Force of Finance: Triumph of the Capital Markets

Force of Finance: Triumph of the Capital Markets

“The Force of Finance: Triumph of the Capital Markets” by Reuven Brenner, Stoddart Publishing Co. Limited, Toronto, 2002 and Texere Publishing London & New York, challenges unsupported conventional thinking in many areas including economics, finance, capital markets, prosperity, freedom and democracy.

“Prosperity is the consequence of one thing and one only: matching talent with capital, and holding both sides accountable,” as illustrated by the economic successes of 17th century Netherlands and the modern Asian Tigers. Brenner warns of the injury caused by public policies of confiscation and unproductive regulations, but reports, “for the moment, the U.S. alone has the fundamentals right.”

Chapter 2 considers the relationship between capital markets and democracy and elaborates extensively about the 1997 observations of Arthur Schlesinger, Jr., “democracy requires capitalism, but capitalism does not require democracy.” More simply stated capitalism thrives where democracy cannot. The legal recognition of private property, open capital markets and dispersion of political power augment both democracy and capitalism. More than any other single factor, “low taxes” bring “economic miracles.”

Brenner calls macroeconomics the “twentieth-century pseudo-science” because it is built on the false Keynsian view that governments can or should manipulate economic outcomes.

In Chapter 4 Brenner points out that “voting rights were not much of an obstacle to governments intent on doing harm.” Thus, Brenner reasons that democracy and capitalism are safer when politicians possess less, rather than more, power: “referenda significantly diminish the power of politicians and bureaucrats.” Experimentation with political change and tools of citizen involvement was truncated and stalled by the Great Wars, the Depression, and the Cold War; but now the time is ripe for renewed interest in reforms, which should be cause for optimism.

Chapter 7, titled “Extracting Sunbeams out of Cucumbers,” explores how “ideas that have no foundation gain scientific status.” For decades economists have used the lighthouse analogy to advocate government intrusion. If government did not provide lighthouses, then there would be none. However, private-sector lighthouses existed for centuries. How could so many great minds get this fact wrong? Ronald Coarse published the historical correction in 1974, but the false analogy continues to appear in new textbooks. Students “arrive at the intended but utterly misleading conclusion. The frequently repeated idea thus passes for fact.” “Students are not being taught science; instead, they are being taught obscure linguistic exercises masquerading as science.” “Matching ideas to real-world events is the meaning of being scientific. It is unscientific to either ignore or reject discovered patterns.” The non-science of the social sciences and humanities hide in a maze of obscure rhetoric designed to bar critical review by outsiders and to ridicule innovators as lacking understanding. “Aesop was right: Obscurity often brings safety.” It is the conformist who survives. “Followers are taught to be blind.” Chinese inventiveness ceased when state power increased; it always does.

That so many politicians and economist were attracted to Keynesian views is simply evidence that people respond to incentives. The opportunity for bigger and more intrusive government benefited both groups irrespective of whether the ideas had merit.

“Precedents are incorporated into behavior and institutions, and often outlive the circumstances that created them.” “Prosperity requires people to abandon old industries and old ways of doing things, and bet on new ones and new ways.”

“Backward-looking societies stay poor.” “Stable currency does not guarantee prosperity” … but “it is a necessary part.” “Out-of-the way Iceland, Australia, and New Zealand are all prosperous and technologically up to date. They are not close to either big markets or principal sea routes. … they have open capital markets.”

“In the absence of democratized capital markets, “freedom” is an empty word.” “With open markets the poor can move up.” “Limiting access to capital markets is the means by which groups can stay in power.” “Indeed, the democratization of financial markets and the adoption of the institutions of direct democracy are, the keys to lasting prosperity.”

“The United States has its share of bad laws, outdated regulations, complex taxes, and controls inherited from the past, many of these are still unquestioned.”

“… as a condition of receiving Western capital, countries should open up their financial markets.” Brenner predicts, “If Putin carries out his promise to impose a 13 % flat tax … Russia will soon prosper, attracting critical masses of talent and capital, reducing corruption, and leapfrogging over many other countries.”

In short “The Force of Finance” offers a comprehensive vision for freedom not yet appreciated by many leaders. All peoples will benefit when economic and political freedoms are enlarged. The key is the opening of and access to financial markets and the dispersion of political power, which tends more to interfere with, rather than facilitate, open financial markets. The sooner people gain the courage to confront and change archaic regulatory and political institutions the sooner people will benefit from increased wealth and freedom.

“The Force of Finance” is recommended reading for those interested in deeper understanding of the interdependency of economic and democratic freedoms.