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IS THIS AN UNTAMPERED FILE?
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Imprimis, On Line -- September, 1993
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IMPRIMIS (im-pr<70>-mis), taking its name from the Latin
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term, "in the first place," is the publication of
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Hillsdale College. Executive Editor, Ronald L.
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Trowbridge; Managing Editor, Lissa Roche; Assistant,
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Patricia A. DuBois. Illustrations by Tom Curtis. The
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opinions expressed in IMPRIMIS may be, but are not
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necessarily, the views of Hillsdale College and its
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External Programs division. Copyright 1993. Permission
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to reprint in whole or part is hereby granted, provided
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a version of the following credit line is used:
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"Reprinted by permission from IMPRIMIS, the monthly
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journal of Hillsdale College." Subscription free upon
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request. ISSN 0277-8432. Circulation 475,000 worldwide,
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established 1972. IMPRIMIS trademark registered in U.S.
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Patent and Trade Office #1563325. For more information
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on free print subscriptions or back issues, call 1-800-
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437-2268, or 1-517-439-1524, ext. 2319, or write
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Imprimis, Hillsdale College, Hillsdale, MI 49242.
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---------------------------------------------
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"Three Cheers for Capitalism"
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by Malcolm S. Forbes, Jr.
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Editor-in-Chief, Forbes
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---------------------------------------------
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Volume 22,
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Number 9
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Hillsdale College,
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Hillsdale, Michigan 49242
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September 1993
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---------------------------------------------
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Preview: This month's Imprimis issue by Malcolm S.
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Forbes, Jr. promotes understanding capitalism as a
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moral as well as an economic system. He observes that
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central planners and politicians always underestimate
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the power of the free market and of individual
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decisions. Mr. Forbes' remarks were delivered at
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Hillsdale's Shavano Institute for National Leadership
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seminar, "American Perestroika: Returning Public
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Services to the Private Sector," in Atlanta before an
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audience of nearly 500 business and community leaders
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in May 1993.
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---------------------------------------------
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Living in the 1990s, we are uniquely able to judge what
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the American economy has achieved in the 20th century.
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For this reason, we ought to give three cheers for
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capitalism. By the term, I mean "democratic
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capitalism," which is as fundamentally different from
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the "managed capitalism" of modern-day central planners
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as it is from the "state capitalism" of old-style
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fascists, socialists, and communists.
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Capitalism works better than any of us can
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conceive. It is also the only truly moral system of
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exchange. It encourages individuals to freely devote
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their energies and impulses to peaceful pursuits, to
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the satisfaction of others' wants and needs, and to
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constructive action for the welfare of all. The basis
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for capitalism is not greed. You don't see misers
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creating Walmarts and Microsofts.
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Think about it for a moment. Capitalism is truly
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miraculous. What other system enables us to cooperate
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with millions of other ordinary people--whom we will
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never meet but whom we will gladly provide with goods
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and services--in an incredible, complex web of
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commercial transactions? And what other system
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perpetuates itself, working every day, year in, year
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out, with no single hand guiding it?
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Capitalism is a moral system if only because it is
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based on trust. When we turn on a light, we assume that
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there will be electricity. When we drive into a service
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station, we assume that there will be fuel. When we
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walk into a restaurant, we assume that there will be
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food. If we were to make a list of all the basic things
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that capitalism provides--things that we take for
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granted--it would fill an encyclopedia.
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How to Become Successful Capitalists
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How do we become successful capitalists? The answer
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sounds simple, but it is often overlooked in places
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where you would think they would know better. (I am
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referring, of course, to government, the media, and our
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most elite business schools and economics departments.)
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We succeed as capitalists by offering goods and
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services that others are willing to buy. Many
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capitalists do not make correct assumptions about what
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to offer and fail, but that is as it should be. There
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is no guarantee of success in any area of life,
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including business--there is always risk. The
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particular advantage of capitalism is that failed
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businesses don't necessarily equal a failed economy;
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they make way for successful businesses.
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But even the most successful businesses can't
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afford to forget about market principles. AT&T is a
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case in point. In the 1970s, fiber-optic technology was
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available, but AT&T decided that it would delay fully
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converting for perhaps 30 to 40 years. It wanted to
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fully depreciate its old plants and equipment, and,
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because it enjoyed a virtual monopoly over its
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customers, it saw no reason to spend a lot of money on
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a new long distance calling system. But then an upstart
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company, MCI, raised a couple billion dollars through
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the much-maligned "junk bonds" market in order to set
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up its own fiber-optic network. AT&T had no choice but
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to keep up with its competition, and, as a result, the
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U.S. experienced an enormous advance in communications
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that has put it ahead of its foreign competitors and
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that has benefited hundreds of millions of consumers.
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About twenty-five years ago, the federal
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government filed an antitrust suit against IBM because
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it had grown so successful that its name had become
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virtually synonymous with the computer industry. But
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the would-be trustbusters underestimated the vitality
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of an open marketplace. IBM's dominance of mainframe
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computers, microchips, and software did not prevent the
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rise of rival companies such as Digital Equipment,
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Apple Computer, Sun Microsystems, and Microsoft. Today,
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IBM's very existence is in jeopardy.
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Around the same time, John Kenneth Galbraith wrote
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The New Industrial State, in which he argued that
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though the Ford Motor Company was no longer the biggest
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of the auto companies (GM had roughly 50 percent of all
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sales), Ford was so large that it did not have to pay
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particular attention to its shareholders or its
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customers. Apparently, Japanese automakers did not read
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John Kenneth Galbraith, or the reports of countless
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other "experts" who claimed that it was impossible to
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compete against Ford, GM, and Chrysler. They even
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ignored their own early failures to storm the U.S.
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market in the 1950s and early 1960s. Finally, after
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||
years of trying, Japanese automakers succeeded--and
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succeeded to an extent that no one could have
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predicted--in challenging the hegemony of the "giants"
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in Detroit.
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Then there is Sears & Roebuck. What more mundane
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business could there be than retailing? Yet, around the
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turn of the century, Sears made retailing truly
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exciting, reaching out to millions of people with new
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marketing methods and new products. By the end of the
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1940s, it dwarfed all competitors. In the last several
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decades, however, the company lost its way and became a
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self-serving, insulated bureaucracy. Now it is closing
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its doors on numerous stores. Its market share has
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plunged--and its profits have almost disappeared.
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Why, by contrast, has another retail firm,
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Walmart, achieved its phenomenal success? Not because
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its founder Sam Walton used to ride around in a pickup
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truck visiting his stores, though that was good
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publicity. It was because he recognized the importance
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of computer technology and had systems devised that
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help store operators respond to inventory information
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on a weekly and even daily basis. Sam Walton knew that
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success, even once it was achieved, was something that
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couldn't be taken for granted.
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What should be clear from each of these examples
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is that capitalism is not a top-down system--it cannot
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be mandated or centrally planned. It operates from the
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bottom up, through individuals--individuals who take
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risks, who often "don't know any better," who venture
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into areas where, according to conventional wisdom,
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they have no business going, who see vast potential
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where others see nothing.
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Often, these individuals literally stumble across
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ideas that never would have occurred to them if they
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were forced to work in a top-down system. And they take
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supposedly "worthless" substances and turn them into
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infinitely valuable ones. Look at penicillin. Whoever
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thought that stale bread could be good for anything?
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The same goes for oil before the invention of the
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gasoline engine and the automobile and for sand before
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the invention of glass, fiber-optics, and the
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microchip.
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There is another important thing to remember about
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capitalism: Failure is not a stigma or a permanent
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obstacle. It is a spur to learn and try again. Edison
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invented the light bulb on, roughly, his ten-thousandth
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attempt. If we had depended on central planners to
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direct his experiments, we would all be sitting around
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in the dark today.
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Open vs. Managed Competition
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This leads to the next question regarding capitalism:
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What is the market? Central planners don't like the
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word; they prefer to say, "market forces," as if
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describing aliens from outer space. But nothing could
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be further from the truth. The market is people. All of
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us. We decide what to do and what not to do, where to
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shop and where not to shop, what to buy and what not to
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buy. So when central planners trash "market forces,"
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they are really trashing us.
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Unfortunately, they are the ones who seem to be
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calling the shots today on a number of issues that
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should be left up to the market, i.e., up to us. One
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such issue is the spiraling costs of health care. Not
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surprisingly, central planners advocate a top-down
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approach to reform. With unconscious irony, they call
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it "managed competition."
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But we have already tried managed competition; in
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fact, it is managed competition that has caused so many
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problems in the health care industry in the first
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place. Specifically, the tax code penalizes individuals
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who want to buy medical insurance by making them pay
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for it with after-tax dollars, even if they are self-
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employed. Only 25 percent of their premiums are
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deductible. But companies may buy health insurance with
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pre-tax dollars. So they, instead of their employees,
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have become the primary purchasers of insurance. This
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drives a wedge between the real customers and the real
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providers and obscures the real costs of such features
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of the system as low deductibles. Imagine if every time
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you went to the supermarket you gave the cash register
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receipt to your employer, who then submitted it to the
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insurance company for a claim. What would happen to
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food prices? They would skyrocket, because you wouldn't
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care whether a bottle of soda cost $10, $100, or
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$1,000.
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The problem doesn't stop there. Growth in demand
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and improvements in technology--key ingredients to
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success in any other business--have instead led to
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crisis in the health care industry. More people are
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receiving better treatment than ever before and leading
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longer, healthier lives, but perversely this has sent
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costs up rather than down and has overloaded the
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delivery system.
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If we want genuine health care reform, we must
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return to open competition. The tax code must be
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revised so that individuals can buy health insurance
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with pre-tax dollars and set up medical IRAs for their
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families that can be used to finance routine medical
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expenses. There is no doubt that a majority of
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Americans would choose this option. They want to have
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control over their own health care decisions. Many
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would choose policies with higher deductibles. Premiums
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would go down and so would paperwork. Physicians and
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hospitals would see their patient load come under
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control and would be induced to offer competitive rates
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and services. The potential benefits are enormous.
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A couple of years ago, Forbes Inc. faced yet
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another round of steeply rising costs for health care.
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We wanted to do something that enabled our employees to
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police those costs in a way we, the employer, were
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unable to do. So we gave them a stake in the process.
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We offered them a bonus: They could keep the difference
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between their claims and $500--and we would double the
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amount. Thus, if they went through a calendar year
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without filing any health claims on the insurance
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company, we would pay them as much as $1000, tax free.
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What happened? Suddenly, every employee became
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cost-conscious. On major medical and dental expenses,
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claims went down 30 percent. These savings financed the
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bonuses and our total health care costs went up zero
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percent last year. This was not because we compelled
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millions of people to participate in some "managed
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competition" scheme, but because we let a few hundred
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individuals make their own health care decisions.
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Letting Individuals Make Their Own Decisions
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Letting individuals make their own decisions is what
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capitalism is all about, but virtually all central
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planners (now in their heyday under the Clinton
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administration) and a good many members of the U.S.
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Congress (Republicans as well as Democrats) fail to
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realize it. They do not, for example, realize that it
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is the decisions of individuals that really decide how
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much tax revenue the government collects and how well
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the economy prospers. Between 1982 and 1986, the
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American private sector created well over 18 million
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new jobs, including a record number of high-paying
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positions. Of these, 14 million were created by new
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businesses. But, in 1987, Congress raised the capital
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gains tax to one of the highest levels in the
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industrial world. What happened? New business and job
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creation declined sharply. The nation was hit with a
|
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recession. And tax revenues, which were supposed to
|
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rise, went down. All this occurred because individuals
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made the decision not to invest. Today, there is almost
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$7 trillion of unrealized capital gains that is going
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begging because of high taxes. If Congress lowered the
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capital gains rate, it would mean more not less tax
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revenues. It also would overwhelm any stimulus package
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Washington could concoct for revitalizing the economy.
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Central planners also tend to be big fans of
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"industrial planning," whereby government picks the
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"winners" in the marketplace through subsidization of
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select companies and technologies. They ignore the fact
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that this will obliterate incentives for companies to
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remain competitive, breed corruption and special
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interests, and penalize the small businesses that are
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the backbone of the economy.
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And they want to micromanage the monetary system,
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knocking down the value of the dollar against the yen
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or raising it against some other currency in closed-
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door meetings with bureaucrats from other
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industrialized nations. They do not realize that one of
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the most important functions of money is to serve as a
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constant, reliable measure. A ruler is supposed to be
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12 inches long, but they want to change it to 11 or 13
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inches whenever it suits their political strategy. You
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and I might call this a swindle, but in Washington it
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is called sophisticated economic management.
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Even such a simple word as "change" takes on a
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whole new definition in Washington, meaning change
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directed from above by well-intended central planners
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and politicians who think that they "know better" than
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most people when it comes to making decisions. But, in
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truth, the most revolutionary sweeping agent of change
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is capitalism. Look at what has happened in Eastern
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Europe, the Soviet Union, Latin America, and Asia. When
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people are free to make their own decisions, they have
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a stake in the economy, and when they have a stake in
|
||
the economy, they have a stake in serving others, and
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when they have a stake in serving others, they have a
|
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stake in fighting for freedom.
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Capitalism is the real enemy of tyranny. It stands
|
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not for accumulated wealth or greed but for human
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innovation, imagination, and risk-taking. It cannot be
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measured in mathematical models or quantified in
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||
statistical terms, which is why central planners and
|
||
politicians always underestimate it. As I noted at the
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outset, it is up to us, then, to give three cheers for
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capitalism. Who knows? If we cheer loud enough, perhaps
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even they will listen.
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---------------------------------------------
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|
||
Malcolm S. Forbes, Jr. is the president and chief
|
||
executive officer of Forbes Inc. and editor-in-chief of
|
||
Forbes magazine, which, with a paid circulation of
|
||
approximately 750,000, is the world's largest business
|
||
journal. Also chairman of Forbes Newspapers Inc., Mr.
|
||
Forbes serves on the boards of numerous civic, business
|
||
and educational organizations, including the Ronald
|
||
Reagan Presidential Foundation and the Foundation for
|
||
Student Communication. From 1985 to mid-1993, he also
|
||
chaired the Board for International Broadcasting, which
|
||
oversees Radio Free Europe and Radio Liberty.
|
||
|
||
###
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|
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+++++++++++++++++++++++++++++++++++++++++++++++++++++++
|
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End of this issue of Imprimis, On Line; Information
|
||
about the electronic publisher, Applied Foresight,
|
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Inc., is in the file, IMPR_BY.TXT
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+++++++++++++++++++++++++++++++++++++++++++++++++++++++
|