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Library of Congress Cataloging-in-Publication Data

Donlan, Thomas G.

A world of wealth : how capitalism turns profits into progress / Thomas G. Donlan.

p. cm.

ISBN 0-13-235000-9 (hardback : alk. paper) 1. Capitalism—United States. 2. Free enter-prise—United

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Introduction

There are two kinds of economists: Those who think the freemarket always works, except when the results don’t suit them; andthose who think the free market never works, except when the resultsdo suit them.

In my view, the free market always works. Whether the results suitme or you is a matter of taste, and if we don’t like the results, we canchange them anytime, just by adding our money to the market. Thebest thing about economics is the free market, and the best thing aboutthe free market is freedom.

In this book, I am attempting to provide intelligible advocacy andexplain economic issues, and I offer some historical background forthe topics in each chapter.

I’m throwing out all the charts, graphs, and technical terms,throwing out the mathematical analysis, throwing out game theories,and throwing out professional economists. What remains is a way oflooking at the world through the powerful lens of capitalist invest-ment and productivity.

This book cannot give you all the answers, but I hope that afterreading it, you will be ready to have interesting conversations withother intelligent people interested in politics, business, and history. Ifyou take the lessons of this book to heart, you should be ready to havewarm and vigorous conversations, for the ideas here are controversial.Many well-meaning people would rather impose their ideas on othersfor their own good; they recoil at the idea that people should maketheir own choices, for better or worse. The consistent philosophy inthis book is that free markets are effective—capitalism provides superior solutions to most of our looming problems. Even more

xv

important, free markets and capitalism are good because they pro-mote individual liberty.

Economics has been called the “dismal science,” and there’s plentygoing on in the world that supports that charge. Poverty and theunequal distribution of wealth, the population explosion, trade con-flicts, immigration, outsourcing, environmental damage, rising energyprices, uncertain health and pension benefits, and many more discour-aging economic issues push their way onto our computer displays, tele-vision screens, and front pages every day.

The phrase “dismal science” was coined by Thomas Carlyle, thenineteenth-century essayist, in a retort to the forecasts of ThomasMalthus, an economist who projected that the earth’s food supplycould not grow as fast as its population; hence, humanity is doomed tosuffer frequent famines.

“Dreary, stolid, dismal, without hope for this world or the next,”said Carlyle of the Malthusian prophecy. He also applied the wholephrase “dismal science” to his own economic argument in 1849 thatfreeing the slaves who worked the West Indies sugar plantations hadnot been in the slaves’ best interests. Carlyle said that, without plan-tation owners’ capital and enterprise, the best the former slaves coulddo on their own was subsistence agriculture and fishing. Sugar hadbeen more lucrative and life as a slave had been more secure, heclaimed.

Dismal science, indeed, if it were true. Man, however, does notlive by bread alone: A hungry free man is better off than a well-fedslave. In this book, we explore some hard questions about capitalismand humanity. It’s true that economics sometimes turns up some dis-tressing conclusions because it is the science of human behaviorstripped of all illusions. Economists observe what people do formoney; it is often not a pleasant sight.

Capitalism is business, and the study of capitalism is the study ofthe sources and uses of profits—how money becomes wealth.

xvi A WORLD OF WEALTH

Although some historians consider capitalism to be a form of socialorganization, all forms of social organization are based on the concen-tration of wealth for investment, and societies prosper on the returnsof their investments.

Studying capitalism should eventually produce an awakening likethat of the Molière character who discovered he had been speakingprose all his life without knowing it. When we talk about the creation,distribution, and consumption of wealth, we are talking about capital-ism, whether we believe in it or not.

Supply and demand are the chief forces in economics. Demand isalways infinite and supply never is. We would all like to gorge our-selves on our favorite things, but they are not infinitely available.Prices are set by the availability of things—supply—and the com-bined desires of people to have certain things in preference to otherthings—demand. Supply and demand are hard to measure becausethey don’t stand still. For each product or service in the global econ-omy, supply and demand are constantly changing according to theneeds and desires of billions of people. Large imbalances betweensupply and demand also occur, creating general price inflation ordeflation. Economics theorists talk about “equilibrium,” the pointwhere supply and demand are in balance, prices are stable, and sup-plies are predictable. It is a wonderful mathematical exercise, worthmany Nobel Memorial Prizes in Economic Science. But as Yogi Berramight have said, “The difference between theory and practice is thatin theory, there is no difference, but in practice, there is.” Any personinterested in economics must understand that prices constantlychange with the preferences of buyers and the availability of parts,labor, and capital (all of which also have prices set in markets).

Value is a different concept from price. There is no such thing asan intrinsic value of goods or services. Value in an economic sense isnothing but a price set in a market. It changes constantly.

INTRODUCTION xvii

Creating Capital

The origin of wealth lies in scarcity. Anything we can have with-out effort has no value. When we must work to hunt, mine, farm,when we buy tools and sell products, and when we must defend ourgains, we establish an economy, an interrelationship of many people.As quickly, we become capitalists—owners of tools, large or small.Day laborers who own their shovels are in that small sense capitalists,just as owners of factories or farms are capitalists with more physical capital. We also work to acquire skills that can be termedhuman capital.

Goods and services are made and provided from ingredients,sometimes called the factors of production. The classic description ofthese ingredients is land, labor, and capital. Land is more than just afield—it stands for the resources of the earth, from mining to agricul-ture. Labor is more than the sweat of our brows—it stands for allforms of energy use. Capital is more than just money or wealth—itstands for tools, machinery, and knowledge.

Any product and nearly all services require judicious mixtures ofall three, so management should be counted as a fourth factor of pro-duction. It is the human talent involved in combining the other three.

A farmer works the land using capital equipment, such as a plow,horse, or tractor, and seed. He is more productive if he knows howmuch seed is enough, how deeply to plow for the particular crop, how hard to work the horse, how much to feed him, and countlessother variables. Even a peasant must manage complexity.

Available resources have changed over time as technology pushesthe limits to growth. From horses to tractors, from seed gathered andsaved to seed genetically engineered and sold at the farm dealer, fromrain to irrigation, from manure to chemicals—every aspect of produc-tion changes because of technology.

xviii A WORLD OF WEALTH

Changes in social organization also affect the optimal allocationof land, labor, and capital. Sharecropping leaves little incentive to make permanent improvements; the growth of banking and credit make land more affordable; insurance and futures marketsmake ventures less risky; education makes farmers more skilled. Thestudy of such forces may be the most serious, and certainly the mostdifficult, part of economics.

The 80-20 Rule

In any society, there will always be more followers than leaders,more losers than winners. An 80-20 rule seems to govern humanaffairs: Left to their own impulses, 80 percent of the work is done by20 percent of the work force; 80 percent of property falls into thehands of 20 percent of the populace; 80 percent of the effort pro-duces 20 percent of the value. Economists call it Pareto’s Law, afterVilifredo Pareto, a nineteenth-century Italian economist who noticed20 percent of Italians were earning 80 percent of the national income.

Here are some other examples of the 80-20 rule:

• Twenty percent of the devices, tools, and people on an assem-bly line are responsible for 80 percent of the defects.

• Twenty percent of the customers account for 80 percent of the profits. Also, 20 percent of the products and 20 percent of the sales force generate 80 percent of the profits.

• Twenty percent of the customers—a different 20 percent—also make 80 percent of the complaints.

• Workers who can schedule themselves—such as artists, writ-ers, or senior office workers—get about 80 percent of theirwork done by working intensely about 20 percent of the time.

• Twenty percent of hospital patients and 20 percent of healthinsurance clients account for 80 percent of the costs of care.

INTRODUCTION xix

Much derided and denounced, “trickle-down economics” refersto the concept that if the 20 percent who create wealth are left unfet-tered and lightly taxed, they and their investments will create morewealth, so the benefits will trickle down to the rest of society in theform of wages and profits. This should not be controversial; it shouldbe taken as a fundamental principle of capitalism.

That’s what it seemed like to Adam Smith, who noted that thewealthiest person cannot eat much more than anyone else. The richman’s food may be more artfully prepared, better decorated, servedby a waiter in a fine uniform, or composed of more courses. Still, ameal is just a meal, and one can eat only so much.

In Smith’s view, all the other trappings of wealth are conduits fortrickle-down economics: If the wealthy diners were not wealthy, theirchefs and sous-chefs might not be employed, their well-paid cakedecorators might be baking cookies at home and selling them on thestreet, their waiters and the rest of their household staffs might besubsistence farmers. None of them could earn as much in such circumstances as they could on an eighteenth-century nobleman’sestate. (That does not stop the servants from resenting their stationsin life or from looking down on those not so well employed.)

Far more important but less visible, wealthy individuals investtheir wealth in productive enterprises, which also employ factory work-ers, salespeople, executives, and janitors. Wealth does not merelytrickle down—it gushes in cataracts and nourishes the entire society.

As Smith said of the rich, “They divide with the poor the produceof all their improvements.”

In modern times, trickle-down economics burst upon theAmerican political scene in the early days of the Reagan administra-tion as a derogatory term for radical tax cuts, especially cuts in highprogressive tax rates on high incomes. In 1981, the highest bracket of

xx A WORLD OF WEALTH

taxable income was taxed at 70 percent, although few people paidtaxes at that rate because the tax code also offered many tax shelters.

Tax-cutters rarely dare to use the term trickle-down economics,although in one incident, President Reagan’s budget director, DavidStockman, privately conceded that his “supply-side economics” wasreally trickle-down economics, and the concession made it into abook that was published while the tax-cut controversy was still lively.

The debate was in two parts: Was it true that Republican tax-cutters wanted to cut rates on the rich? And was it true that cuttinghigh tax rates on the rich would stimulate investment, create newjobs, and bring benefits to lower income classes?

Both things were true, although the effects take time to worktheir way through the economy, and other factors also operate. SomeDemocrats, however, believed trickle-down economics was a cruel hoax and the benefits for the middle class and the poor werenonexistent.

Republicans rarely come out well when Democrats accuse themof favoring the rich, and thus they rarely defend trickle-down eco-nomics well. They ignore it or run away from it as much as they can.

They should be casting the alternative in terms people can under-stand. The point of high tax rates is to take wealth away from individ-uals who have a lot of it, never mind that most of it is invested in theproductive economy, where the returns on the investment are trick-ling down to everyone. Most government spending, however, is justspending—pure consumption that does little to create new wealth.

Democratic government has this fundamental problem: In broadterms, 20 percent of the people do most of the productive work andcreate most of the nation’s wealth, but the other 80 percent commanda heavy majority of votes. It’s a pleasant surprise that democraciesfoster much investment and productivity growth at all.

INTRODUCTION xxi

The Power of Productivity

Economic productivity is something for every member of societyto celebrate. When productivity is rising in a society, wealth is beingcreated, and more and more wealth is available—through the trickle-down effect—to satisfy the wants and needs of the whole population.However a society chooses to divide its output, productivity drivesoutput upward. There’s nothing more important for the economicwell-being of any society.

Labor productivity, however, is often misunderstood. It has littleto do with how hard the work force labors. It actually measures thepower of capital: Capitalists acquire the land necessary for theirenterprise. Capitalists select the sources of the enterprise’s raw mate-rials. Capitalists borrow money or sell shares in the enterprise so theycan make these investments and hire workers. (Or capitalists hiremanagers to do these things.)

When workers take their tools from the owner of the enterprise,use them according to the owner’s direction, and become more pro-ductive than they could be on their own, their labor productivityincreases. (Their labor productivity might also increase if they workharder each hour, if they bring their own, better tools to the factory,or if they acquire more training or education and learn to worksmarter and more efficiently.)

Many economists separate out such intangible factors as advanc-ing technology, innovation, managerial skill, luck, and organizationalchange and call these the fruits of total factor productivity, not of cap-ital alone. Those who study this kind of productivity say that morethan half the advancement of U.S. productivity since World War II hasbeen the result of these intangible factors. But capitalists should getmost of the credit for introducing new work methods as much as forpurchasing new machinery.

xxii A WORLD OF WEALTH

For a simple example, suppose a furniture manufacturing busi-ness has been hiring skilled painters to brush-paint its products. Theboss buys some paint sprayers, which are easier and faster to use.Almost immediately, the painters can paint 50 percent faster, withresults that are just as good. Any student of productivity would con-sider this a case of capital deepening, in which the advancement ofoutput is due to the increase of investment in capital equipment.Over time, the workers become more skilled with the new equip-ment, learning, for example, that they can layer several coats of paintwithout waiting for each coat to dry. The factory owner alsorearranges the work floor so that the spray painters have easier accessto the work they are painting. Output rises again, even though therewas no further investment in capital equipment. This may be calledan increase in total factor productivity, but it should be credited to theoriginal capital investment in paint sprayers.

There are three ways a nation can enjoy more income, three waysto make the economic pie get bigger. First, more people can go towork: A country might encourage immigration to fill newly createdjobs. Second, people can acquire more skills: A country might openeducational opportunities to women, easing their entrance to highlypaid professions. The United States has used both methods in recentdecades, but they are not indefinitely repeatable opportunities. Thethird way is to encourage people to invest in plant, equipment, andorganization. The third way is harder, more expensive, and potentiallyunlimited.

An important reason economics has been called the dismal sci-ence is that its honest practitioners offer so little comfort to politi-cians and other wishful thinkers. A dollar spent on ice cream won’t beavailable later to spend on meat and potatoes. That’s hard enough toaccept, but here’s something worse: Dollars spent on wages won’t beavailable later for the business to purchase new equipment or build

INTRODUCTION xxiii

new factories, so later there will be fewer jobs, and fewer well-payingjobs, than there might have been had the boss paid less. Many of ourleaders would prefer to tell us something else—that businesses can spend more money on wages and benefits and still have enoughprofits to create more jobs, or that corporate profits and individualcapital gains can be cut or taxed without harming investment and productivity.

What is really dismal is that so many economists are ready to feedthe fire of political redistribution. Reckless economists advise politi-cians to favor consumption over investment, labor over capital, andjam today over meat and potatoes and jam tomorrow.

The pursuit of productivity and wealth requires more self-restraint and more determined investment in the pursuit of profit. Inthe following chapters, we examine the continuing conflict betweenconsumption and investment.

xxiv A WORLD OF WEALTH

INDEX

Aabsolute advantage, 62

affordable health care versusuniversal health care versus high-quality health care, 131-132

agriculture industry, protectionism of, 53

alternative minimum tax (AMT), 103

American Medical Association, 133

American party, 66

amnesty for illegal immigrants, 68, 78

AMT (alternative minimum tax), 103

antitrust legislation, 122-127

appliances, tax credits for energyefficiency, 11

appraisers, role in real-estate bubble, 174

Arizona example (illegal immigrationlegislation), 70-73

assimilation of ethnic minorities, 76

atomic bombs, nuclear power versus, 14

Atomic Energy Commission, 15

automobiles, tax credits for energyefficiency, 12

205

Bbaby boomers, effect on national

economy, 161-165

Babylonian Code of Hammurabi, 121

birth rates, 88

Bismarck, Otto von, 154

Bloomberg, Michael, 108-110

borrowers, role in real-estate bubble, 174

Bradford, Scott, 56

British coal supply example, 19-20

British colonial power, free trade and, 44

brokers, role in real-estate bubble, 174

Burr, Aaron, 46

Bush, George W., 10, 94-95, 97-98,119, 162, 172

CCalifornia

development in, 42electricity crisis, 122

Canadian lumber industry example(restraint of trade), 47-48

206 INDEX

cap and trade (carbon-dioxideemissions), 26

capital, 188accumulation, versus accumulation

of wealth, 87-88as factor of production, xviiiproductivity and, xxii-xxiv, 187-190return on investments and, 195-198

capitalismin energy production, 1-3

British coal supply example, 19-20

national energy policies, 7-12price of oil, 3-7suggested actions for, 12-16world supply of oil, 17-19

origin of wealth, xviii-xixstudy of, xvi

carbon-dioxide emissions, controlson, 25-26

Carlyle, Thomas, xvi

cars, 12

Carter, Jimmy, 9, 15, 133, 183

Castro, Fidel, 59

Cato Institute (think tank), 152

China, U.S. economic policy toward, 58

Chinese Exclusion Act of 1882, 66

Churchill, Winston, 12

Cisneros, Henry, 172

citizenshipof children of illegal immigrants, 72naturalization, 65, 77

climate change, economics and, 23-29

Cline, William R., 51

Clinton, Bill, 133, 172

CMOs (collateralized mortgageobligations), 173

coal, 1

British coal supply example, 19-20in Energy Policy Act of 2005, 11

coal mining example (investments inindustrial revolution), 82-83

The Coal Question (Jevons), 19

Colbert, Jean Baptiste, 61

collateralized mortgage obligations(CMOs), 173

commons, 40

communications industry, FCCregulation of, 126-127

comparative advantage, 56, 63

competitionantitrust legislation, 122-127in health insurance, 144-147from imports, 56as response to price controls, 117

Con Edison utility, 85

congestion taxes, 108-111

conquest, trade without, 59-60

conspicuous consumption, 88

Constitution (U.S.), free tradeprotections in, 43-46

consumption, investment versus, xxiv

Corn Laws, 62-64

Corporate Average Fuel Economystandards, 8

corporate taxes, 106-108

cost of health careincreases in, 139-140per capita, 137-138

cost of health insurance, 142-143

Council on Sustainable Development, 29

credit availability, liquidity versus,175-177

credit scores, role in real-estatebubble, 173

INDEX 207

Cuba, U.S. economic policy toward, 59

Cuomo, Andrew, 172

DDarwin, Charles, 90

The Decline and Fall of the RomanEmpire (Gibbon), 104

declining birth rates, 90-91

default setting for tax rates, 99

deficit spending, problems with, 195

demand, xvii

demographicsbaby boomers, effect on national

economy, 161-165Generations X and Y, effect on

national economy, 166-168Social Security and Medicare

and, 159

Deng Xiaoping, 192

Department of Energy, 9

depressions, 179-180

developing countries, economicpolicies toward, 58-59

Diocletian, 121

dismal science, xvi, xxiii

division of labor, 33-35

Doha Round of trade negotiations, 50

down payments on real estate, 171

Drexel, Morgan, and Co., 85

drilling, creating oil supply, 13

drug benefits, 140

EE-Verify program, 71

Earned Income Tax Credit, 100, 104

ecology analogy, economics and, 30-32

economic cycles from GreatDepression until today, 179-184

economic growth, population growthand, 89-92

economic policies toward developingcountries, 58-59

economic rent, 63

economicsclimate change and, 23-29cycles of, 198-200as dismal science, xvi, xxiiiecology analogy and, 30-32effect of baby boomers on, 161-165effect of Generations X and Y on,

166-168of free trade, 62-64of illegal immigration, 70-73politics and, xx-xxiiiproductivity’s effect on, 185-187supply-side economics, xxitrickle-down economics, xix-xxi

economies of scale, 56

ecosystem, growth limits in, 35-36

Edison General Electric Co., 85

Edison, Thomas A., 81, 84-86

educationfor immigrants, 77income inequality and, 191-193

efficiency, 27

80-20 rule, xix-xxi

Eisenhower, Dwight D., 181

electricity, 1, 83-87

Electrolux example (outsourcingjobs), 53-55

Emerson, Ralph Waldo, 111

employers, illegal immigration and, 69

208 INDEX

energy consumption, GDP and, 4

energy efficiencyin Energy Policy Act of 2005, 11-12GDP versus, 27

Energy Policy Act of 2005, elementsof, 10-12

energy productioncapitalism in, 1-3

British coal supply example, 19-20

national energy policies, 7-12price of oil, 3-7suggested actions for, 12-16world supply of oil, 17-19

climate change, effect on, 26-29

environmental issuesclimate change, economics and,

23-29flood prevention, 41-42growth limits in ecosystem, 35-36sustainable development, 29-30tragedy of the commons, 37-41

equilibrium, xvii

estate taxes, 97

ethnic minorities, assimilation of, 76

European Union, immigration in, 75

exemption from taxes, 104-106

Ffactors of production, xviii-xix

Fair Isaac (credit analysis company), 173

Fair, William R., 173

fairness in taxes, search for, 101-103

family reunification policies inimmigration, 68

family size, changes in, 90-91

farmers, 53

FCC (Federal CommunicationsCommission), 126-127

Federal Employee Health BenefitsProgram, 145-146

Federal Energy RegulatoryCommission, 11

Federal Insurance Contributions Act(FICA), 104

Federal Reserve, chairman of, 183

federal revenue, sources of, 96

Federalists, 46

fertility rates, 88

FICA (Federal InsuranceContributions Act), 104

flipping houses, 171

flood prevention, 41-42

food supply, population growthversus, 88-89

Ford Motor Company, 135, 189-190

Ford, Gerald R., 8

Ford, Henry, 189-190

Franklin, Benjamin, 97, 111

free marketbaby boomers’ retirement, effect on,

164-165cycles of, 198, 200in ecology analogy, 31-32price controls versus, 116-121

antitrust legislation, 122-125in pharmaceutical industry,

127-130price-gouging in, 114-115

free trade, 47benefits of, 56-57defined, 43with developing countries, 58-59economics of, 62-64protectionism versus, in global

economy, 49-55

INDEX 209

unilateral free trade, 52in United States, history of, 43-47

French mercantile system, 60-62

Friedman, Milton, 182

fuel, 13

Fuller, Ida Mae, 150

funding shortfalls in Social Securityand Medicare, 157-161

GGalbraith, John Kenneth, 116, 199

gasoline, price controls on, 13

Gates, Bill, 123

GDPenergy consumption and, 4energy efficiency versus, 27

General Electric, 85

General Motors, 135

Generations X and Y, effect onnational economy, 166-168

Gibbon, Edward, 104

Glendower, Owen, 176

global economyfree trade benefits, 56-57free trade versus protectionism,

49-55immigration, effect of, 75-76

global warming, 23

Gore, Al, 23

government regulation, 116

Great Depression, 179-180

greater fool theory, 171

Greenspan, Alan, 153, 172, 183

Grieco, Paul, 56

growth limits in ecosystem, 35-36

guest-worker programs, 67, 78

HHamilton, Alexander, 45-46

Hammurabi, code of, 121

Hardin, Garrett, 39

Hayek, Friedrich A., 31

health care, 140cost per capita, 137-138rising cost of, 139-140

health care systemalternatives to current system,

144-147reform efforts, list of, 133-137universal versus affordable versus

high-quality, 131-132

health insurancealternatives to current system,

144-147cost of, 142-143legislation concerning, 135-137

Henry IV, Part I (Shakespeare), 176

high-quality health care versusuniversal health care versusaffordable health care, 131-132

historyof free trade in United States, 43-47of immigration in United States,

65-69

holding companies, 86

Holmes, Oliver Wendell Jr., 93

home ownership, tax benefits of, 169

Hong Kong, unilateral free trade in, 52

Hotspur, Henry, 176

housing bubble, 120, 169

Hubbert, M. King, 17

Huckabee, Mike, 105

Hufbauer, Gary, 56

Hume, David, 62

210 INDEX

Iillegal immigration

economics of, 70-73growth of, 68-69legislation proposals concerning,

73-74

immigration. See also illegalimmigrationin global economy, effect of, 75-76history in U.S., 65-69suggestions for reform, 76-78

imports, competition from, 56

income elasticity of poverty line, 194-195

income inequality, 188education and, 191-193poverty line and, 194-195

income taxes, progressive, 99-101

An Inconvenient Truth (Gore), 24

Industrial Revolution, 40investment and invention in, 81-87,

91-92

inequality, 192

infectious diseases, deaths from, 140

inflation, 118-121, 180-184

An Inquiry into the Nature andCauses of the Wealth of Nations(Smith), 33

Insull, Samuel, 85-86

insurance, healthalternatives to current system,

144-147cost of, 142-143

Intergovernmental Panel on ClimateChange (IPCC), 23

invention, role in industrialrevolution, 81-87, 91-92

investment, 188consumption versus, xxivfor creating capital, 87-88

in public infrastructure, 196return on, 195-198role in industrial revolution, 81-87,

91-92

investment bankers, role in real-estate bubble, 173

investment income, as cause ofinequality, 193

investment tax credit, 196

investment trusts, origin of, 83

IPCC (Intergovermental Panel onClimate Change), 23

IRAs, savings rates in, 167

Isaac, Earl J., 173

J–KJefferson, Thomas, 46

Jevons, William Stanley, 19-20

job creation statistics, 55

job elimination statistics, 55

jobs, outsourcing, 53

Johnson, Lyndon B., 133, 182

Kaufman, Henry, 175

Kennedy, John F., 182

Keynes, John Maynard, 180-184, 195

“Know-Nothings” party, 66

Kyoto Accord, 25

Llabor

division of, 33-35as factor of production, xviii

labor costs, increasing productivity, 6

labor productivity, xxii, 187

Laffer, Arthur, 95

land (factor of production), xviii

INDEX 211

legal immigration, effect on U.S., 65

legislation, 116against price-gouging, 114-115antitrust legislation, 122-127health insurance legislation,

135-137illegal immigration legislation, 70-74

lenders, role in real-estate bubble, 174

Lindsey, Lawrence B., 95

liquid natural gas (LNG), in EnergyPolicy Act of 2005, 11

liquidity, credit availability versus,175-177

Luddites, origin of term, 186

lumber industry example (restraint oftrade), 47-48

MMachiavelli, 60

Malthus, Thomas, xvi, 88

management (factor of production), xviii

marginal cost, 124

marginal price, 124

markets, 31

Maryland, health insurancelegislation in, 135

Massachusetts, health insurancelegislation in, 136

Mazarin, Cardinal, 61

Medicaid, 133-134, 143

Medical Savings accounts, 147

Medicare, 133-134baby boomers’ effect on, 161-165cost of, 142funding shortfalls in, 157-161Generations X and Y’s effect on,

166-168

rising cost of, 139taxes, 104

Mencken, H.L., 12

mercantile system, 60, 62

The Merry Adventures of Robin Hood(Pyle), 99

Mexican immigration, 67, 69

Microsoft, 123-125

Middle West Utilities, 86

millennials, 166

Mondale, Walter, 99

monopolies, antitrust legislation, 122-127

Monopoly (game), 122-123

Montchretien, 60

Morgan, J.P., 84-85

mortgage crisis, 176

Most Favored Nation status, 58

mutual funds, origin of, 83

My Life and Work (Ford), 189

NNAFTA (North American Free Trade

Agreement), 49

national economy from GreatDepression until today, 179-184

national energy policies, 7-12

national health insurance system,simplicity of, 135

national sales tax, 105-106

natural disasters, price-gougingduring, 114-115

naturalization, 65, 77

New Orleans, rebuilding of, 41

New York City, congestion taxproposal, 108-111

212 INDEX

Nixon, Richard M., 7, 118, 133, 182

North American Free TradeAgreement (NAFTA), 49

North-South division, history of freetrade in United States, 46

northern California, development in, 42

nuclear power, 14-16

Nuclear Regulatory Commission(NRC), 15-16

OO’Neill, Tip, 153

OECD (Organisation for Economic Co-operation andDevelopment), 137

Of Commerce (Hume), 62

oil, 1creating supply, 13price of, 3-4

national energy policies and, 7-12

supply and demand, effect of, 4-7

world supply of, 17-19

OPEC (Organization of PetroleumExporting Countries), 6

opportunity cost, 63

Organisation for Economic Co-operation and Development(OECD), 137

Organization of Petroleum ExportingCountries (OPEC), 6

outsourcing, free trade versusprotectionism, 49-55

overfishingexample, 38-39solutions to, 41

PPareto, Vilifredo, xix

Pareto’s Law, xix-xxi

Parkinson’s Law, 96

patents, effect on pharmaceuticalindustry, 141-142

payments for health insurance, 142-143

pensions, 154

Perot, Ross, 6, 49

petroleum, 19

pharmaceutical industry, pricecontrols in, 127-130, 140-142

planning, 7

politics, economics and, xx-xxiii

population growthdeclining birth rates, 90-91economic growth and, 89-92food supply growth versus, 88-89

poverty line, income elasticity of,194-195

power plants, 14

predatory borrowers, role in real-estate bubble, 174

predatory lenders, role in real-estatebubble, 174

prescription drugs, 140

priceof oil, 3-4

national energy policies and, 7-12

supply and demand, effect of, 4-7

value versus, xvii

price controls, 116-121in ancient times, 121-122antitrust legislation, 122-125California electricity crisis and, 122

INDEX 213

on gasoline, 13in pharmaceutical industry, 127-130,

140-142

price-gouging, 114-115

Principle of Absolute Advantage, 62

Principle of Comparative Advantage, 63

private rights, public interests versus,37-41

production, factors of, xviii-xix

productivitycapital and, xxii-xxiveducation and income inequality,

191-193effect of capital on, 187-190effect on economy, 185-187Henry Ford example, 189-190increasing

energy consumption, 4labor costs, 6

professional investors, role in real-estate bubble, 174

progressive income taxes, 99-101

protectionism, free trade versus, 49-55

protective tariffs, history of free tradein United States, 45-46

public infrastructure, investment in, 196

public interests, private rights versus,37-41

Pyle, Howard, 99

Q–Rquality health care versus universal

health care versus affordable healthcare, 131-132

quota system for immigration, 67

rating agencies, role in real-estatebubble, 173

Reagan, Ronald, 9, 153

real-estate bubblecomparison with tulip-bulb bubble,

177-179explained, 169-172liquidity versus credit availability in,

175-177responsibility for, 172-177

recession, 118-121, 182-184

reform efforts (health care system),list of, 133-137

Refundable Earned Income TaxCredit, 100, 104

regulation, 116of electric utility industry, 86FCC regulation, 126-127of nuclear power, 15-16price controls, 116-121

relevant market in antitrust cases,124-125

reprocessing nuclear fuel, 15

restraint of trade, U.S./Canadianlumber industries example, 47-48

retirement plansalternatives to current system,

166-168baby boomers’ effect on, 161-165Generations X and Y’s effect on,

166-168savings rate needed for, 154-157Social Security

explained, 149-154funding shortfalls in, 157-161

return on investments, 195-198

revenue, sources of federal revenue, 96

Ricardo, David, 56, 63-64

Richelieu, Cardinal, 61

214 INDEX

Robin Hood principle, 99-101

Rogers, Will, 112

Roosevelt, Franklin D., 133, 162

Roosevelt, Theodore, 133

Ssales tax, replacing other taxes with,

105-106

saving, spending versus, 181

savings ratein IRAs, 167needed for retirement plans,

154-157

sea-level changes, 24

self-interest in trade, 33-35

Shakespeare, William, 176

shortagesin coal supply, 19-20in oil supply, 17-19

Smith, Adam, xx, 33-35, 87, 200

Social Securityalternatives to current system,

166-168baby boomers’ effect on, 161-165explained, 149-154funding shortfalls in, 157-161Generations X and Y’s effect on,

166-168taxes, 104

Social Security Administration, 152

social services for immigrants, 77

Society for Useful Manufactures, 45

Soviet Unionprice controls in, 117-118U.S. economic policy toward, 58

specialization, 56

spending, saving versus, 181

Stalin, Josef, 117

standard of living, rising of, 194-195

steel industry, protectionism of, 53

Stockman, David, xxi

Strategic Petroleum Reserve, 8

subsidies in Energy Policy Act of 2005, 10-12

supply, xviiof coal, 19-20of oil, 13, 17-19

supply and demandin ecology analogy, 31-32law of, xviioil prices, effect on, 4-7

supply-side economics, xxi

sustainable development, 29-30, 36

Ttariffs, history of free trade in United

States, 45-46

tax credits in Energy Policy Act of 2005, 11-12

Tax Foundation, 93

Tax Freedom Day, 93-94

tax income, effect on tax rates, 94

tax rates. See also taxesdefault setting for, 99determining correct rate, 94-97progressive income taxes, 99-101tax income, effect on, 94temporary cuts to, 97-98

taxation in mercantile system, 60-62

taxes. See also tax ratesamount paid, 93-94AMT (alternative minimum

tax), 103benefits of home ownership, 169congestion taxes, 108-111corporate taxes, 106-108determining correct rate, 94-97

INDEX 215

estate taxes, 97exemption from, 104-106fairness in, search for, 101-103health-insurance premiums as

pretax income, 146investment tax credit, 196Medicare, 104progressive income taxes, 99-101replacing with sales tax, 105-106Social Security, 104, 149-154Tax Freedom Day, 93-94

technology stock bubble, 183

temporary tax rate cuts, 97-98

Thatcher, Margaret, 20

Thoreau, Henry David, 111

Three Mile Island nuclear powerplant, 14

total factor productivity, xxii-xxiii

trade, 44mercantile system, 60-62restraint of, 47-48self-interest in, 33-35without conquest, 59-60

trade negotiations, 49-53

tragedy of the commons, 37-41

trickle-down economics, xix-xxi

Truman, Harry S., 133, 181

trust fund (Social Security), 153-154

tulip-bulb bubble, 177-179

U–Vunilateral free trade, 52

United Auto Workers, 135

United Statesagriculture industry, protectionism

of, 53economic policies toward

developing countries, 58-59history of free trade in, 43-47

history of immigration in, 65-69lumber industry example (restraint

of trade), 47-48price controls in, 118-121steel industry, protectionism of, 53

universal health careattempts to create, 133-137versus affordable health care versus

high-quality health care, 131-132

value, price versus, xvii

Volcker, Paul, 183

W–ZWal-Mart, 135, 186

Walker, David, 161

warmercantile system and, 60-62price controls during, 116-121

Washington, George, 45, 122

wastefulness in tax compliance, 106-108

wealthaccumulation, versus accumulation

of capital, 87-88origin of, xviii-xix

Webster, Daniel, 46

Westinghouse, George, 85

Woodward, Bob, 183

World Trade Organization (WTO)meetings, 50-52

Yucca Flats facility, 15