How Capitalism Saved America
by Thomas J. DiLorenzo
EXCERPT
What Is Capitalism?
"Free-market capitalism is a network of free and voluntary exchanges in which producers work, produce, and exchange their products for the products of others through prices voluntarily arrived at." --Murray N. Rothbard, "Capitalism versus Statism" (1972)
"Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned." --Ayn Rand, Capitalism: The Unknown Ideal (1962)
So how has the United States gotten so far from true capitalism? How have so many pernicious myths about capitalism come to be so prevalent?
The answer is that too many Americans are ignorant of how capitalism really works--though with some of the most ardent anticapitalists, the ignorance is willful. To counter such ignorance, it is useful to return to the first great treatise on capitalism, Adam Smith's The Wealth of Nations, published in 1776, the same year the American colonies declared their independence from Britain. Smith described the basic workings of capitalism succinctly:
In civilized society [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.... Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, brewer, or the baker, that we expect our dinner, but from their regard to their own interest.... Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow citizens.
Here Smith clearly explained some of the most important elements of capitalism--the division of labor, social cooperation, and free exchange. The division of labor is a natural, and beneficial, consequence of the fact that each human being is unique in a thousand different ways--in motivation, intelligence, interests, physical attributes and abilities, preferences, goals, skill levels, age, formal and informal education, worldly experiences, family history and culture, psychology, and much more. So, for example, people who happen to live in a fertile part of the world are more inclined to specialize in farming than, say, people who live in the arid Middle East. But because of this specialization, we rely daily on thousands of people whom we don't even know for the basic necessities of life. This breeds social cooperation. The farmer in the American Midwest can sell food to Middle Easterners and use some of the money he earns from that to purchase, for instance, petroleum products that are generated in the Middle East. Imagine how poor we would all be if we were to live under what is called economic autarky--where we all had to grow our own food, build our own houses, make our own clothing, manufacture and fuel our own cars, and so on.
Free exchange allows us to avoid the economic desperation of autarky. It also provides powerful incentives to continue educating ourselves and improving our skills so we can provide our fellow man with better and better (and less expensive) goods and services in return for money. This notion of serving one's fellow man is central to any capitalist economy. In fact, the economist and syndicated columnist Walter Williams refers to dollars (and other currencies) as "certificates of performance," for one can only earn money by providing one's fellow man with a good or service that he values more than the money he pays for it.
Nevertheless, as Smith observed, capitalism does not operate on the principle of altruism or "benevolence"; a basic fact of human nature is that we all have an instinct for self-preservation and personal advancement. Capitalism succeeds precisely because free exchange is mutually advantageous; each party serves his own self-interest, or what Smith called "self-love." Cattle ranchers in Montana, for instance, rise at 4 a.m. and work until well after dark at a number of physically demanding jobs not out of love for their fellow man but because they want to earn a living for themselves and their families. Yet the marvelous advantage of capitalism is that it captures this motivation and channels it in a way that encourages human cooperation and betterment.
In a capitalist economy the primary means (the only means, for most people) of improving one's standard of living is, in Adam Smith's formulation, giving others that which they want. Indeed, most exceptionally wealthy people amassed their fortunes precisely because they provided valued products to millions of people all around the world. This is what Bill Gates did with Microsoft and what Henry Ford, Andrew Carnegie, and many other well-known industrialists did before him. The clothing industry, the grocery industry, mechanized agriculture, and many other industries have created multimillionaires or billionaires because these individuals have vastly improved the standard of living of the masses. A common myth spread by anticapitalists is that the wealthiest capitalists profit at the expense of the rest of the society, particularly the working classes. But it is amazing to consider the innovations and improvements that entrepreneurs have brought to everyone. As the Austrian economist Ludwig von Mises wrote, "Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new things." Indeed, the most successful capitalists have brought to the masses products and services that were once considered luxuries available only to the rich. The result is that the average American working person today lives better in many ways than kings did several hundred years ago, with his automobiles, central heating and air conditioning, swimming pools and hot tubs, inexpensive food, and all the other "necessities" of modern life that those kings would have considered miracles. All of this is the product of capitalism. The economist Joseph Schumpeter summed up how capitalism benefits the masses:
The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses.... It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls.
These are the facts that the neo-Marxist propagandists ignore when bashing capitalism as a zero-sum game in which "somebody wins, somebody loses."
Excerpted from How Capitalism Saved America by Thomas DiLorenzo, Copyright© 2004 by Thomas DiLorenzo. Excerpted by permission of Crown Forum, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.