Ayn Rand collected and published a number of her economic essays under the title, Capitalism: The Unknown Ideal. She was not the first to identify the anomaly. At the height of the Great Depression, Samuel Pettengill wrote: “When it is said that free enterprise has failed, my answer is that we have not permitted it to work.”
Unfortunately, the debate over capitalism has largely overlooked the vital point Pettengill and Rand raised. Thousands of words are written daily on the subject, but we have to wonder how many writers know what they are talking about? Myths and misconceptions have plagued historical research and continue to hinder conceptual clarity on the question.
The capitalism we debate doesn’t exist. There is Laissez-faire capitalism that respects productive labor, private property, and voluntary exchange. Then there is crony capitalism. By this arrangement corporate welfare benefits, privileges and immunities are awarded to well-connected lobbyists and special interest groups, invariably at public expense (if only for taxpayers). Cronyism comes in a variety of flavors. We speak of pork, bacon, earmarks, member items, constituent services, protective tariffs, farm, and business subsidies, bank bailouts, pay-to-play and too-big-to-fail. And then there are the profits private, “non-profit” agencies reap by providing the services to which social welfare recipients are lawfully “entitled.”
These two economic models should not be lumped into a single unit of analysis and called “capitalism.” Laissez-faire rejects the visible, invariably corrupt hand that crony politics plays. Unlike genuine capitalists, counterfeit capitalists seek to mitigate normal market risks by getting the government to provide a safe bet or sure thing. Hence is public power routinely put to private, pecuniary use (and thankful beneficiaries are happy to pay their benefactors a hefty price for the privilege).
Talk about myths and misconceptions, take the conventional reading of America’s past. It is widely reported that the 19th-century American economy was essentially unregulated. This economic “anarchy,” it is said, precipitated a long series of boom-and-bust business cycles. So populists and Progressives naturally and “compassionately” demanded remedial measures to combat the hardships capitalist “progress” repeatedly produced.
Is any of this true? First, the 19th-century economy was politically regulated every step of the way. Perhaps government didn’t impose restraints on business enterprise (e.g., minimum wage or environmental mandates) But at no point could the market freely go about its business. Free enterprise must be free not just of acts that impede economic growth. They must be free of public policies that positively promote economic growth, as well.
It turns out that the country’s long succession of financial panics and enduring depressions were precipitated not by free-market activities, but by crony capitalist policies?
Failed corporate welfare schemes, alone, created the “need,” and demand for social welfare reform from the Progressive Era to the New Deal and beyond?
Corporate welfare provisions helped some, harmed others, and severely distorted the pace and direction of business growth, especially with respect to patterns of capital investment. Once the government’s best-laid plans bumped into flesh-and-blood, economic players, all bets for a happy ending were off. Land and stock speculators saw their opening and took it. They blew up the bubbles of prosperity that, for a while, happily expanded, then tragically exploded, leaving behind years of hardship. In the history of the republic, this pattern forms an unbroken chain of events (down to 2008). What is worse, the bold political efforts to revive a moribund economy only prolonged the pain. Consider FDR’s New Deal. Never before had an administration done so much to restore prosperity and never before had poverty spread so far and persisted so long.
The origins of the corporate welfare state can be traced to the second bill signed into law by our first president, the Tariff Act of 1789. Indeed, a long succession of tariff acts benefited domestic manufactures but, by crippling transatlantic trade, materially harmed farmers, planters, shipbuilders, seaport merchants, and thousands employed in the maritime and carting trades. Every family paid more for the manufactured goods it purchased. And since ever-higher tariff duties cut into Britain’s sale of textiles in America, her industries didn’t need as much southern cotton. At a time when cotton was the country’s leading export, rising tariff duties devastated (1) those who labored in the soil and (2) the banks that issued their mortgages and loans. In combination with Alexander Hamilton’s other “implied powers” and pragmatic financial plans, the young republic ran right into the Panic of 1792.
How did we get from that day to this? Once the nation decided that some of its citizens had a right not to go out and get, but to lobby Congress and be given, it faced two daunting questions: who else should be given and exactly how much should everyone get? There was only one answer: politics. Out of the darkness of despair, men like John Dewey came along and promised a bold, experimental path to reconstruction and growth. The pragmatic politics of Progressivism would light the way. We are just beginning to see where Progressivism is leading us. What was the title? The Road to Serfdom?
The conclusion is clear. The boom-and-bust business cycle is a purely political, not an economic, phenomenon. It occupies no space in a free, unfettered market governed only by Adam Smith’s Invisible Hand. To this point, markets have not been free, but regulated for the benefit of a cacophony of special interests. Drain the swamp, then watch what wonders a laissez-faire economy can generate. Unbounded opportunity to pursue success in a multiplicity of human occupations and endeavors, outpourings of life-saving, labor-saving gadgets and inventions to bring affordable comforts and conveniences to the masses and lessen the burdens of daily life, this is what a laissez-faire future shorn of liberal, welfare socialism has to offer. It’s an ideal worth working for and attaining.
Ayn Rand, Capitalism: The Unknown Ideal (New York: The New American Library 1966)
Samuel Pettengill, Jefferson the Forgotten Man (New York: America’s Future, Inc. 1938)
For government’s role in precipitating the Housing and financial collapse of 2008, see Thomas Sowell, The Housing Boom and Bust (New York: Basic Books 2009) and especially John A. Allison, The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope (New York: McGraw Hill 2013).
Andrew H Browning, the Panic of 1819: The First Great Depression (Columbia, MI: University of Missouri Prress 2019), p. 8. The 1930 Smoot-Hawley Tariff (more than the prior year’s stock market crash) exerted the same effect on agriculture and the banking system. It led to what Milton Friedman and Anna Schwartz labeled “The Great Contraction.” On its contribution to the Great Depression, see Milton Friedman and Anna Schwartz, A Monetary History of the United States: 1867-1960 (Princeton NJ: Princeton University Press 1963) pp. 199-259.
The tale is told in Robert Sobel, Panic On Wall Street (New York: Collier Books 1968 pp. 8-31 ). See also Jerome Huyler Locke In America: The Moral Philosophy of the Founding Era (Lawrence, KS University of Kansas Press 1995, 2000 pp. 285-91)