Economics: Free Market Capitalism


Figure 1.--This doffer boy worked in the Globe Cotton Mill in Augusta, Georgia during 1909. Notice the lint on his cap. Countless images like this are used to create a connection between capitalism and child labor. In fact it is only with the energence of capitalism and ihe Industrial Revolution that child labor, which is as old as the human species, began to be be seen as a social problem and brought to light by men like Lewis Hine. Andc it was only the wealth generated by free msrket cpitalism generasted the wealth a society needed to do away with child labor. Source Lewis Hine.

European mercantilism evolved into what we now call capitalism. Capitalism is founded on the same ecoinomic impulse as mercantilism the drive for profit. Both the mercantilist and the capitalist seeks to acquiring desirable goods for lower prices than they can be sold. The difference between the two is profit. And profit is at the heart of the system. Socialists have criticised the profit motive. And it is a cold, dark unemotianal heart. The only problem for socialists is that it generates wealth. And socialism with empathy and humanitarian social concerns does not. Adam Smith in the Wealth of Nations describes the mechanism that drives capitalism. The profit motive was essentially a hidden hand directing the system. Smith postulated that society as a whole benefitted by allowing each individual from seeking his own individual interests. Individuals pursuing their own personal interests will guarantee the interests of society as a whole. There are major differences between mercantilism and capitalism. Capitalism involves the rational or efficent use of the means of production. Labor becomes specialized workers in the form of wage labor. The managers or capitalist manipulate capital, raw materials, terchnology, and oher fsactors so as to maximize profit or wealth. There is the potential for capitalist to cause social problems by reducing wages to poverty levels, cvhild labor, casusing pollution, producing unsafe problems, unfair competition, etc. Here it is up to the Government to regulate the system to prevet these undesirable consequences. Labor unions can also unballance the system through raqeteerng, unsustaninable wage demands, etc. And thus must be regulated. Here there is a fine line. Inadequate regulation can threaten te system by resulting in a socially unacceptable concentration of wealth. Oppressive regulation can destroy the profitability of the system. The individual and his desire for a profit is at the hear of the capitalist system. It was the Dutch who first invented capitalism. It ws quickly adopted by the English and in the American colonies. It was the efficiecies and wealth generating capabilities of capitalism that enabled the Dutch and English to survive and prosper in conflicts with much larger countries. Other European countries also embrsaced capitalism, but none more throughly than the Anglo-American powers. This proved to be the central force in the 20th century when Britain and America faced a series of conflicts with powerful adversaries challeging not only capitalism, but ln\beral democracy which developoed as an adjunct.

Mercantilism

Mercantilism was the governing economic policy pursued by European countries during the 15th-18th cenuries. This included the Renaissabnce, Reformation, and Enligtenment. It was an era of government (meaning royal) control of foreign trade. This led to frequent if limited wars. It was during the mercabtilist era that the economies of the East and West began to come together. Through most of the era the West had trouble finding trade goods the Indians and Chinese wanted in exchange for the silk, porcelin, and spices that the West coveted. Gold and silver from the Americas helped finance the trade. Perhaos this was one of the reasons that the evolving trade was western merchants ciming to the East and not the revrse. There was no great spokesman for mercantilism like Adam Smith for capitalism (The Wealth of Nations) and Karl Marx for Communism (Das Kapital). Mercantilism was esentially the attempt of pre-industrial European leaders to gain control over the increasingly complex ecomomies that emerged from the late-Medieval era. The primary goal of the European rulers was to acquire as much bullion (gold and silver) as possible. This affected the policies pursued. Important topics include the voyages of discovery, American gold and slver, guilds, royal monompolies, the highland clearances, the potato, and slavery.

Invention of Capitalism (17th century)

Capitalism like democracy is the unique creation of the West. The two were intricately linked and appeared at the same place and comparable times--the Netherlands and England (17th century). Conditions favorable to the rise of capitalism occurred through large areas of Western Europe. This began with several developments. First was the quickening of economy in the late medieval era. In part because of the Crusades and the Renaissance we begin to see banks developing in the Italian city states. Second was the demographic crisis of the 14th century resulting from the devestaing plague. This substantially reduced the European populations and increased the bargaining strength of the peasantry in their relationship with fedudal lords. The result was to sinificantly weaken the manorail system. The result was to expand free labor, innovation, and productivity. Third was the maritime expansion of the West as a result of technological advances, both to the East and the discovery of the Americas in the West. Trade with the East expanded trade. The conquest of the America resulted in huge quantities of bullion (gold and silver) flooding into Europe as well as new products. The potato was particularly important because it significanyly increased agricultural productivity, especially in northern Europe. The devlopments might suggest that capitalism would be invented in southern Europe. There were the merchant banks of Italy and the vast wealth acuring to Portugal and Spain by the maritime outburst and conqiet of the Americas. But this did not occurr, it was in northern Europe that capitalism was invented. The economonic hot spor was the low countries where exptemely profitable wool weaving industies developed in Flanders. England was tied to this development as the source of rhe wool. But just the opposite occurred, it was not the bullion rich countries, but the mpre productive countries and provinces to the north. The Low countries became a province of Spain. At about the same time the Protestant Reformation swept through northern Europe. This both separated part of the Low countries from Spain and changed the outlook of the people of northern Europe, including ideas favorable to capitalism. Traders first in Amsterdam and and then in London created the first chartered joint-stock companies which helped to promote commerce and trade. The first stock exchanges were establishd. Important banking and insurance institutions were founded. The Netherlands under assault from the Spanish was not a large enough country to drive the creation of capitalism. England although aelatively small country at the time was. At the same time the Glorious Revolution took place in England, once and for all establishing the auhority of a Protestant elected parliament over a Catholic absolutist monarchy. And in this process Protesrant troops from the Netherlands played a key role.

Essence

Capitalism at its core is economic liberty just as decomocracy is political liberty. It is about voluntry exchane for mutual benefit.

Capitalist Therory

Capitalism is founded on the same ecoinomic impulse as mercantilism the drive for profit. Both the mercantilist and the capitalist seeks to acquiring desirable goods for lower prices than they can be sold. The difference between the two is profit. And profit is at the heart of the system. Socialists have criticised the profit motive. And it is a cold, dark unemotianal heart. The only problem for socialists is that it generates wealth. And socialism with empathy and humanitarian social concerns does not. Adam Smith in the Wealth of Nations describes the mechanism that drives capitalism. The profit motive was essentially a hidden hand directing the system. Smith postulated that society as a whole benefitted by allowing each individual from seeking his own individual interests. Individuals pursuing their own personal interests will guarantee the interests of society as a whole. There are major differences between mercantilism and capitalism. Capitalism involves the rational or efficent use of the means of production. Labor becomes specialized workers in the form of wage labor. The managers or capitalist manipulate capital, raw materials, terchnology, and oher fsactors so as to maximize profit or wealth. There is the potential for capitalist to cause social problems by reducing wages to poverty levels, child labor, casusing pollution, producing unsafe problems, unfair competition, etc. Here it is up to the Government to regulate the system to prevet these undesirable consequences. Labor unions can also unballance the system through raqeteerng, unsustaninable wage demands, etc. And thus must be regulated. Here there is a fine line. Inadequate regulation can threaten te system by resulting in a socially unacceptable concentration of wealth. Oppressive regulation can destroy the profitability of the system. The individual and his desire for a profit is at the hear of the capitalist system.

Human Behavior

Adam smith famously referred to the 'invisible hand'. By this he means the natural force that underlies free market capitalism. Smith maintains that in a free market each individual will attempt to maximize his own self-interest. The resulting interaction of market participants, leading to the exchange of goods and services, permits individuals to fare better than if he attempted to produce each item himself. And the efforts of free people to maximize their own personal self interest will lead to an overall natioinal benefit. Socialisdts ctend to denegrate this invisibke hand as aind of mr=etaphysics. Actually by basing a economic system on precived moral constraints rather than human nature , it is the socialists who are engaging in theocracy. Which explains why capitalism is a more efficent economic system. Research on primates suggests just how deeply rooted in human nature free market vapitalism is. Laurie Santos oversees the Comparative Cognition Laboratory at Yale University. Much of her work seeks to determine the roots of human economic behavior. She has trained ten Capuchin monkeys to trade tokens for food and is studying how her monkeys make decesions about money. Designinging the experiments is trickybecause as as Santiss explains, "Monkys are not very good at math." She is finding that mokey behavior is remsrkably similar to human behavior. The don't like to save, That don't like being treated unfairly. Theec are differences. The monkie do not seem to eant expensive items more than cheaper ones. In that monkey behavior seems more rational than human behavior. Mrcus, p. C11.] But overall the research is increasingly suggesting that human exonomic behavior is deeply rooted in our DNA. Thus rather than metaphysics, Adam Smith's invisible hand seems a very intuitive description of human economic behavior.

Components

Various components were connected with the capitalism that the Dutch invented and the Anglo-American powers perfected. These included: 1) a maritime system, 2) liberal democracy, and 3) technical innovation. It is difficult to assess to what affect these three components were causes or effects in a complex interelated system. 4) A fourth component has to be consiudered--Protestantism. It is immeditately apprent that the three great practioners of capitalism (the Netherlands, England/Britain, and America) were Protestant countries, often locked in desperate struggles with Catholic countries). And there are two aspects of Protestantism that must be considerd. First, Protestantism by irs very nature (Bible reading and individual contemplsation) was prone to split into competing scts, imposible to control by any autocratic authority. Second, Protestant doctrine itself, especially Calvanistic thouht.

Industrial Revolution

One of the often ignored questions in economioc history is why the Industrial Revolution occured in the West. China was the last of the four great river valley civilizations to develop. It became the richest and most technologically advanced civilization. China achieved the idea of a competivive civil service based on examinatiions. This was insituted by the Qin Dynasty (221207 BC). Thuis was something not achieved in the West until the late-19th century. Well into the modern age, China was more technologically advanced than Europe. Many of the great advnces such as gun powder and moveable print all came from China. In fact, even in the early-19th century, Europeans had difficulty finding trade items of interest to the Chinese. By all expecttions, one would expect that the Industrial Revolution should have ooccurred in China. The reason of course is that two key elements were lacking in China: 1) capitaliam and 2) the rule of law. These elements of course are interelated. The rule of law has aong history, beginning with Rome and institutionalized in the Catholic Church and Feudal system before achieving its final form democratic form in Britain with the Glorious Revolution (17th century). And this was at the same time that capitalism invented by the Dutch was adopted by the expanding English maritime ecionomy. The result was the Industrial Revolution.

Morality

From a relastively early point in the development of indusrrial capitlism, social commentators have been disturbed by the inequities in capitalist economies. In fact, there have always been inwquities in human society. These inequities have been very pronounced since the Agricultural Revolution (about 8000 BC). Why then did social critics first begin to serious question these inquities. Too often poorly eduycated writers claimn that industrial capitalism first created the inequities. This is simply untrue. Inequities existed thriughout Europe and the rest of the world before capitalism. What the Industrial Revolution did was to generate wealth on an unpresedented level. And the result was the creation for the first time oif a very affluent middle class. That affluence was reflected in many ways. The middle class substatislly changed society. One of the changes was to redefine childhood. We see ordinary families keeping dogs and cats as pets for the first time. And we see large numbers of individuals with the time to mull over the social condition. And for the first time we see this concern over inequities--essentially generated by the creation of wealth and affluence. One reason that sociasl critics began to question capitalism was the mechanisms of capitalism--Adam Smith's invisible hand. There was no morality to it, rather a cold unfeeling mechanism. There was no morality, the mechanism was purely mechanical, the principle that society as a whole will benefit if individuals are free to pursue their own selfish personal interests. Thus social reformers like Marx designed a much "moral" system in which instead of pursing selfish personal interests, that individuals would be proivided for based on their needs. Pure Marxist doctrie saw a whitering away of the state, but in fact to redestribute resources a powerful state is needed. And the critics of capitalism see the state as a mechism for inserting morality into the social process. This however presents two fundamental problems for the moralists. First the state is controlled by a political process which may or may not be moral and that morality is something that different people can view very differently. Second, is a moral issue that the opponents of capitalism who claim the moral highround like to ignore. What is the miorality of seizing the poroperty of one group of citizens and giving it to another? But morality is something whih can be argued intermably. A much more important question is subject to factual resolution. What social system allows the individual to best develop his or her inate abilities. The answer is capitalism. Ask your self, where have the great discoveries that made the nodern world come? They came from capitalist countries, primarily America, Britain, France, and Germany. This is true in virtually every field of human endevor. Why did no major advances in science come from the Soviet Union or other Socisalist countries. Is it moral to limit human aspirations. Why was it the Capitalist West that created not only the industrial technology, but also the new information based technology. Why was it corporatios that created modern drugs and medical procedures? Why was the Green Revolution which saved billions if lives in the Third World generated by the United States. Is it really moral to organize soiciety on the basis of a soicial system thast rather than creating wealth, destroys it. Planned economies did not have the market cycles of Capitalist countries, but they also proved extridinarily ineffiucent, essentially guaranteeing wuidespreas poverty. In Socialist countries a very common phenomenon was that the value of manufactured goods often were worth less than the raw materials used to produce them. This is why the Comunist Eastern European countries, Russia, Cuba, China (before the capitalist reforms), North Korea could not export. And all of these countries had to develop highly coercive state structures to either resistriubute wealth or prevent individuals from pursuing their self interests.

Historical Development

It was in Italy that capitalism first appeared in an embryonic stage among Italian city states. Some credit the Templars and the Crusade as the veginning point. It was the Dutch, however, who invented capitalism, vcroissing the threashold from the medieval to mdern era. It was quickly adopted by the English and in the American colonies. It was the efficiecies and wealth generating capabilities of capitalism that enabled the Dutch and English to survive and prosper in conflicts with much larger countries. Other European countries also embraced capitalism, but none more throughly than the Anglo-American powers. And it was the Dutch, English, and Americans that developed capitalist systems with a maritime component that enabled it to extend their economies well beyond their own territory. This was critical for the Dutch who had to fight wars with the two most powerful continental powes--first Spain and then France. The Dutch were dwarfed by both these empires. But they had a vast trading fleet to suport their drive for independence and help from the English/British. The British saw the independence of the the Lowlands as vital to their independence. But at the same time they waged three Naval Wars with the Dutch to seize naval dominance. And this was the system which the English inplanted along the coast of north America (17th century). And it was England that proved to be the crucible from which the Industrial Revolution sprang. Other European countries also adopted capitalism to varying degrees, but none more fully than the Anglo-American powers. Market capitalism and its interrelated adjuncts proved to be the central force in the 20th century when Britain and America faced a series of conflicts with powerful adversaries which sharply different visions for western civilizations--autocracy/totalitarianism or liberal democracy. Although the challengers amassed potent armies and great power controlled by powerful autocrats it was the seemingly disorganized democracies with less martial traditions, but backed by highly efficent capitalist economies that prevailed.

Government

One of the most contoversial aspects of modern ecomomics is the appropriate role of government. Capitalism proved so sucessful because the mechanism of the free market is superior to any efforts by governmental authorities to manage the economy. This was at the heart of America's rise and the failure of the Soviet Union. As a result, at the same time capitlism appeared, the phase laissez faire began to be used describing the essential government policies to ensure the proper functioning of the free market. It came to encapsulte an economic system in which commercial transactions between private parties are left free from government restrictions (tariffs, royalties, monpolies, subsidies, mandates, laws, regulations, etc.). The French phrase 'laissez-faire' literally means 'let [them] do', impling 'let them do as they want' or something like 'hands off'. The origins are disputed, but some believe the phtrase was first used in a meeting between the famed Louis XIV's brilliant finance minister, Jean-Baptiste Colbert, and a group of French businessmen led by a certain M. Le Gendre (about 1681). Colbert with all his brilliance was not a capatalist, one reason that England/Britain would be able to contain French power. Colbert was a mercantilist who like other royal officials believed in Government managment and direction of the economy. A solicitius Colbert asked the asembled businessmen how the French state could assist them and help strengthen French commerce. M. Le Gendre replied directly, 'Laissez-nous faire'. In the next century and a half of conflict with Britain, the French weakpoint was its failure to embrace capitalism and the free market. Of course 'laissez-faire' and Adam Smith's subsequent blue printnever mean that there was nor role for government. In fact govenment is vital in the functioning of a capitalist state. The Governmrent has to protect property rights, create a stable currency, prevent unfair behavior and larceny, and regulate the market to insure that all participants are treately fairly. What it should not do if the market is to operate efficently is to intervene to pick and choose winners and to attempt to control outcomes. The idea that the Government should never intervene can have disasterous results. One of the most obscene such incidents of governmenbtal irresponsibility was the dececission by Liberal Lord John Russell,based on his belief in the principle of laissez-faire to close the food depots that were feeding the starving Irish during the Potato Famine--millions died as a result. The failure of Government to refulate markets can lead to illegal activity and felonious market manipulation. Some of this was involved in the Wall Street Crash playin a role in the Great Depression (1929). On the other hand, excessive Government interbention in the market can also have adverse onsequences. There is considerable evidence that the News Deal polcies actually prevented the economic recovery from the Great Depression. Several decades of intervenist Socialist policies in the onece dynamic European economies have led to declining innovation, stagnant growth, declining incomes, high unemployment, cuts in entitlement programs, and bankuptsy.

Corporations

The essence of capitalism is the private ownership of the means of productions. Capitalism is an economic system based on individual rights and freedom. Thus corporations or smaller businesses and compamies. There has been an effort in recent years to demonize corporations. It should be noted that poor countries lack important corporations., It is only wealthy countries tht have important corporations. This is no ccident. It ihe income from successful corporation that generate income and wealth, Corporations like people are not perfct. They are falable, but no successful country can be sucessful without them. The only exception is countries tht have vast quantities of natural resources to export, but vmost ofthese countries (Iran, Russia, Saudi Arabia, Venezuela, and other countries) are not veryb pleasant places to live. They also are consuming countries that have added next to nothing in the way of inniovations and creative ideas. Corporations are created to generate wealth for investors. In doing this, however, they accomplish a wide range of socially beneficial actions. Corporations create jobs, often training workers for these jobs. We havenoted claims that governments also create jobs. There is, however, a big difference between coporate and government jobs. Some government jobs are important, but they are only created by tking money from tax payers. Thus there is no net increase in economic activity. Government economic actiins are a zero sum game. One grouop gains while another grouop loses. Governments do not generate wealth, they simply take respurces from some people and give it to thers--a zero sum game with extractiins ti support the cost of the beaurcracy. Caopitalism on the other habd is not a zero sum game, but a way to expand wealth so that everyone benefits. Corporate jobs are created from the wealth that corporations generate and thus expand tge economy. Corporations not only grow indusyries, but create whole new industries. Most of the innovations of our modern world have come from corporations. And from the jobs created and the taxes they pay, support governments at all levels. The corporations that left-wing politicians demonize in America are the very institutions that make America not only rich, but very different from most other countries. It is not only the share holders and workers who benefit from corporations, but cstomerssuppliers, communities, and even those depemdent on governmrnt benefits The safety net is supported by corporate taxes and the health of thge general economy/

Stock Markets

The most visible operation of capitalism is te stock mrket. This is where the private oners of corporatiions (the means pf production) but orc sell their shares daily. Here is where people with innivative ideas can obtain capital topursue new idea. It is also whwewordinary people can purchase atake in te corporatiins that are creating productsxand services and launching innovative new projects. People can thus participate in exciting new business ventures or enjoy more modest returns with ownrship of more established companies. Here individuals can generate returns to establish financial stability for themselves and their family. Individual throughout Europe are today learning that they can not rely in government to provide for their retirement or even basic servives like hekth care.

Poverty

The historical record is very clear. The great bulk of mankind live in poverty until the Industrial Revolution. The Industrial Revolution itself was generated by free market capitalism and the wealth generated by the industrial revolution lifted millions from the daily grind of poverty. This is not an opinion, but an easily verifiable historical fact. Countries that participated in the Industrial Revolution (America, Britain, Grance, and Germany) became aflluent. Countries and regions that did not (China, India, Africa, and Latin America) remained poor. Yet most young people do not know this. Having seen Oliver they connect the Industrial Revolution with poverty. And this view is often reinforced at school. Here we are not just talking about Cold War-Era Soviet schools, but schools in America and Western Europe. Amazingly today, young people in China tend to have a higher opinion of capitalism than American children. American text books often give more attention to the inequities resulting from capitalism than the overall affluence resulting. The impression created is that child labor was caused by the Industrial Revolution. We found internet sites on child labor that actually stated that child labor began with the industrial revolution giving the perposterous impression that children in earlier periods did nor work. Rarely di text books point out that the campaign to eliminate child labor actually began with the Industrial Revolution. Famed economist Milton Freeman rights in great detail how the creations of free trade and free market capitalism allowed masses of people escape from poverty. The examples are endless, James Watt and the steam engine provided the power to escape from human and animal power. Cyrus McCormick made the first major advances in harvesting since the advent of agriculture. The Wright Brothers lsunched the aviation industry. Henry Fird brought the automile to the common mam. Major advances in science which contributed to the economomic progress also came from free market capitalism: Newton, Darwin, and Eistein. And incredibly the changes can occur very rapidly. Just look at the Asian Tigers or now China and India.

Taxation

A major issue in state with a capatalist economy is taxation. There are three basic types of economies: socialist (state onership), capatlist/free enterprise, and mixed economies (partial state ownership). Taxation is not an issue in a socialist state because the government owning the means of production can generate revenue from the operations of state controlled enterprises. The problem for the citizens of these socialist or largely socialist countries (Cuba, North Korea, and Viet Nam) is that state operations are so ineficient that the economy is not productive and thus the people are among the poorest in the world. The inefficies of socialist economics led to the collaspse of the Dociet Union and the decesion of socialist countries (like China) to adopt free market reforms. Taxation is an issue in a free market economy because the state has no way to generated recenue except to tax. Historically the two most capatalist countries have been Britain and America and their economic success since the 17th century has been largely due to the ecomomoic sucess generated by market capitalism. They also until the Depression of the 1930s have been the countries with the lowest tax burden. American officials from an early point recognized that the power to tax was the power to kill, a doctine enunciated by the Supreme Court at an early point in the Republic. Political liberalism was founded in Europe on the idea of restriction state intrusions in economic life. The state at the time was cdominated by aristocrats or individuals enriched by state action and refressive European tax systems reflected this. American tax tax revenue was at first generated by tariff revenue. State revenue systems was more varied. As the United States industrialized abd during the crisis of the Civil War, other forms of revune were needed. There are a range of different taxes, but they can be either regressive or progressive taxes. A regressive tax affects all tax payers equally. A progressive tax imposes a higher tax burden to those with higer incomes. The progressive movement strongly promoted a progressive tax system. The idea of a progressive tax system in generally accepted in democratic nations. The basic question is what level to set the tax rate. Here there are two basic concerns. First is equity. While there is differences of opinion here, the basic principle is that the wealthy who benefit most from society should pay more. Second is effectiveness. And here there are two matters to consider. One is the law of diminidhing returns. There is a point beyond which highrr rates will actially retuen less revenue because payer will avoid them. Two, thre is also a ate beyond which will retard economic activity, reducing both government revenue and the wages of the lower income people the progressive income tax was susposped to benefit. Notice that equity is a value judgement and highly subjective. Effectiveness is not subjective and can be meaured imperically.

America

Students learming American history are generally not presented with information explaining how market capitalism essentially created within a century the most powerful nation on earth. Rather standard history books tend to dweall upon inequities. Often 19th century histories focus on the fight to abolish slavery. While the horrors of slavery are now well depicted. Rarely do history teachers make the point that it was the superior morality and effiencies of free market capitalism that first ended slavery in the northern states and gave the northern states the industrial power to prevail in the Civil War. Rarely do teachers pursue the morality of capitalism, but in a capitalist economy, the individual is a free agent. This is why free workers oppose slavery. In the short term, it does not make erase racial prejudice, but it does end slavery. Which is what happened in the norther states after independence. And the industry created by free market capital and free labor defeated the plantation slaveogracy of the southern states. After the Civil War, teachers focus on industrialization and the inequities faced by workers and immigrants. Here there are important issues to consider. Industrialists were able to influence the Governmrent to use its power to prevent workers from organizing and exerting their rights. What teachers fail to address is the fact that workers in America achieved much higher incomes than European workers. This is part of the reason that European workers flocked to the United States during the late-19th and early 20th century. The reason for this was efficiencies of the American free market economy. Too often American histories focused on the difficulties for immigrants in America and not the fact that they enjoyed more prosperous lives in America. And virtually never addressed is why there was more opportunity and economic success in America.

Income Distribution


Profit

One of the great ironies in economic history is that it was the absence of the profit motive which Marx and the world Scocialist movement so vociferously vilified that doomed the Soviet Union to failure. Soviet economic planners diligently worked to asign factiries throughout the country with the raw materials they required. without the descipline of the profit mechanism, however, thet oversaw a system in which the raw materials that went into a product were often worth more than the finished product produced even without considering the added cost of labor. This basic fact is so astinishing that many question it. But it is absolutely the case. And the proof is the fact that the state-ownd industries throughout the Soviet Union and the Soviet Eastern European Empire quickly went bankrupt after the collapse of Communism. As a result od such massive inefficeny and misalocation of resources , the Soviet Union was unable to sucessflly compete with the West. And the lingering impact can be seen in modern Russia. The entire economy is based om exporting energy (oil and gas) and other raw materiial instead of manufacturing producrs, despite the fact that the country has an educated population with many scietists and engineers. It is also the reason that Socialists in Western Europe stopped advocating the nationalization of industry. Despite this basic history, we see profit and the profit motive consrantly villified in the West. Many corportatioins reporting large profits are criticized. Few Americans seem to understnd what profits are. Profit is variously defined, bit as reasonable definition is, "a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses an other costs." There is a general belief that profits are then paid out to oners. This is only partially true. There are two other major allocation for profits. First is income tax payments. Companis that do not earn a profit do not pay income taxes. This observers who criticize profits are in effect advicating for lower tax revnue. Second, profits are used to finance growth and job creation. Again those who complain about profits are advocating lower growth rates and job creation. We constantly notepoliticans complining about slow growth and high unemplyment, but at the same time criticizing high coirporate profits. The third major use of profits is rewarding investors.

Innovation

Capitalism has generated enormous innovation and resulted in fundamental improvement in our daily lives. The Industrial Revolution began in Britain (mid-18th century) with an impresive series of inventions and perhaps more importantly, profitable ways of using the inventioins. This was followed by stunning scientific and technical innovation in the 19th century. Economic output increased exponentially leading to rising income and living standards. As a result, for the first time in human history. average people in North America and many European countries began leading comfortable lives. Only with ibreased productivity can wages and benefits be increased. Thomas Hobbes famouly wrote tht life in a state of nsture was 'solitary, poor, nasty, brutish and short'. And tht continued to be the case forthe greatmass of the world's population yntil free market capitalism and the indiustrial Revolution began increasing economic ouput. Most of the world lived lives along the lines of modern Bangladesh. Earning something like the equivalebt if a dollar a day. The head of the U.S. Patent Office famously stated that the office may have to close because everything of importance hd been invented. Actually, the pace of innovention and innovation only quickened. And since World War II the pace of innovation has been starteling with atomic energy, television, satellites, transistors, circuitboards, computers, cell phones the internet, news drugs and medical procedures, and much more. In addition to technological innonvation, capitalism also created stylish clothing and aabnge of other appealing consumer products. All of this has come out of products created by capitalism through private companies. It is also interesting to think how in the 20th century that Communism controlled the Soviet Union, Eastern Europe, China, and other countries. Yet no scientific, technical, industrial, agticultural, or medical innovations of any importance came out of those countries. This despite enormous investsments in education and the development of an educated population, especially in the Soviet Union. Notably it is not just that few important innovations came out of the socialist world, but no inovations of any importance were produced. This is a starteling indictement of socialist econonomics.

Modern Assessments

An incredible amount of verbage has been written extoling and condeming the two economic poles of modern industrial economic organization. An incredible amount of hate-filled invective have been leveled against capitalism. This has generally come from those who would like to limit freedom, both religious and political groups. Both groups sought to control ideas and wealth. The Catholic church deemed usury, even interest a sin as does Islam. The mullas in a theocratic state like Iran seek to control the economy and privide the pillars of state security monopolies and economic advantages. European monarchies resisted capitalism, assigning monopolies and benefits to its supporters. The totalitarian movements of the 20th century, both Communism and Fascism, attacked capitalism because the freedom it was based on limited their ability to control the individual. The modern Islamists are similarly motivated. While a detailed assessment is complicated, there are some salient, indisputable facts. First, the closer a country aproaches capitalist, free market economics, the richer it is. And conversely, the closer a state socialist commad economics, the poorer it is. Second, modern industrialn states achieved affluence as capitalist states. Socialist economics have spread the wealth in already developed countries, but has never suceeded in creaditing an affluent modern economy. A factor here is the enormous opportunities for corruption in state runconcerns. The sucess of capitalism in creating the Asian Tigers and in reversing the disaterous socialist econmies of China and India is starteling. Three, while there is less concentration of wealth in socialist economies, mean incomes in socialist economies tend to be much lower than in capitalist countries. Four, the high incomes and restrictive labor legislation have not only created permanetly high levels of unemployment in European wellfare states and unsustainable entitlements that are now requiring drastic benefit cuts. Five, major scientific and medical innovations have largely come from capitalist countries or from companies in European welfare states that rely on markets in capitalist countries. Six, the Soviet Empire imploded because socialist command economics could not compete with capitalist marrket economies.

Continuing Socialist Influence

If our assessment of capitalism and socialism is correct, the inevitable question is why does socialism or socialist influenced economics persist. Here there are a number of reasons. First, in ciuntrues without deeplu rooted democratic traditions, dictators want to control the ecnomy. As Willie Sutton explained why he robbed babks, "That is where the money is." Would be dictators like Stalin, Mao, Castro, Chavez, and the like can not fully control a country if there is a vibrant private sector. Control of the economy is needed if the leader is to change society and reward the supporters whokeepn him in power. Second, in democratic nations, populist politicans promising to spread the wealth can since the time of Ceasar gain electoral support. Third, the moraly guided ethos of a perfect society in which everyones needs are met is intrincically much more apealing than the grey, amoral capitalist 'invisible hand' invisioned by Adam Smith, even though the capitalist invisible hand has proven to be more efficent at generating wealth. This can be observed in Latin America where many continued to be mesmerized by the romance of Communisrt revolution even though socialism has abjectly failed (Cuba, Nicaragua, and Venezuela), and capitalist free market reforms have proven enormously sucessful (Brazil and Chile). While pronounced in Latin America, this ethic is certainly not limited to Latin America. There is a general left-wing bias among educators throughout the Western world. Fourth, capitalist market economics results in inevitable swings in the business cycle. Workers who lose their jobs inevitably look to elected politicans to intervene in the economy even though intervention might slow the recovery. Here programs like Food Stamps and unemployment insurance can help cushion these swings, but government tinkering in the economy sush as heavy taxation, expebding funds on politically connected groups, or pushing home loans to low income people can cause huge economic dislocatiohs.

Sources

Marcus, Amy Dockser. "The hard science of monkey business," The Wall Street Journal (April 1, 2012), p. C11.

Smith, Adam. The Wealth of Nations (1776).






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Created: 1:33 AM 8/18/2009
Last updated: 5:50 AM 11/4/2014