An excerpt from Chapter 1 of Capitalism: A Treatise on Economics, Volume I.
Economics Versus Altruism
If economics merely contradicted people’s unscientific conclusions based on their personal observations, its path would be difficult enough. Its problems are enormously compounded, however, by the fact that its teachings also contradict some of the most deeply cherished moral and ethical doctrines, above all, the doctrine that the pursuit of self-interest by the individual is harmful to the interests of others and thus that it is the individual’s obligation to practice altruism and self-sacrifice.
Economics as a science studies the rational pursuit of material self-interest, to which it traces the existence of all vital economic institutions and thus of material civilization itself, and from which it derives an entire body of economic laws. It cannot help concluding that rational self-interest and the profit motive are profoundly benevolent forces, serving human life and well-being in every respect, and that they should be given perfect freedom in which to operate. Nevertheless, traditional morality regards self-interest as amoral at best, and, indeed, as positively immoral. It considers love of others and self-sacrifice for the sake of others to be man’s highest virtues, around which he should build his life.
Thus, the teachings of economics are widely perceived as a threat to morality. And, by the same token, the anticapitalistic slogans described earlier in this section are perceived as expressions of justified moral outrage. As a result, economics must make its way not merely against ignorance, but against ignorance supported by moral fervor and self-righteousness. Without the issue being named, economists are in a similar position to the old astronomers, whose knowledge that the earth revolved about the sun not only appeared to contradict what everyone could see for himself but also stood as a challenge to the entire theological view of the universe. Economics and capitalism are a comparable challenge to the morality of altruism.
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It is almost certain that economics and capitalism will be unable to gain sufficient cultural acceptance to ensure the influence of the one and the survival of the other until there is a radical change in people’s ideas concerning morality and ethics, and that this change will have to be effected in fields other than economics—notably, philosophy and psychology. But even so, economics itself has an enormous contribution to make in changing people’s ideas on these subjects, which every advocate of rational self-interest would be well advised to utilize.
A major reason for the condemnation of self-interest is, certainly, beliefs about its economic consequences. If people did not believe, for example, that one man’s gain is another’s loss, but, on the contrary, that in a capitalist society one man’s gain is actually other men’s gain, their fear and hatred of self-interest could probably not be maintained. Yet precisely this is what economics proves. It proves what is actually the simplest thing in the world. Namely, that if individuals rationally seek to do good for themselves, each of them can in fact achieve his good. It proves that in a division-of-labor, capitalist society, in the very nature of the process, in seeking his own good, the individual promotes the good of others, whose self-interested actions likewise promote the achievement of his good. Economics proves the existence of a harmony of the rational self-interests of all participants in the economic system—a harmony which permeates the institutions of private ownership of the means of production, economic inequality, and economic competition. At the same time, it shows that the fear of self-interest and the consequent prohibition of its pursuit is the one great cause of paralysis and stagnation—that if individuals are prohibited from doing good for themselves, their good simply cannot be achieved.
The teachings of economics encounter opposition not only from the supporters of altruism, but also from the practitioners of an irrational, short-sighted, self-defeating form of self-interest, as well. These are, above all, the businessmen and wage earners whose short-run interests would be harmed by the free competition of capitalism and are protected or positively promoted by policies of government intervention, and who do not scruple to seek government intervention. For example, the businessmen and wage earners who seek government subsidies, price supports, tariffs, licensing laws, exclusive government franchises, labor-union privileges, immigration quotas, and the like.
Such businessmen and wage earners form themselves into pressure groups and lobbies, and seek to profit at the expense of the rest of the public. They and their spokesmen unscrupulously exploit the economic ignorance of the majority of people by appealing to popular misconceptions and using them in support of destructive policies. Their action is self-defeating in that the success of each group in achieving the privileges it wants imposes losses on other groups that are greater than its gains; at the same time, its gains are canceled by the success of other groups in obtaining the special privileges they want. The net effect is losses for virtually everyone. For not only does each group plunder others and in turn is plundered by them, but, in the process, the overall total of what is produced is more and more diminished, as well.
For example, what farmers gain in subsidies they lose in tariffs, higher prices because of monopoly labor unions, higher taxes for welfare-type spending, and so on. Indeed, the gains of each type of farmer are even canceled in part by the gains of other types of farmers—for example, the gains of wheat farmers are lost in part in paying higher prices for other subsidized farm products, like cotton, tobacco, milk, and butter. In the same way, the benefit of the higher wages secured by a labor union is lost in the payment of higher prices for products produced by the members of all other unions, as well as in the payment of higher prices caused by subsidies, tariffs, and so on. The net effect works out to be that less of virtually everything is produced, because such policies both reduce the efficiency of production and prevent people from being employed. Virtually everyone is made worse off—those who become unemployed and those who continue to work. Because of the inefficiencies introduced, the latter must pay prices that are increased to a greater degree than their incomes, and they must also use part of their incomes to support the unemployed.
The pressure-group members may subjectively believe that they are pursuing their self-interests. The supporters of altruism and socialism may believe that the absurd process of mutual plunder carried on by such groups represents capitalism and the profit motive. But the fact is that self-interest is not achieved by pressure-group warfare. Nor is the activity of pressure groups a characteristic of capitalism. On the contrary, it is the product of the “mixed economy”—an economy which remains capitalistic in its basic structure, but in which the government stands ready to intervene by bestowing favors on some groups and imposing penalties on others.
(As used in this book, the term “mixed economy” is to be understood as what von Mises called a “hampered market economy.” As he explains, an economic system is either a market economy, in which case its operations are determined by the initiative of private individuals motivated to make profits and avoid losses, or a socialist economy, in which case its operations are determined by the government. These two alternatives cannot be combined into an economy that would somehow be a mixture of mutually exclusive possibilities. Thus, the term “mixed economy” is to be understood in this book as denoting a hampered market economy.45)
In contrast, under genuine capitalism—laissez-faire capitalism—the government has no favors to give and no arbitrary penalties to impose. It thus has nothing to offer pressure groups and creates no basis for pressure groups being formed out of considerations of self-defense.
The absurdity of the pressure-group mentality manifests itself in the further fact that it provides powerful support for the fear and hatred of self-interest emanating from altruism, and thus leads to the suppression of the pursuit of self-interest. The practitioners of pressure-group warfare are in the contradictory position of wanting to serve their own particular interests and yet, with good reason, simultaneously having to fear and oppose the pursuit of self-interest by others, since under pressure-group warfare, one man’s gain actually is another’s loss. The result is that while people strive to achieve their self-interest in their capacity as members of pressure groups, yet, in their capacity as citizens, they strive to create social conditions in which the pursuit of self-interest of any kind becomes more and more impossible. Because, given their mentality, they cannot help but regard the pursuit of self-interest as antisocial and thus must oppose it for everyone else.
In these ways, the irrational pursuit of self-interest represented by pressure group warfare actually represents people actively and powerfully working against their self-interest.
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The practitioners of pressure group-warfare condemn economics because they do not understand it—indeed, may have made themselves incapable of understanding it. Their mental horizon is so narrow and confined that it does not extend beyond what promotes or impairs their immediate self-interest in their present investments and lines of work. They perceive the doctrines of economics entirely from that perspective. Thus, a shoe manufacturer of this type, who could not withstand foreign competition, hears economics’ doctrine of free trade from no other perspective than that, if implemented, it would put him out of the shoe business. And thus he concludes that he has a self-interest in opposing the doctrine of free trade. And, for similar reasons, virtually every other doctrine of economics is opposed by the pressure groups concerned. To use the analogy to astronomy once more, it is as though people mistakenly concluded not only that the sun circled the earth and that morality itself supported the proposition, but also that their personal well-being required them to oppose any alternative explanation.
The preceding discussion points to the most fundamental and serious difficulty economics encounters, which is a growing antipathy to reason and logic as such. Economics presupposes a willingness of the individual to open his mind to a view of the entire economic system extending over a long period of time, and to follow chains of deductive reasoning explaining the effects of things on all individuals and groups within the system, both in the long run and in the short run.46 This broadness of outlook that economics presupposes is, unfortunately, not often to be found in today’s society. Under the influence of irrationalist philosophy, people doubt their ability to achieve understanding of fundamental and broad significance. They are unwilling to pursue matters to first causes and to rely on logic to explain effects not immediately evident.
In large part, people’s reluctance to think has been the result of a two-centuries-long attack on the reliability of human reason by a series of philosophers from Immanuel Kant to Bertrand Russell—an attack which began soon after the birth of economic science. More than any other factor, this attack on the reliability of reason has been responsible for the perpetuation of the mentality of primitive man in the realm of economics.47
A leading consequence and manifestation of this attack has been the appearance of a series of irrationalist writers, who have come to the fore in field after field, and who have taken a positive delight in establishing the appearance of paradox and in seeming to overturn all that reason and logic had previously been thought to prove true beyond doubt. The most prominent figure of this type in economics is Keynes, who held that “Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.”48 In other fields, renowned authorities proclaim that parallel lines meet, that electrons can cross from one orbit of an atom to another without traversing the interval in between, that an empty canvas or smears made by monkeys is a work of art, and that the clatter of falling garbage pails or a moment of silence is a work of music. And lest we should forget our recurrent example of the motion of the earth around the sun, contemporary philosophers assert that one cannot even be certain that the sun will rise tomorrow—that such a thing has no necessity, and will just “probably” occur.
The ability of such views to gain prominence already reflects an advanced state of philosophical corruption. Once established, they give the realm of ideas the aura of a dishonest game, a game that serious people are unwilling to play or to concern themselves with. At the same time, they open the floodgates to the dishonest. In the realm of economics, the establishment of such views has enormously encouraged the pressure groups and advocates of socialism, who have been enabled to propound their opposition to the teachings of economics under the sanction of an allegedly higher, more advanced “non-Euclidean economics.” In addition, by depriving the intellect of credibility and substituting sophistry for science, their establishment has allowed demagogues to flourish as never before. The demagogues can count both on few serious opponents and on audiences not willing or able to understand such opponents. Thus, they have an open season in propounding all the absurd charges against capitalism that I described earlier.
Economics by itself certainly cannot reverse this epistemological current. Even more than in the case of ethics, that must come mainly from within philosophy. But economics, or any other special science, can certainly make an important contribution to that reversal by refuting the irrationalists within its own domain and by establishing the principle that within its domain intelligible natural law is, indeed, operative. In refuting the theories of Keynes and similar authors, it can show that in economics there is no basis for the advocacy of irrational theories and that reason prevails. This perhaps may help to set a pattern for the same kind of demonstration in other fields.
Economics, moreover, is uniquely qualified to demolish the apparent conflict between theory and practice which today’s intellectuals experience in connection with the undeniable failure of socialism and success of capitalism. The overwhelming majority of today’s intellectuals, it must be kept in mind, believe virtually every point of the indictment of capitalism described earlier in this section. Thus, from their perspective, socialism should have succeeded and capitalism have failed. They had to expect that Soviet Russia, with its alleged rational economic planning and concentration on the building up of heavy industry, should have achieved the kind of economic eminence that Japan has achieved under capitalism, and have done so long ago. At the same time, they had to expect that the United States and Western Europe should have fallen into greater and greater chaos and poverty.
Yet, despite everything they believe, and think they understand, socialism has failed, while capitalism has succeeded. Being unwilling to admit that they have been wrong in their beliefs—thoroughly, devastatingly wrong—they choose to interpret the failure of socialism and success of capitalism as proof of the impotence of the mind to grasp reality, and now turn en masse to supporting the ecology movement and its assault on science and technology.49 In this way, ironically, the failure of socialism and success of capitalism have played an important role in accelerating the growth of irrationalism.
In presenting a correct theory of capitalism and socialism—that is, in explaining why in reason capitalism must result in a rising productivity of labor and improving standards of living, while socialism must culminate in economic chaos and a totalitarian dictatorship—economics reunites theory and practice in this vital area. It thereby reaffirms the power of the human mind and removes the failure of socialism and success of capitalism as any kind of pretext for irrationalism.
Economics and Capitalism: Science and Value
This is not a book on philosophy. It is not its purpose to validate the philosophy of the Enlightenment with respect to the fundamental questions of metaphysics, epistemology, or ethics. It simply takes for granted the reliability of reason as a tool of knowledge and the consequent value of man and the human individual. It leaves to philosophers the job of convincing those who do not share these convictions. Its domain is merely the principles of economics and the demonstration that capitalism is the system required for prosperity, progress, and peace.
Nevertheless, one philosophical question that must be briefly addressed here is the assertion that science and value should be kept separate and distinct—an assertion that is often made by advocates of socialism and interventionism when they are confronted with the advocacy of capitalism. This book obviously flies in the face of that demand, for it consistently seeks to forge a union between the science of economics and the value of capitalism.
Despite the prevailing view, this procedure is perfectly sound. The notion that science and value should be divorced is utterly contradictory. It itself expresses a value judgment in its very utterance. And it is not only self-contradictory, but contradictory of the most cherished principles of science as well. Science itself is built on a foundation of values that all scientists are logically obliged to defend: values such as reason, observation, truth, honesty, integrity, and the freedom of inquiry. In the absence of such values, there could be no science. The leading historical illustration of the truth of these propositions is the case of Galileo and the moral outrage which all lovers of science and truth must feel against those who sought to silence him.
It is nonsense to argue that science should be divorced from values. No one who makes this demand has ever been able consistently to practice it. What it is proper to say is that science should be divorced from mere emotion—that it must always be solidly grounded in observation and deduction. Irrational emotion should not be confused with dedication to values, however.
The basis of the value of capitalism is ultimately the same as the basis of the value of science, namely, human life and human reason. Capitalism is the social system necessary to the well-being and survival of human beings and to their life as rational beings. It is also necessary to the pursuit of science—to the pursuit of truth without fear of the initiation of physical force. These are all demonstrable propositions. The advocacy of capitalism by economists, therefore, should be no more remarkable, and no more grounds for objection, than the advocacy of health by medical doctors.50
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).
45. See von Mises, Human Action, pp. 258-259. Also, see below, pp. 263-264.
46. Cf. Henry Hazlitt, Economics in One Lesson, pp. 15-19.
47. Among the most important and comprehensive writings on the subject of irrationalism and its destructive influence are those of Ayn Rand, virtually all of whose works shed profound light on it. See, for example, Atlas Shrugged (New York: Random House, 1957) and the title essay in For the New Intellectual (New York: Random House, 1961). See also the book of her leading intellectual disciple Leonard Peikoff, The Ominous Parallels: The End of Freedom in America (New York: Stein and Day, 1982). The works of von Mises also stress the destructive influence of irrationalism in all matters pertaining to economics and capitalism and are extremely valuable in this regard. See in particular, Human Action and Socialism.
48. J. M. Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), p. 129.
49. See below, pp. 99-106.
50. For a philosophic demonstration of the wider union of fact and value, see the excellent essay “Fact and Value” by Leonard Peikoff in The Intellectual Activist 5, no. 1 (May 18,1989).