Two months ago I came across an ad in the print edition of the Wall Street Journal that struck me as so inspiring that I clipped it and posted it on my refrigerator. The ad shows a golfer standing on a bank, staring down at a ball that landed on an inaccessible rock next to a water hazard. Above the image is a caption that reads: “It’s What You Do Next That Counts.”

It wasn’t the artistic nature of the creative that I found appealing so much as the message that it conveys. With his ball lying in an unapproachable spot, the golfer has seemingly blown it. His score, not just for the hole but perhaps the entire tournament, hangs in balance. But rather than despair or lose his cool, he contemplatively stands there evaluating his next move. He’s neither denying reality nor despairing; instead, he’s evaluating this potential crisis moment and plotting his next move.

I should mention a couple of other details about this advertisement. The ad is for Accenture and the golfer is Tiger Woods, which makes the caption pretty ironic.

By now everyone knows that Tiger Woods is in midst of his own moment of crisis. Following his bizarre Thanksgiving car crash and revelations of multiple affairs, the first athlete ever to surpass $1 billion in career earnings has watched as sponsors pulled his TV ads, Accenture canceled his endorsement deal, and his popularity has tumbled. Just yesterday, word came that one of Tiger’s doctors is being investigated for providing performance enhancing drugs; while there’s nothing to link Tiger to this drug scandal, his handlers must be cringing over this association. Tiger’s response was to announce that he’s taking an indefinite hiatus from the PGA tour in order to focus on his family and attempt to save his marriage.

Clearly Tiger’s double life is reprehensible, and I sympathize with his wife, Elin Nordegren. I’m also grieved to see my former Stanford classmate self-destruct like this. (I didn’t know Tiger well, but we did meet a few times at the Farm—including our first day of classes in 1994, when he informed our Medieval history professor that he’d have to miss a lot of lectures because of his golf obligations.) His family’s future is at stake, so I won’t make light of this situation or offer any trite advice.

However, I do think that these events provide a timely backdrop to reflect on handling a crisis, something that every entrepreneur is sure to encounter at some point in his or her career. Whether it’s cash flow woes, a product problem, the entrance of new competitors, a legal challenge, internal conflicts, customer retention issues, damaging media coverage, or some combination of the above, startups face many potential existential crises on the path to becoming a viable business.

How should you respond when your company faces a moment of crisis? Like the ad says, “It’s What You Do Next That Counts.” Let’s examine a crisis moment from early in PayPal’s existence to glean a basic framework.

Back in the summer of 2000, the company was burning through $10 million a month. We had basically no revenue coming in, while the cost of our users funding transactions with their credit cards was soaring. The board had just made its second CEO change in half a year. In the marketplace, PayPal was facing stiff competition from eBay’s Billpoint, while Yahoo and Citibank were creating online payments services of their own. Meanwhile, PayPal was being attacked daily by foreign mafia, who used the service to siphon money off of stolen credit card numbers. But wait—as the late Billy Mays would say—there’s more. We were also experiencing a customer service meltdown, as hundreds of thousands of inquiries from our growing user base overwhelmed our young company’s ability to respond.

I think that qualifies as a crisis. (Now you probably understand why I titled my book The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth.) So how did Peter Thiel, David Sacks, and the rest of the management team respond? Let’s take a look, and in the process distill a few principles about managing in the midst of crisis.

1) Identify the problems you’re facing. As both Tiger’s and PayPal’s situations demonstrate, the onset of a crisis can be marked by multiple significant problems coming to a head all at once. I often heard Peter Thiel compare PayPal to a big machine with many inter-dependent levers, pulleys, and dials that needed to be calibrated. This is a useful analogy because it implies that when something is going wrong with the machine, you don’t want to run around randomly turning dials and yanking levers. Instead, you need to step back from the crisis situation and rationally assess the nature of the problems you’re facing; otherwise you could end up making the situation worse.

2) Narrow your focus. Humans generally crave stability, hence we naturally seek to control our circumstances. So when your world is crashing in around you, it’s tempting to rush in and try to fix everything at once in order to regain a sense of control. But in the midst of a crisis, this often isn’t possible, even if you had unlimited resources (which most entrepreneurs do not). So when you’re beset by multiple serious problems, it’s critical to identify which ones are the most important to your business that are also actionable. In the case of PayPal’s crisis, our management team prioritized generating revenue, cracking down on fraud, and improving customer service efficiency as the top priorities. While this didn’t address some critical challenges such as our competitive situation or negative public image, the execs judged that making progress on these issues would stabilize the business and allow us to address the other problems over time.

3) Devise a few key metrics. Intuition is important, but don’t rely on your gut feeling alone—especially when you’re in the midst of a potentially emotional situation. In a crisis, identify and monitor a few key metrics that relate directly to the problems you’ve targeted for action so you can gauge the effectiveness of your efforts. Generally speaking, operational metrics are preferable to financial metrics because you can collect them faster, and they should be closely related to whatever the issue is you’re trying to fix. In PayPal’s hour of crisis, I devised a simple visual metric that tracked our progress on revenue growth; I plotted the % of transactions to fee-bearing accounts (which made us money) vs. the % of transactions funded by credit cards (which cost us money) over an x-axis for time. We knew we had to get the lines to cross in order to make the business model viable. While overly simplified, it was a powerful operational metric that everyone in the company could understand, and to this day former colleagues still mention it to me as something that made an impression on them.

4) Implement a feasible strategic response. Notice I didn’t say “find the perfect solution,” because generally such a thing doesn’t exist in a crisis. The real world is much messier than that, and a state of crisis implies you have a limited amount of time to assess your options. Once you’ve narrowed your focus to your most critical problems and identified metrics to quantify what’s going on, it’s time to map out a feasible way to move the needle. For a company this often means pulling together teams charged with figuring out the details of the strategic effort and then implementing them. At PayPal, I was tasked with running our “upsell team,” which owned the task of migrating the small businesses that were using the service into fee-bearing accounts after they’d enjoyed a free service for most of the year. Our team identified the product changes we needed to make in order to accomplish this, quantified the possible outcome using our key metrics, and then got management’s sign-off to implement the strategy.

5) Be honest with your stakeholders. As your strategic response to the crisis unfolds, it’s critical to communicate clearly with your stakeholders the reason behind the changes being implemented. Depending on the nature of the crisis, your employees, investors, strategic partners, and customers probably have some sense that things aren’t right. Rather than clamming up while you implement your strategic response, communicate with them the reasons behind your actions. Obviously this requires discretion, but an appropriate level of transparency can help stakeholders get behind your changes. At PayPal, I opened up a dialogue with the small businesses (mostly auction sellers) that we were moving into fee-bearing accounts. I tried them a clear sense of what was coming, and made sure they understood this was a necessary decision for the long run viability of our business. The campaign resulted in a 99% conversion rate, and our transaction revenues grew from $1.0 million to $7.4 million in just one quarter.

6) Monitor the results and continue implementing. The end of a crisis is seldom marked by a definitive signal, so it’s critical to keep a close eye on your key metrics as you implement your strategic response. If your metrics don’t improve, it suggests your response isn’t working—or that you haven’t diagnosed the cause-and-effect of the problems correctly. Either way, your metrics are your feedback loop that tell you how your response is impacting the situation, which determines if you can continue on to step #7, or need to go back to step #1.

7) Do a post mortem. It’s important to understand what caused the crisis so you can avoid similar problems in the future, and while you already diagnosed the problems causing the crisis, it’s also critical to revisit this after the crisis has abated. Your perspective on the situation has probably changed once you’re removed from the heat of the moment, and it affords you the luxury of drawing big picture lessons that you can take with you. (Eric Ries offers a useful framework called the “Five Whys” for diagnosing the source of problems and implementing solutions to prevent them from recurring. It’s definitely worth a read—and a bookmark.)

A lot more can be said about this topic, but I think this framework from PayPal’s experience illustrates some basic tools for figuring out how to respond, using logic and data to guide your execution.

In a moment of crisis, what you do next does count. That’s the reason that I’ve chosen to leave Tiger’s ad on my fridge.

One day after Facebook casually announced that it had eclipsed the 350 million user mark, I’m going to revisit the question of who will succeed in developing the dominant Web 2.0 payment system.

In my previous post, I made the case that PayPal was better positioned than Facebook to achieve this, a position I stand by even in light of the latter’s staggering growth. As I noted, there are four reasons why it will be difficult for Facebook or any other competitor to unseat PayPal: 1) payments networks are incredibly hard to build, 2) payments are not a core competency of most companies so they’ll struggle to deal with the complexities of the market, 3) non-fiat currencies are a hard sell to consumers, and 4) a Web 2.0 payments network would have the most value if it’s also compatible with real world transactions. All of these points (especially the last one) suggest that PayPal is in the driver’s seat.

But being in the driver’s seat doesn’t mean you’ll cross the finish line, much less take the checkered flag. If PayPal wants to become the Web 2.0 payments network of choice, it has a lot of work to do. Let’s take a look at some of the strategic measures it would need to pursue.

First, PayPal needs to foster an ecosystem around it that engages developers, expands its influence, and decentralizes innovation. Fortunately that’s what the company has taken strides to do recently, with the PayPal Innovate09 conference and the launch of the PayPal X Developer Network site. So it looks like the company is enthusiastically throwing its support behind its API, a feature my former colleague Dave McClure was calling for back in 2002 when he was PayPal’s “director of geek marketing.” So the good news here is that PayPal is making strides to emulate Facebook and Apple, who’ve already reaped the benefits of an army of third party applications, but it still has a long way to go. Getting developers to further integrate PayPal into games, virtual goods, and other social applications is key to dominating Web 2.0 payments. Innovative companies like Payvment that are using the API deserve the company’s support—and maybe even some venture funding from PayPal. Google does it, and it wouldn’t be hard for PayPal to allocate a few million dollars from its annual cashflow into a payments-focused venture fund.

Second, PayPal needs to expand the types of payments its core functionality services. Currently, PayPal’s “send money” functionality lets you classify transactions as goods, services, and eBay items. Clearly this is insufficient for the Web 2.0 universe, where content or simulated goods are often the center of transactions. But the need to expand payment types goes beyond just slapping a few new categories into a radio box—PayPal needs to explore making payment types user-defined. If a social network wants to sell stored value units (e.g. how Slide charges “gold” for premium Superpoke actions) then PayPal needs to accommodate them. And there’s no way to accommodate the limitless ideas of social entrepreneurs except by allowing for user-defined payment types. But this should be part of the core functionality available to all users on the main site through both send money and website payments, not something that depends on developers building into third party apps.

Third, PayPal needs to make a vigorous effort to allow users to export their eBay Feedback and PayPal reputation scores out of the eBay marketplace and onto anywhere they’re needed on the web. The reputational information that eBay/PayPal has collected on its users’ behalf is hugely valuable—and under-leveraged. Reputation isn’t too important for many social activities like re-tweeting or even deciding who to friend on Facebook, but when money is involved that dynamic changes. If “social” payments are to become a significant part of ecommerce, they can’t be confined to transactions between friends. Counter-party reputation will help instill confidence and empower this form of commerce, and the information available to PayPal/eBay is something that Facebook, Amazon, and Google can’t match.

(Brief aside: I’ve long been an advocate of eBay liberating Feedback scores from its site and allowing users to port their reputation elsewhere on the Web, including homepages, blogs, and social profiles. Back in 2003, after eBay acquired PayPal, I informally pitched the idea of exporting Feedback to my new colleagues on the eBay side of the company but it failed to gain traction. I’m sure that was in part due to my own communication deficiencies, but I also encountered some “we don’t do anything to cannibalize eBay’s core marketplace” pushback. With their marketplace stagnant and PayPal acknowledged as the core driver of eBay’s future growth prospects, I doubt the dynamic would be the same today. Plus, eBay CEO John Donahoe and PayPal president Scott Thompson both seem to realize how important PayPal’s growth is to the future prospects of eBay Inc.)

Fourth, PayPal needs to enable users to tweet payments. The mechanism for sending money via Twitter could be pretty simple, and it’s important enough to be part of PayPal’s core functionality. To do this, PayPal will need to let users link their account with Twitter, something their users have already been trained to do by linking PayPal to their eBay account as well as banks and credit cards. Some form of verification would probably be required; the hurdle needs to be a bit higher than what it takes to synch up third party apps like TweetDeck due to security concerns. One way to do this would be for PayPal to send a unique code to a user’s primary email address, which they then have to copy into a direct message on Twitter to @PayPal.)

Once this is set up, tweeting money would be easy. I think the simplest way would be to send a direct message to @PayPal followed by a simple syntax that includes the recipient’s Twitter username, the amount, and an optional note. Using a DM to convey the send money instructions to @PayPal would preserve privacy for both sender and recipient. If the recipient has already linked his PayPal and Twitter accounts, he would then get a DM from @PayPal confirming that he’s got cash. If the accounts aren’t linked, he’d get tweeted a notice from @PayPal that he’s got cash (but no specifics on the transaction since tweets aren’t hidden), along with a shortened link to take him to PayPal’s site to claim it by linking accounts. This flow would be simple and elegant, and once the accounts are linked people could tweet money without having to login to PayPal’s site.

You might be asking, if the goal is to become the Web 2.0 payments gold standard, why focus on Twitter first, as opposed to Facebook? I think Twitter is the better forum for PayPal to go after right now for a couple of reasons. For one thing, integration would be easier given the open nature of Twitter’s platform. Also, the overlap in the Venn diagram of PayPal (78 million active users) and Twitter (93 million active users) should be close to 100%. Twitter’s users still skew toward the tech savvy and early adopters, whereas Facebook’s 350 million accounts are obviously less tech savvy on average because they look more like the world as a whole (i.e. there’s a lot of Baby Boomers using Facebook).

PayPal should have a significant portion of Twitter users linking their accounts within 1-2 quarters, which would give it a strong launch pad for going after the rest of the Web 2.0 universe. Think of what third party developers could build after users begin to link their PayPal and Twitter accounts on a serious scale. Also, capturing payments for the majority of the Twitter user base would also give Facebook a major disincentive to block PayPal from its site, which (like eBay before them) is a temptation they’ll probably face once PayPal starts playing in their sandbox.

This is by no means an exhaustive list of the steps PayPal would need to take to secure leadership in Web 2.0 payments. We haven’t even touched on pricing, much less Facebook integration. But it’s a good start.

Call it micro-payments, social networking payments, virtual currency, or whatever you like, but speculation is heating up as to who will develop a service that addresses Web 2.0’s payment needs.

PayPal claimed this mantle for the first incarnation of the internet. As I detailed in The PayPal Wars, when Peter Thiel, Max Levchin, David Sacks, Reid Hoffman, and the rest of our executive team made the decision in January 2000 to build our payments network on top of eBay’s ecosystem of buyers and sellers, we outflanked our competitors and identified the path that would let us scale to profitability. In doing so, our startup beat out Yahoo, Citibank, and even eBay itself (which jointly owned Billpoint with Wells Fargo) to become the de facto standard for selling goods online.

But the payment needs of the social web are different. Goods are generally virtual or content-related, and the transaction amounts are often small. (For example, Slide charges a $1 for premium SuperPoke actions, or gives you unlimited quantity for $4.99 per month. Contrast this with the $50 average transaction price we saw at PayPal.) Also, any payment solution would need to be tightly integrated with the social network it’s serving.

The need for social payments is growing. Case in point, Dan Gillmor asserts on his blog Mediactive that YouTube Direct (YouTube’s platform to let news organizations collect user-submitted videos) would also benefit from a payment system. Dan points out that this would allow content providers to reward their followers for providing them with monetizable content.

A couple of Twitter-centric payment services have already sprouted up; Twitpay and Twippr both leverage PayPal’s platform to allow you to tweet money. (See this Squidoo post for a helpful comparison.) TipJoy, another company that specialized in Twitter payments, is shutting down.

Of course, it’s Facebook—the most important social network site—that’s attracting a lot of attention in the payments discussion. Mashable’s Pete Cashmore writes that Facebook itself could become the micro-payment service of choice for content providers. Noting the proliferation of virtual goods on the social networking system, as well as the many media companies now participating in Facebook Connect, he concludes that Facebook (which has a beta virtual currency in beta mode) has a better chance to build this platform than PayPal, Google, or Amazon.

TwoFish’s Lisa Rutherford provided a nice overview of the marketplace a few months ago for VentureBeat. She saw PayPal, Amazon, and Google as potential players, but seems to suggest that it’s unclear if Facebook will make a full court press to dominate this space. However, it looks like that’s exactly what Facebook is doing; I’m told that they recently hired a couple of highly respected ex-PayPal guys to work on their payments team.

Facebook is certainly formidable. Nonetheless, I still think PayPal should own this space. Here are some reasons why:

First, a payments network is not easy to build. Even if you have an existing network of users that you can leverage, the back-end is a lot more difficult than a content-based service.  Fraud risk, funding costs, and customer support are all major factors that we underestimated in terms of complexity or cost as PayPal was scaling. As I noted in my book, PayPal was bleeding $10 million per month back in 2000 while we struggled to fix our business model, and that was before the company had scaled to any significant size.

Second, just because a company is good at its core business doesn’t mean it will be good at payments. Facebook is an amazing company, but that’s no guarantee that it can leverage its social leadership to build a scaleable payments network. Google hasn’t been able to do it with its Checkout feature, and despite the elegance of One Click, Amazon has never been able to get much traction with payments off its own site. If a competitor has a better product, users will opt for the competitor. The case of eBay’s own users refusing to adopt Billpoint in favor of PayPal illustrates this.

Third, non-fiat currencies aren’t an easy sell to consumers. Ask Flooz. Ask Beenz. These two early, would-be PayPal competitors occupy spots #2 and #3 on Business Pundit’s “25 Internet Startups That Bombed Miserably” list. (If not for “Startup.com,” they might’ve ousted GovWorks from the top spot.) While many people think that the time is ripe for a virtual currency, there’s no hard evidence of demand for a system of value not based on fiat money. Cash is still king, and that’s a major obstacle for companies like Facebook opting to build a virtual currency.

Fourth, the implicit assumption that a Web 2.0 payments network doesn’t need to be compatible with transactions happening in the real world is false. Backwards compatibility is important for any platform—just ask an Office 2003 user who’s received a .docx file. The utility of a payments system is immensely greater if the network encompasses not just the up-and-coming world of social/virtual transactions, but also some chunk of the $30 trillion in annual consumer payments worldwide. PayPal already moves $2200 USD per second through its servers; that’s a nice head start.

Building a payments network is difficult, and it’s not clear that Facebook or any other competitor will be able to leapfrog over PayPal and build the defining platform for Web 2.0. However, if PayPal wants to seize leadership in this space, it has a lot of work to do. We’ll explore that in a future post.

Entrepreneurship is vital. I don’t think anyone would deny that. Much has been said about the importance of entrepreneurship in the economy. As the Kauffman Foundation notes on its site, “Entrepreneurs renew society by constantly looking for opportunities to make products, institutions and practices better.”

But let’s take the discussion a step beyond utilitarianism and ask if entrepreneurship is more than just a useful activity. Could it be deemed a necessity? Or even something divine? At first that sounds like a stretch, but bear with me. Last month at the NFRA convention I made a brief allusion to this notion in my speech, “The Moral Case for Capitalism.” In contrasting the free market with command economies, I noted that capitalism “disperses power, uses a decentralized marketplace, protects property rights, and allows humans—who are made in the image of their Creator—to be creative.” While I stopped short of unpacking this concept in my speech, I think it merits some additional thought.

To explore this concept further, let’s hit rewind and go back in time. Way back. To the first chapter of Genesis and the biblical story of creation. Now, I’m going to avoid any discussion of the inerrancy of the Bible in this post, and I won’t wade into questions of intelligent design vs. evolution, or bicker over the authorship of Genesis. Let’s save those issues for another day. Instead, let’s look at what the first book of the Torah—one of the most important works in human history—is telling us about God and humanity, and see if we can derive a few takeaways from this ancient text that apply to entrepreneurship.

In the beginning God created the heavens and the earth… And God said, “Let there be light,” and there was light. God saw that the light was good…

And God said, “Let the water under the sky be gathered to one place, and let dry ground appear.” And it was so….And God saw that it was good.

Then God said, “Let the land produce vegetation: seed-bearing plants and trees on the land that bear fruit with seed in it, according to their various kinds.” And it was so…. And God saw that it was good. (Gen. 1: 1, 3-4, 9-10, 11-12)

The first thing we learn about God from the above passage is that he is a creator. The Bible talks about many other attributes of God, but his role as creator is the first divine quality presented in the Torah. The author felt this was so significant that it was the first quality chosen to convey about the Monotheistic Deity of the Jewish people. Power, wrath, or a demand for allegiance would have been common attributes to ascribe to a deity in a pre-modern religious cult because they conveyed legitimacy to the human authorities claiming to be that god’s representatives. But Genesis starts us off with a different perspective—God as creator and life-giver.

The second thing that we learn about God is that he views his creation as good. He takes satisfaction in what he brings into existence and declares it sufficient. The created world was distinct from God, meaning its purpose was to exist as separate from God but in concert with his divine plan. (The significance of Genesis distinguishing between creator and creation cannot be overstated—this distinction would ultimately help liberate humanity from the superstition of pantheism and lead to the development of science.)

So right off the bat, Genesis paints God as a creator and says what he creates is good. God is the universe’s first entrepreneur, and the universe is his venture.

Mankind then enters the narrative, and the first thing we are told about humanity is no less significant: “So God created man in his own image, in the image of God he created him; male and female he created them.” (Gen. 1:27) Men and women are both described as beings made to resemble God, the ultimate proof of their intrinsic value. In the verses that follow (1:28-29), they are given what is called the “cultural mandate,” stewardship over the earth and the instruction to populate it and build societies.

In sum, humanity is made in God’s image. God is the creator, and he creates good things. Therefore men and women are meant to be creators, and create good things.

What are the implications of this? First of all, I’d say it doesn’t mean that being an entrepreneur makes you better than other people, or that godliness is conveyed to those who create companies. I’m pretty sure you can be a founder and a jerk. But it does suggest that being creative, bringing things into existence, is part of our nature.

Also, we can create things that are good, just as God’s creation was good. I understand this to mean that we can make things that improve the world around us. I think this fits into the story the Bible is telling, too. Genesis goes on to describe the fall of man, which introduces pain and death into the world and distorts humanity’s relationship with God and each other. This creates suffering, which I think gives extra urgency to the cultural mandate. We need to build things that make the world better, and hopefully mitigate some of the brokenness that came from the fall.

This isn’t to say that humans can undo the effects of sin or construct a utopia here on earth.  Genesis makes it clear (here and here) that God will ultimately fix what is broken in his startup. But I think the Bible does suggest that we can mitigate the effects of sin by carrying out the cultural mandate and emulating our creator. What does this look like in everyday life? Well, for entrepreneurs I’d say that it means striving to create companies that give people jobs, deliver valuable products and services, develop new technologies, and reward investors (who can then reinvest in new companies).

Entrepreneurship can therefore be understood as something programmed into us, a reflection of the creator’s spark that can play a role in making the world a better place.  There are other outlets of being creative, of course, and not everyone is meant to be an entrepreneur. But the Genesis account suggests that bringing a new organization into existence is more than just a utilitarian exercise; it’s a trait whose origins can be traced back to the beginning.

Here’s the video of my speech, “The Moral Case for Capitalism,” that I gave at the NFRA National Convention in Reno, NV last Saturday. The videos are divided into three parts. The text of the speech (including references) is pasted below.

Thank you, Rod, for that kind introduction. It’s good to be here in Reno today, and I’m excited to have this opportunity to speak to all of you. I’d like to take a minute to thank the NFRA executive board for inviting me, and Executive Vice President Chris Brown for arranging for me to be here. And thanks to all of you for getting up early to join me. I know how tempting it must have been to sleep in or stop off at the slots. I didn’t feel any temptation to hit the slots, though. They gave me a room on the 13^th floor. I took that as a sign to stay out of the casino and practice my speech.

I’m here to make the moral and biblical case for capitalism. But before I dive into my topic, let me give you some additional background to explain why I’m so passionate about this topic. I’m not from Washington and I’ve never spent time inside the Beltway. My entire career has been in California, on the opposite side of the country from DC. Early in my career I quit a stable job in finance to join a little-known Silicon Valley startup called PayPal. Over the years that followed—as I detailed in my book, The PayPal Wars—our team took the dot-com from losing $10 million a month to profitability, an initial public offering, and an acquisition by eBay in late-2002. Soon after eBay purchased PayPal, I left to start my own company, World Ahead Media, a publishing startup with a conservative and free market focus. World Ahead was acquired by WorldNetDaily last year and renamed WND Books.

The reason I mention all of this is to make the point that I’ve seen firsthand what entrepreneurship in a capitalist economy can accomplish. I’ve seen how jobs are created, how good companies are built, and how the amazing power of the free market can be harnessed. So it disturbs me to watch as the free enterprise system comes under attack from liberal politicians in Washington DC, people who know nothing about capitalism, except that they want to control it.

During his campaign for president last year, Barack Obama told John Harwood of CNBC that he believed in capitalism. He said, “I am a pro-growth, free market guy. I love the market. I think it is the best invention to allocate resources and produce enormous prosperity for America or the world that’s ever been designed.”[1]

But since President Obama was sworn in last January, the federal government has expanded its control over private enterprise on a scale not seen in several generations. Under the guise of solving the economic crisis created by the mortgage meltdown, Washington DC is now vastly increasing its involvement in the banking, automotive, energy, and health care industries. New bureaucracies are being proposed, and Congress is on a spending rampage. The federal deficit is expected to average over $1 trillion per year for the next decade. Congress is even debating a bill that would “allow the government to create a detailed set of standards for cybersecurity, as well as take over the process of certifying IT technicians.”[2]

Yes, really. Washington wants to run cybersecurity. And we thought Windows Vista was bad!

In the words of the Wall Street Journal’s Kimberly Strassel, the Beltway has manufactured a “creative history” that says greedy bankers got out of hand so we need more regulations and less freedom.[3]

In this atmosphere, it’s not surprising that Ron Bloom, the White House’s manufacturing czar, recently said in a speech that, “We know that the free market is nonsense. We know that the whole point is to game the system… We kind of agree with Mao that political power comes largely from the barrel of a gun.”[4]

While one White House czar is quoting Mao Tse Tung, another czar is micromanaging executive salaries. And another czar is overseeing the auto companies. There are czars for health care, information technology, and general technology. There are a couple of economic czars.[5] And there was a czar for green jobs, but that spot’s vacant now.

It seems like every aspect of the economy is suddenly being managed by DC bureaucrats. While I’d like to think that these policies reflect only the sentiments of extreme left-wing ideologues in Washington, the truth is that capitalism is under fire more broadly. An April poll by Rassmussen revealed that “only 53% of American adults believe capitalism is better than socialism.”[6] One-fifth of all Americans say that socialism is better, and 27% aren’t sure. Adults under-30 are evenly split, with 37% opting for capitalism vs. 33% for socialism.

Earlier this year, Newsweek ran a cover story entitled “We Are All Socialists Now.” While that’s mostly wishful thinking on the part of Newsweek’s editorial staff, the unpleasant truth is that capitalism has a major image problem. And unless those of who believe in traditional values and a limited government speak out and rebut the critics of capitalism, the situation will not improve.

Part of that answer is properly explaining what caused last year’s financial crisis. To be blunt, John McCain and George Bush failed to do this, hence the Left’s “creative history” has become the accepted narrative. Since NFRA members are an educated group, I won’t spend much time recounting how the federal government—through the Community Reinvestment Act, Fannie Mae, and Freddie Mac—distorted the mortgage market and helped create the sub-prime time bomb that detonated over the past couple of years. Stanford economist John Taylor, in a short book entitled Getting Off Track, also demonstrates how bad monetary policy by the Federal Reserve created the real estate bubble.

While it’s important to understand how bad fiscal, regulatory, and monetary policy created the financial crisis, defending the free market requires more than a “policy wonk” response. Demonstrating that government meddling in the economy had unintended consequences is important, but it’s not the same as articulating the virtues of the free market.

The critique against capitalism goes far beyond just blaming it for the current recession. Critics today go so far as to say that the free market is contrary to the Bible, that it is cruel, exploitative, and the cause of so much poverty and suffering around the globe. In a word, they are saying that capitalism is evil.

It’s important to answer this accusation. Today we have an entire generation of voters who do not remember Ronald Reagan, much less the harm collectivism did to the countries behind the Iron Curtain. Capitalism does not have the moral high ground in their eyes, nor does socialism seem inherently wrong. In our current political and cultural environment, the argument for the free market needs to be made afresh. Fortunately, it’s an easy one to make. Capitalism is the most moral and fair economic system ever devised by man. In short, capitalism is good, and proving this is not hard. I’m going to present three points that make this case:

• First, capitalism was inspired by biblical principles; it’s an economic system based on the teachings of God’s word.
• Second, capitalism runs on win-win transactions; it’s an economic system that produces a positive sum gain and rewards those who help their fellow man.
• And third, capitalism has blessed the world; it’s an economic system that has lifted billions out of poverty while changing the course of human history.

We’ll address all three points in turn.

Point #1: Capitalism was inspired by biblical principles.

Let me emphasize that no economic model is specifically prescribed in the Bible. In the Old Testament, God did articulate a number of rules for the Hebrew economy, but the New Testament doesn’t contain directions for how countries should set up their economic systems. The teachings of Christ and his followers are primarily concerned about the message of eternal salvation. However, the origins of the free market are undeniably rooted in principles contained in God’s word.

Unlike Marxism, which was dreamed up in the heads of philosophers, capitalism came about in a hodge-podge fashion in England during the 17^th through 19^th centuries and gradually spread through the Continent, replacing mercantilism and what was left of feudalism as Europe’s dominant economic system. But even though it has decentralized origins, the reasoning behind the free market comes from one primary source: the Good Book.

Economist Joel Mokryr, in The Lever of Riches, writes: “Western Christianity contained the seeds of future technological progress.” Mokyr and other economic historians, including Walter Russell Mead, document how Christian beliefs coming out of the Reformation led to the advent of capitalism. Some of the most prominent ones include:[7]

1. Private Property: The Bible establishes property rights as belonging to all people, regardless of power, so much so that it’s one of the Ten Commandments. (“Thou shall not steal.”)
2. Humanity’s Role in Creation: The Bible distinguished between the Creator and his creation, liberating humanity from the fear of pantheism and superstition, empowering us to make use of the resources around us.
3. Hard Work and Good Stewardship: The Bible calls for honest labor and a modest lifestyle. This promotes savings and investment, which creates a capital pool to finance new ventures in a free market.
4. “The Faith of Abraham:”Abraham is known as a man of faith for following God’s call to leave his familiar settings and journey to an unknown land. To people this meant it was OK to strike out on a new path, to follow God’s calling into a new area or a new profession, and break with the traditions of the past.
5. Optimism for the future tempered by original sin. The Bible says we’ll never have a utopian paradise on this earth, but the world can be made better by exercising God’s principles.

These are just some of the Christian beliefs that inspired this new economic system. To be sure, other factors, especially the political fragmentation of Europe, set the table for capitalism to spread, however it was the Bible that laid the intellectual framework for the free market. From property rights to the use of natural resources, from the call to innovate to the concept that the individual isn’t bound by tradition, capitalism came from a distinctly biblical heritage.

Point #2: Capitalism runs on win-win transactions.

The building blocks of capitalism are voluntary transactions by buyers and sellers. When two parties voluntarily transact with each other, both are better off, even if they’re just looking out for themselves. Adam Smith, writing in The Wealth of Nations, famously noted that: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.” Even if a selfish, imperfect person is only looking out for himself, he’ll have to offer some benefit to another person if he’s going to get them to agree to transact.

Jay Richards illustrates this in his recent book, Money, Greed, and God.[8] He recounts the “trading game” he played in his 6^th grade class. In this example, the teacher hands out dime store toys randomly to all the children. The kids are then asked to write down, on a scale of 1 to 10, how much they liked what they received. After the teacher tallies and averages the scores, she gives them the option to trade their toys. No one is forced to do so, but everyone has the right to negotiate voluntary trades with their classmates. After the bartering is done, the teacher has the kids write down their satisfaction scores again, and this time the average is higher, demonstrating how voluntary transactions are win-win.

In capitalism, buyers and sellers, guided by what Adam Smith called the “Invisible Hand,” use freedom to create value for both parties. But, as economist Joseph Schumpeter would later point out, it’s innovation that creates the most value. There’s a tremendous financial incentive to come up with a new product, invention, or method that shakes up the marketplace and benefits as many people as possible. Schumpeter called this process “Creative Destruction,” saying that it “incessantly revolutionizes the economic structure from within, incessantly destroying the old one.”[9]

Creative Destruction is what has led the economy forward, and made the capitalist system one of constant innovation. While socialist countries often struggle just to feed their people, nations with economic liberty have produced an explosion of knowledge, technology, and innovation over the past century.

Point #3: Capitalism has blessed the world.

Finally, it must be emphasized that capitalism is more than just a system based on biblical principles, comprised of win-win transactions. The free market has unleashed economic growth and global prosperity in a way never before seen in human history. In short, this biblically inspired system is a blessing to the world.

Looking back across the millennia, the history of the world is one of economic stagnation. Before capitalism, economic growth and rising standards of living were not the norm.

Angus Madison, professor emeritus at the University of Groningen in the Netherlands, has estimated the world’s historic economic output. Before capitalism, in the 5 centuries between A.D. 1000 and 1500, the world economy took 500 years to double in size. But as capitalism began to spread in Europe during the 19^th century, the world economy nearly tripled in just 80 years. And that growth further accelerated as the free market spread; during the 20^th century, the world economy grew by 17 times.

We’ve certainly been blessed with prosperity from capitalism here in United States. GDP per worker in America rose from about $15,000 in 1900 to $65,000 in the year 2000.[10] And this prosperity has been widespread. While not everyone shares equally in the outcome of the free market, U.S. income levels for the lowest quintile have risen over time. And poor households in a capitalist country like ours have done very well by historical standards:

• 99% of poor households in the US have a refrigerator.
• 97% have a color TV, and 63% have cable.
• 73% have a car, and 31% have two or more cars![11]

But it’s not just here in America that we’ve seen the blessings of capitalism. Between 1970 and 1990, the number of people living below the absolute poverty line declined from 38% of the world’s population to 26%, even as the global population grew substantially during that time.

If anything, what’s keeping certain parts of the world poor is too little capitalism! Peruvian economist Hernando de Soto estimates that a lack of property rights robs Third World citizens of over $9 trillion of wealth.

The growth of income caused by capitalism has blessed the world by creating a rising standard of living and, as result, increased life expectancy. According to Gapminder.org, in 1850 the average life expectancy in nearly all countries was between 30 and 40 years. (That would make me a senior citizen!) Today, most countries have life expectancies between 65-80 years.

To summarize, capitalism has introduced widespread economic growth. It has lifted billions of people out of poverty. It has fed the hungry. It has created new technologies. It has lengthened people’s lives. Capitalism has blessed the world.

This response to the critics of the free market is powerful. While no one should claim that capitalism is perfect—no human institution is perfect!—it is the best economic system available to man. The free market is based on biblical principles, it runs on win-win transactions, and it has improved the plight of people all around the world.

The same cannot be said of centralized economies. Call it communism, socialism, or whatever you like, but the results of experiments in economic centralization are always the same: stagnation, suffering, and quite often death.

The Black Book of Communism, published by Harvard University Press, estimates that nearly 100 million citizens of communist countries were killed by the own governments in the 20^th century. 100 million lives snuffed out by an economic system that puts massive power into the hands of elites.

The Bible says that humanity is fallen and sinful, so it’s no wonder that a system that centralizes power results in tragedy. Capitalism disperses power, uses a decentralized marketplace, protects property rights, and allows humans—who are made in the image of their Creator—to be creative. Socialism brings calamity, but capitalism promotes flourishing.

So let’s make this case to our fellow Americans. Let’s answer the critics who call for more government control in our lives. Let’s articulate why the free market is virtuous.

Capitalism is one of the most important institutions in human history. It’s worth fighting for!

Thank you.

[2] http://www.foxnews.com/politics/2009/04/21/proposed-heavy-restrictions-internet-freedoms/

[3] http://online.wsj.com/article/SB123751023925990683.html

[4] http://www.breitbart.tv/obama-czar-agrees-with-mao-too-and-thinks-free-market-is-nonsense/

[5] http://noisyroom.net/blog/2009/07/22/obamas-czars-listing-update-072209/

[6] just_53_say_capitalism_better_than_socialism

[7] Sources: Joel Mokyr, The Lever of Riches, pp. 201-205. Jay Richards, Money, Greed, and God, pp. 145-151.  Walter Russell Mead, God and Gold, pp. 191-247

[8] Jay Richards, Money, Greed, and God, pp. 60-61.

[9] Joseph Schumpeter, Capitalism, Socialism, & Democracy.

[10] http://www.j-bradford-delong.net/TCEH/2000/TCEH_2.html

[11] http://www.heritage.org/Research/Welfare/bg2064.cfm