Chapter 2 – Capitalism and the U.S.
Republic I believed that wealth is not created by the dictate of governments but by the talents and creativity and work and inspiration of individuals.
-- Margaret Thatcher Capitalism Capitalism is self-perpetuating and always gets better because capital always flows to an application that generates the highest possible return, and that produces efficiency, growth, and improvement.
The system of Capitalism has built the most prosperous nation the history of mankind has ever known, and I will compare it with the failure of its present-day competitor, Socialism.
The word, Capitalism, is thrown around so frequently by those who believe in it and also by those who loathe it, that most citizens take it for granted and think that they understand it. To gain an operating understanding of Capitalism’s inner economic workings, the recently published book by Dr. Thomas Sowell1 provides a clear and simplified version (without equations) to those of us who seek a more thorough understanding of this system that generates abundant and growing prosperity in America.
L. von Mises2 states, “If history could prove and teach us anything, it would be that private ownership of the means of production is a necessary requisite of civilization and material wellbeing.” Since recorded history men have lived in varying degrees between voluntary free association and community compulsion.
Men and women can live creatively only under conditions of freely elected voluntary cooperation, or “a mature preference for the uncoerced man,” as John Chamberlain3 wrote. Said another way, enslaved people make poor capitalists; in fact, they adhere to whatever odd or irrational standard is dictated to them because tyranny of any sort stamps out all forms of individuality (at least any public displays of it).
Capitalism does not require coercion, murder, or shutting people up in concentration camps to force compliance. It does not force men and women to accept incompatible occupations or products that first must have been approved by a planning committee or bureaucracy. Ludwig von Mises4 wrote clearly that, “The socialist wants to feed and house humanity and cover its nakedness. But men prefer to eat, dwell, dress and generally to seek happiness after their own fashion.” (Italics mine) After all, a free market is really just many individuals who are pursuing their own forms of selfrealization with the full knowledge that no one will tell them what form those self-realized outcomes should take. There could hardly be a better practical pronouncement of Capitalism than, “Is it not lawful for me to do what I wish with mine own?” 5 The importance of property to each individual is observable. But it is quickly apparent how inexact it is to try to measure the subjective value of property of anyone and compare it to the subjective value of someone else’s property to that someone else.
Though it may be difficult to quantify the subjectivity of value, the market takes subjective values and generates objective prices.
It is true, De gustabus non est disputandum: there is no disputing about tastes. But tastes make markets effective because they fuel innovation.
Ownership of property is necessary for the free market. The free market permits comparisons of items, which leads to the creation of value. John Chamberlain6 observed, “The market is the characteristic institution of Capitalism, … It is what results when free choice is applied to the disposition of property.” The seller seeks to cover the costs of materials, labor and energy expended and to earn a profit. The buyer seeks to save labor, energy, and materials by making a like-value exchange. These two subjective evaluations meet at the agreed-upon price. In a free market, these transactions move forward rapidly because individuals on both sides of the transactions trust one another, and they believe that they will experience a variety of objective and subjective benefits. Creating the perception of those benefits is the core basis for marketing.
Free market economics require the rights to life, liberty, and property (or in earlier writings, “estate”). These three requirements form the basis for human optimism and the accumulation of confidence about our individual and aggregate futures. Remove any or all of those conditions, and life becomes more primitive and much less predictable. These three entities are necessary if there is to be any economic calculation and therefore any creation of wealth.
It was John Locke’s Second Treatise on Civil Government, which inspired the founders of the United States. Locke wrote in 1667, “If a government is derived from the people, it can only have the power necessary to their own preservation” (protection). According to Locke, 7 the business of government was to make as few laws as possible. There was need for “laws …only for the security of the government and protection of people in their lives, estates and liberties…” Locke regarded property as wholly important to freedom.
Prescriptive property rights were the substance of the Magna Carta in England in 1215 A.D. and were guaranteed by it. Thus, Englishmen from the early thirteenth century held that rights came with birth and not from any permissive act of a king or state, in contrast to France where there was no such safety of life, liberty, and property. The principles articulated in the Magna Carta form the most stable social system because they emphasize decentralization and diffusion of decision-making away from a central power (political elite) in favor of a market made up of countless individuals who each pursues his own form of happiness (“De gustabus” all over again!).
In England, at the beginning of the seventeenth century, the Stuarts came into power and tried to assert again the earlier “divineright” theory of rule, but the courts led by the resolute Chief Justice Edward Coke almost came to war with the crown. Justice Coke provided most of the groundwork for American constitutional law by his insistence that no one could be deprived of rights without full and fair hearing within stated government powers. He also asserted that monopolies and impositions upon trade came under the heading of “deprivations of liberty.” The American colonists fought for life, liberty, and property.
They soon found that neither life nor liberty could be sustained, nor happiness pursued, without a special type of government, which would guarantee respect for contractual relations among property holders who wished to trade in a single currency across State lines. They established the Constitution of the United States in Philadelphia and ratified it in 1789. Without this American political structure there would have been no dynamic Capitalism.* Alexander Hamilton strengthened the government by making it responsible for all of the debts accumulated during the War of Independence. He used debt to unify the country. Brilliant! His move was in the best of capitalist principles because he knew that generally people pull together harder to reduce or pay down debt.
Capitalism is a very large concept. It is the system, which provides for the needs and wants of the people (consumers) in the best and most efficient manner. The US founders understood it well, knowing that free trade and commerce were essential to the success of the federation. Interestingly, Adam Smith’s, The Wealth Of Nations, was published in England in 1776, the same year as the proclaiming of the Declaration of Independence.
Adam Smith’s8 work was the first extensive treatise and elucidation of Capitalism and provides a great in-depth clarification of how the system operates and what derives from it. He gives an excellent description of the power of the “division of labour” and its meaning for the building of free enterprise. He defines the division of labor as the “separation of different trades and employments from one another.” This is of course the basis for productivity enhancement, which is currently on prominent display in the American economy. Since 2000, the economy has grown 10% (about a trillion dollars), but it did it with about 250,000 fewer workers in the labor force.
* This short synopsis of the history of English and American appreciation of respect for property and liberty is based on Chapter 2 of John Chamberlain’s book, The Roots of Capitalism.
Consumers want to be satisfied. It is they who determine what makes a man less or more prosperous. It is the consumers’ application of the yardstick of their own personal wants, desires, and ends that demonstrates the popular and successful system of the market. The entrepreneurs (business organizers and owners) who provide the items and services required for the satisfaction of those consumer desires and wants, in the best and cheapest way, are the most who succeed in becoming wealthy. Entrepreneurs are opportunists who believe that they have found a higher return for capital and that their unique use for that capital has a riskreward ratio that can be tipped in their favor. Basically, under Capitalism, everybody’s station in life depends on his own doing.
It is timely here to present a definition of Capitalism. The definition in Webster’s Encyclopedic Unabridged Dictionary (1989) is the one generally accepted; namely, “…an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth.” That dictionary definition describes only some of Capitalism’s characteristics. A more all-encompassing definition can be given in terms of property: “Capitalism is that societal structure whose mechanism is capable of protecting all forms of private property completely.” This definition by Andrew J. Galambos9 depends upon a precise definition of property, which he divides into three categories: 1) primordial property, or life itself, 2) primary property, that is, thoughts and ideas, which are the first derivatives of an individual’s life (sometimes called intellectual property), and 3) secondary property, derived from ideas and actions.
The paraphrased following is based upon the Thrusts For Freedom written by Andrew J. Galambos: Man first owns his own life. No one may own anyone but himor herself. Thus, ownership of primordial property excludes slav ery from the start. Children are not property, because they have property rights of their own. Until children reach the capability of caring for themselves, parents (or those who raise the children) are their guides. Men do not own women as in primitive civilizations and some third-world countries of today.
Thoughts belong to the individual who thinks them. Ideas are communicated thoughts. To recognize that ideas belong to the person who originates them is a major step to respecting and protecting primary property. By recognizing the ownership of primary property, intellectual freedom arises and inspires expansion of knowledge and production.
All personal actions result from personal thoughts and ideas. Put another way, personal thoughts and ideas precede personal actions.
It follows then that ownership of one’s own thoughts (one’s own mind) means that one must also own one’s actions! Distinctly, the ownership of thoughts and ideas (primary property) places the responsibility for a person’s actions squarely on that person, not on “society.” It is true that parents, teachers, churches, and environment influence the development of character and behavior, but individual actions are the ultimate responsibility of the individual.
Ownership of thoughts and actions are clearly property rights.
Uncoerced human action is called liberty, and since all human rights depend upon man’s liberty, it follows that all human rights are property rights. These include the access to and use of land and the production, utilization, enjoyment, and the disposal of material, tangible goods of all kinds (including consumer goods, architecture, and the means of transportation).
Further extensions of man’s life and actions lead to voluntary transactions (contracts) involving property transfers (sales, trades, gifts, etc.). Involuntary transfers of property result from coercion; that is, with coercion, property ceases to be property and becomes plunder.10 Of course, it is obvious that education is necessary to learn the vast history of ideas and institutions that originated earlier. True and accurate history is the story of the building of civilizations.
Unfortunately, however, much history today is altered to favor various groups with specific philosophical agendas. Accuracy of the history of the origin of ideas requires understanding, frequent repetition, and open clarification. Debate assists clarification.
The correct role of government is to protect property rights (all forms). The protections of those property rights in the US today are attempted through patents, trademarks, copyrights, licensing agreements, royalties, and the like. The theft of such property becomes an ‘art form’ in countries that fail to protect such rights.
China is a good example. To force companies to give up their inventions because of complaining competitors is coercion.
There is great practicality in appreciating and accepting Galambos’ definitions of property. Recognizing the ownership of one’s life and one’s mind (with its ideas and creations) makes simple the concepts that derive from them; e.g., 1) responsibility for one’s actions, 2) the protection of primary as well as secondary property, and 3) the consequent protection of privacy.
In his concept of TOTAL CAPITALISM, Galambos11 portrays Capitalism as “more than an economic system; it is a way of life which is both moral and practical as no other system can be, and one of its characteristics is a free enterprise economy.” He also called attention to the fact that a full, unencumbered Capitalism is not operating freely now because of the gradually increasing bureaucratic interference and controls which impair its correct functions.
Most of what Capitalism’s critics decry as faults of the capitalistic system is the result of the government restrictions heaped upon enterprises. Much inconvenience and increased cost to consumers are the usual consequences. This is when the role of government acts as an instrument of behavior change. Our tax code is a veritable accumulation of social engineering rules.
Our huge price supports for farmers merely bankrupt and help destroy small competitors in other nations. When the government subsidizes something we get more of it. The Scandinavian countries subsidize and support drug addition and of course, they get more of the behavior that they are trying to reduce. Inevitably the cost of these programs must rise and the level of taxation has to expand. The public sector then becomes an ever- growing millstone around the neck of the private sector.
Ideas precede the development of secondary property. Products, companies, and corporations, all derive from thoughts, dreams, vision and planning. Absent external, coercive interference, ideas lead to inventions, inventions lead to products, and products require business structure to develop. Technology creates the tools and machines to manufacture the entrepreneur’s ideas and inventions.
Manufacture and distribution of those products follow.
Capitalism succeeds because free people can work, earn, and save. It is the investor who uses his savings to invest in an enterprise.
Accumulated and invested savings are the resources to build and expand an enterprise. They are also necessary to grow an economy. When the savings rate is too low and government spending is too high, home industries are deprived of investment sources, and economies must rely on foreign sources of capital.
The entrepreneur, the technologist, and the investor combine to create the means of production to make the products, which will improve the standard of living of everyone in a free society. As a result of this combination and the freedom to carry it out, the United States has developed and enjoyed the highest standard of living yet created.
Fossil fuels are the major source of energy to drive the improvement of comforts of life. Atomic energy is a major and safe source of the generation of electricity, but those who have been miseducated in physics and the workings of the real geophysical environment have restricted it.
Under the title of “Liberty = Prosperity” in a most interesting opinion editorial in the Wall Street Journal on November 12, 2002, the author, Mary Anastasia O’Grady12, reported the Heritage Foundation’s 2003 Index of Economic Freedom, which indexed 152 countries into five categories ranging from “free” to “repressed” and six listed as “unrated.” She said the Index indicated that economic freedom has advanced throughout the world. To quote O’Grady, “Europe and politicians may cling to the rhetoric of socialism, but on much of that continent, economic liberty is gaining ground.” She wrote further, “Economically free countries tend to have higher per capita income than less free countries,” and she provided tables to support her point. The reason for the higher per capita earnings of the economically free countries is their understanding and utilization of the stabilizing principles for which originally the American colonists fought; namely, life, liberty, and property. With these guarantees came respect for contractual relations. The existence and growth of the United States is the biggest evidence of the stability of this system and the use of the free market.
The successful entrepreneur benefits by the exchange of desired and saleable items for more liquid assets, and can expand his enterprise.
Motivated by the sale of his product, that producer will produce more. When sales decline, the producer will produce less. Hiring others to assist in production creates jobs and salaries, so that employees derive betterment and improvement in their well-being. They are not ‘taken advantage of.’ It is Capitalism that betters the lives of workers. “Liberation of the worker” with Socialism is an illogical assertion by Karl Marx and his followers.
Professor Walter E. Williams wrote in 1997 that in human history Capitalism is relatively new. To quote Professor Williams, “Prior to Capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man. Capitalists seek to find what people want and produce and market it as efficiently as possible. Capitalism made it possible to become wealthy by serving your fellow man.” Government cannot create jobs in a productive sense. Of course it can ‘make jobs’ by hiring more personnel, but it does not expand the economy because tax dollars taken from the economy are the source of payment to those personnel. Government takes rather than contributes. It siphons off rather than creates. Contrary to the claims of politicians, when they say “We must create jobs,” the only way they can ‘create’ anything really is to get out of the way by reducing the hindering regulations and taxes, or to get off the backs of companies and corporations that do create jobs. The public sector only makes jobs for which the marginal productivity is either zero or negative! Saddam Hussein’s invasion of Kuwait was nothing more than armed robbery. That’s the problem throughout the Muslim world. They abhor free markets so they are left with violence as a way to ‘build’ wealth and influence. Since the Muslim world’s effectiveness pretty much vanished by the 15th century, the Muslim fanatics are finding themselves pushed to the edge of irrelevancy in today’s world. The trouble is they don’t know of, or they refuse, any other way to compete in the modern world.
Why is it that people who create unprecedented convenience, longer life expectancy, and greater wealth for all who work should be heaped with scorn and ridicule? The most obvious answer is ENVY. Compare the US living standards with those of all third world countries. The people who create these conditions usually do become wealthy as a result of their entrepreneurial actions.
There is no way to conceive that they create poverty. There is everything proper about the resulting betterment to all those receiving those developed goods and services. One of the best examples is Henry Ford whose personal wealth, though large, was greatly overshadowed by the benefits to the common man, each of whom now could afford a car. A more recent example is Bill Gates of Microsoft and the positive effect his ideas and company have had on the businesses and personal lives of those who use his products.
Because of personal, proprietary interest, efficiency and improvement are continually at the forefront of the development of all successful enterprises. The profit-seeking entrepreneur strives continuously to satisfy his customers. Simply understood, the generating of wealth occurs with private ownership of the means of production.
Markets can support conscious, moral choices when trust is in place and fair values are exchanged. In a voluntary market exchange, there is a responsibility of each party to the other. The first responsibility is on the part of the seller who must deliver proper goods or services. The buyer’s responsibility is to pay as agreed. This is a bilateral transaction from which both parties benefit. It is a win-win situation, and that is the way unfettered free enterprise works. There is no disadvantage to anyone. No one is exploited because there is no coercion.
To shift one of the market-transaction parties involuntarily away from the other alters the interest and the responsibility of the negotiation.
Thus there can emerge factors, which dramatically revise the voluntary exchange of goods and services. Government intervention (involuntarily shifting the forces of free- market exchanges) distorts the factors of the otherwise voluntary marketplace, introduces inefficiency, and destroys incentive. By definition, we know that to be coercion.
Negotiations in contracting are designed to reduce transaction costs because all transactions in the market have costs. On the other hand, government regulations increase those costs.
When a government or central despot orders and manipulates production, then a take-it- or-leave-it situation prevails with no alternatives or choices. Competition disappears. Satisfaction is minimal, and there is no recourse for inferior service. No despot or bureaucratic central committee can reproduce the limitless product development or abundance in a free capitalistic system.
The overwhelming general poverty of the former Soviet Union citizenry and their dissatisfaction regarding the lack of consumer goods attested to that.
Successful Capitalism depends on trust and the exchange of fair value between producers and buyers. As long as both conditions persist, the bargain continues. Socialism fosters only dependence.
From the individuals’ perspective in socialized systems, selfreliance wanes, and over time it is replaced by learned helplessness.
In that entire social system, individuals who have learned to be helpless become so timid that they fear self-reliance and actually criticize it as an aspect of personal freedom. In this respect, Socialism is a form of engineered tyranny that institutionalizes and nurtures dependence.
A question that I believe worth asking is, why is the agenda of Socialism (‘liberalism’) propagated by making negative accusations of the positive program and concepts of Capitalism? This negative approach is too frequently heard from our campuses and read in textbooks of higher learning. I believe that the answer lies in part with their push to make the ‘liberal’ agenda sound good by making the principles of ownership of private property appear “unjust.” But, on the other hand, I ask how in the world can ‘no ownership of private property’ sound good?
Socialists really have very little to offer the individual who wants creative goods and services. Since socialists eschew the encompassing principles of the free market, they have to force their version of taste on the masses. That is a poor substitute indeed for consumer-driven innovation.
In attempting to find accurate reporting of the facts of the development of this country’s true and successful entrepreneurs, the author, Burton W. Folsom, Jr. 13, wrote that he examined (and listed) many of today’s college textbooks, which reported the opposite results of the true stories and actions taken by the famous, successful entrepreneurs Cornelius Vanderbilt, James J. Hill, and Andrew Mellon, all of whom achieved their success without the aid of the government. The accounts of these few entrepreneurs are described in Chapter 5.
If one favors a philosophy, then that one should work for its positive promotion instead of negatively criticizing and attacking an opposing philosophy. Negative opposition accomplishes nothing positive and is thus a waste of effort and time. Even being anti- communist or anti-socialist by demonstrating and handing out pamphlets is a waste of time and energy. Being pro- Capitalism and pro-United States requires positive thinking and effort, and these activities are fruitful.
A reprinted editorial14 from the Dallas Morning News, titled “The Party’s Over,” reprinted in the Press-Telegram (Long Beach, California) on July 28, 2002, states that the arrest of Adelphia Communications founder, John J. Rigas, and two of his sons for siphoning off corporate funds for personal loans “epitomizes capi talism’s avaricious side.” Pardon me! Capitalism has no “avaricious” side. People may be avaricious and greedy, but the system is not. Still, in the same editorial, the writer did get it partly right by stating: “Capitalism’s commission is not to promote the unchecked self-interests of a few top executives, but to honor contracts and promises to investors and employees who are also part of corporate successes.” ‘Liberal’ slurs on the persons who propose positive plans for the betterment of society comprise a favorite mechanism of the socialist assault. By putting the proponents of Capitalism on the defensive, they are made to appear weak, and if done by implying that they are not truthful or by out-and-out accusing them of lying, then by ‘liberal’ intent, those proponents of Capitalism are intended not to be believed. Thus, promoters of Socialism hide their real motives and do not have to defend their position by logical debate of issues or programs. Usually they rely on their attack to discredit opponents instead of proposing positive alternatives to what they assail. As a result, the ‘liberal’ avoids true and rational discussion.
In her recent book, Slander, Ann Coulter15 over several pages describes how President Ronald Reagan was made to appear “dumb and senile.” Yet for all his ‘dumbness,’ Reagan “was re-elected with the largest electoral college total ever. He went on to end the Soviet Union, preside over a booming economy, and translate his immense popularity with the public into another landslide election for his vice president.” The U.S. Republic America has been a country of immigrants from its very beginning.
The ‘melting pot’ concept is a real one, and ideally the concept of equal before the law levels the playing field. The degree of justice in the US is high and has the ideal that everyone is treated equally. The goal of “equal before the law”’ was established and is defended here in the US. Equal treatment within the confines of the law is essential because true Capitalism’s various markets are “meritocracies.” They offer the greatest rewards to those who can create the greatest value. What happens in organizations when equality in raises and promotions replaces merit? Under those conditions do star employees stay or leave? In the public sector (and also with unions) the problem is that equality is favored over equity-in-reward decisions.
Those in opposition to the principle of equal-before-the-law point out the inequality of slaves before the Civil War, the blacks’ unequal treatment since that war, and the late attainment of the vote for women as three of the big negatives of democracy in this country. Now, what the opposers fail to realize and acknowledge is the fact that our founders established a mechanism of correction of problems that had existed for centuries prior to this country’s founding and beyond. Conceptual changes do not immediately change biases and actions of people when they have been accustomed to other long- standing systems of societal traditions. Witness the heated discussions and compromises on slavery among the original States’ representatives to the Continental Congress when hammering out a constitution. The founders put off the issue of slavery because they thought the new union was simply too fragile, yet they did establish the correct concept on the law that now prevails.
Equality before the law protects the benefits of Capitalism to mankind, which makes private ownership of the means of production possible. It was designed to protect the citizens and their private property. Von Mises wrote, “Social peace is attained only when one allows all members of society to participate in democratic institutions. And this means equality of all before the Law.”16 (Italics mine) Equity and merit are the rules in free markets. But, those making unwise decisions often use our legal system as a regulator or governor of markets because there is no requirement that market participants must be smart.
The concept of importance of each individual’s pursuit of happiness gives a wider meaning to the idea of equal before the law, because every individual’s importance is as valid as everyone else’s. Said another way, one man’s goals are as valued as any other man’s, and his pursuit is as valid as any other’s, so long as his (or her) pursuit of happiness does not interfere with anyone else’s.
The whole Constitution and Bill of Rights were conceived to insure protection of individuals, the rights of States, and the kind of equality of opportunity not experienced before in history. The Constitution and the Bill of Rights protect freedoms, and the system of Capitalism guarantees equality of opportunity.
It is worse than a shame that the National Education Association (NEA) in the public schools has so drastically reduced the teaching of the historical background of these concepts and their formation.
The NEA general membership tends to be less interested in politics, but the officials are ‘elites’ driven by what serves their interests, which tend to be political and “left– leaning.”17 It does take some intelligent effort and desire to understand markets and how assets are priced. Schoolteachers are traditionally not an indepth source of economic thinking. Perhaps they can teach students the basics of balancing a check book, but they seldom are interested or qualified to t