Capitalism: The Nature and Importance of Economics

by | May 13, 2020

Economics belongs alongside mathematics, natural science, history, philosophy, and the humanities as an integral part of a liberal education.

An excerpt from Chapter 1 of Capitalism: A Treatise on Economics, Volume I.

Solving Politico-Economic Problems

Apart from the very survival of a division-of-labor society, and all that depends on it, the most important application of economics is to provide the knowledge necessary for the adoption of government policies conducive to the smooth and efficient functioning of such a society.5 On the basis of the knowledge it provides, economics offers logically demonstrable solutions for politico-economic problems. For example, it explains very clearly how to stop such major present-day problems as inflation, shortages, depressions, and mass unemployment, and how to turn capital decumulation into capital accumulation and a declining productivity of labor into a rising productivity of labor. In addition, economics can very clearly show how to achieve economic progress all across the world, and is potentially capable of playing an enormous role in eliminating the intellectual and economic causes both of domestic strife and of international conflict and war. As I will show, the essential nature of the policies economics demonstrates to be necessary to solve all such problems is respect for property rights and economic freedom.

Understanding History

Because it explains what promotes and what impairs the functioning of the division of labor, economics is an essential tool for understanding the world’s history—the broad sweep of its periods of progress and its periods of decline—and the journalistic events of any given time. Its applications include a grasp of the causes of the decline of ancient civilization and of the rise of the modern, industrial world, both of which can be understood in terms of the rise or fall of the division of labor.

Economics brings to the understanding of history and journalism a foundation of scientific knowledge which can serve historians and journalists in much the same way as a knowledge of natural science and mathematics. Namely, it can give to historians and journalists a knowledge of what is and is not possible, and therefore a knowledge of what can and cannot qualify as an explanation of economic phenomena. For example, a knowledge of modern natural science precludes any historical or journalistic explanation of events based on Ptolemaic astronomy or the phlogiston theory of chemistry, not to mention beliefs in such notions as witchcraft, astrology, or any form of supernaturalism. In exactly the same way, it will be shown in this book that a knowledge of economics precludes any historical or journalistic explanation of events based on such doctrines as the Marxian theory of exploitation and class warfare, or on the belief that machinery causes unemployment or that depressions are caused by “overproduction.”6

Economics can also serve historians and journalists as a guide to what further facts to look for in the explanation of economic events. For example, whenever shortages exist, it tells them to look for government controls limiting the rise in prices; whenever unemployment exists, it tells them to look for government interference limiting the fall in money wage rates; and whenever a depression exists, it tells them to look for a preceding expansion of money and credit.7

Implications for Ethics and Personal Understanding

Economics has powerful implications for ethics. It demonstrates exhaustively that in a division-of-labor, capitalist society, one man’s gain is not another man’s loss, that, indeed, it is actually other men’s gain—especially in the case of the building of great fortunes. In sum, economics demonstrates that the rational self-interests of all men are harmonious. In so doing, economics raises a leading voice against the traditional ethics of altruism and self-sacrifice. It presents society—a division-of-labor, capitalist society—not as an entity over and above the individual, to which he must sacrifice his interests, but as an indispensable means within which the individual can fulfill the ultimate ends of his own personal life and happiness.8

A knowledge of economics is indispensable for anyone who seeks to understand his own place in the modern world and that of others. It is a powerful antidote to unfounded feelings of being the victim or perpetrator of “exploitation” and to all feelings of “alienation” based on the belief that the economic world is immoral, purposeless, or chaotic. Such unfounded feelings rest on an ignorance of economics.

The feelings pertaining to alleged exploitation rest on ignorance of the productive role of various economic functions, such as those of businessman and capitalist, retailing and wholesaling, and advertising and speculation, and on the underlying conviction that essentially only manual labor is productive and is, therefore, the only legitimate form of economic activity.9 Feelings pertaining to the alleged purposelessness of much of economic activity rest on ignorance of the role of wealth in human life beyond the immediate necessities of food, clothing, and shelter. This ignorance leads to the conviction that economic activity beyond the provision of these necessities serves no legitimate purpose.10 Feelings pertaining to the alleged chaos of economic activity rest on ignorance of the knowledge economics provides of the benevolent role of such institutions as the division of labor, private ownership of the means of production, exchange and money, economic competition, and the price system.

In opposition to feelings of alienation, economic science makes the economic world fully intelligible. It explains the foundations of the enormous economic progress which has taken place in the “Western” world over the last two centuries. (This includes the rapid economic progress that has been made in recent decades by several countries in the Far East, which have largely become “Westernized.”) And in providing demonstrable solutions for all of the world’s major economic problems, it points the way for intelligent action to make possible radical and progressive improvement in the material conditions of human beings everywhere. As a result, knowledge of the subject cannot help but support the conviction that the fundamental nature of the world is benevolent and thus that there is no rational basis for feelings of fundamental estrangement from the world.11

The above discussion, of course, is totally in opposition to the widely believed claims of Marx and Engels and their followers, such as Erich Fromm, that the economic system of the modern world—capitalism—is the basis of alienation. Indeed, it is consistent with the above discussion that the actual basis of “alienation” resides within the psychological makeup of those who experience the problem. Ignorance of economics reinforces feelings of alienation and allows the alleged deficiencies of the economic system to serve as a convenient rationalization for the existence of the problem.12

Economics and Business

Despite popular beliefs, economics is not a science of quantitative predictions. It does not provide reliable information on such matters as what the price of a common stock or commodity will be in the future, or what the “gross national product” will be in the next year or quarter.13

However, a knowledge of economics does provide an important intellectual framework for making business and personal financial decisions. For example, a businessman who understands economics is in a far better position to appreciate what the demand for his firm’s products depends on than a businessman who does not. Similarly, an individual investor who understands economics is in a vastly better position to protect himself from the consequences of such things as inflation or deflation than one who does not.

But the most important application of economics to business and investment is that only a widespread knowledge of economics can assure the continued existence of the very activities of business and investment. These activities are prohibited under socialism. In a socialist society, such as that of the former Soviet Union, which is governed by the belief that profits and interest are incomes derived from “exploitation,” individuals who attempt to engage in business or investment activity have been sent to concentration camps or executed. Business activities can endure and flourish only in a society which understands economics and which is therefore capable of appreciating their value. The value of economics to businessmen should be thought of not as teaching them how to make money (which is a talent that they possess to an incalculably greater degree than economists), but as explaining why it is to the self-interest of everyone that businessmen should be free to make money. This is something which businessmen do not know, which is vital to them (and to everyone else), and which economics is uniquely qualified to explain.

Economics and the Defense of Individual Rights

Knowledge of economics is indispensable to the defense of individual rights. The philosophy of individual rights, as set forth in the writings of John Locke and the Declaration of Independence and Constitution of the United States, has been thoroughly undermined as the result of the influence of wrong economic theories, above all, the theories of Karl Marx and the other socialists. The essential conclusion of such theories is that in the economic sphere the exercise of individual rights as understood by Locke and the Founding Fathers of the United States serves merely to enable the capitalists to exploit the workers and consumers, or is otherwise comparably destructive to the interests of the great majority of people. Precisely as a result of the influence of these vicious ideas, culminating in the victory of the New Deal, the Supreme Court of the United States has, since 1937, simply abandoned the defense of economic freedom. Since that time it has allowed Congress and the state legislatures, and even unelected regulatory agencies, to do practically anything they wish in this area, the Constitution and Bill of Rights and all prior American legal precedent notwithstanding.14

A thorough knowledge of economics is essential to understanding why the exercise of individual rights in the economic sphere not only is not harmful to the interests of others, but is in the foremost interest of everyone. It is essential if the American people are ever to reclaim the safeguards to economic freedom provided by their Constitution, or if people anywhere are to be able to establish and maintain systems of government based on meaningful respect for individual rights. Indeed, in demonstrating the harmony of the rational self-interests of all men under freedom, this entire book has no greater or more urgent purpose than that of helping to uphold the philosophy of individual rights.

* * *

The nature and importance of economics imply that study of the subject should be an important part of the general education of every intelligent person. Economics belongs alongside mathematics, natural science, history, philosophy, and the humanities as an integral part of a liberal education. It deserves an especially prominent place in the education of lawyers, businessmen, journalists, historians, the writers of literary works, and university, college, and secondary-school teachers of the humanities and social sciences. These are the groups that play the dominant role in forming people’s attitudes concerning legislation and social institutions and whose work can most profit from an understanding of economics.

Excerpted from Chapter 1 of Capitalism: A Treatise on Economics, Volume I. Copyright 2020 George Reisman. All rights reserved.

The encyclopedic Capitalism: A Treatise on Economics is a required reference for every Capitalist’s library. Reisman’s treatise is now available in two volumes: Volume I (focuses on microeconomic issues) and Volume II (focuses on macroeconomic issues).


5. Because of its primary application to government policy, it is understandable why the subject was originally known as political economy, which was its name from the time of Adam Smith to the last quarter of the nineteenth century, when the change to “economics” took place.
6. See below, pp. 473-498, 544-548, 559-580, and pp. 603-668.
7. I am indebted to von Mises for this view of what economics has to offer historians and journalists. Cf. Ludwig von Mises, Epistemological Problems of Economics, trans. George Reisman (Princeton, N. J.: D. Van Nostrand, 1960), pp. 27-30, 99-102.
8. Cf. Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951), p. 402; reprint ed. (Indianapolis: Liberty Classics, 1981). Page references are to the Yale University Press edition; pagination from this edition is retained in the reprint edition.
9. On this subject, see below, pp. 462-498.
10. For elaboration, see below, pp. 42-49 and 542-559. 11. See the writings of Ayn Rand for a consistent elaboration of the “benevolent universe premise” across the entire range of human activity.
12. For a discussion of the ideas of Marx and Engels on “alienation,” see below, pp. 129-130.
13. See above, the discussion of mathematical economics on pp. 8-9. See also below, pp. 58-61.
14. See Bernard Siegan, Economic Liberties and the Constitution (Chicago: University of Chicago Press, 1980).

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. See his author's page for additional titles by him. Visit his website and his blog Watch his YouTube videos and follow @GGReisman on Twitter.

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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