Faithful readers will know that I have attempted, over several blog posts, to make a few points about economics, most of which I know are not original to me, but for which I have not provided citation to authority. I now have found some excellent authority for some points, but still no authority for a very important point, and I'm starting to think it is original to me. I'm happy to be proven wrong.
On several occasions I have posited that "trade creates wealth," or that voluntary transactions in a fair market make both traders better off, thereby increasing the wealth of the whole economy over what it was prior to the trade. Milton Friedman notes it is an "elementary--yet frequently denied--proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed." (Milton Friedman, Capitalism and Freedom at 13 (Univ. Chicago Press 2002) (originally published in 1962)). An interesting website for the teaching of economics provides a video demonstration of trade creating wealth in a classroom exercise.
"Profit" is therefore nothing but the wealth created from trading (or from work, investment or invention). If you profit from trade, then so did those with whom you traded. Profits are not evil, but are the product of wealth creation, which is the opposite of poverty. Just as trade creates wealth, trade destroys poverty.
Friedman also supports my larger point that liberty and prosperity are tied to each other and symbiotically enhance each other. As he says, "The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other. Historical evidence speaks with a single voice on the relation between political freedom and a free market." (Id. at 9). From this, Friedman concludes that capitalism is a necessary, although not sufficient, condition for political freedom. (Id. at 10). If so (and I agree it is), then the political freedoms guaranteed by our Constitution must include the right to economic freedom, as the former cannot exist without the latter. The Declaration of Independence begins with the proposition that all men are endowed by their Creator with the rights to life, liberty and the pursuit of happiness, and the Fifth Amendment to the Constitution prohibits the government from depriving anyone of "life, liberty or property" without due process of law. "Liberty" entails economic freedom. We have a Constitutional right to it, which means the government has no right to impose socialism or other restrictions on that freedom. Since the New Deal, however, the Supreme Court has consistently treated the right to economic freedom as non-existent. We are now seeing the injury to our political freedom as a consequence.
The link between economic freedom and political freedom leads me to another observation, which is that although politicians and commentators (including talk-radio and cable hosts) know a great deal about political rights and constitutional protections for them, they know next to nothing about economics. They cannot explain why free market capitalism isn't evil, but is in fact a tremendous good that has destroyed more poverty and done more to enhance the quality of life of billions of people than any other economic activity in history. We will not return to prosperity until members of the political class learn to advocate free market capitalism as the system that maximizes wealth for all elements of society and act to restore economic freedom by reducing governmental restrictions and activity to a bare minimum.
I have not been able to find authoritative support for the reverse of the proposition that "voluntary transactions create wealth," which is that involuntary transactions destroy wealth. I presented an explanation here why I think this must be true, but so far I don't see it postulated elsewhere. Wealth redistribution is the clearest example of wealth destruction, but any taxation to pay for government spending that does not pay for a public good (defense, fire stations, needed bridges) that makes us as a group better off than without it also takes more wealth than it creates. Such government spending therefore never can operate as a "stimulus" to the economy. If this is correct, nearly everything government does to "help" us instead hurts us. We are failing to realize prosperity precisely because the government is spending so much to make it happen. Only voluntary transactions create wealth, and the government cannot create it by robbing Peter (or Peter's grandchildren) to pay Paul; in fact it destroys wealth by doing so. I would be very pleased to be told of an authoritative analysis that backs me up.
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