Last month I briefly explained how capitalism is self-regulating, creates wealth, and protects individual freedom. This month we get down to particulars. If capitalism is so good, why are we taught since childhood that capitalism promotes greed and inequality, and is prone to periodic recessions and depressions? And what of the recent charge that “globalism,” a product of capitalism, threatens to suck jobs from the U.S. and ruin cultures all around the world?
Capitalism and Greed
“The impulse to acquisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with capitalism,” wrote Max Weber in 1904. “This impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, dishonest officials, soldiers, nobles, crusaders, gamblers, and beggars. One may say that it has been common to all sorts and conditions of men at all times and in all countries of the earth, wherever the objective possibility of it is or has been given.”
What distinguishes capitalism from all other methods of organizing production is that capitalist institutions act as a check on greed by elevating trade–voluntary exchanges that create new wealth, not just redistribute existing wealth–over the use of force, fraud, or privilege. Capitalism created a path to financial security and wealth that protects rather than violates human rights and is open to the vast majority of people without political or military power.
The unprecedented spread of affluence caused by capitalism created the right conditions for the emergence of a new type of social morality that found virtue in the consequences of human action rather than only in the purity or benevolence of the actors’ intentions. Michael Novak writes:
“These champions of civic humanism argued that for common people, it would be better if the aim of social systems ceased being power and plunder. It would be better if the leading social purpose became the pursuit of plenty and the creation of new wealth. In that case, one could hope to banish poverty from all the nations of the earth.”
The classical virtues of honor, chivalry, courage, and so on remain, but feeding the hungry, clothing the naked, and giving shelter to the homeless require that we first produce, trade, and accumulate wealth. This is why capitalism, the best system for creating wealth ever discovered, has profoundly moral consequences.
Capitalism and Inequality
Capitalism is profoundly egalitarian. Its existence relies on institutions that protect the equal rights of consumers and producers, eschews privilege and authority, and distributes wealth based on each participants’ contribution to satisfying the needs of others. So we should immediately be suspicious of claims that capitalism causes inequality.
Historical data on income inequality in the U.S. show that both the rich and the poor are getting richer. The proportion of the U.S. population that was poor, measured by household consumption, fell from 31 percent in 1949 to just 2 percent in the late 1990s. Census data released in September 2000 found the nation’s poverty rate had reached a 33-year low, and poverty among African-Americans and Hispanics was at the lowest levels since record-keeping began in the 1950s.
“Snap-shot” views of income distribution in a capitalist society overlook the movement of households from low- to middle- and high-income status, and sometimes back again. According to W. Michael Cox and Richard Alm in their 1999 book, Myths of Rich & Poor, only 5 percent of households in the bottom fifth of income earners in 1975 were still there in 1991. Almost 3 out of 10 had risen to the top fifth, and more than three-quarters had reached the two highest tiers of income earners for at least one year by 1991.
These numbers should be reassuring to those who like to “keep score” on the relative wealth of various categories of people, but it is possible to focus too much on such statistics. Incomes, after all, are outcomes of voluntary decisions and moral behavior. Income inequality generally means different choices are being made, often involving complex trade-offs between leisure, status, and work that outside observers cannot hope to judge as right or wrong.
The Great Depression
The popular notion that inaction by then-President Herbert Hoover caused the Great Depression “is drastically to misread the historical record,” wrote the late economist Murray Rothbard. Hoover in fact was an interventionist on a scale never before seen in U.S. national politics.
In A Monetary History of the United States, 1867-1960, Milton Friedman and Anna Jacobson Schwartz repeatedly fingered government policies as the culprit in the Great Depression:
- The Federal Reserve reduced the amount of credit outstanding, and therefore the stock of money, in 1931 and again in 1933;
- Congress passed and President Hoover approved a major tax increase in June 1932;
- Rumors that President-elect Roosevelt would devalue the dollar (which he later did) caused the final banking panic; and
- The national banking holiday declared by Roosevelt on March 6, 1933, undermined public confidence so greatly that 5,000 banks didn’t reopen after the holiday expired, and 2,000 closed permanently.
It seems clear that government, not capitalism, caused the Great Depression. So who do you trust to avoid the next depression?
Capitalism and Globalization
William Greider’s apocalyptic 1997 book, One World Ready or Not, is typical of a recent warnings that the growing integration of worldwide markets, called “globalism,” poses a threat to us all. With the vagueness and doublespeak that characterizes professional scaremongers, he predicts “the global system will, indeed, probably experience a series of terrible events [when?]–wrenching calamities that are economic or social or environmental in nature–before common sense can prevail.” [emphasis added]
Greider imagines the world will run out of natural resources and places to store its waste before it can raise the standard of living for most of its expected inhabitants. But the plain fact of the matter is that in every part of world except those torn by civil war or governed by socialist tyrants, production is outpacing population growth and consumer demand for food, clothing, and shelter. Human intervention and productivity, spurred by the division of labor and widening expanse of markets, are finding new ways and means to grow more and waste less.
According to Greider, “The industrial system must be reinvented to save the earth. The social values that are precious to most people must be freed from the confinements of economic imperatives and allowed to find fuller expression.” This is utopian nonsense. No one, regardless of his brilliance or political power, can “reinvent” the industrial system. One might as well call for “reinventing” the English language, or a rainforest. Adopting policies that violate property rights and restrict trade doesn’t free people, it reduces their choices and virtually guarantees that they will work harder and longer to feed and protect themselves and their children.
Still Learning
Capitalism doesn’t glorify greed, income inequality is less (and less meaningful) than widely thought, government (not capitalism) caused the Great Depression, and the fear of globalism is just the latest trip into fear-mongering by the same old players on the Left.
Near the end of The Rise and Fall of the Soviet Empire, Brian Crozier’s definitive history of a fallen world power, he writes: “Socialism is at the heart of the twentieth century’s totalist experiments, whether in Lenin’s Russia, Mussolini’s Italy, or Hitler’s Germany; in Mao Zedong’s China, Castro’s Cuba, or Kim Il Sung’s North Korea. Wherever it has been tried it has failed: in Britain as in Sweden as in India. The degrees of failure vary in proportion to the intensity of its application. So do the degrees of pain and death.”
Capitalism–disliked, defamed, and misunderstood as it is–looks pretty good compared to the alternative.
