The ABC of Market Economy

There are basically only two ways in which economic life can be organized. The first is by the voluntary choice of families and individuals and by voluntary cooperation. This arrangement has come to be known as the free market. The other is by the orders of a dictator. This is a command economy. In its more extreme form, when an organized state expropriates the means of production, it is called socialism or comirnmism. Economic life must be primarily organized by one system or the other.

It can, of course, be a mixture, as it unfortunately is in most nations today. But the mixture tends to be unstable. If it is a mixture of a free and a coerced economy the coerced section tends constantly to increase.

One qualification needs to be emphasized. A "free market does not mean and has never meant that everybody is free to do as he likes. Since time immemorial mankind has operated under a rule of law, written or unwritten. Under a market system as any other, people are forbidden to kill, molest, rob, libel or otherwise intentionally injure each other. Otherwise free choice and all other individual freedoms would be impossible. But an economic system must be dominantly either a free or a command system.

Ever since the introduction and spread of Marxism the great majority of people who publicly discuss economic issues have been confused. Recently a very eminent person was quoted as denouncing economic systems that respond "only to the forces of the market place, and are governed" by the profit motive of the few rather than the needs of the many. He warned that such a system could put "the world's food supply into even greater jeopardy."

The sincerity of these remarks is beyond question. But they show how phrases can betray us. We have come to think of the profit-motive as a narrowly selfish drive confined to a small group of the already-rich whose profit comes at the expense of everybody else. But in its widest sense the profit-motive is one that all of us share and must share. It is our universal motive to make conditions more satisfactory for ourselves and our families. It is the motive of self-preservation. It is the motive of the father who is not only trying to feed and house himself but his wife and his children, and to make the economic conditions of his whole family, if possible, constantly better. It is the dominant motive of all productive activity.

Voluntary Cooperation

This motive is often called "selfish." No doubt in part it is. But it is hard to see how mankind (or any animal species) could have survived without a minimum of selfishness. The individual must make sure he himself survives before the species can survive. And the so-called profit motive itself is seldom solely selfish.

In a primitive society the unit is seldom the individual but the family, or even the clan. Division of labor begins within the family. The father hunts or plants and harvests crops; the mother cooks and bears and nurses children; the children collect firewood, and so forth. In the clan or the wider group there is even more minute subdivision and specialization of labor. There are farmers, carpenters, plumbers, architects, tailors, barbers, doctors, lawyers, clergymen, and so ad infinitum. They supply each other by exchanging their services. Because of his specialization, production increases more than proportionately to numbers; it becomes incredibly efficient and expert. There develops an immense system of voluntary productive cooperation and voluntary exchange.

Each of us is free (within certain limits) to choose the occupation in which he himself specializes. And in selecting this he is guided by the relative rewards in this occupation, by its relative ease or difficulty, pleasantness or unpleasantness, and the special gifts, skills, and training it requires. His rewards are decided by how highly other people value his services.

Free-Market Economy

This immense cooperative system is known as a free-market economy. It was not consciously planned by anybody. It evolved. It is not perfect, in the sense that it leads to the maximum possible balanced production and/or distributes its rewards and penalties in exact proportion to the economic deserts of each of us. But this could not be expected of any economic "system. The fate of each of us is always affected by the accidents and catastrophes as well as the blessings of nature -- by rainfall, earthquakes, tornadoes, hurricanes, or what not. A flood or a drought may wipe out half a crop, bringing disaster to those growers directly hit by it, and perhaps record-high prices and profits to the growers who were spared. And no system can overcome the shortcomings of the human beings that operate it -- the relative ignorance, ineptitude, or sheer bad luck of some of us, the lack of perfect foresight or omniscience on the part of all of us.

But the ups and downs of the market economy tend to be self-correcting. Over-production of automobiles or apartments will lead to fewer of them being produced the following year. A short crop of corn or wheat will cause more of that crop to be planted the following season. Even before there were government statistics, producers were guided by relative prices and profits. Production will tend to be constantly more efficient because the less efficient producers will tend to be weeded out and the more efficient will be encouraged to expand output.

The people who recognize the merits of this system call it the market economy or free enterprise. The people who want to abolish it have called it -- since the publication of The Communist Manifesto in 1848 -- capitalism. The name was intended to discredit it -- to imply that it was a system developed for and by the "capitalists" -- by definition the disgustingly rich who used their capital to enslave and "exploit" the workers.

The whole process was grossly distorted. The enterpriser was putting his accumulated savings at risk at what he hoped was an opportunity. He had no prior assurance of success. He had to offer the going wage or better to attract workers from their existing employments. Where the more successful enterprisers were, the higher wages also tended to be. Marx talked as if the success of every new business undertaking was a certainty, and not a sheer gamble. This resulted in his condemning the enterpriser for his very risk-taking and venturesomeness. Marx took profits for granted. He seemed to assume that wealth could never be honestly earned by successful risk-taking but had to be inherited. He ignored the record of constant business failures.

But the label "capitalism" did pay unintended tribute to one of the system's supreme merits. By providing rewards to some of the people who risked investing their capital, it kept putting into the hands of the workers more and constantly better tools to increase per capita production more and more. The system of private property and capitalism is the most productive system that has ever existed.

The Communist Manifesto was an appeal to "the masses" to envy and hate the rich. It told them that their only salvation was to "expropriate the expropriators," to destroy capitalism root and branch by violent revolution.

Marx attempted a rationalization of this course, built upon what he saw as inevitable deductions from a doctrine of Ricardo. That doctrine was in error; in Marx's hands the error became fateful. Ricardo concluded that all value was created by "labor" (which might almost be true if one counted labor from the beginning of time -- all the labor of everybody that went into the production of houses, land clearing, grading, plowing, and the creation of factories, tools and machines. But Marx chose to use the term as applying only to current labor, and the labor only of hired employees. This completely ignored the contribution of capital tools, the foresight or luck of investors, the skill of management, and many other factors.

The Errors of Marx

The theoretical errors of Marx have since been exposed by a score of brilliant writers. In fact, his preposterous conclusions could also have been proved wrong even at the time Das Kapital appeared by a patient examination of the available contemporary knowledge of incomes, payrolls and profits.

But the day of organized, abundant, and even "official" statistics had not yet come. To cite only one of the figures we now know: In the ten years from 1969 to 1978, inclusive, American "nonfinancial corporations were paying their employees an average of 90.2 percent of the combined total available for division between the two groups, and only 9.8 percent to their stockholders. The latter figure refers to profits after taxes. But only about half of this amount -- 4.1 percent -- was on the average of those ten years paid out in dividends. (These figures compared with public-opinion polls taken at the time which showed a consensus of most Americans that corporate employees got only 25 percent of the total available for division and the stockholders 75 percent.)

Yet the fierce diatribes of Marx and Engels led to the Russian Revolution of 1917, the slaughter of tens of thousands, the conquest and communization by Russia of some half dozen neighboring countries, and the development and production of nuclear weapons that threaten the very survival of mankind.

Economically, communism has proved a complete disaster. Not only has it failed to improve the welfare of the masses; it has appallingly depressed it. Before its revolution, the great annual problem of Russia was to find sufficient foreign markets for its crop surpluses. Today its problem is to import and pay for less than adequate foodstuffs.

Yet The Communist Manifesto and the quantity of socialist propaganda which it inspired continue to exert immense influence. Even many of those who profess themselves, quite sincerely, to be violently anticommunist, feel that the most effective way to combat communism is to make concessions to it. Some of them accept socialism itself -- but "peaceful socialism" -- as the only cure for the "evils of capitalism." Others agree that socialism in a pure form is undesirable, but that the alleged evils of capitalism are real -- that it lacks "compassion," that it does not provide a "safety net" for the poor and unfortunate; that it does not redistribute the wealth "justly" -- in a word, that it fails to provide "social justice."

And all these criticisms take for granted that there is a class of people, our officeholders, or at least other politicians whom we could elect in their place, who could set this all right if they had the will to do so.

And most of our politicians have been promising to do exactly that for the last half century.

The trouble is that their attempted legislative remedies turn out to be systematically wrong.

It is complained that prices are too high. A law is passed forbidding them to go higher. The result is that fewer and fewer items are produced, or that black markets develop. The law is ignored, or finally repealed.

It is said that rents are too high. Rent ceilings are imposed. New apartments cease to be built, or at least fewer of them. Old apartment buildings stand vacant, and fall into decay. Higher rents are eventually legally allowed, but they are practically always set below what market rates would be. The result is that tenants, in whose supposed interest the rent controls were imposed, eventually suffer as a body even more than landlords, because there is a chronic shortage of housing.

Wages are supposed to be too low. Minimum wages are fixed. The result is that teenagers, and especially black teenagers, are thrown out of work and on the relief rolls. The law encourages strong unions and compels employers to bargain collectively with them. The result is often excessive wage-rates, and a chronic amount of unemployed.

Unemployment relief and Social Security schemes are put into effect to provide "safety nets." This reduces the urgency for the unemployed to find new or better-paid work and reduces their incentive to look. Unemployment payments, Social Security and other such safety nets continue to grow. To pay for these, taxes are increased. But they do not raise the expected revenue because the taxation itself, reducing profit incentives and increasing losses, reduces enterprise and production. The spending and safety nets are increased. Deficit spending appears and increases. Inflation appears, demoralizing production further.

Sad to relate, these consequences have appeared in country after country. It is hard to find a single country today that has not become a bankrupt Welfare State, its currency constantly depreciating. Nobody has the courage to suggest dismantling it or to propose reducing its handouts or safety nets to affordable levels. Instead the remedy proposed everywhere is to "tax-the-rich" (which turns out everywhere to include the middle-classes) still more, and to redistribute the wealth.

Guided by Profit

Let us return to our point of beginning. The eminent person that I quoted then is mistaken when he tells us that we are governed by the profit-motive of the few rather than the needs of the many. The profit motive is simply the name for the practically universal motive of all men and all families -- the motive to survive and to improve one's condition. Some of us are more successful at this effort than others. But it is precisely the profit-motive of the many that must be our main reliance for supplying the needs of the many.

It is strange that so little recognition is given to the fact that a man cannot grow richer without making others richer, whether that is his intent or not. If he invests and starts a new and successful business, he must hire an increasing number of workers, and raise wages by his own increased demand. He is supplying his customers either with a better product than they had before, or as good a product at a cheaper price, in which case they have more money left to buy other things. Even if he uses his own receipts only to increase his own consumer demand, he helps provide more employment or higher pay; but if he reinvests his profits to increase the output of his business, he directly provides more employment, more production, more goods.

So let us be thankful for the successful profit-motive in others. Of course, none of us should respond only to the forces of the market place. Fortunately few of us do. Americans are not only among the richest people in the world today but among the most generous. It is only when each of us has provided for more than his own needs that he can acquire a surplus to help meet the needs of others. Voluntary cooperation is the key.

Need for a legal tender

This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand's Capitalism: The Unknown Ideal

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

Alan Greenspan
[written in 1966]

A Note on Supply Side Economics

While all macroeconomics involves both supply and demand, supply-side economics is a school of macroeconomic thought popularised in the 1970s by the ideas of Robert Mundell, Arthur Laffer and Jude Wanniski. The term was coined by Wanniski in 1975.

In 1978 Wanniski published "The Way the World Works" in which he laid out the central thesis of supply-side economics and detailed the supposed merits of low taxation and a gold standard.

In 1983 economist Victor Canto, a disciple of Arthur Laffer, published The Foundations of Supply-Side Economics. This theory focuses on the effects of marginal tax rates on the incentive to work and save, which affect the growth of the "supply side" or what Keynesians call potential output. While the latter focus on changes in the rate of supply-side growth in the long run, the "new" supply-siders often promised short-term results.

Historical Origins

Supply-side economics was principally a response to perceived failings of Keynesian ideas that had steadily risen to dominance following the Great Depression. In particular, the point of disagreement was the question of the stagflation of the 1970s, and the failure of Keynesian policies to produce growth without inflation, and the failure to provide a clear solution for the series of recessions which occurred in the wake of the oil crisis in 1973. As with the crash of 1929, whether particular policies could have avoided the negative outcomes of history is a matter of intense debate.

Specifically, supply-side economics grew out of monetarists' critiques of Keynesian economics, and instead focused on encouraging investment, which they asserted was the basis of classical economics. In particular the notion that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. In classical times this idea had been summarised in Say's Law of economics, which had been refuted by Keynes in the 1930's. This lead the supply-siders to advocate large reductions in marginal capital gains tax rates in response to inflation, to encourage allocation of assets to investment, which would produce more capital, and therefore more supply. The increased supply would then lower prices because of competition, hence the term "Supply-Side Economics". This policy was generalized to call for lower marginal tax rates in general, especially at higher incomes.

Like many conservative versions of economics, many supply-side advocates claim that they are merely reinstating classical economics. (See Keynesianism for a discussion on Keynes and the classical critiques of his theory) However, to most economists they are practicing Keynesian economics, with the lateration of promoting demand side for investment and upper income consumption, that there is nothing to distinguish "Supply Side Economics" from ordinary borrowing to finance present budget deficits.

Supply siders maintain that they are a production-centred world view, and that this was behind the writing of classical economists such as Adam Smith and Karl Marx. In contrast to the modern Keynesian world view these authors are thought, by supply siders, to focus exclusively on production, as opposed to the effects of demand. Despite both these economists being frequently characterised as polar opposites in economic thinking, Jude Wanniski says that their production centred world view puts them closer together than either is to Keynsian economic thinking. By appealing to Say's Law supply-side economists such as Jude Wanniski seek to return the emphasis of macro-economic analysis to these classical traditions.

Critics of supply-side economics, such as Paul Krugman, quote one-time Reagan aide, David Stockman, to argue that this rhetoric is merely "a trojan horse for upper bracket tax cuts without economic justification." They point out that demand is crucial to both Marx and Smith, and that Keynes formulated demand side ideas because there had been a demand side failure in the late 1920's and early 1930's.

Supply-side supporters broke with Friedman and Lucas in that they argued that cutting tax rates alone would be sufficient to grow GDP, lift tax revenues and balance the budget. Supported by the powerful editorial pages of the Wall Street Journal and the Washington Times, supply-side economics became a force in public policy starting in the early 1980's.

In the United States commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Ronald Reagan were largely based on supply-side economics. However the monetary policies that prevailed at the time under Federal Reserve chair Paul Volcker were based on standard Keynesian and monetarist theory: he pursued a policy of using high interest rates and low money supply growth to squeeze inflationary expectations out of the economic system. Hence supply side supporters argue that Reaganomics was only partially based on supply-side economics. Nonetheless, Jude Wanniski cited Reagan, along with Jack Kemp, as a great advocate for supply-side economics in politics and to repeatedly praise his leadership.

Supply-side theorists also point to the success of the Kennedy tax-cuts to defend their case (even though they were justified at the time by Keynesian theory). More generally, supply-side rhetoric is often used to justify tax cuts for high income earners and other policies based on trickle-down theory. However an examination of the actual policies proposed and their motivations shows that Kennedy was attempting to end, not exacerbate trade deficits, and his intention was focused on the macro-economic effects of an inflation-employment trade off. (See Kennedy's 1963 speech on the balance of payments deficit (http://www.geocities.com/~newgeneration/imf.htm) and his address proposing the tax cut (http://www.presidency.ucsb.edu/site/docs/pppus.php?admin=035&year=1962&id=549) for his own balancing of supply and demand side forces which motivated the tax reduction, and the awareness that too large a tax cut would be inflationary.)

Fiscal policy theory

Supply side economics holds that increased taxation steadily reduces economic trade between economic participants within a nation and that it discourages investment. Taxes act as a type of trade barrier or tariff that causes economic participants to revert to less efficient means of satisfying their needs. As such higher taxation leads to lower levels of specialisation and lower economic efficiency. The idea is illustrated by the Laffer curve.

Crucial to the operation of supply-side theory is the expansion of free trade and free movement of capital. It is argued that free capital movement, in addition to the classical reasoning of comparative advantage, frequently allows an economic expansion. Lowering tax barriers to trade provides to the domestic economy all the advantages that the international economy gets from lower tariff barriers.

Supply-side economists have less to say on the effects of government spending. Jude Wanniski is to some extent almost indifferent to the effects of government debt. Of course under a floating fiat monetary system interest rates are typically regulated through open market operations so there is no unfettered market pricing to transparently signal crediters views on the nature or level of government debt.

According to Mundell "Fiscal discipline is a learned behavior." Or to put it another way, eventually the unfavorable effects of running persistent budget deficits will force governments to reduce spending in line with their levels of revenue. This view is also promoted by Victor Canto and other advocates of "starve the beast" politics.

The central issue at stake is the point of diminishing returns on liquidity in the investment sector: is there a point where additional money is "pushing on a string"? To the supply side economist, reallocation away from consumption to private investment, and most especially from public investment to private investment, will always yield superior economic results. In standard monetarist and Keynesian theory, however, there will be a point where increases in asset prices will produce no new supply, that is where investment demand will out run potential investment supply, and produce instead, asset inflation, or in common terms a bubble. The existence of this point, and where it is should it exist, is the essential question of the efficacy of supply-side economics.

One of the reasons that "Supply Side" economics does not have credibility in the mainstream of economics is the tendency of its adherents to simply lie when the facts fall against them. For example, there are elaborately crafted apologia proving that the Reagan tax reductions of 1981 "really" did what was promised. These rely on confusing real and nominal variables, taking credit for all of the GDP growth, and ignore the series of tax increases that were passed, which shifted more of the tax burden on to the middle class. The vehemence and insistence of supply side zealots on these bogus apologies has done a great deal to erode the utility of the term in economic circles.

Monetary policy theory

Supply siders advocate that monetary policy should be based on a price rule. The aim of monetary policy should be to target a specific value of money irrespective of the quantity of money than must be created or withdrawn by the central bank to achieve this target. This contrasts with monetarism's focus on the quantity of money, and Keynesian theory's emphasis on real aggregate demand. The important difference is that to a monetarist the quantity of money, specifically represented by the Money Supply is the crucial determining variable for the relationship between the supply and demand for money, while to a Keynesian adequeate demand to support the available money supply is important. Keynes famously remarked "money doesn't matter".

This is an area where supply side theory has been particularly influential. Under macro-economic theory, the general level of price was based on the strict increase in price of a basket of goods. Under supply-side theory, the rate of inflation should be based on the substitutions that individuals make in the market place, and should take into account the improved quality of goods. In the late 1980's and through the 1990's, under Presidents of both American political parties, shifts were made in the calculation of the broadly followed measure of inflation the "Consumer Price Index for Urban Consumers", or CPI-W, which reflected supply side ideas on substitution. The argument for factoring in goods quality was not accepted, which has lead supply side economicists to claim that the real CPI is actually between .5% and 1% lower than the stated rate.

This area represents one of the points of contention between conservative economic theorists who argue for a quantity of money theory of inflation, including Austrian economics, many strict gold standard economists and traditional monetarists, and supply-side theorists. According to the increases in money supply during the 1990's, the real rate of inflation must be higher than is currently stated. These economists argue that the cost of housing is understated in the CPI-W, and that the inflation rate should be between .5% and 1% higher. It is for this reason that many central bankers, investment analysts and economists follow the "GDP deflator" which measures the total output of the society and the prices paid for all goods, not merely consumer goods.

Typically Supply Siders view gold as the best unit of account with which to measure the price of "fiat" money, which is defined as a money supply not directly limited by specie or hard assets. Hence the purest Supply Siders are in general advocates of a gold standard. However the reverse is not true, many gold standard advocates are harsh critics of supply side economics.

Supply Side economists assert that the value of money is purely dictated by the supply and demand for money. In their view, a monetary system without a hard basis is a fiat money system, which means that money has value only because the government has a legislated monopoly on the supply of base money. Hence it has complete control over the value of money. Any decline in the value of money (or appreciation) is hence viewed as the result of errant central bank policy.

According to critics of supply side theory, this is a "sky-hook" which allows supply side economists to "blame the fed" every time supply side theory fails to deliver on its promises of unending growth at lower tax rates.

USA Monetary and Fiscal Experience

Supply-side economists seek a cause and effect relationship between lowering marginal rates on capital formation and economic expansion. The supply-side history of economics since the 1960's hinges on the following key turning points:

The Kennedy Tax cuts which reduced marginal rates are believed by supply side economists to be responsible for the 1960's prosperity. The more generally accepted view among economists is that the tax program of 1963, by reducing the incentives to shelter income, reduced economic distortion. For example, while the theoretical top bracket rate was originally 90%, in practice, no one paid this rate, using various loopholes and deductions to avoid paying.

In 1971 Richard Nixon ended the Bretton Woods gold standard. After a few short years the price of gold rose rapidly followed in quick succession by the price of oil. The supply side explaination of this event is that the real value of gold and oil was mostly unchanged but the US dollar was in rapid decline due to monetary mistakes and policy drift. This cycle of money losing its value manifest itself as an wage/price inflation spiral.

At the same time the Flemming-Mundell model of currency flows gained greater credence when it was codified into a single set of equations, and became increasingly influential in Neo-liberal economics. The argument for a floating currency regime had first been adopted by Friedman, but supply side economics such as Wanniski typically argued that exchange rates should be fixed relative to gold. Mundell was the author of the influential view that it was Johnson's budget deficits that were the cause of inflationary pressure. However, as Lester Thurow pointed out, the standard model of inflationary pressure shows that Johnson's peak year of deficits would have created only a small upward pressure, that instead it was persistent American trade deficits through the 1960's which had a greater effect on the imbalance between the value of the US dollar and the gold that it was in theory convertible to.

Robert Mundell believes that Nixon's failure to cut taxes in the early 1970's to be the cause of "stagflation", his argument being that the incentive for individuals to invest was reduced to below zero. Measuring the S&P 500 in inflation adjusted terms, the stock market lost half of its value between the market peak of 1972 and its bottom in 1982, with money seeking better returns in real estate and commodities instead. The argument from the supply-side point of view then goes on to state that the cuts in capital gains tax rates that were part of the 1981 tax package returned incentives to invest. The Keynesian point of view is that after a long bear market, money had fled from stocks and was set to return, once the expectation of inflation had been reduced. Neither of these two arguments fully account for the rise of equities over the course of the "long Bull Market" of 1982-2000.

The importance of this argument needs to be seen in light of the effects of the hyper-inflation of the late 1970's, where credit became constricted, as rates of interest rose rapidly, and the number of borrowers who could qualify for even standard mortgages fell. Inflation acted as a tax on wage increases, because the highly progressive income tax system of the time meant that more and more households suffered from "bracket creep" - were a wage increase would be reduced in value by the increased taxes collected. The effects of inflation produced, in 1980, a strong political consensus for a change in basic policy.

Ronald Reagan made supply side economics a household word, and promised an "across the board" reduction in income tax rates and an even larger reduction in capital gains tax rates. When vying for the Republican party presidential nominee for the 1980 election, George H.W. Bush derided Ronald Reagan's policy of supply-side economics as "voodoo economics". However, later he seemed to endorse these policies, and is speculated by some to have lost in his re-election bid for allowing tax increases.

Supply side economics was critiqued from the right as well, for example hard gold standard advocates, such as the Mises institute, have argued that there is no such thing as a dollar, merely a specific quantity of gold. Therefore, according to this view, the entire central bank mechanism which supply-side economics advocates is a needless fiction which creates anomalies in the price of commodities. In their view the central problem was that the United States needed to reassert a hard gold standard first, and this would force the necessary reductions in expenditures.

The centerpiece of the supply side argument is the economic rebound from the 1980-1982 double dip recession, combined with the continued fall in commodity prices. The "across the board" tax cuts of 1981 are seen as the great motivator for the "Seven Fat Years". Critics of this view point out that the "rebound" from the from the "Reagan Recession" of 1981-1982 is exactly in accordance with the "disinflation" scenario predicted by IS-LM models of the late 1970's: essentially that the increases in federal funds rates squeezed out inflation, and that federal budget deficits acted to "prime the pump". This model had been the basis of Volker's federal reserve policy.

In 1981 supply-side economist Robert Mundell told Ronald Reagan that by cutting upper bracket taxation rates, and by lowering tax rates on capital gains, national output would increase and as a result government tax revenues would also increase. The economic expansion would also mop up excess liquidity and bring inflation back within control. Revenues did not increase, and federal budget deficits exploded, however, the incentive to invest in equities worked: in 1982 the stock market began a rally which nearly tripled the dow between its low in 1982 and its pre-1987 crash high in August.

This failure of expected revenues to materialize caused a search for "reasons", and increased the level of criticisms from those who had stated before the 1981 tax package that reducing revenues and increasing spending would lead to deficits. It was in this atmosphere that David Stockman, the self-proclaimed supply side Budget Director under Reagan, admitted that the "Rosy Scenario" which he used to justify the predictions was "cooked" and "So the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory."

Critics of supply side economics, cited this as proof that the theory had failed. They also pointed to the lack of academic credentials by movement leaders such as Jude Wanniski and Robert Bartley to infer that the theories were bankrupt. Mundell in his Nobel prize lecture countered that the success of price stabilty was proof that the supply-side revolution had worked. The continuing debate over supply-side policies tends to focus on the massive federal and current account deficits that have accumulated in the US since 1980.

Proponents of supply-side economics, such as Canto, argue that the emergence of deficits was because of insufficient fiscal discipline - where as critics, such as Solow of MIT and Friedman of the University of Chicago, argue that supply-side economics is garden variety "vulgar Keynesianism", and that tax cuts unmatched by spending cuts and financed by borrowing is within the realm of standard theory. However, the results have eluded both sides of the debate: in supply side theory revenues should have shot up, and in classical monetarism, the price stability of the period beginning in 1982 should not have occurred given M1 growth. (For a fuller discussion of the uncoupling of money supply to inflation see Monetarism), where as classical Keynesian theory predicts higher long term interest rates based on standard models - instead, interest rates have continued to generational lows in the US and Europe.

After the emergence of supply-side economics, economists using Supply Side Theory began advocating a flat-tax system, most prominently Arthur Laffer developer of the Laffer Curve, and Jude Wanniski who coined the term "supply side economics". While generally associated with conservative politics, such as former Presidential candidate Steve Forbes, flat tax systems based on Value Add Taxes have been proposed by liberal economists and by at least one Democratic Presidential Candidate.

The paradigm of a tax system which rewards investment over consumption was accepted across the political spectrum, and no plan not rooted in supply-side economic theories has been advanced since 1982 which had any serious chance of passage into law. In 1986, a tax overhaul, described by Mundell as "the completion of the supply-side revolution" was drafted, largely by Democrats in congress. It included increases in payroll taxes, decreases in top marginal rates, and increases in capital gains taxes. Combined with the mortgage interest deduction and the regressive effects of state taxation - which has increased dramatically, it produces closer to a flat tax effect. Proponents, such as Mundell and Laffer, point to the dramatic rise in the stock market as being a sign that this tax overhaul was effective, although they note that the hike in capgains may be more trouble than it was worth. Critics, such as economist Bradford J. DeLong point to the dramatic increase in disparity of wealth as being proof that the result was merely to create "bad productivity".

Supply-siders blame the 1991 recession on the Federal Reserve, and argue that Clinton's tax increases, since they did not change marginal capital gains tax rates, left the supply side nature of the 1986 tax bill in place. Similarly, supply side economists blame the Federal Reserve for the collapse of the economic bubble, and have argue that since the early phases of the massive tax breaks of George W. Bush's first two years were based on credits and not cuts in marginal rates, they did not act to stimulate the economy. Critics of Supply Side economics note that the "blame the Fed" excuse of supply siders seems to be a "one size fits all" cover, that when anything good happens, supply siders credit tax cuts, and when anything bad happens, it is the fault of the Federal Reserve.

More generally traditional economists point to the "overhang" of deficits from the Reagan era, the S&L bailout, the effects of a ballooning federal budget deficit, the defense budget cuts which began in earnest in 1989, and the expectation of lack of continued fiscal discipline as being the source of the recession. These arguments focus on the Reagan Deficits, which supply siders vehemently denied would occur, and in some cases pretend did not even happen. Critics of supply side economics take these "head in the sand" positions to be indications that supply side economics is a religion, not a school of economic thought, and that it has a "one size fits all" approach to policy, namely cutting upper income taxes.

More vehement critiques of supply side economics dismiss the entire project as a complete failure which is "out of touch with reality" and a mere trojan horse for reducing marginal tax rates on upper income brackets. These critiques are found in Samuel Bowles work, which argues that real productivity fell under supply-side taxation regimes on a unit-worker basis. Paul Krugman, of MIT, called supply-side economics "Peddling Prosperity" and dismissed it as being unworthy of serious economists in a 1994 book written for the general audience.

These criticisms point to the explosion in deficits, the failure of the "Laffer Curve" to materialize and the conversion of price volatility to currency volatility as proofs that supply side economics does not work.

The long jobs drought after the recession which began in 2001 has provided further ammunition for critics of supply side theory. After a string of massive tax reductions, which added over a trillion dollars to the deficit, and managed to produce only tepid growth after three years, both liberal and conservative economists have attacked the paradigm of "deficits don't matter" promulgated by the avowedly supply side Executive Branch of George W Bush. The supply-siders have difficulty blaming the Federal Reserve, whose chairman backed the tax packages and has kept the federal funds rate in an "easy" monetary stance - and at the same time the lack of results has been extremely visible. Supply siders procede to blame Clinton and Osama bin Laden, despite the lack of any rigorous model which explains the long drought in hiring that can be attributed either to the bubble bursting of 2000, or the September 11th attacks of 2001.

Materialism - Evil or Good?

There are two things at which Americans have always excelled: One is generating almost unimaginable material wealth, and the other is feeling bad about it. If guilt and materialism are two sides of a single very American coin, it’s a coin that has achieved new currency in recent years, as hand-wringing and McMansions vie for our souls like the angels and devils who perch on the shoulders of cartoon characters, urging them to be good or bad.

When Princeton University researchers asked working Americans about these matters a decade ago, 89 percent of those surveyed agreed that “our society is much too materialistic,” and 74 percent said that materialism is a serious social problem. Since then, a good deal has been written about materialism, and magazines such as Real Simple (filled with advertising) have sprung up to combat it. But few of us would argue that we’ve become any less consumed with consuming; the latest magazine sensation, after all, is Lucky, which dispenses with all the editorial folderol and devotes itself entirely to offering readers things they can buy.

The real question is, Why should we worry? Why be of two minds about what we buy and how well we live? Most of us have earned what we possess; we’re not members of some hereditary landed gentry. Our material success isn’t to blame for anyone else’s poverty—and, on the contrary, might even ameliorate it (even Third World sweatshops have this effect, much as we might lament them). So how come we’re so sheepish about possessions? Why do we need a class of professional worrywarts—a.k.a. the intelligentsia—to warn us, from the stern pulpits of Cambridge, Berkeley, and other bastions of higher education (and even higher real estate prices) about the perils of consumerism run amok?

There are good reasons, to be sure. If we saved more, we could probably achieve faster economic growth. If we taxed ourselves more, we might reduce income inequality. If we consumed less, our restraint might help the environment (although the environment mostly has grown cleaner as spending has increased). Then, too, there’s a personal price to be paid for affluence: Because we’re so busy pursuing our individual fortunes, we endure a dizzying rate of change and weakened community and family ties.

There is merit in all these arguments, but while I know lots of people who are ambivalent about their own consumerism, hardly any seem to worry that their getting and spending is undermining the economy or pulling people off family farms. No, the real reason for our unease about possessions is that many of us, just like the makers of Hebrew National franks, still seem to answer to a higher power. We may not articulate it, but what really has us worried is how we think God wants us to behave.

And on that score, materialism was making people nervous long before there was an America. In the Bible, the love of money is said to be the root of all evil, and the rich man has as much of a shot at heaven as a camel has of passing through the eye of a needle. On the other hand, biblical characters who enjoy God’s blessings have an awful lot of livestock, and other neat stuff as well. Though Job loses everything while God is testing him, he gets it all back when he passes the test. Perhaps even God is of two minds about materialism. Here on earth, however, traditional authorities have always insisted that materialism is a challenge not just to the social order but to the perfection of God’s world. James B. Twitchell, a student of advertising and a cheerful iconoclast on materialism, has observed that sumptuary laws were once enforced by ecclesiastical courts “because luxury was defined as living above one’s station, a form of insubordination against the concept of copia—the idea that God’s world is already full and complete.”

America represents the antithesis of that idea. Many of the earliest European settlers were motivated by religion, yet by their efforts they transformed the new land—God’s country?—into a nation of insubordinates, determined not so much to live above their station as to refuse to acknowledge they even had one. Surely this is the place Joseph Schumpeter had in mind when he wrote of “creative destruction.” America was soon enough a nation where money could buy social status, and American financial institutions pioneered such weapons of mass consumption as the credit card. Today, no other nation produces material wealth on quite the scale we do—and citizens of few other affluent countries are allowed to keep as much of their earnings. In America, I daresay, individuals have direct control of more spending per capita than in just about any other nation.

If affluence is a sign of grace, is it any wonder that Americans are more religious than most other modern peoples? Twitchell is right in observing that the roots of our ambivalence about materialism are essentially religious in nature. They can be traced all the way back to Yahweh’s injunction against graven images, which might distract us from God or suggest by their insignificant dimensions some limits to his grandeur. Over the centuries the holiest among us, at least putatively, have been those who shunned material possessions and kept their eyes on some higher prize. From that elevated perspective, material goods, which are essentially transient, seem emblems of human vanity and gaudy memento mori. Unless you happen to be a pharaoh, you can’t take it with you; there’s a much better chance that your kids will have to get rid of it at a garage sale. Ultimately, our love-hate relationship with materialism reflects the tension between our age-old concern with the afterlife and our inevitable desire for pleasure and comfort in this one.

The Puritans wrestled this contradiction with characteristic intelligence and verve, but our guilt about materialism is probably their legacy. They understood that there was nothing inherently evil in financial success, and much potential good, given how the money might be used. The same work ethic, Protestant or otherwise, powers the economy to­day. Americans take less time off than Europeans, for instance, and there is no tradition here of the idle rich. But the Puritans also believed that poverty made it easier to get close to God. Worldly goods “are veils set betwixt God and us,” wrote the English Pur­itan Thomas Watson, who added: “How ready is [man] to terminate his happiness in externals.”

Leland Ryken, a biblical scholar and professor of English at Wheaton Col­lege who has written extensively about Christ­ian attitudes toward work and leisure, shrewdly observes that the Puritans regarded money as a social good rather than a mere private possession: “The Puritan outlook stemmed from a firm belief that people are stewards of what God has entrusted to them. Money is ultimately God’s, not ours. In the words of the influential Puritan book A Godly Form of Household Government, money is ‘that which God hath lent thee.’” So who are you to go buying a Jaguar with that bonus check?

As if to dramatize Puritan ambivalence about wealth, New England later produced a pair of influential nonconformists, Horatio Alger, Jr. (1832–99) and Henry David Thoreau (1817–62), whose work embodies sharply contrasting visions of material wealth; for better or worse, we’ve learned from both of them. Alger’s many novels and stories offered an ethical template for upward mobility, even as they gave him a sanitized outlet for his dangerous fantasies about young boys. Thoreau, meanwhile, came to personify the strong disdain for materialism—what might be called the sexual plumage of capitalism—that would later be expressed by commentators such as Thorstein Veblen and Juliet Schor.

Alger and Thoreau had much in common. Both were from Massa­chusetts, went to Harvard, and lived, in various ways, as outsiders. Their lives overlapped for 30 years. Both struggled at times financially, and both apparently were homosexual.

The popular image of Thoreau is of the lone eccentric contemplating nature at Walden Pond. In fact, he spent only two years and two months there, and while he always preferred to be thinking and writing, he spent much of his life improving his father’s pencil business, surveying land, and otherwise earning money. Of course, Thoreau scorned business as anything more than a means to an end. His literary output, mostly ignored in his lifetime, won a wide audience over the years, in part, perhaps, because of the triumph of the materialism he so reviled. Thoreau’s instinctive disdain for moneymaking, his natural asceticism and implicit environmentalism, his embrace of civil disobedience, and his opposition to slavery all fit him well for the role of patron saint of American intellectuals.

Alger’s work, by contrast, is read by hardly anyone these days, and his life was not as saintly as Thoreau’s. When accusations of “unnatural” acts with teenage boys—acts he did not deny—forced him from his pulpit in Brewster, Massachusetts, the erstwhile Unitarian minister decamped for New York City, where he became a professional writer. It was in venal New York that he made his name with the kind of stories we associate with him to this day: tales of unschooled but goodhearted lads whose spunk, industry, and yes, good looks, win them material success, with the help of a little luck and their older male mentors. Alger’s hackneyed parables are tales of the American dream, itself an accumulation of hopes that has always had a strongly materialistic component. The books themselves are now ignored, but their central fable has become part of our heritage. “Alger is to America,” wrote the novelist Nathanael West, “what Homer was to the Greeks.”

If Thoreau won the lofty battle of ideology, Alger won the war on the ground. This tension is most clearly visible among our “opinion leaders,” who identify far more easily with Thoreau than with, say, Ragged Dick. One reason may be that few writers and scholars seem to have Alger stories of their own. I rarely meet journalists or academics from poor or even working-class families, and even the movie business, built by hardscrabble immigrants from icy Eastern Europe, is run today by the children of Southern California sunshine and prosperity.

Hollywood aside, journalists, academics, and intellectuals have already self-selected for anti-materialist bias by choosing a path away from money, which may account for why they’re so down on consumerism (unless it involves Volvo station wagons). In this they’re true to their ecclesiastical origins; monasteries, after all, were once havens of learning, and intellectuals often operated in a churchly context. Worse yet, some intellectuals, abetted by tenure and textbook sales, are doing very well indeed, and they in turn can feel guilty about all those itinerant teaching fellows and underpaid junior faculty whose lives suggest a comment by Robert Musil in his novel The Man without Qualities: “In every profession that is followed not for the sake of money but for love,” wrote Musil, “there comes a moment when the advancing years seem to be leading into the void.”

There are no such feelings in the self-made man (or woman). Once a staple of American life and literature, the self-made man is now a somewhat discredited figure. Like the Puritans, knowing moderns doubt that anyone really can be self-made (except maybe immigrants), though they’re certainly not willing to assign to God the credit for success. Besides, more of us now are born comfortable, even if we work as hard as if we weren’t, and this change may account for the persistence of minimalism as a style of home décor among the fashionable. The perversely Veblenesque costliness of minimalist design—all that glossy concrete, and no cheap clamshell moldings to slap over the ragged seams where the doorways casually meet the drywall—attests to its ascetic snob appeal. So does the general democratization of materialism. Once everybody has possessions, fashion can fulfill its role, which is to reinforce the primacy of wealth and give those in the know a way of distinguishing themselves, only by shunning possessions altogether.

“Materialism,” in this context, refers to somebody else’s wanting what you already have. When my teenage nephew, in school, read Leo Tolstoy’s “How Much Land Does a Man Need?”—a parable about greed whose grim answer is: six feet for a burial plot—nobody told the students that Tolstoy himself owned a 4,000-acre estate (inherited, of course). We have plenty of such well-heeled hypocrites closer to home. John Lennon, for example, who lugubriously sang “imagine no possessions,” made a bundle with the Beatles and lived at the Dakota, an unusually prestigious and expensive apartment building even by New York City standards. And before moving into a $1.7 million house in New York’s northern suburbs, Hillary Rodham Clinton told the World Economic Forum in Davos that without a strong civil society, we risk succumbing to unbridled materialism. “We are creating a consumer-driven culture that promotes values and ethics that undermine both capitalism and democracy,” she warned. But Mrs. Clinton soon suspended her concerns about capitalism and democracy to accept a controversial avalanche of costly china and other furnishings for the new house.

Heck, Thoreau could never have spent all that time at Walden if his friend Ralph Waldo Emerson hadn’t bought the land. It’s fitting that getting and spending—by somebody—gave us our most famous anti-materialist work of literature. Getting and spending by everyone else continues to make the intellectual life possible, which is why universities are named for the likes of Carnegie, Rockefeller, Stanford, and Duke. Every church has a collection plate, after all, even if the priests like to bite the hands that feed them.
Daniel Akst is a novelist and essayist living in New York’s Hudson Valley.

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Reprinted from Winter 2004 Wilson Quarterly
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