Whether it’s Michael Moore or the New York Times, Hollywood or academia, a growing segment in America is waging a war on capitalism. We hear that greedy plutocrats exploit the American public; that capitalism harms consumers, the working class, and the environment; that the government needs to rein in capitalism; and on and on. Anticapitalist critiques have only grown more fevered in the wake of corporate scandals like Enron and WorldCom. Indeed, the 2004 presidential campaign has brought frequent calls to re-regulate the American economy.
But the anticapitalist arguments are pure bunk, as Thomas J. DiLorenzo reveals in How Capitalism Saved America. DiLorenzo, a professor of economics, shows how capitalism has made America the most prosperous nation on earth—and how the sort of government regulation that politicians and pundits endorse has hindered economic growth, caused higher unemployment, raised prices, and created many other problems. He propels the reader along with a fresh and compelling look at critical events in American history—covering everything from the Pilgrims to Bill Gates.
And just as he did in his last book, The Real Lincoln, DiLorenzo explodes numerous myths that have become conventional wisdom. How Capitalism Saved America reveals:
· How the introduction of a capitalist system saved the Pilgrims from starvation
· How the American Revolution was in large part a revolt against Britain’s stifling economic controls
· How the so-called robber barons actually improved the lives of millions of Americans by providing newer and better products at lower prices
· How the New Deal made the Great Depression worse
· How deregulation got this country out of the energy crisis of the 1970s—and was not the cause of recent blackouts in California and the Northeast
· And much more
How Capitalism Saved America is popular history at its explosive best.
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THOMAS J. DILORENZO is a professor of economics in the Sellinger School of Business and Management at Loyola College in Maryland and a member of the senior faculty of the Mises Institute in Auburn, Alabama. He is the author or coauthor of twelve books, the most recent of which is The Real Lincoln. His writings frequently appear in academic journals as well as such national publications as the Wall Street Journal, Barron’s, Reader’s Digest, USA Today, and the Washington Post. DiLorenzo lives in Clarksville, Maryland.Excerpt. © Reprinted by permission. All rights reserved.:
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 co- operation 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.”
We all observe corporate executives, bankers, and businesspeople in general managing the day-to-day affairs of business, from the smallest dry cleaner to the largest multinational corporation. This has led many to believe that they—the public—have no say in their economy, which is largely in the hands of these “plutocrats.” But this is a myth, for as Mises pointed out:
Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt. . . . Other men who did better in satisfying the demand of the consumers replace him. . . . The consumers . . . make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what qualities. They are merciless egoistic bosses, full of whims and fancies, changeable and unpredict- able. . . . They do not care a whit for past merit and vested inter- ests. . . . In their capacities as buyers and consumers they are hard hearted and callous, without consideration for other people.
Every business depends on repeat sales, and for this reason the consumer really is the captain of the economic ship, as Mises called it. True, some businesses treat consumers poorly, but such behavior is always harshly penalized (by consumers) with lower profits or bankruptcy. Meanwhile, the opposite kind of behavior is rewarded. This goes not only for businesses that deal directly with consumers but for all of their suppliers and workers as well. The demand for labor on the part of businesses, for example, is said to be a “derived demand” in that it is derived from the consumer demand for the product. Thus, if consumers prefer more Bibles and less booze, fewer workers will be manufacturing booze and more will be publishing Bibles. This is why it is ultimately the consumers who pay everyone’s wages in a capitalist economy. People who acquire skills producing goods and services for which there is stronger consumer demand will, all other things being equal, be paid more than those who work in industries in which consumer demand is weaker.
In this sense consumers are “voting” with their dollars. Consumer sovereignty under capitalism is truly a form of economic democracy. But it is much more efficient than political democracy. In political democracies the majority rules and the minority can be largely ignored. In an “eco...
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