The “Failure” of Capitalism

During the recent financial crisis, politicians on both sides of the aisle barraged us with claims that if Washington did not act quickly and decisively, the nation would face one of the most serious economic crises in its history. Politicians and pundits have chastised Wall Street for its greed, and claimed that the free market, i.e., capitalism, has failed. We have been told that greater oversight—which means, more regulation—is required.

Congressmen and Senators were deluged with phone calls and emails. Reportedly citizens were overwhelmingly opposed to the bailout plan passed by Congress. Yet, Congress ignored this opposition and passed the legislation by a wide margin.

The claims regarding capitalism and the actions of our political leaders are not new, nor are they limited to the recent turmoil in the financial markets. The same underlying ideas can be seen in regard to other issues, such as airport zoning, the Texas Open Beaches Act, and other infringements of property rights. Indeed, the same underlying ideas are present in every government intervention into the economy.

Sen. Dianne Feinstein captured the essence of Washington’s attitude. During the debate over the bailout bill, she stated that she had received 91,000 calls or emails regarding the bill, and 85,000 were opposed. Despite 93% of her constituents opposing the bill, she voted for it. She stated that “there is a great deal of confusion out there” and her constituents “don’t understand” the situation.

(Voting contrary to constituent’s wishes is not inherently wrong. Voting to protect individual freedom against the wishes of constituents is a good thing. The bailout bill however, violates individual rights on a massive scale.)

We could dismiss Feinstein’s remarks as those of an arrogant, career politician. While this is true, those remarks reveal the fundamental ideas that guide Feinstein and her intellectual brethren.

The essence of capitalism is the intransigent recognition and protection of individual rights, including property rights. A right pertains to action—it is a sanction to act without interference from others, so long as one respects the mutual rights of others. Rights do not guarantee that one’s actions will be successful, nor are they a claim to the products of other’s actions.

In a capitalist society, government is limited to the protection of individual rights. In such a society, an individual may not use force against others, just as others may not use force against him. In a capitalist society, every interaction between individuals is based on the voluntary consent of all involved.

This is not, and has not been, the case with our financial markets for a very long time. For decades, our financial markets have been heavily regulated and controlled by the government. The Federal Reserve, the Securities and Exchange Commission, the Justice Department, and a myriad other departments and agencies exert tremendous control over the financial markets. For example, the Justice Department under the Clinton Administration threatened mortgage companies with litigation if they did not begin extending loans to a greater number of applicants. The result was an explosion of sub-prime, i.e., risky, loans. Where the market deemed these loans as imprudent, the government forced businesses to extend them anyway, or face law suits.

The large number of defaults on these loans—which the private businesses had predicted, and thus, did not voluntarily make—caused banks and mortgage companies to face huge losses.

In other words, government mandates forced businesses to act contrary to their own judgment. Government compelled businesses to make risky loans under the threat of prosecution. This is not capitalism. When the recipients of those loans defaulted, the government stepped in. This is not capitalism.

That our financial markets are heavily regulated has not stopped politicians from decrying the failure of capitalism. This is not surprising, because to acknowledge government’s role would require intellectual honesty and undermine the ambitions of most politicians.

The premise underlying government regulations is that individuals must be protected from unscrupulous businesses. Left to their own devices, businesses would abuse consumers. Left to their own devices, consumers cannot understand the complexities of the market. Or, as Sen. Feinstein put it, “there is a great deal of confusion out there” and consumers “don’t understand”.

In other words, individuals are incapable of making decisions for themselves. Consequently, government must intercede, or as Jim Blackburn, an environmental attorney and coastal expert based in Houston said in a Houston Chronicle article: "We have to protect people from themselves and certainly from developers." And therefore, the government may properly restrict and control the actions of individuals.

But if individuals cannot make rational decisions, how will those individuals in government make rational decisions? Depending on the situation, those who put forth this argument offer two different justifications.

The most popular is to develop a consensus. In this scenario, opinions are solicited and some “common ground” is developed. Policies are then drafted that will appeal to a broad spectrum of people. If enough people agree, this view implies, then reality will somehow conform.

The second is rarely stated explicitly, but was implied by Sen. Feinstein. If constituents are “confused”, then our leaders must make decisions for us. They are privy to an understanding that escapes most people, and like Plato’s Philosopher Kings, they can properly relieve of us the need to think for ourself.

Regardless of the justification, interventions into the economy are aimed at controlling individuals. Through prescription and proscription such interventions prevent individuals from acting on their own judgment, and compel them to act in a manner dictated by law.

This true of zoning—individuals may not use their property as they choose, but only as permitted by zoning officials. This is true of occupational licensing—individuals may not offer or contract for services without government approval. This is true of minimum wage laws—individuals cannot offer or accept wages less than the government mandate. It is true of every government intervention into the economy.

Invariably, government mandates have unintended consequences. The recent problems in the mortgage markets are one example. In response, the government seeks more controls in an attempt to fix the problems previous controls created. And each time, they blame capitalism—i.e., the voluntary choices of individuals—as the culprit. However, only some individuals get the blame, while others get a free pass.

The problems in the sub-prime mortgage market are a case in point. The greed of individuals on Wall Street is blamed, and the individuals who took out loans that they could not afford are held blameless. Ignoring the fact that such transactions had two voluntary parties, the borrower is considered innocent. And the lender, who was forced into the transaction, is cast as a manipulative demon who must be shackled with further controls.

Absolving the borrowers of any culpability is consistent with the belief that individuals cannot make decisions for themselves. If individuals are incapable of rational decision making, then they cannot be held responsible for any decisions they happen to make. In short, individuals cannot choose for themselves, and when they are allowed to, we cannot hold them accountable. Unless of course, those individuals happen to be on Wall Street.

Those who attack the free market are attacking freedom. They are attacking the right of each individual to think and act for himself. They are attacking your right to life, liberty, and the pursuit of happiness. Disenchanted with the choices that individuals sometimes make, power lusting politicians and their supporters seek to eliminate individual choice. They believe that they have a right to impose their values upon you. And so long as you allow it, they will continue to do so.

Galt’s Gulch

In the novel Atlas Shrugged, each summer the heroes of the story retreat to a secluded valley. This valley, called Galt’s Gulch, is a bastion of individual freedom, rational thinking, and respect for the rights of each individual. It provides the heroes with a respite from the increasing controls on individual freedom being enacted by the government.

While Galt’s Gulch is fictional, the principles embraced by the community are not. Those principles are eloquently captured in the oath taken by each individual entering the community:

I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine.

The extent to which a community understands, accepts, and practices this principle is the extent to which that community thrives economically. The extent to which a community recognizes the moral foundation for individual freedom is the extent to which the individuals in that community prosper.

In the Declaration of Independence our Founding Fathers recognized the essence of this principle when they stated that each individual has a right to “life, liberty, and the pursuit of happiness.” The Founders recognized the fact that each individual has a moral right to his own life, that his life is not a commodity to be disposed of by society. They recognized the fact that each individual has a moral right to be free to pursue his own happiness, so long as he respects the mutual right of others.

In many ways Houston has embraced this principle. Houston has largely embraced the right of individuals to use their property in the pursuit of their values. But the principle has remained unnamed and implicit, and thus Houstonians have accepted numerous restrictions on personal liberty—the sign ordinance, the landscaping ordinance, and regulations on sexually oriented businesses to name a few.

The economic benefits of Houston’s freedom have been widely publicized during 2008. While many areas of the nation suffer from a collapsing housing market and a loss of jobs, Houstonians have continued to enjoy economic growth and prosperity. Our robust economy is the effect; freedom is the cause.

Because the principle has remained unnamed, Houstonians are vulnerable to continued assaults on their personal liberty. Those who seek greater control over our lives systematically target seemingly isolated issues, proposing new restrictions to control some “undesirable” land use, such as the Ashby High Rise, Magnolia Glen, or development around airports.

However, these are not isolated issues. In each instance the proposed restrictions require some individuals to sacrifice their values for the alleged benefit of the community. In each instance some individuals are forced to live for the sake of others.

So long as the principle remains unnamed Houstonians will continue to accept restrictions on personal liberty as “practical”. They will continue to advocate personal freedom while simultaneously accepting its infringement.

It is time for the principle to be declared openly, proudly, and without equivocation. Each individual has a moral right to the freedom necessary to sustain and enjoy his life. No individual has a moral right to force others to provide for his sustenance or enjoyment. And it is the responsibility of our government to protect this right.

Throughout the economic turmoil of 2008 Houston has set a shining example to the world. Houston has prospered because it has rejected the restrictive policies of other cities.

If we wish to continue and expand our prosperity, we must become a real-life Galt’s Gulch. We must refuse to live for the sake of others. We must refuse to force others to live for our sake. When we can do that, completely and consistently, our future will be secure. The glory of human freedom will be ours.

Protection from our Protectors

The City’s Airport Commission held its first hearing on airport zoning on August 21. Carolyn Feibel reported in the Chronicle that “it was surprisingly brief and undramatic.” That isn’t completely surprising, since it was held in the middle of a work day.

Feibel wrote:

Brenda Taylor, who lives in the North Hollow subdivision near Bush IAH, said at the hearing that she understands why the city needs to restrict construction around the airport. But she doesn't like the provision of a notice being attached to real property records for houses located in the tiers.

Taylor referenced my last story, which said "The notice's exact language still is being worked out, but it will indicate that property in the tier could be subject to airport noise and hazards, and is located in an area that the city has power to regulate."

"After 25 years, my property has become dangerous?" asked Taylor. "If so, the cities of Houston and Humble have to take immediate steps to protect us."

Taylor has a legitimate concern. By government fiat her property is not subject to regulations and controls. Selling her home will likely be much more difficult.

Taylor is also correct in saying that the cities of Houston and Humble should be protecting her. The government’s sole purpose is the protection of individual rights, including property rights. However, the City of Houston is demonstrating, with ever greater frequency, its willingness to cast aside its role as a protector of rights and instead become a violator of rights.

Airport zoning is one example. The city is proposing regulations that will control construction around Houston’s airports. These regulations include soundproofing requirements, as well as a complete prohibition on construction in certain areas. In other words, the city is forcing land owners to follow its edicts, or face penalties of $500 per day.

This entire power grab is being motivated by an FAA mandate. But rather than stand up to the FAA, city officials are meekly caving to what is essentially blackmail. Rather than protect the property rights of Houstonians, city officials are seizing upon another opportunity to expand their control of land use within the city.

The contrast between our current city officials and America’s Founding Fathers is stark. Our Founders defiantly stood up to the most powerful military in the world. They proudly declared the rights of individuals to “life, liberty, and the pursuit of happiness”. They did not cower in appeasement. They did not cave to political expediency.

City officials have abandoned their responsibility to protect our rights. Worse yet, they are becoming violators of those rights. Who will protect us from our protectors?

© J. Brian Phillips 2008

Airport Zoning Ordinance

The city recently released its draft ordinance on airport zoning. The ordinance was mandated by the FAA at the risk of the city losing federal funding.

The ordinance creates three “tiers” around the city’s airports. Building restrictions in the outer tiers are minimal, while in the tiers closest to the airports the ordinance prohibits construction of hospitals, schools, and churches, and requires soundproofing of new homes.

Undoubtedly the ordinance will increase the cost of housing within these tiers. The cost of soundproofing new homes will ultimately be passed on to home buyers. Residential construction on undeveloped land is prohibited, which will reduce the availability of housing.

More significantly, the ordinance prohibits individuals from using their property as they choose. The city will deny a property owner permission to build a house, a church, or a hospital on his land, even if he is willing to tolerate the noise of air traffic. In other words, the city is telling the property owner what is best for him, and using the force of law to impose its dictates.

Violations of the ordinance carry a penalty of $500 per day. Which means, if you choose to build a home that does not meet the soundproofing requirements, you will be fined. You violate nobody’s rights by doing this, but are subjected to the threat of fines.

That the federal government mandates such ordinances is bad enough. That our City Council caves to blackmail is worse. Rather than standing up to the FAA, Council simply goes along. Rather than protect the rights of Houstonians, Council appeases a federal bureaucracy.

For years the city has enacted ordinances that, in other cities, would be a part of a comprehensive zoning plan. This piece-meal approach has allowed the city to slowly grab more control over land use. Airport zoning is just one more example of this.

Fortunately the ordinance is still in the draft phase. Both the city and City Council will hold hearings on the ordinance prior to voting. The first hearing is scheduled for August 21.

© J. Brian Phillips 2008

Airport Zoning

Reacting to a federal mandate, city officials are developing zoning-like restrictions around Houston’s airports. Click here to read the Chronicle story.

Janet Lee Westphal submitted the following letter to the Chronicle:

In your article “City moves closer to first zoning law,” I was outraged to learn that the City Council and Mayor White are just going to deliberately ignore the wishes of Houstonians and blithely let the FAA violate the property rights of Houstonians by creating zoning around the airports.

Instead of going along with the FAA, the City Council and Mayor White should have the
courage to stand up to the FAA and let them know that Houstonians won’t accept
zoning in any form. Houstonians have defeated zoning laws on three different occasions because they realize that zoning will violate their rights to do with
their property as they see fit.

Does the City Council think that by calling it another name (land use regulation) that citizens won’t recognize it for what it is—a blatant attempt by government officials to tell home owners, business owners, and developers what they can and cannot do with their property? Existing homeowners and businesses throughout Houston should contact their City Council member and voice their concern.

Once the city government starts passing zoning regulations, not only will the people in these airport regions no longer have a right to decide what they’ll do with their property, but who’s going to stop the city government from limiting zoning to just these areas?

Janet Lee Westphal

Janet's letter was published in the Houston Chronicle on June 30, 2008.