Property Rights

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.

Opinion Editorial

By Dennis Polhill

The failed monorail proposal contained interesting aspects, one of them being the absurdity of its discussion as a viable proposal.  Voters wisely recognized the dubious and speculative nature of the exaggerated technological and economic claims.  Even if the monorail could have worked at any price, then how would this massive capital outlay ever do anything to address traffic congestion?  To succeed, the monorail would have to absorb all future as well as some of the pre-existing trip demand.  When expectations transcend the unlikely and range to the impossible, advocates engage in delusional fantasy.

The November 2001 election was friendly to most ballot measures across the nation.  Odd-year elections typically do not address many issues.  Nationwide there were four statewide initiatives and 29 referred measures in five states.  Thirty-one of the 33 passed.  The only other item to fail was a referred measure that would have allowed Washington state funds to be invested in the stock market.  It received eight percent more yes votes than did the monorail.  The Colorado monorail might arguably have been the 2001 elections stupidest idea in America.

Die-hard supporters hold firm in their view of monorails viability.  If its viable, they should not be deprived of the opportunity to profit by offering this service in the free market.  The fact that advocates opted for the awkward, slow, inefficient and maddening politics of a government-sponsored project suggests that they do not truly believe its viability.

Non-viable projects require the coercive force of government to extract support from unwilling taxpayers.  Therefore, all capital-intensive proposals brought for a vote should be suspect.  The current orgy of collectivist coercion threatens the very foundation of self-government, free markets and freedom.  Well intended, but unenlightened, zealots seek to impose their view of a better life upon all.  Provided privately, the monorail would empower every individual to choose whether its benefits were worth the outlay.  This is how good decisions are made: at the grocery store; when going to dinner, plays or movies; in buying cars, houses or vacations.  Choice is the American way.

Yet there is no shortage of ideas unabashedly requiring coercive imposition: sports stadiums, convention centers, light rail, T-REX, and monorail.  The reasoning is always the same.  The huge cost is small if imposed on large numbers of people.  The first bite of the monorail apple would cost each person in Colorado only $19.  Its assumed that people will not perceive the next bite, which is to be 80 times bigger.  Instead of doing its critical tasks well, government is intruding into all forms of activities, subverting rather than augmenting markets.

James Buchanan earned the 1986 Nobel Prize in Economics for the development of Public Choice Theory.  The theory asserts that the behavior of political actors is predictable on economic grounds.  That is, special interests succeed most when benefits are concentrated and costs are distributed widely. After being defunded by statewide vote of the people in 1993, the Colorado Tourism Board was refunded in 1999 by the state legislature.  Legislators are effectively powerless when confronted with enormous pro-spend testimony and minimal anti-spend testimony.  It is not economically rational for citizens to incur the time, expense and hassle to testify against special-interest legislation when their individual cost is small.

An Independence Institute Issue Paper by Dr. Barry Fagin, “Who Testifies and Why <> discovered that before the Colorado Senate Finance Committee chances are 96% that a witness is a beneficiary.  Another study finds that before the U.S. Congress, witnesses favor more spending 145 to 1 and senior legislators are more inclined to support special interests.

Because parasitic interest groups prefer a more favorable audience, the ballot is their instrument of last resort.  Indeed, monorail advocates were rejected by the legislature prior to their decision to go to the ballot.

Spending money frivolously is a right each individual enjoys.  There are as many ways to do it as there are personalities.  People work hard and save in order to maximize this right.  Its exercise relieves stress and enriches.  Intellect and individualism become more pronounced.  Outlays offer new business opportunities and elevate the wealth of other individuals.

But extended to the collective, frivolous expenditure is not a right.  It is collectivist tyranny.  To the minority being imposed upon, the fact that the frivolous spending decision was made by either 51 or 99 percent is cold comfort.  To preserve freedom and choice, Americans must learn that many government transportation proposals are boondoggles that consume more resources than they create.

Under the collectivist abuse model, each free person is impoverished ever so slightly each time a non-viable activity is funded.  It is the torturous death by one thousand cuts.  All Americans owe it to themselves and to their grandchildren to give deep and serious consideration to the implications of offering support to collectivist endeavors.


Copyright 2001, Independence Institute

INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.

JON CALDARA is President of the Institute.

DENNIS POLHILL is a Senior Fellow with the Independence Institute.

ADDITIONAL RESOURCES on this subject can be found at:

NOTHING WRITTEN here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.

PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the Independence Institute.

Opinion Editorial

By Dennis Polhill

The recent bankruptcy and closure of Sunset Beach Fitness and Racquet Club in Golden is a reminder that the laws of economics are real and that our political masters persist in ignoring them.

Sunset Beach was a successful and thriving Golden business. The owners participated in all of the right groups, were on city committees and donated willingly to the proper functions. But on May 21, 1991 the city sales tax was increased by 1%. Passage was by 11 votes and the number of spoiled ballots was strangely high, exceeding the margin of victory. Disaffected citizens claimed foul, circulated initiative petitions to bring the matter to a second vote and filed suits.

For a politician spending money is like a cocaine fix to an addict. They were not about to be dissuaded by mere citizens and the city invalidated 84% of the petition signatures to avoid a repeat election.

The sales tax increase yielded a $1,500,000 per year windfall. The revenue stream was quickly committed to bonds. Since this was shortly before the voters enacted the Taxpayers Bill of Rights, which requires voter approval for governments to issue bond, the city of Golden avoided having to ask the voters for permission to go into debt. No expense was be spared for a Taj Mahal Recreation Center. Rec Centers are not bad, but they can cause problems for taxpaying businesses.

When the Rec Center opened in 1994, Sunset Beach monthly gross revenues declined $10,000.  At 5% interest, $10,000 represents the monthly return that $2,400,000 would yield. Thus, Sunset Beach’s market value decreased $2,400,000. The investors would not get back their investments.

Golden had conducted a Financial Feasibility Analysis. The analysis stated that because other governments had built expensive Rec Centers, Golden could also. This is political rationalization for keeping up with the Joneses.

The study estimated that a Golden Rec Center would have a cost recovery ratio of 55%.Cost recovery ratio means that users will pay only 55% of operating costs. Non-users would pay all other costs: 45% of the operating costs plus the capital/construction costs. Essentially, through the force of government, Rec Center users make non-users pay over half of the cost of the Rec Center.

The unfairness of non-users having to pay for services of users is compounded by impact on competitive markets. Normal businesses do not have the force of government or the power to redistribute costs to people who don’t want the business’s service. The only revenue source for businesses is voluntary  exchange with customers. Under Golden-style collectivism, collapse of competition and market failure are inevitable. Because hidden and redistributed costs are still costs, government monopoly yields less service at higher cost.

Anti-trust laws recognize the importance of fair competition. Corporations are prohibited from engaging in certain types of predatory conduct. Penalties are severe.

Government sponsored market failures are shockingly common. The City of Denver, not content with being in the ski resort, land development, and golf course businesses, unabashedly discusses spending $107,000,000 to build a city-owned hotel. The Foothills Park and Recreation District is seeking $41 million, of which $16 million would build a Rec Center near a competing business. Golden wants its 16,000 people to pay $54 million ($3,400 each) for a golf course.

The absurdity is mind-boggling. Taxpayers who don’t golf or use Rec Centers are forced to pay for  millions of dollars in capital assets, yet receive no benefit. How can Golden claim that golf should be subsidized? Subsidized golf courses tax the poor to benefit  the rich.

When will politicians learn to resist the seductive false promises of socialism? When one person is unfairly injured so that another can gain, society makes no progress.

Dennis Polhill is a Senior Fellow with the Independence Institute, a free-market think tank in Golden, He is co-author of a chapter on unfair government competition with small business, in the book Colorado in the Balance, and also author of a longer Issue Paper on the subject.

This article, from the Independence Institute staff, fellows and research network, is offered for your use at no charge. Independence Feature Syndicate articles are published for educational purposes only, and the authors speak for themselves. Nothing written here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.
Please send comments to Editorial Coordinator, Independence Institute, 14142 Denver West Pkwy., suite 185, Golden, CO 80401 Phone 303-279-6536 (fax) 303-279-4176 (email)

Action Items

  • Government cost accounting should be modified to identify all cost components of producing various services. The units of service produced and the cost per unit should be reported to the public and the media.
  • Clarify the respective duties of various government entities and prohibit them from declaring themselves exempt from each other’s laws. If a county has jurisdiction over zoning, a park district cannot declare itself exempt. If a city has jurisdiction over building codes, fire codes, and sign codes, school districts must yield to city rules and procedures.
  • Governments should specify in clear terms why they are being formed and the scope of their functions. This can be called an annual business plan. These functions should be subject to periodic sunset review by a vote of the citizenry.
  • Governments should not compete with each other. The same services should not be supplied by two governments to the same geographic area or to the same customer base.
  • Governments should be governed by their own laws. Since regulations exist to protect the health, safety, and welfare of the public, it is inappropriate for a government to be exempt from any regulation. This applies equally to regulatory procedures, such as plan reviews, permitting, testing, and inspection. This is especially true when a government operates in competition with private businesses.
  • Governments that compete with private businesses should avoid the conflict of interest that exists when they function as a regulator. Their regulatory responsibility should be reassigned to an independent agency.
  • Government agencies that supply private goods to consumers in competition with taxpaying businesses should not be exempt from taxes or fees.
  • Government agencies that compete with private businesses should not be exempt from laws and regulations designed to protect consumers. Examples of such laws include exemption from liability and from anti-trust statutes.
  • Develop procedures and guidelines for governments to divest from services when government monopoly is no longer needed. This occurs when there is a technology shift or when there is an evolution in market demand creating the opportunity to grow private sector competitive suppliers.
  • CRS Title 24, Article 113, “State Government Competition With Private Enterprise” should be amended and enlarged:
    • To apply to all governments, not just the state.
    • To provide damage relief to injured businesses and individuals.
    • To impose penalties against individuals personally who knowingly participate in injury to existing businesses.
    • Remove the complaint and administrative responsibility for this law from the Colorado Office of Regulatory Reform (ORR) and reassign it to an advocacy branch of the state that is more likely to be concerned with saving jobs and protecting private property than enlarging government.
  • The advocacy agency should:
    • Define and streamline the complaint process.
    • Make the public aware that there are protections.
    • Log and track all complaints and remedies.
    • Report annually to the Governor and the Legislature.
  • Finally, activate the State’s Privatization Commission. Give it a charge such as enforcement or monitoring of CRS 194-24-113. Appoint commissioners dedicated to protecting small business, rather than protecting the government.

Number 12-93

By Dennis Polhill

Executive Summary

Unfair Competition exists when a government or quasi-government entity takes
advantage of its tax exemption and other privileges to supply private goods to the market
in competition with private suppliers. Unfair Competition adversely effects all
Americans. Small businesses are most vulnerable. When jobs are lost, the poor, the
unemployed, and women are especially damaged. When private enterprises are replaced
with less efficient government enterprises, national productivity and competitiveness are
adversely impacted. When the tax base is diminished, all taxpayers are injured.
The Federal government has investigated Unfair Competition frequently since 1980. In
1980, the Small Business Administration did a study which yielded numerous grievous
examples and extensive recommended actions. In 1986, a White House Conference on
Small Business labeled Unfair Competition as the third most serious concern in the
country for small business. In 1987, the General Accounting Office surveyed 27,000
businesses, nearly two-thirds of which were found to be suffering a degree of Unfair
In Colorado at least 34 industries are currently suffering damage as a result of Unfair
Competition from government. Unfair Competition is also perpetrated by quasigovernment
agencies that enjoy either monopoly privilege, tax exemptions or regulation
exemptions that are granted by government. Among the steps necessary to a solution are
the following:

  • All regulations which do not apply to government business entities, but which do apply to private industry should be either abandoned or enforced uniformly.
  • Agencies of governments that supply private goods to the market should lose their tax exempt status and other privileges.
  • Governments should adopt accounting practices and management approaches that reveal more closely the true cost of service provided.

Entire Paper: Unfair Government Competition Against Small Business (PDF)

Golden Transcript, February 6, 1992

Socializing property threatens America
By Dennis Polhill
Golden resident

Socialism is disintegrating all over the world. Centrally controlled command economies do not work. Only a free-market economy can deliver goods of adequate quantity and qualify at the right time to suit the fickle demands of the consumer. Yet, with all of the world so solidly convinced and struggling so desperately to emulate America, only America in the world community of countries continues to grow its government and is doing so at a staggering pace of four times faster than national economic growth rate.

Many Americans are aware of the trend and the ultimate consequences if not controlled. The result of this mood is the adoption of various tax-limitation and spending-limitation measures and an increasing unwillingness of taxpayers to approve new taxes or increases in tax rates even when the proposed public project is worthy. Unfortunately, with over 80,000 governments in America and over 2,000 in Colorado, controlling this many-headed dragon is not so simple. Government is continuing to grow beyond what is reflected on your tax bill first with increasing amounts of public debt and secondly by venturing into free markets to compete with private businesses for their customers.

“Follow the money.”

The public supplier and private supplier are both making available the same product or service to the customer. The government sector is all governments that we all pay taxes to for the services we expect and enjoy: police protection, fire protection, schools, water, sewer, streets, etc., etc.

If a public sector supplier operates with the same level of management intensity and entrepreneurial initiative as the private supplier, the product will appear on the market at about 67 percent of price of the private supplier. The 33 percent difference is a rough estimate of the benefit of not having to pay any taxes. When the taxes are not paid the government sector is deprived of needed revenue. The result is that the shortage of tax revenue is accommodated by an increase in the tax rate. The additional tax is paid by, you guessed it, the consumer.

The consumer’s duty is to acquire the best product at the least price. If both products are the same, the consumer’s purchasing decision is simplified to selecting the product of least expense. The consumer will purchase from the public sector supplier. One by one the customers gravitate to the lower-priced public supplier. Eventually the private supplier will lose a sufficient number of his customers that he will be forced to close.

People in private business call this “unfair competition.”

Really that name is too polite. If your business is the private business that the government decides to compete with, you are at risk of losing everything: your business, your job, your income, your savings, your credit, your reputation, and possibly more: your home, your family. A more accurate label would be “tyrannical, abusive and socialistic subversion of free enterprise at the expense of hard working and patriotic businesses.” The common good does not make this form of public policy legitimate. It is discriminatory, un-American, and socialistic all in the same breath.

The extent of the problem is greater than one would imagine.
Most people are aware of the aggressive advances being made by cities, counties and districts into the athletic club and day-care industries. Some less visible examples are catering, ambulance services, dental services, janitorial supplies, laboratory testing services, geological consulting services, golf courses, miniature golf courses, hotels, underground storage tank testing, cement manufacturing, fish farms, Christmas tree sales, greenhouses, hearing aids, fire safety suit manufacturing, forest-fire-fighting equipment, office leasing, asphalt concrete manufacturing, pavement deflection testing, veterinarian services, book stores, computer sales.

During October and November of 1991 a group of nearly 300 business owners from all over Colorado met to determine the top 10 business issues of Colorado. The effort was initiated through the vision of Gov. Roy Romer and the cooperation of the entire state Legislature. All of them appointed voting delegates to the Governor’s Statehouse Conference on Small Business. These 300 business leaders of Colorado voted the issue of government competition as the second-most pressing issue facing businesses in Colorado. Legislation will be introduced during January and it is expected that this and the other nine important business issues will all become law this year.