“Industry is increased, commodities are multiplied, agriculture and manufacturers flourish: and herein consists the true wealth and prosperity of a state.”
- Alexander Hamilton, 1790
“A people who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything.”
- George Washington, 1784
Individual initiative is an infinitely more powerful economic force than government action. Wealth is generated when individuals risk their own resources in hopes of meeting a need in the lives of other people or businesses, and do so in a manner that earns them a profit. That need might be a hammer or food, or it could be capital needed by a business to start or expand its operations.
As we mentioned in Principle #5, the government doesn’t have anything to give that it didn’t take from someone else. In other words, government cannot create wealth; it can only take wealth from people and redistribute it to others. This redistribution of wealth might be to an individual through a welfare-type program, or to a business with which the government has a contract, or to government employees. That’s not to say people can’t get wealthy from government programs, but it is not new wealth; it is wealth that was generated by someone else, and the government took it from them. This is not a negative statement, implying that it is never appropriate for government to tax the people; it is simply a statement of fact. How much wealth the government should take and how it uses that wealth are subject to debate, but the simple fact is that government does not create wealth.
In some ways, it is understandable that people would think first how the government would be a good source for building wealth in a community or state. It’s easier to grasp the concept of expanding a government service or agency than it is to comprehend how the private sector could piece together a cohesive economy. And yet, it’s that wonderful mystery of private sector initiative that has made ours the most productive and resilient economy the world has ever known!
With few exceptions, the areas of our state and country where government has spent trillions (yes, with a T) to “help” the poor by transferring wealth to them from other people, are still mired in poverty. For the good those programs might do in helping with short-term needs, they have helped create a pattern of generational poverty, where creativity is stifled and hopelessness prevails.
Instead of transferring wealth, government’s role in the economy should be to protect the freedom of individuals to generate wealth for themselves. (For more on this, see Principle #8.)
Numerous examples throughout history can be cited of nations that attempted to force equality of wealth through government efforts. The former Soviet Union is one of the most notable, a nation with vast resources, an enormous population, yet a failed economy because it was directed by the government. Current-day Russia has experienced economic problems, not because it moved to a supposedly “free” market system, but primarily because it did not provide the property rights protections necessary for a truly free market. This kept the power in the hands of officials with strong connections to the government, allowing them to take advantage of the people just as they had under Communist rule. (Related to that, the Russian people were not sufficiently informed how a free market system is supposed to work and how they could apply their new-found freedom.)
In contrast, the former Soviet bloc nations that have been most successful economically since the fall of the Soviet Union are those that have provided a dependable system of justice, a low (usually flat) tax on its citizens, and a limited regulatory system. This allows entrepreneurs to know the rules of the game and explore their opportunities with relative certainty that their rights will be protected, and that they will have few unnecessary burdens placed on them by the government.
Financially speaking, free people are not equal, and equal people are not free. If 100 people were made equally wealthy today, they would no longer be equal by tomorrow. Some would spend, some would give, and some would save, making their wealth “unequal” once again.
The greatness of the free-enterprise system is found in the equality of opportunity, not equality of outcome. Why should anyone strive for excellence when there is no incentive to produce a better product or offer a better service? Economic opportunity—the chance to make a profit and build wealth—encourages innovation and competition. This, in turn, benefits the whole economy, not just the entrepreneur, because it results in improved products and services. As one entrepreneur gains success, others might be drawn to compete, resulting in even better products and services, or equal quality at a lower price. In the end, consumers benefit from a healthy, competitive free-market system—where true wealth is created.
Government officials who understand that government cannot create wealth but can clear the way entrepreneurs to do so will govern with humility and restraint.