The Poverty of Nations: Chapter 4 Economic Systems

I'm currently reading The Poverty of Nations by Wayne Grudem and Barry Asmus that was published about a year ago.  It was on my reading list, and my daughter bought it for me for Christmas.  I've begun to read it and will give a summary as I go.

Introduction was here
Chapter 1 was here
Chapter 2 was here
Chapter 3 was here

Now for chapter 4.

This chapter is a description of the free market and its advantages.

First comes the definition.
Economic production and consumption are determined by the free choices of individuals rather than governments and there is private ownership of the means of production.

This system leaves people free to choose to work, and where to work.  They are free to keep the rewards of their labor and talent.

They quote Adam Smith:

That system of laws, therefore, which is connected with the establishment of the bounty, seems to deserve no part of the praise which has been bestowed upon it. The improvement and prosperity of Great Britain, which has been so often ascribed to those laws, may very easily be accounted for by other causes. That security which the laws in Great Britain give to every man that he shall enjoy the fruits of his own labour is alone sufficient to make any country flourish, notwithstanding these and twenty other absurd regulations of commerce; and this security was perfected by the revolution much about the same time that the bounty was established. The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security. In Great Britain industry is perfectly secure; and though it is far from being perfectly free, it is as free or freer than in any other part of Europe.   An Inquiry into the Nature and Causes of the Wealth of Nations   IV.5.82 
  http://www.econlib.org/library/Smith/smWN15.html#IV.5.82  accessed on June 24, 2015

 The authors point out that except for oil rich countries all countries with a high per capita income have a free market system.

Grudem and Asmus also discuss biblical support for a free market economy.  These points include the Biblical teaching about private property, but stewardship for what we do possess.  The fact that we are all created in God's image means that we should all have equal rights before the law.

The foundation of a free market is private ownership of property.  Governments should not over regulate property use.  Clear titles to land, property (including intellectual) are important so that people can actually keep and use their own property.  Without titles, there is no guarantee that my property today will be mine next week.  Furthermore, when I have a title to my property I can use it as collateral for loans.

Getting titles for poor people for property they already own would go a long way to helping lift people out of their poverty.

The authors cite a study by Hernando de Soto, The Mystery of Capital.   De Soto concludes that without legal protection for property poverty cannot be eradicated.  There is no third way between capitalism and socialism.

There is a role for government in all this, but it is limited to preventing and punishing fraud and criminal behavior.  The government also must ensure low tax rates and a stable currency.

In this time when capitalism and free markets are under attack this chapter sorely needs to be read by Americans and Europeans or we may lose the wealth that our ancestors have bequeathed us.

Chapter 3 Economic Systems that do not lead to prosperity

I'm currently reading The Poverty of Nations by Wayne Grudem and Barry Asmus that was published about a year ago.  It was on my reading list, and my daughter bought it for me for Christmas.  I've begun to read it and will give a summary as I go.

Introduction was here
Chapter 1 was here
Chapter 2 was here

Now for chapter 3.
It's also helpful to look at which systems don't work and why they don't.  Although the right system in and of itself does not bring a nation out of poverty, the wrong system will doom a nation.  A poor system will not lead to lasting solutions to poverty.

The authors describe nine systems and critique each to show how they do or do not lead to the creation of more wealth.

1. Hunting and gathering systems do not leave enough time and energy to devote to economic development and specialization.  Plus, there simply aren't enough of these resources left to support a nation in this fashion.
2. Subsistence farming does not leave enough energy and time to devote to specialization and development.  All one's time and energy are spent on producing enough food to feed one's self and a few others.  Again, there aren't enough resources in the world to support a large population in this fashion.
3. Slavery.  Living off the lives of others is not going to lift a nation out of poverty.  Enslaved people never do their best.  Plus such a system is dehumanizing.
4. Tribal ownership.  If everyone owns it, then no one does.  Commonly owned property is usually treated more poorly than property that individuals own.
5. Feudalism  In this system too much of the return to the labor goes to the land owner and not enough to those at the bottom of society.  
6. Mercantilism  Although it seems that this method would increase a nation's wealth, it would not do so over the long haul.  Large companies and monopolies are favored against consumers.  The producer os favored rather than the consumer.  The government picks the winners and losers.  
7. Socialism and communism misunderstand how goods are valued.  They are valued by how much someone else wants them, not by the resources and the time put into creating them. Communism reduces the incentive to work.  The problems of tribal ownership also haunt communism and socialism to some degree.  The history of communism also indicates that it is an evil system, with close to 100 million human beings killed by their own governments during the twentieth century.
8. Welfare state and equality  This system can't be sustained on a large scale and for very long.  Sooner or later someone has to pay the bills.  The incentive for hard work is also removed.  
9. Free market system  This system is the one that the authors describe as the one that is most likely to lead to the reduction of poverty.  It is important to understand what they mean by a free market system.  It is where the individuals can freely choose what to buy and not buy, what to purchase and not purchase, where to invest and not to invest.

The next chapter describes the free market system