Invention is the mother of necessity.13
The worst way to organize an economy is for the central government to amass all the capital—by taxing its citizens heavily or by owning all enterprises itself—and then for that government to decide how the capital will be deployed. The Soviet Union paid with its life for its stubborn commitment to a centrally planned economy, and (as I noted in Chapter 1) China is headed down this same path. On a smaller scale, the economies (and, to a considerable extent, the societies) of Cuba, much of Central and South America, and most of Africa were destroyed by top-down economic systems.
The best way to manage an economy is to allow it to manage itself as freely as is possible without tolerating monopoly profits or other forms of illegal or predatory activity. In such a society, decisions about the use of capital—before and after it has been earned—will be pushed down as far as they can go. In terms of the deployment of wealth after it has been earned, those decisions are made in the United States at the individual wealthy family level. Wealthy families are, by definition, the only ones who possess excess capital, that is, wealth far beyond what will be needed to provide comfortable lives for themselves. (Middle income families, by contrast, have savings: capital that is not needed today, but that is expected to be needed by those families in the future.)
The effectiveness with which a society deploys its privately accumulated ...