  • Economic Sophisms by Frédéric Bastiat
  • Political Economy by Frédéric Bastiat
  • Atlas Shrugged Ayn Rand
  • Economics in One Lesson by Henry Hazlitt
  • The Road to Serfdom by Friedrich A. Hayek
  • Free to Choose by Milton & Rose FriedmanThroughout history, people have suffered the ravages of poverty, not realizing that government policies were preventing them from escaping such poverty. The idea of economic liberty, first enunciated more than 200 years ago, provides the means by which the poor can finally be lifted out of such poverty. At the risk of being nationalistic, I believe that it shall yet be the people of the United States who, discovering their heritage of liberty, will lead the world to a rebirth of freedom — lead the world to the highest reaches of freedom ever seen by man. But what could be better, especially for those on the bottom rungs of the economic ladder, than a world in which nations are competing against each other in the attainment of that goal? Conquiste a liberdade! Muito obrigado. (Win freedom! Thank you very much.)
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    Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.