American free-market capitalism: Don’t underestimate the potential of this factor

John Manzella, Tribune News Service

American free-market capitalism has generated the greatest economic growth that the world has ever seen. At the core of its brilliance is its ability to create incentives to produce solutions to problems and to distribute those solutions worldwide. In doing so, it has paved the way for tremendous gains in efficiency and productivity while lifting millions of people out of poverty.

When discussing its benefits, the late author and philosopher Michael Novak said: ‘No other system so rapidly raises up the living standards of the poor, so thoroughly improves the conditions of life, or generates greater social wealth and distributes it more broadly. In the long competition of the last 100 years, neither socialist nor third-world experiments have performed as well in improving the lot of common people.’

For centuries, the American experiment has embraced free-market capitalism along with the rule of law, separation of church and state, entrepreneurialism, balance of power, the welcoming of immigrants and a brilliant Constitution. This ‘secret sauce’ has created a stable environment encouraging entrepreneurs to take risks and empowering people to unleash their creativity to achieve their dreams.

After dozens of speaking engagements in Mexico in the early 1990s, I found that many in the audience either had an American passport or badly wanted one. When I crossed through Checkpoint Charlie into East Berlin as the Berlin Wall was coming down, I was told by countless East Germans of their wish to move to the United States to seek a better life. And when visiting China, young Chinese often tell me of their desire to study in America or permanently move here.

What draws so many people to the United States? America’s ‘secret sauce’ continues to provide tremendous advantages that few other countries can. However, due to flaws revealed during the Great Recession that began in 2008 and throughout its slow and uneven recovery, many Americans began to question the credibility of our economic model.

In efforts to help those struggling to get ahead and create greater economic opportunities for all, some elected officials are advocating left-leaning (some would say ‘socialist’) policies that give the state too much decision-making authority. And herein lies the problem.

Stated by author John Steele Gordon: ‘Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias.’

Additionally, government service providers lack competition, a primary factor that makes capitalism so successful, and have less incentive to become more efficient, productive, innovative and accountable. If left unchecked, economic decisions made by the market today could become decisions made by policymakers tomorrow who assume they know better.

Michael Novak also stressed that checks and balances are to the political order what competition is to capitalism. China, for example, does not have a system of checks and balances, nor one that promotes competition. As a result, its brand of one-party capitalism is undergoing difficulties that are likely to become more severe in the years ahead.Other examples where the state substituted its decision-making ability for that of the market include the former Soviet Union, North Korea, and Venezuela — all failed states.

On the other hand, the American system of capitalism is far from perfect.

Some argue that our system is in a constant struggle to achieve a balance between the wealthiest and the rest, but in recent years has shifted too much power to the top, creating greater inequality. Others assert that crony capitalism, which exists when competition is unfairly limited, is too pervasive. And still others claim that their ability to reach the middle class has become nearly impossible.

In an effort to improve economic outcomes for all Americans, it’s essential to continually improve our system of free-market capitalism — not move toward a more socialist-like model that empowers politicians to make decisions that should be made by the market.

Free market capitalism is responsible for improving the living standards of millions or even billions of people around the world. It’s also responsible for creating the wealth that, through taxation, supports essential government services, social programs and safety nets.

Seeking the right balance between the market and the state is critical. But in the process let’s be sure to improve America’s ‘secret sauce,’ not poison it.