Myths about Capitalism

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Capitalism is a recent historical phenomenon, and its impact is most often unappreciated. Have you ever wondered why so many centuries past by without any significant advances in technology and material comfort? Have you ever questioned why the industrial revolution suddenly sprang forth seemingly out of nowhere to improve the lives of almost everyone on the planet in such a short time? Let’s take a look and see why.

[You might want to check out the previous post “Capitalism – villain or solution?” in conjunction with this one.]

The context – A brief history of capitalism

In the middle ages, the average person (peasant or surf) lived in conditions that would horrify most westerners today. They ate meals off a dirt floor in huts held together with mud. They had no bathrooms, soap or running water, no underwear, radios or central heating; they worked 18 days to barely subsist and lived on the edge of starvation in constant fear of famines and plagues that periodically wiped out huge numbers of people. Even Kings and noblemen lived in conditions worse than even the poorest people today. Infant mortality is estimated to have been between 30-50% and life expectancy was between 25-30 years at birth, rising to about 50 for those fortunate enough to reach the age of 30.

The period of European history called the Enlightenment (1685 – 1815) enabled massive changes in philosophy, science, and politics, and as a result, things changed radically. The tight grip of the church that had lasted for centuries gave way to the age of reason. The root cause was the philosophical shift from faith and mysticism to empirical evidence and logical thinking. The discovery of the scientific method led to the scientific revolution and to numerous innovations and inventions. At the same time, the Philosophy of reason led to ideas of political freedom rooted in the concept of individual rights of men.

The thinking of English Philosopher John Locke (1632 – 1704) had a strong influence over the founding fathers of America, and through them, his ideas led to the creation of the United States of America. For the first time in human history, a country was created where the rights of men superseded the state. Men were to be served by a limited government given the role of protecting the rights and property of men and the enforcement of contracts.

Capitalism is the social expression of the concept of individual rights. This is why Capitalism was born with the independence of the United States of America from England in 1776. Of course, the concept of trade was not new, but capitalism brought trade into the mainstream. Men were now economically and politically free, and trade flourished. [It is crucial to note that capitalism was opposed from the start, and has been undermined continuously ever since by collectivists on the left and mystics on the right. With increasing state control both sides of the Atlantic and the introduction of the Federal Reserve central bank in America, capitalism has long been lost to the mixed economy.]

The industrial revolution followed with the USA leading the way. England benefited from established trade routes from its imperial days as well as being the freest country in Europe. For the brief span of roughly 150 years capitalism exerted its benevolent influence. The population of Europe rose by 300% in the 19^th Century, where previously it had grown by 3% per century. The world enjoyed 100 years of international peace from 1812 to 1914, and the global slave trade was abolished as it became clear that slave economies are far less efficient than a free market, and therefore cannot compete. The standard of living of almost everyone in the world rose as a result of capitalism, yet these days no one knows what it is and wrongly holds it responsible for much suffering and for many problems. It is always tragic to hear of a false accusation and punishment of a single man or woman. The scale of the tragedy is magnified across the whole of humanity as capitalism is similarly falsely accused, and the benefits of freedom and wealth are increasingly compromised.

Facts and fallacies

Crony Capitalism is an unfortunate term that besmirches the whole concept of capitalism. In truth, crony capitalism is the tag team partnership of BIG government with BIG business. It is the practice of buying political influence so as to gain economic advantage. It is important to realise that the thug in the team is the use of force. The state is the only institution that has a monopoly on the legal initiation of the use of force. Politicians can be corrupted, and their favours can be bought. This means that the legislative power of the state can be bought. It is unfortunate that many people jump to blaming an accumulation of wealth and capital as the problem, but do not see the use of force and coercion as playing a part.

It is like a murderer who buys a gun to kill someone, and the murder weapon is said to be the money with which he bought the gun. When problems arise through the buying of political power, the system that provides the means to accumulate the money which buys the political power is deemed to be the problem. In fact, the real problem is the use of force in the form of legislation, tariffs, subsidies, special licenses and any other means of distorting the level playing field of a genuinely free market. Capitalism is opposed to the use of force. The point is that crony capitalism is nothing to do with capitalism, it is simply corruption and the buying of the power of the state.

Let’s look at a few of the accusations levelled at capitalism.

1.     It leads to the creation of poverty.

It is crucial to remind ourselves that poverty was the default situation when capitalism began. The historical record shows that capitalism has increased the standard of living of almost everyone on the planet lifting millions out of poverty. In a free society with a free market there are no rules or restrictions to stop or interfere with you or I buying, selling, exchanging, trading, producing and profiting as we go about our private business, pleasing customers by offering value in the form of goods and services that they are free to buy or not buy. There are, of course, still rules, but these are to enforce contracts and ensure that no one impinges upon the interests of anyone else – the basic common law. Everyone has the ability and opportunity to craft their own trade and offer their unique product, to innovate and produce wealth, or to exchange their labour for a wage. This is the way out of poverty, not its cause. The only losers in a capitalist (free) system are the idle or those who wish to be kept by the effort of others. Those in genuine need are not ignored. There is nothing about capitalism that leaves the poor to their fate.

Many people fear that the genuinely needy, the old and the sick would perish in a non-coercive free market without government taxation. But this is unfounded when you look at how much people do give to charities today. And bear in mind that people can afford to be much more generous when they have no tax burden.

There are many examples in history where greater political and economic freedom has resulted in greater wealth production, such as Hong Kong, West Germany after World War 2, and most recently China. But it must be noted that it is only elements of capitalism that have been adopted in China and it is far from a free society. Yet its successful wealth creation stands in proportion to the extent that it has granted economic freedom.

In a fundamental sense it is the lack of a free market that leads to poverty, yet these days it is largely intervention and regulation in the money supply and in trade and industry that create the problems.  It is the interference with, and distortions of, the free market through cumulative regulations that cause much of the poverty we see today.

When we consider how to reduce or eradicate poverty we must think in principles. Capitalism is NOT the cause of poverty it’s the cause of wealth creation.

2. It benefits one class of people (greedy capitalist employers) at the expense of everyone else, specifically exploiting the working class in dreadful working conditions.

Capitalism is a voluntary system when force and coercion have no place. No one is forced to work for any employer and no one is forced to buy any particular product. Men with the ingenuity to start businesses and manufacture goods create employment opportunities in the form of jobs. People who are looking for gainful employment are free to engage in contracts of employment. There is nothing inherent in capitalism that is exploitative. In fact, the contrary is true. Capitalism stands in opposition to slavery and does not force anyone into labour.

In a free market, workers are free to seek the employer paying the highest wages, free to increase their own skills, and free to start their own business.

The unfair protection of established wealth is another matter unrelated to the principles of capitalism.

3. It leads to the establishment of monopolies in the market, leading to unjustified high prices.

The fact is that a free market economy makes a monopoly impossible. The kind of monopoly people mean here is a coercive monopoly. This means exclusive control of a given field of production closed to and exempt from competition in order to set arbitrary production policies and to charge arbitrary prices independent of the market and immune from the law of supply and demand. The only way to exclude competition in the market is by law, resulting in the impossibility of competition. It is always an act of government that creates a coercive monopoly.

If any given product is way better than the competition and becomes the exclusive product of choice within a population, this too can be considered a monopoly. However, this is due to the merit of the product and the benefits it provides to people. This is clearly not a problem and is the reward of merit, producing the best product. In such a situation a company could be said to enjoy a monopoly, even though free market competition is possible. This is NOT the same as a coercive monopoly.

4. It causes artificial scarcity and built-in obsolescence.

These result from a coercive monopoly and can only remain in the absence of a free market. A better product is, in fact, a better product. It is only regulations, red tape, the granting of special licenses or any other legislative acts of government that can prevent a better product from reaching the market. This is not capitalism.

Even if a particular natural resource becomes scarce, a free market ensures open competition from different resources with technical innovation. It is impossible to corner a free market. All raw materials remain in competition with all other raw materials and new innovations for the cheapest and most effective solutions.

5. It ignores the social good by focusing exclusively on profit.

There is no greater social good than men respecting each other’s individual rights and consequently being free. It is a capitalist system that enables this.

We have already noted the social good Capitalism made possible in point number 1.

Also, there is no rational reason to pour scorn on the concept of profit and to confer moral condemnation upon those who seek it as a reward for their effort. Would we condemn a man for accepting wages as his reward for his effort? To seek gain in material values or the money that represents the value with which to purchase them is entirely rational and necessary

The denunciation of the profit motive is due to underlying philosophical presumptions. The prevailing mental conditioning today predisposes many to condemn the pursuit of material values and the acquisition of wealth as immoral. But this is baseless. When the concept of profit brings so much life-giving benefit we must question the morality that calls it evil.

Profits are the fuel of the economy. No one would produce anything in the absence of profit. It is profoundly ignorant to see the profit motive as evil since we all need values to survive and someone has to produce them. Profits enable future investment both in new technologies and more efficient means of production. These benefit everyone making labour more efficient and consequently increasing wages – the prices paid for labour.

Capitalism harnesses the need to produce values, and profit is the reward for merit, for best practice, for rational thinking that develops maximum efficiency. Profit is the reward for the desire to better one’s material existence and drives the machine that ultimately benefits all. The profit motive is noble and moral.

6. It causes inequality

This accusation presupposes that everyone is born equal, that it is good for us to all be equal. Neither is true. People are not born equal; not in height or physical attributes, in their attractiveness, their natural abilities nor their interests and preferences. People’s intelligence varies widely. Environmental factors play some role, but it remains a fact that we are not all equal. We very clearly all possess different predispositions to be good at different things. This natural difference is called diversity and in nature, and biodiversity is considered a good thing.

Capitalism allows men to choose to specialise in what they do best, in what interests them the most. It enables people to exercise their free will and choose a line of work that appeals to them and not be appointed a role by any ‘authority’. Capitalism makes the best use of the natural diversity in human attributes to maximise efficiencies in production and the happiness of all people choosing their working activity. Human inequality is not caused by capitalism, it is inherent.

Inequality may indeed grow as a result of capitalism as those with greater initiative, or those who strive for success achieve more in the free market. This is no bad thing. The greatest painters, singers, sportsmen and women all rise way above the rest of us in the free market of their respective activity. We don’t blame ‘sport’ for the inequality of football players who are extremely good over the rest of us who are not.

7. It encourages greed.

Capitalism is respect for property rights, without which any other rights would be impossible. This means you and I (as well as any privately owned business) get to own and keep our own stuff. It is also respect for contracts, which means we have to keep our word.

Greed is not merely wanting more and more comforts and more toys and labour saving devices. It is not greedy to want to continuously improve one’s lot. Striving for more is not greed. Greed is irrational over consumption when needs are met.

There is nothing about the nature of capitalism that promotes greed. Some people may be greedy. Some people like to overeat. Some people are irrational, but this is not the fault of capitalism. On the contrary, capitalism promotes rationality and punishes the entrepreneur who is irrational in his decision-making process.

8. It necessitates the endless pursuit of economic growth.

What we have today is not capitalism but a mixed economy. Government intervention in the economy has been increasing for decades and is the inevitable result of the policy of interfering with the market and with the natural laws of supply and demand. One intervention always leads to another due to the knock-on effect and the complex interaction of economic factors in an economy. There is no free market in the money supply, it is entirely manipulated and controlled by the central banks and the arbitrary setting of interest rates.

It is for complex reasons involving government debt and deficit spending, that growth in the economy is pursued as an end in itself.  Capitalism has no inherent requirement for a particular rate of growth. It is true, however, that economic growth is proportionate to the degree of economic freedom.

9. It leads to cultural homogenisation and the destruction of cultural diversity.

Capitalism is market led, or rather customer led. The best products end up in demand the most. But it is not this that leads to Starbucks and Costa Coffee dominating the market and appearing on every street corner. In a genuinely free market, there would be no barriers to competition. Regulations, licence requirements and special franchises do more to create a monoculture than a free market.

Big business buying the influence of government to restrict and prevent competition is a more significant contributor to cultural homogenisation. This is not capitalism.

10. It causes environmental destruction.

Pure laisez-faire capitalism rewards the most efficient means of production, this is naturally contrary to the idea of wasteful production. Wasting resources costs money and therefore hinders profits and leaves a business less competitive. Unrestricted capitalism rewards the entrepreneur who can think of ways to reduce waste. There is no conflict between the natural environment and capitalism.

Far more waste and inefficiency occur when the state attempts to run an industry. A look at the track record of nationalised industries proves this. Few would argue that governments run industries more efficiently than private interests. Remember that it is very much easier to spend someone else’s money than your own.

Capitalism is only a means of producing the values that people demand. It happens to be the best and most moral means, but it is a means none the less. It is the demand side of the equation that chooses the product. Whether the product is made responsibly or with disastrous environmental consequences. There is no point in producing anything for which there is no market. The market decides what it values and therefore best practices of production must be market led.

This highlights the need for genuine education of the market as well as responsible-minded entrepreneurs. Environmental damage is in no one’s interest, and it is not an inevitable result of capitalism.

11. It leads to the ‘unjust’ accumulation of vast fortunes of the so-called fat cats of industry.

The belief that vast wealth is somehow evil stems from the same ethical assumptions mentioned earlier that are born out of various religious convictions. Self-denial and poverty have both been espoused as virtuous from the same source. But are they? What is wrong with becoming rich as a reward for one’s business acumen? What is wrong with enjoying an abundance of material possessions?

Wealth creation is not a zero-sum game. When industrialists or businessmen create wealth and employment opportunities it is not because they have taken it from someone else. Creating wealth always lifts people out of poverty and benefits all. The more wealth that is created the better it is for everyone. In just the same way as it is better for everyone if we were all more clever and knowledgeable.

On a practical note, the accumulation of fortunes and the availability of large amounts of capital for investment purposes is essential for the proper functioning of an industrialised economy. The very thing that benefits us all with cars, clothes, computers and mobile phones. Without large capital investment in factories and research and development, it would not be possible to finance the inventions and technological improvements of an industrial society. To advocate against the accumulation of wealth would be another tragic and self-defeating own-goal.

12. It causes the instability of ‘boom and bust’ cycles and depressions such as that of 1929 – 1933.

What we have today is not capitalism. There is nothing inherent in a capitalistic system that can cause large-scale instability or depressions. Without arbitrary control of the money supply, interest rates and even currencies would be subject to the free market. It is only with interference in the money supply and the availability of credit that results in the boom and bust blamed on capitalism.

Yes, there are contractions and adjustments in an economy. Technological advances like the development of the automobile last century drove many livery stables out of business, just as the internet and Youtube are displacing the TV set today. Shifts in consumer knowledge and preference can have a similar effect. There is a multitude of factors that can cause temporary contractions in specific industries and even whole economies, such as hurricanes and volcanoes and times of war, but the free market is its own protector. It is only in the regulated mixed economy that we get bank bailouts and runaway speculation.

in the USA at the end of the 19th century, the so-called ‘robber barons’ of big business were blamed for economic instability which led to the creation of the Federal Reserve in 1913. This institution was specifically created to prevent the boom and bust cycle. Instead, it presided over the greatest depression in history prolonged by repeated intervention in the free market by the government of President Roosevelt. Government intervention in the economy has increased in all western economies since then, and the boom-bust cycles continue.

Conclusion

Before we cast judgment upon capitalism we must understand what it is and what it isn’t. I have noticed in the research for this post that almost every piece of writing on the subject fails to define capitalism. To discuss a topic in a conceptual vacuum is less than useless. It enables all sorts of mud to be slung at a meaningless label. It can only undermine knowledge and render us further dumbed down.

Capitalism: is a social system based on the recognition of individual rights including property rights in which all property is privately owned. It is a system based on the private ownership of the means of production in which men freely exchange goods and services unregulated by any governmental (coercive) intervention.

Some people say that humanity is waking into a higher consciousness. But what is a higher consciousness? What is greater awareness? The answer is that both can only come about through increased conceptual awareness – i.e. rational thinking, through wanting to know and seeking to understand. Because the only difference between an intellectually sovereign adult and a newborn infant is the number of conceptual integrations that have been performed; that is the number of concepts consciously identified and then integrated into a sum of non-contradictory knowledge of reality.

Reason, thinking and a greater conceptual awareness may one day lift humanity into a higher consciousness. Only then will people re-embrace capitalism and usher in the age of peace, freedom and abundance.

Nigel Howitt

November 2017

 

Valuable Resources

books:

• ‘Capitalism the Creator‘ – by Carl Snyder
• ‘The God of the Machine’ – by Isabel Patterson
• ‘Human Action: A Treatise on Economics’ – Ludwig Von Mises
  
• ‘Planning for Freedom’ – Ludwig Von Mises

A rational look at capitalism can be found here  in the Ayn Rand Lexicon. and  The Mises Institute  is a great place to learn about Austrian economics and capitalism: