What Capitalism Is and What Capitalism Is Not (Part 2 of 2)

by | Nov 8, 2017 | POLITICS

The free enterprise, or capitalist, system has done more to improve the material condition of humanity than any other economic arrangement of human cooperation in all of recorded history.

The free enterprise, or capitalist, system has done more to improve the material condition of humanity than any other economic arrangement of human cooperation in all of recorded history.

Part 1 | Part 2

Yet, “capitalism” constantly stands condemned and accused of being the cause of humanity’s wows, while in reality nothing is further from the truth.

In a mere two hundred years, the economic condition of mankind has been dramatically transformed. In 1820, the world population was barely one billion people and had only grown to 1.5 billion by 1900. In 2017, the global population has increased to over 7.4 billion people.  Has this huge increase in world population lead to abject material misery and human despair?  Not at all; instead, it has been very much the opposite. In 1900, global Gross Domestic Product stood at around one billion dollars, while today it stands at nearly $80 trillion.

In 1820, world per capita GDP is estimated to have been about $1,000; by 1900 it doubled to $2,000 per person on average. By 2017, per capita GDP is approaching $16,000, an eight-fold increase in little over a century and with a world population seven times larger than a little over a hundred years ago. Now, of course, this growth in material betterment based on the global per capita benchmark has not impacted on all people, everywhere, to the same degree or at the same time.

The Escape from Poverty Due to Capitalism

But this is due to the fact that not all of the countries of the world evolved or introduced at the same time many or most of the essential institutional ingredients necessary to foster such amazing economic improvement in the human condition. It began in parts of Europe and then North America in the eighteenth and nineteenth centuries, and from there it spread to other corners of the global in different ways and to different degrees. And some cases, capitalism has, even today, barely touched some parts of the world.

Yet, wherever the institutions of individual freedom, private property, freedom of contract and enterprise, rule of law and relatively limited or restrained government have been introduced or existed, there the human engine of creativity, entrepreneurship and productive investment and trade has opened the way to a potential horn-of-plenty to replace the poverty, disease, and cruelty of pre-capitalist political systems that were the reality of human association almost everywhere before a few centuries ago.

As economic historian Deirdre McCloskey has said, “The real sustenance of the poor has been economic growth, the Great Enrichment, which raised real incomes in the past two centuries by a factor of thirty. Look again at the figure: a factor of 30, or about 3,000 percent.”

This transformation of the human condition is slowly but surely enveloping the world, an improvement that carries within it the possibility for the end to human poverty in its most appalling forms before the close of the twenty-first century. Yet, “capitalism” is blamed for whatever the critic of any aspect of the human circumstance finds intolerable on this planet.

One of the burning issues of our times is the charge and challenge of income inequality among segments of the population, the fact that some are “rich” while others are “less well off” and some are “poor.” The fact is, the competitive free market capitalist system has done more to rid humanity from “unnatural” inequalities and permit all to benefit from the impact of the “natural” differences among human beings.

Before Capitalism “the Few” Plundered “the Many”

Throughout most of human history political power, economic privilege, and social status have been the result of physical prowess and strength for conquest, control and plunder. Spoliations of the productions of others and the enslavement of them were the methods for possession of the means for wealth and luxury in those earlier times. It was truly the case that “the few” were able to rule over “the many” and live off what they produced through the use or threat of physical force.

Superstitions and crude ideologies served as the complementary rationales for systems of enslavements and compulsory servitude. Kings and princes, pharaohs and priests used psychological and cultural tools to manipulate the minds of others to accept as pre-ordained and inescapable the rule of the power-lusting few.

These were really societies of a permanent and persistent “one percent” living and lionizing over the rest of the population. Of course, by our standards of living the politically privileged and powerful lived lives of unimaginable material poverty; yet, their lives were better than most of their slaves and subjects. I would suggest that very few of us would be willing to trade places, no matter humble our own current economic position may be, for the crude and rough and short lifespans of the monarchs and noblemen of just a few hundred years ago.

Such political and economic and social orders of things were grounded in “unnatural” inequalities based on political power and privilege. Most individuals were coercively kept in a status, caste or “class” position in society having nothing to do with their innate, acquired and self-motivated qualities and characteristics that might have enabled them to attain a better circumstance for themselves, if they had had the freedom within the right institutional arrangements to associatively better themselves in peaceful and voluntary interaction with others.

Liberal Capitalism Brought Freedom and Betterment

This all began to change with the emergence of political and economic liberalism in the eighteenth and nineteenth centuries. Governments were increasingly restricted and restrained in their discretionary prerogatives and power. There emerged the idea of “the rights of man,” under which those who held governmental positions were to be “servants” securing and protecting the individual rights of each human being to his life, liberty, and honestly acquired property.

A new ideal gained influence, that of an equality of all before the law and in the treatment of all those living under the jurisdiction of a particular government, whether it was a constitutionally limited monarchy, or a republic or democracy. This ideal, which was most reflected in the words of the American Declaration of Independence, implied that when each individual stands with equal individual rights, with political privileges and favors for none, each person is at liberty to try to find his own place in society, and rise to that unequal circumstance that his interests and inclinations and drives guide him, in free and voluntary association and trade with others who also all possess the same rights to their life, liberty and property.

A growing number of people were increasingly liberated from the regulations, controls and restrictions with which governments up until that time had hindered, hampered and prohibited freedom of commerce and exchange for the coerced benefit of those close to the monarch’s throne.

Each individual was now becoming freer to pursue his own interests and purposes, as he defined them, for his own personal betterment. However, the “rules of the game” of the liberal and capitalist society are such that each person could only improve his own circumstances by applying his own and unique talents, abilities and resources to serve the demands of others as the means of earning the income that would permit him to buy from those others what he desired for his own plans for a better life. As Adam Smith said, as if by an “invisible hand,” though each individual pursues his own interests, the institutional setting cumulatively results in the mutual and growing material and cultural betterment of all.

The Middle Class Emerges from “the Poor”

Over the decades of the nineteenth century and into the twentieth, there emerged something very limited in the preceding centuries in modern Europe: a “middle class.” That is, those whose economic circumstances improved through economic opportunity due to a growing and competitive market, along with the freedom to work, save and invest, within a culture of “self-improvement” and the appreciation for the spirit of enterprise.

From where did this emerging and growing middle class come? It came from the “lower classes,” from those who in earlier ages were the servants and slaves of kings and princes at or near the bottom of economic existence. With secure property rights, relatively low taxes, and reduced or minimal government regulation of commerce and industry, those with an entrepreneurial spirit could take their chance by opening and running enterprises. The nineteenth century was a great period for innovation, industrial experimentation, and mass production.

Free enterprise enabled savings to be placed to work in industry. Capital investments in new, different and better forms of machinery needed more human hands to work with them to produce the growing number and types of products flooding on to the market. The demand for labor grew; workers were drawn to the city areas where the new industries were taking root and away from the age-old forms and styles of work in the countryside. Wages slowly but surely rose in the industrial centers, enabling a man or a woman to earn income never imagined in the rural areas under the aristocratic and arrogant eyes of the landed nobility that “lorded” over them.

As incomes rose for a growing number of people moving to the urban areas the need for and benefits from skills and education created motives for these new industrial workers to desire to improve their talents and abilities; private institutions of learning arose offering to teach both basic literacy and “mechanical” training in the form of what today we call vocational schools. Economic historian E. G. West, in his book, Education and the State (1965) estimated that between 1790 and 1830 about two-thirds to three-quarters of the entire British population was made fully literate through profit and non-profit private institutions of learning.

This, in turn, generated the market demand for what in Great Britain became known as the “penny press,” inexpensive newspapers to quench the thirst by a growing portion of the population for everyday knowledge and information about events around the world as well as the scientific and technological advances that were popping up in rapid succession like mushrooms under a gentle rain.

Gains from Investments in Physical and Human Capital

The demand for workers in the industrial and manufacturing enterprises in the nineteenth century raised wages up from their stagnant rural levels. The profits that these enterprises earned by devising ways of supplying goods that this expanding work force desired in their role as consumers served to create the financial means to increase investment in new and better machinery.

The greater productivity of these investments in machines, tools and equipment (the physical “capital” of the market) reinforced the pulling up of wages as the productivity of those employed increased per man hour – what the economist called the “marginal product of labor,” that is, the increment of additional output attributable to the employment of one more worker within the enterprising establishment.

Thus, capital formation that was raising labor productivity as well as worker investment in “human capital” (the employee’s knowledge, skills and abilities) combined to lift more people out of poverty as the worker’s productive worth in the market increased. A growing number of industrial workers were, indeed, competing for jobs with an increasing population; but capital formation in new and better machine, tools and equipment brought about an increase in labor productivity at a relatively faster rate than the growth in the working age labor force. The net effect: rising wages and a reduced “gap” between the meaningful standards of living between “the rich” and the expanding “middle class” drawn from “the poor.”

Rather than poverty versus plenty separating “the many” from “the few,” over the last two hundred years the distinction has increasingly been reduced to degrees of wealth, comfort, amenities, and luxuries among people in society. This has been the cumulative outcome of the competitive process within the market economy. The horn-of-plenty produced by private enterprise has placed a vast and growing variety and quality of goods and services available to all – a great equalization in the quality and standard of living.

The Past’s Material Inequality vs. Growing Equal Availability for All

Three or four hundred years ago, the housing accommodates separating the nobility from the “commoner” was a castle with servants and retainers versus a thatched hut hovel that the unfortunate occupants usually shared with the farm livestock. Queen Elizabeth I in the 1500s had a luxurious wardrobe of a small handful of dresses, while the multitude mostly wore rags handed down from the dead to the living that too frequently carried vermin that could spread plagues. The diet of the landed lords of the manors were limited to whatever was grown or raised on their estates, while “tenants” tied to the land ate a much smaller amount of monotonous meals often verging on starvation depending upon the luck of the seasons. And both nobleman and commoner rarely traveled during their lives much beyond the confines of the narrow regions in which they had been born.

Today, for the vast majority in the more market-based economies, the differences between the wealthy, the middle class and “the poor” are often reduced to how many rooms in a house or apartment, with usually more than one television around the home; household kitchen and other appliances all have the same basic quality and features; most households possess one or more cars to transport family members wherever they desire to go.  Travelling around the country or across the world is, now, the common practice, with over 3.6 billion people – a number equal to almost half of the world’s population – moving about the globe by commercial airliners in 2016. Also, a huge majority of the world’s people – rich or poor or those somewhere in the middle – equally have access and enjoy the uses and benefits of the Internet and the cell phone (except when oppressive governments attempt to interfere).

The varieties and qualities of food purchasable at a relatively small range of price variance are virtually the same for everyone anywhere in widely market-based societies. “The rich” may be seen at supermarket discount stores, and the middle class and “the poor” can be seen leaving the checkout counters with carts full of items at the higher-end food stores. All have the same items at fairly reasonable and reachable prices from suppliers encompassing the world, so seasonal availability of various perishable goods is almost a thing of the past.

Market Competition as the Great Positive Social Leveler

The British economist, William H. Hutt (1899-1988), pointed out in, Economists and the Public (1936), “As a matter of fact, to the economist studying society, competition appears, prima facie, to be the great leveling force. One would have thought that the onus would have been on its opponents to show that this was not so.”

Over a handful of generations, competitive capitalism has raised up into material and financial comfort and ease vast numbers of those who otherwise would have remained in the depths of the poverty that had prevailed for thousands of years. This has come about both through rising incomes and from the lowering of the real costs and prices of multitudes of goods and services brought to the doorstep of almost everyone in the West and increasingly more and more billions of people around the rest of the world.

This has been made possible to the extent that societies have been fairly free, so secure individual rights under equality before the law has allowed the “natural” inequalities among people to more fully emerge. Given these differences – heredity and circumstances of birth, inclinations and motivations for self-improvement – every individual implicitly tries to do the best they can in the context of each one searching out their comparative advantage in the social system of division of labor.

The competitive market process places the talents, abilities and the drive of each person at the service of everyone else. Those who abilities, skills or inclinations result in a more modest place in the market pattern of human specialization in terms of money income earned, benefit from all the successes of their financial “betters’” in the marketplace, since the latter’s own financial rewards are dependent upon the extent to which they have participated in the satisfying of all wants and desires of the others in society.

Private Charity and Assistance to Those Less Well Off

But must an individual’s potential go to waste or be less fulfilled because of the accidents of birth? If only that individual had been born into a different family and social setting, he or she might have been able to achieve so much more, both as a contributor and recipient of all a free market economy has to offer.

The ethics of a free society and a capitalist economic system is based on recognition and protection of individual rights to life, liberty and honestly acquired property within a social order of voluntary association and mutual agreement in all exchanges and contracts entered into. Compulsion and force in human relationships are reduced to the minimum consistent with a peaceful society of free men.

This means that the “helping hand” to assist those who may possibly benefit from the benevolent charity and philanthropy of others, must and should also be based on free choice and voluntary giving and support. Not only is this essential to and consistent with the principles of a free society, but it also puts to work that same advantages of competition for the “raising up” of the less well-off.

Private, decentralized judgment and decision-making on matters of charity opens the door to many different approaches and methods to be tried and experimented with to find and achieve the most preferred and desired results in helping others. Many private minds are set to work to solve these “social problems,” rather than delegating it to a handful of minds in government appointed positions in the bureaucracy for taxed-based redistributions that crowd out the private-sector alternatives.

Furthermore, in the voluntary arena, those organizing charitable and philanthropic endeavors to assist those less well off are dependent upon the voluntary giving of existing and potential benefactors. This means that the charitable organizers and administrators must demonstrate their successes with the voluntary dollars contributed to them, if the donations are to continue to be forthcoming in the months and years ahead.

In government bureaucracies, responsibility for failure or missed targets are often difficult to pinpoint, and in spite of which the tax-based revenues continue to flow in to maintain a failed redistributive status quo. Under private sector charity and philanthropy, failure is easier to identify and by whom, and the donors are able to demonstrate their disappoint by withdrawing their support and transferring their voluntary dollars into alternative directions that appear to offer better ways of raising up those considered to be too far behind within the on-going general betterment of the society.

Among the benefits and rewards from the emergence and growth of the capitalist economic system has been the great escape from poverty for a dramatically growing global population. Equal individual rights for all enables each to use and apply their unequal skills, abilities, talents and inclinations to better themselves, but with the resulting mutual material and cultural improvement of a growing number of all of humanity. The material differences among more and more people, everywhere, becomes less between the stark contrast of wealth versus poverty, and more and more merely degrees of comfort, easy, convenience, and opportunity for all that modern and modernizing market society has to offer.

The reality of the world that market economies have successfully produced for the betterment of mankind stands as a rebuttal of all those who condemn the capitalist system based on a delusionary misconception of what a market-based society is really all about.

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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