by Caleb Nelson
There is nothing a government can do to help an economy grow (other than protecting rights). Every action government takes is an interference and a brake on the engine of prosperity. Government creates nothing; it can only establish a safe climate for business and trade. But even its necessary functions are a drain on the economy as the money which goes to support it is diverted from production. Of course, this is a proper and necessary expenditure considering military, police, and courts provide the foundation of law and order which allow prosperity to flourish in the first place. But beyond these things, all a government can do to help an economy is leave it alone. An economy is a self-regulating mechanism like a heart. We don’t have to worry about micromanaging ventricular contractions, the timing of valves, and the rate of blood flow. All we have to do is make sure we set up the right conditions of diet, exercise, and sleep, and the heart takes care of itself.
Because freedom is moral, natural, and in conformity with reality, it is therefore also practical. That means without market regulation, things would work. They would go much more smoothly than we are used to. Ups and downs in the stock market would be less drastic and of much shorter duration. Investor confidence wouldn’t be pegged to something so arbitrary and ridiculous as the Federal Reserve’s interest rate, or the next Presidential press conference.
There would be no bailouts and safety nets, no allowance made for poor performance. Everyone and every company would stand or fall on their own merits and abilities and be judged by the marketplace. There would be no insulation from the most prestigious of universities: the School of Hard-Knocks. People would be empowered by the knowledge that they live in a world of consequences, and can choose the consequences they want by their actions. People would be taught that success requires relying on themselves, that they must take action and claim full responsibility for their lives and choices. These requirements of survival are the most effective check against immoral action.
Yet for those to whom the requirements of survival are insufficient motivation, a free market would still have objective laws to punish those who cheat and defraud. Legal punishments would act as deterrents to crime just as they do now. We’ve already seen that laws have no power to prevent crime; they may only punish it, just as natural causality does.
Through more than two hundred years of government intervention in the market, we have seen that the state is helpless to avoid disasters and prevent calamity. Problems caused by regulations cannot be fixed with more regulations. When a doctor confuses poison for the cure, the result is death. It would be better to let natural laws and incentives drive the marketplace, while we become informed and cautious consumers and only give our trust to the trustworthy. When we occasionally fail in our vigilance, we will still have done much better than the government regulators. To prevent fraud and deception, let the laws be strong enough to discourage even the vilest opportunist from considering a breach of trust.
How would things continue to work without market regulation? Suppose an inventor comes along and creates an industry. It won’t be long before competitors arise and begin producing the same sorts of products in the same price range, with only minor variances for quality and the like (the smart phone, for example). Because the products are more or less made in the same way, and with the same materials, the cost of production of these products will remain fairly static across the board.
One way for this equilibrium to change is innovation. When a company innovates, it has an edge in the market. Because it has found a way to cut costs, it can undercut the competition and charge less for the same thing while maintaining a workable profit margin. If competitors fail to follow the industry leader and cut their costs with the same or other innovations, they will most likely go out of business. Because it is in their self-interest to remain in business, most companies will adopt the innovations. This permanently lowers the price of the good or service for the consumer and frees up capital to be put toward other more productive ends. Innovation may also lead to a better product with different features which would attract interested consumers to prefer it over the competition’s version.
At this point we still have multiple competitors in the market. How can a coercive monopoly arise out of this situation? How could one company capture the full market share? They couldn’t. Nothing about America is one-size-fits-all. The company could offer higher quality or better service, but not everyone wants that. There will always be those who prefer low price over high quality or good service over low price.
Let’s turn to some real world examples of these principles in action. The objective here is to give a detailed historical example to show all the ways capitalism works in an economy, and to show how true principles actually work. Having a concrete example of principles in action dispels the doubt that principles don’t work or aren’t practical.
“MONOPOLIES” IN HISTORY
In 1798, the state of New York had granted a thirty year steamboat monopoly to Robert Fulton and Robert Livingston.[296] That meant that it was illegal in the Land of the Free to start your own steamboat company to compete with Fulton! The predictable inevitability occurred—with no competition, the prices were artificially high. Prices were set by the whim of the company that had coercive monopoly power backed by the government.
Working for Thomas Gibbons based in New Jersey, Cornelius Vanderbilt began to run steam ships in defiance of the monopoly and offered lower prices. Eventually, the Supreme Court struck down the monopoly in 1824 in Gibbons vs. Ogden. Within two years of that ruling, steamboat traffic quadrupled on the Ohio River. By creating a monopoly in the “public interest” the government was guilty of restraint of trade. They limited the number of options for the consumers and in this way forced every steamboat consumer to pay higher prices than if government had not meddled in the first place.
With the salt now removed from the economic soil, the market was free to flourish. With new companies competing, innovation soon followed as it inevitably does. Competition and technological advancements allowed the operation costs to drop, and therefore the prices as well. As soon as the monopoly was struck down, prices dropped from $7 to $3.
[297] Fulton couldn’t compete and soon went out of business.
In the 1830’s Vanderbilt began competing against the Hudson River Steamboat Association (HRSBA), the largest steamboat company in the country, which had informally tried to fix prices. On the New York to Albany line, Vanderbilt cut prices from $3, to $1, to 10¢, and finally to nothing!
[298] How did he manage that? By selling food on the boats and making a profit on that. Remarking on this incredible situation, a newspaper of the day said, “Times must be hard indeed when a traveler who wishes to save money cannot afford to walk.”
Vanderbilt so vexed his competitors, that the infuriated steamboat association finally bought him out for $100,000, and an annuity of $5,000 a year for ten years. Vanderbilt brought the HRSBA to its knees with only two boats to their ten. Despite being up against the largest company, David was able to take down Goliath. With this deadly precedent set, a slew of competitors followed, many of which also got buyouts from the HRSBA. Vanderbilt took his money and moved on.
[299]
Cornelius Vanderbilt
[xx]
This was no isolated event. Vanderbilt went on to compete in the trans-Atlantic steam boat industry. A man named Samuel Cunard managed to get a massive subsidy from the British government to run passenger ships and deliver mail. Not to be outdone, Edward Collins went to the American Congress and also got a subsidy to compete against Cunard.
Because Collins had not earned the money he got from the government, he spent it haphazardly. Without having to face the demands of reality—to be profitable or go bankrupt—Collins had no reason to be wise or efficient with his free money. He built four huge, opulent ships filled with the finest trappings. These lumbering ships used double the amount of coal that his British competitors did. When Vanderbilt went to congress offering to do what Coll
ins did for much less and was rebuffed, he decided to take down Collins without any help.
As always, Vanderbilt was innovative and creative in the ways he competed. Vanderbilt’s ships needed far less upkeep than Collins’ leaky clunkers, and they were captained by competent men whose expertise allowed Vanderbilt to do without the cost of insurance. He also sold second and third class tickets to draw a larger volume of passengers. Despite all this, after one year of fierce competition, Vanderbilt was barely making it. Once again, his interest in new technology helped give him an edge. He built the largest steamship to ever sail the Atlantic which he equipped with the newly invented Vertical Walking Beam engine. This engine was not only more efficient than the conventional Crosshead design, using less wood and cutting fuel costs, but it was also smaller which would allow for more passenger space.
Half of Collins’ unseaworthy fleet sank, and his huge new vessel to replace them was built so poorly that it could only make two trips before it was mothballed and sold at a nearly $1 million loss. Finally Congress admitted their debacle and cut off funding to Collins.
This is an instance of one of the unintended consequences of government interference: the stagnation of technological advancement. With no competition as incentive to innovate, older and inefficient technologies lasted much longer than they naturally would have. Dr. Burton W. Folsom, Jr. observed that “Cunard and Collins both used their monopolies to stifle innovation and delay technological changes in steamship construction. Several English steamship companies experimented with iron hulls and screw propellers in the 1840’s, but Cunard thwarted this whenever he could.”
[300]
Vanderbilt’s exploits in the world of steamboats is just one of many examples in history of how true principles will always work when applied properly, and how breaking them inevitably brings problems. To summarize the principles covered in this historical example:
Governments are the only entity with the power to create a coercive monopoly;
Innovation and technology reduce costs and provide greater prosperity;
Because government monopolies suspend the demands of reality, the need to be efficient is removed, waste abounds, innovation is stifled, costs remain high, and labor is squandered.
The question statists avoid is, if they claim to be against man’s “dependence” on a large, centralized economic entity in the form of a “free market” monopoly, why do they then say that the solution is that everyone be forced to deal with a large, centralized economic entity in the form of the government, knowing that this form includes the added monopoly on the use of force to enact its interests? A supposed free market monopoly could never, by definition, FORCE anyone to do business with it—the government can and does.
THE “ROBBER BARONS”
“Well, I obviously have made a decision to make sure the economy doesn’t collapse. I’ve abandoned free market principles to save the free market system.”
[301] – George W. Bush
Another way capitalism has been eroded is by the absurd belief that the government must restrict free trade in order to preserve free trade. How can something that is restricted, mandated, or controlled be considered free? That’s like your doctor saying, “We’re going to abandon the principles of healthy living to save your health;” then he injects a Twinkie straight into your brain.
Opponents of capitalism typically make the assumption that complete laissez-faire capitalism used to exist in America and then point to so-called “robber barons” which exercised unjust dominion over the working class. Their main contention is that, before the benevolent government regulated the industries and put checks against the corporate greed, America was a nightmare of tyrannical businesses oppressing the lower classes. They contend that without regulation, these “robber baron” types would establish coercive monopolies which would bar new entrants to the market, gouge consumers, enslave workers, and hurt everyone. This view is victim to three main fallacies, with a host of other implicit ones about how capitalism works.
First, America has never known a truly free market.
Second, none of the prominent titans of the industrial revolution fit the description of “robber baron.” Those who claim these tyrants existed rarely bother to name their specific crimes. We are merely meant to feel that somehow they were bad and the world is better off without them.
Third, coercive monopolies cannot exist in a free market. Such monopolies are only created, and have only ever been created, by governmental influence, mandate, subsidy, and intervention. The alleged power of a robber baron can only be obtained by government sanction.
The term “robber baron” makes reference to the feudal lords of medieval Europe who had special privileges, land, and power granted by the King. These lords reigned over serfs who were in servitude under their authority. The earliest reference of this term was made by the preacher Henry Ward Beecher, who, in speaking of the low quality of goods in his day said, “It is the attempt of the more shrewd to take advantage of the less shrewd. It is the attempt of the strong to oppress the weak. It is the old robber baron in his castle descending, after men have planted their crops, and stealing them. It is the grasping king that appropriates the earnings of his subjects.”
[302]
Under capitalism, no one has authority to appropriate the property of another—no single person or group of people. Any form of fraud or theft is immoral, condemned by, and punishable by objective law. In American history, no business owner had the ability to seize earnings of others—that is, except one special class of businessmen that Folsom calls “political entrepreneurs.”
[303] These political entrepreneurs arose as a result of statism in a mixed economy. They cannot exist in a free market. Political entrepreneurs use (bribe, buy, pressure) legislatures to seize the earnings of others through taxation in the form of subsidies, bailouts, tax exemptions, and grants. Political entrepreneurs lobby for special favors, laws, tax breaks, subsidies, or any other governmental action that will give them an advantage over their competitors.
What Folsom calls “market entrepreneurs,” in contrast to the political ones, seek success by using their own judgment, competing in the market, providing products and services that other men find valuable enough to trade for by their own free choice. They rely on no special favors from politicians; they sink or swim solely on their ability to please their fellow men.
Who in this scenario is the true robber baron? The one that must give superior products and services to survive? Or the one who lobbies for plunder from your pocket?
The profit motive is the self-interested force which drives innovation and wealth creation. It is what has raised many parts of the world from starvation and squalor to a level of commonplace and seemingly indispensable luxuries. How wonderful it is to have television, microwaves, refrigerators, cars, planes, iPads, and computers; even chocolate, once a luxury for nobility, is now ubiquitous and inexpensive. Things are so good now in America that our primary cultural concern is trying not to eat ourselves to death! What a contrast to world history! What a change from the ancient cultures that associated corpulence with high social status! What we call poverty, ancient people would call opulence; 91% of Americans have a cell phone.
[304] Even the poorest Americans are often overfed. This prosperity we enjoy today directly results from our level of economic freedom. As good as things are now, think of how much better they’d be if the trillions of dollars squandered by Congress every year were in the hands of productive people, interested in improving life for all and making a profit on it.
ATTACK #2
Capitalism Debases Men by Creating Hunger
vs.
Capitalism Debases the Morality of Men by Creating Riches
“The United States is the only country on record that has never had a famine since it became a nation.”
[305] - Isabel Paterson
(Fact check: We don’t know if it is still the only country, but it is true it has never ha
d a famine since its founding, with the contextually meaningless exception of some Eskimos on an island in the “Department of Alaska” shortly after its acquisition from Russia around 1880.)
POVERTY
Which is it? Does capitalism create poverty or riches? Or is the problem that it creates wealth for some and not for others? Both statements in these attacks are false. Even the poorest of Americans live like kings, not only compared to the poor in other countries, but compared to actual kings of a hundred years ago or more. Ask yourself which life would you rather lead—that of King Louis XIV of France or of a poor American? What has capitalism given the poor American that a king didn’t have? Indoor plumbing, phones, television, internet, cars, deodorant, advances in health care and dentistry, fast food, grocery stores, and on and on. You eat more chocolate than ancient kings; their cushiest chair was nothing compared to your recliner.
No one in America who actually has a need, barring the prideful or mentally disordered, ever has to go without shelter or food.
GREED
“Those greedy capitalists—all they care about is money!”
“They don’t really need that big house/car/toy. Don’t they know how much good they could be doing with the money it cost to buy that?”
“Why would she spend that much on that! I wouldn’t do that.”
“It’s immoral to make that much profit.”