Unleashing Capitalism

Russell S. Sobel, Ph.D.

Professor of Economics
James Clark Coffman Distinguished Chair

West Virginia University

What Explains Prosperity?
 Adam Smith’s Question:
Why Are Some Countries Rich and Others Poor?

An Inquiry into the Nature and

Causes of the Wealth of
Nations (1776)

 Policies and the system of economic organization

(e.g., capitalism) matter more than things such
as resources, geography, education, etc.
Rankings of Reliance on Capitalism
Growth is a function of “inputs” AND “institutions”

West Virginia
needs to get its
“Institutions” in
better shape
North Korea vs. South Korea

Per Capita
Income
= $1,800

Per Capita
Income
= $24,200
States also Differ in Reliance on Capitalism

West Virginia Ranks

50th in Capitalism

We are less “free market”

than Estonia and Latvia
 WV’s PCPI: Rank 48th – 75% of U.S. Average
Figure 1.1: Average Income by State, 2005

$50,000

$45,000

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0
 We Are Falling Behind Other States

West Virginia's Rank Among States

25
Per Capita Personal Income Rank

1934
30

35

40

45

50
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
 Figure 1.3: State Growth Comparisons

$35,000

$30,000
Per Capita Income

$25,000

$20,000

$13,361 $13,900 $13,194

$15,000

$10,000

$5,000

$0
West Virginia Georgia North Carolina

1965 2005

1965 PCPI Ranks: WV=42, GA=41, NC=45

 Figure 1.3: State Growth Comparisons

$35,000
$31,191 $31,029
$30,000
$26,029
Per Capita Income

$25,000

$20,000

$13,361 $13,900
$15,000 $13,194

$10,000

$5,000

$0
West Virginia Georgia North Carolina

1965 2005

1965 PCPI Ranks: WV=42, GA=41, NC=45

2005 PCPI Ranks: WV=48, GA=33, NC=35
Growth Rates: WV=1.4%, GA=2.0%, NC=2.2%
What Faster Growth Means for Future Prosperity

Figure 1.2: Which Future for West Virginia?

$90,000
$80,000
$70,000
Per Capita Income

$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1935

1945

1975

2005

2045
1925

1985

1995

2015

2025

2055
1955

1965

2035
Historical 1.4% Growth 1.9% Growth 2.4% Growth

Average income in West Virginia will reach $50,000 an entire generation

earlier if we can increase long-run growth by just one percentage point
 How Can Policy be
Reformed to Better
Embrace Capitalism and
Promote Long-Run
Growth?
Today I’ll give a “menu” of reforms in 5 major areas
 1. Lower Taxes & Regulations on
Productive Activities
Examples:
Capital Investment
 Business franchise tax
 Personal property tax on
inventory, machinery
and equipment

Labor Force
- Welfare Reform
Earned Income Spendable Income
$0 $11,026
$6,000 $11,014
$12,000 $15,286
2. Discourage “Unproductive” Uses
of Resources
(e.g., excessive lobbying or lawsuit abuse)

Examples:
Legal Reform
 Venue Requirements
 Joint & Several Liability Reform

 End Partisan Election of Judges

Avoid targeted taxes, credits, &

subsidies - they encourage lobbying
 3. Rely on Entrepreneurial Discovery, Not
“Central Planning,” to Guide the State Economy

An economy undergoes continuous change

– some industries fail, others are born

Capitalism critically relies on entrepreneurship and

the profit and loss system to direct this process

This process cannot be centrally planned or directed

effectively - it must be discovered within the
marketplace
 The Reason …Because Nobody Knows
Ken Olson, chairman/founder of Digital Equipment Corp., 1977.
"There is no reason anyone would want a computer in their home."

Fred Smith’s (FedEx) Yale University Senior Project Grade Remark:

"The concept is interesting and well-formed, but in order to earn
better than a 'C,' the idea must be feasible."

Would You Have Invested?

Microsoft Corporation, 1978
To Promote & Unleash Entrepreneurship:
 Avoid interfering with the profit/loss mechanism

 Avoid regulating prices or wages

 Privatize or induce choice whenever possible

 Don’t impose barriers to entering occupations &

industries
Barriers to Entrepreneurship
 4. Reduce Government Size,
Growth, and Centralization
 Goal should be to increase the share of our
state economy controlled through the private
sector

 An important first step is to constrain future

state spending growth
 Growth of WV State Govt.
West Virginia Real Per Capita State Spending
$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0
1860 1880 1900 1920 1940 1960 1980 2000

1921 B&O Tax Adopted – Converted to Bus Franchise Tax 1987

1933 Consumer Sales Tax Adopted
 4. Reduce Government Size,
Growth, and Centralization
 Goal should be to increase the share of our
state economy controlled through the private
sector

 An important first step is to constrain future

state spending growth

 Overall spending can also be reduced and

made more effective by decentralizing
spending to local governments (WV is 2nd
most centralized state)
 5. Increase the Security of Property
Rights & Impose Checks on the
Regulatory Environment
 Restrict the use of eminent domain for
private redevelopment (post-Kelo)
(H.B. 4048 was passed in 2006 but it didn’t go far enough)

 Regulations should be subject to cost-

benefit analysis (and include sunset
provisions based on proof of effectiveness)
- Ex. Mine Safety, ATV
Thank You / Q&A

Contact Information:

Russell S. Sobel, Ph.D.

Coffman Distinguished Chair
Dept. of Economics, WVU

Russell.Sobel@mail.wvu.edu

(304) 293-7864