Freeman

ARTICLE

The Lessons of History

SEPTEMBER 01, 1982 by JOHN JEFFERSON DAVIS

Dr. Davis is Associate Professor of Theology at Gordon-Conwell Theological Seminary, South Hamilton, Massachusetts. This article is from the manuscript of a forthcoming book, A Land of Milk and Honey: Biblical Foundations of the Free Market.

“Leningrad can be overstocked with cross-country skis . . . and yet go several months without soap for washing dishes. I knew a Moscow family that spent a frantic month hunting for a child’s potty while radios were a glut on the market.”[1] These observations by Hedrick Smith, former Moscow Bureau Chief for the New York Times, highlight the persistent problems of a planned socialist economy.

We will be examining here the respective track records of the free market and socialist economic systems. Marx believed that history would demonstrate the inherent superiority of socialism. He predicted that capitalism would lead to the progressive impoverishment of the workers, and that the system itself would be destroyed by a succession of boom-and-bust cycles of increasing intensity.

Leon Trotsky, one of the key figures in the earlier phases of the Russian Revolution, had even more grandiose hopes for socialism. He believed that in a socialist society man would become “. . . incomparably stronger, wiser, finer. His body more harmonious, his movements more rhythmical, his voice more musical . . . The human average will rise to the level of an Aristotle, a Goethe, a Marx. Above these other heights new peaks will arise.”

History has not been kind to the utopian hopes of Marx and Trotsky. The “New Socialist Man” is yet to appear, and, as we shall see, the historical record shows that capitalism has been far more effective than socialism in improving the lot of the common man.

We will also be examining some popular but mistaken notions about the track record of the free market system. Did not the “Robber Barons” of the nineteenth century demonstrate that industrial capitalism is a predatory and oppressive system? Did not the Great Depression demonstrate once and for all the inherent instability of the free market? We will attempt to show here that the common perception on both these questions is mistaken, and only serves to obscure the real merits of the free market approach.

The Longer View

Without an adequate knowledge of the past it is easy to lose sight of the fact that the material abundance produced by industrial capitalism is a very recent phenomenon in human history. Poverty has been the usual lot of mankind for most of recorded history. The concept of a steadily growing economy was virtually unknown in ancient times. Growth rates through most of human history have been very low, zero, or negative. Pre-industrial societies were caught in a Malthusian trap of slow growth, increasing population, outstripping of food supplies, and demographic disaster.

As the British historian Paul Johnson has pointed out, prior to the eighteenth century, “it was rare for even the most advanced economies, those of England and Holland, to achieve one per cent growth in any year.”[2] Beginning in the 1780s, England achieved a then-unprecedented annual growth rate of two per cent. By the end of the decade a rate of four per cent had been attained—a rate which was to be sustained for the next 50 years.

During the nineteenth century Britain increased the size of its work-force by 400 per cent. Real wages doubled during the period 1800—1850, and doubled again from 1850—1900. “This meant,” notes Johnson, “there was a 1600 per cent increase in the production and consumption of wagegoods during the century. Nothing like this had happened anywhere before in the whole of history.”[3] After 1850, even higher rates of growth were being attained in Belgium, France, Austria- Hungary, Germany, and the United States. Marx’s prediction that industrial capitalism would progressively impoverish the workers was falsified by the facts of history.

Technological and Intellectual

What produced this great “lift off’ in the Western nations? The experience of England, the pioneer in the new industrial revolution, is quite instructive. The sources of the dramatic progress were both technological and intellectual. Harnessing the new energy of coal and steam lifted English society to a new plateau of productivity far higher than the old economy based on the muscle of horse and man.

The new ideas of Adam Smith exploded the old mercantilist notions which measured the nation’s wealth by stocks of silver and gold amassed through plunder and the cumbersome operations of a centrally controlled economy. Adam Smith’s Wealth of Nations portrayed a vision of a society in which the initiative, energy, and imagination of countless enterprising individuals would produce a more abundant society for all. The Protestant Reformation, and later the Wesleyan revival, reinforced the biblical values of work, thrift, and personal responsibility, and thus helped create a moral climate which contributed to economic progress.

“In short,” writes Paul Johnson reviewing the trend of events, “after nearly five recorded millennia of floundering about, in relative or absolute poverty, humanity suddenly in the 1780′s began to hit on the right formula: industrial capitalism.”[4] And the progress was indeed dramatic. During the 1780s, 80 per cent of the people of France were spending 90 per cent of their income on bread, merely to stay alive. Today France has more automobiles per capita even than Germany, and more second homes than any other European country. It is important to keep facts such as these in mind as we examine some particular issues relating to the nineteenth century experience.

“Robber Barons” and “Dark, Satanic Mills”

Despite the impressive historical evidence for dramatic economic progress in Western society during the last several centuries, there is the widespread belief in the popular mind that capitalism produced enormous degradation, impoverishment, and oppression for the common man. This view can be found in novels, textbooks, newspapers, and television and radio productions today. How did it arise? Curiously enough, this view was spread not only by Karl Marx and his followers, but also by countless nineteenth century social reformers, educators, writers, and clergymen who had no particular sympathy for the doctrines of Marx. One can recall the lurid descriptions of the factory system in the novels of Charles Dickens, and the English poet William Blake’s characterization of these factories as “dark, satanic mills.”

The English industrial revolution had not only improved the living conditions of the masses, but also produced a fundamental alteration in society’s perception of poverty. Since poverty no longer appeared to be the inevitable lot of mankind, instances of it seemed all the more to call for vigorous reform. Industrial capitalism produced a “revolution of rising expectations,” and its very success provoked an outpouring of criticism. A social conscience quickened by the evangelical revivals of the nineteenth century was made more sensitive to such criticisms.

But were the English factories really “dark, satanic mills”? There is no question that conditions in many of the factories were far from ideal, but careful historical research has exploded the myth that the system led to the progressive impoverishment of the workers. Exactly the opposite was the case. Economic historians W. H. Hutt and T. S. Ashton have demonstrated that while there were some areas of unevenness, the general trend for English workers in the nineteenth century was one of improving standards of living. Real wages were increasing; the price of textiles fell, increasing the availability of clothing; after 1820, the price of consumer items such as tea, coffee, and sugar fell substantially. Ashton concludes that “the number of those who were able to share in the benefits of economic progress was larger than the number of those who were shut out from those benefits.”[5] Countless thousands of English men and women voluntarily left the farms in order to work in the factories, believing that the new system offered greater opportunities for economic betterment. And more often than not, those hopes were realized.

In 1837 or 1838, Thomas Holmes, aged 87, gave to a member of the Liverpool Statistical Society his recollections of the changes in English society during his lifetime. “There has been a very great increase in the consumption of meat, wheaten bread, poultry, tea and sugar,” he said. “The poorest are not so well fed. But they are better clothed, lodged and provided with furniture, better taken care of in sickness and misfortune. So they are gainers. This, I think, is a plain statement of the whole case.”[6]

Robber Barons

It is a commonly held belief that nineteenth century America was the age of the “robber barons.” John D. Rockefeller, Cornelius Vanderbilt, Leland Stanford, and other predatory capitalists were milking the country dry with their rapacious, dog-eat-dog form of economic warfare. This is the picture presented in Matthew Josephson’s influential 1934 book, The Robber Barons. According to Josephson, the capitalistic system was the problem, and government intervention was the solution. In spite of Josephson’s claims, however, a closer examination of the record discloses that the real culprit was not the free market system as such, but government intervention on behalf of privileged business interests.

A good case in point is provided by the “Credit Mobilier” scandal of the 1860s. The Credit Mobilier was a “construction” company directed by those who had controlling interests in the Union Pacific Railroad. Through their political influence Congress passed the Pacific Railroad bill in 1862, granting the Union Pacific Railroad 12,000,000 acres of land and $27,000,000 in six per cent, thirty-year government bonds as a first mortgage, and 9,000,000 acres of land and $24,000,000 in government bonds to the Central Pacific Railroad. The project was to establish rail connections between Omaha, Nebraska and the Great Salt Lake.

Financial interests in the Union Pacific Railroad used the Credit Mobilier to subcontract the construction work to themselves, and when construction costs mysteriously skyrocketed, the profits reaped by the Credit Mobilier were enormous. When the swindle became known, the public outcry against “laissez faire capitalism” was immediate. But as Susan L. Brown and other authors in The Incredible Bread Machine have pointed out, capitalism was being blamed unfairly. The promoters of the Credit Mobilier raised their capital not by private investment but by government subsidy—by “subsidies, franchises, land grants and associated government involvements which are not characteristic of laissez faire capitalism.”[7] The Credit Mobilier was not a true example of the free market, but of its perversion through the use of government power for the sake of special privilege. In this case “big business” was reaping profits not through fair competition on the open market, but through manipulating the political system for its own ends.

John D. Rockefeller’s Standard Oil Company is frequently cited as the prime example of the evils of monopoly capitalism in the nineteenth century. According to the authors of one popular college text, “Rockefeller was a ruthless operator who did not hesitate to crush his competitors by harsh and unfair methods.”

Rockefeller’s Efficiency

As economist Lawrence W. Reed has pointed out, such charges present a distorted picture of the reasons for Rockefeller’s financial success. According to Reed, Rockefeller’s profits stemmed not from a coercive monopoly produced by government grants of exclusive privilege, but from an efficiency monopoly—a concentration of the market produced by a company’s excellence in satisfying its customers. Even Ida Tarbell, one of Rockefeller’s most persistent critics, admired the efficiency of his operations. Tarbell, describing one of Standard Oil’s refineries, admitted that it was “a marvellous example of economy, not only in materials, but in time and in footsteps.” Economic historian D. T. Armentano has pointed out that between 1870 and

1885 Standard Oil reduced its refining costs for kerosene from 3 cents per gallon to less than .5 cents per gallon. “Clearly,” notes Armentano, “the firm was relatively efficient, and its efficiency was being translated to the consumer in the form of lower prices for a much improved product, and to the firm in the form of additional profits.”[8]

Did Standard Oil ruthlessly drive out its competitors through predatory price cutting? Reed cites the conclusion of historian Gabriel Kolko: “Standard attained its control of the refinery business primarily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refinery owners later reopened new plants after selling to Standard.”

Unlike the Credit Mobilier, John D. Rockefeller’s profits did not derive from special subsidies and privileges granted by the government. While it was certainly the case that Rockefeller wanted to make money, a fair reading of the facts discloses that he succeeded in doing so by the socially beneficial mechanism of the free market—by efficiently producing a quality product that the public really wanted to buy.

The Great Depression

More than any other event in the twentieth century, the Great Depression succeeded in convincing a generation of Americans that the free market system, left to itself, simply could not work. The social impact of this event was enormous. Some 12 million Americans were unemployed; some 5,000 banks and 86,000 businesses failed; in 1932 alone, 273,000 families were evicted from their homes. Despair and a sense of helplessness gripped the country. People knocked on doors for handouts, and some even fought over leftovers in the alleys behind res taurants. The journalist Saul Pett expressed the common view of the matter in his observation that the Depression was “the watershed, the great turn in history in which laissez-faire died and the basic philosophy of American government was profoundly altered.”[9] Only the resources of the federal government, so it seemed, could rescue the nation from the wreckage of the free enterprise system.

But was this really the case? Recent economic research has been questioning this common view, and presenting facts which show that government intervention was more a cause than a cure of the nation’s economic crisis. A good measure of the blame must be laid at the feet of the Federal Reserve System, which presided Over a reckless expansion of credit during the years 1924-1929. Professor Hans Sennholz, a noted conservative economist, has argued that this credit expansion made the crash of 1929 inevitable. “Inflation and credit expansion always precipitate business maladjustments and malinvestments that must later be liquidated,” he writes.[10] Even after the monetary collapse began, the Federal Reserve did not take responsible countermeasures. According to Prof. Milton Friedman, the evidence is now quite conclusive that “the System not only had a legislative mandate to prevent the monetary collapse, but could have done so if it had wisely used the powers that had been granted to it in the Federal Reserve Act.”[11]

The Lesson of 1929

The Smoot-Hawley Tariff Act of 1930 represented another misguided government intervention which only served to deepen the economic crisis. By raising U.S. tariffs to record levels, this action virtually closed our borders to foreign goods, provoked retaliatory tariffs on American products, and contributed to unemployment at home and abroad. Sennholz points out that U.S. exports dropped dramatically from $5.5 billion in 1929 to $1.7 billion in 1932.

The federal government compounded the nation’s economic woes with the Revenue Act of 1932, doubling the federal income tax burden. This sharpest tax increase in the nation’s history designed to “soak the rich,” contributed greatly to the downward spiral. “This blow alone,” notes Sennholz, “would bring any economy to its knees, and shatters the silly contention that the Great Depression was a consequence of economic freedom.”

Franklin D. Roosevelt’s “New Deal” received the lion’s share of credit for lifting the country out of the Depression, but it was really due to circumstances beyond government’s control—the beginning of the Second World War—that the nation’s unemployment problems were solved. The real lesson of 1929 is not that the free market system can’t work, but that misguided government interventions in the market can produce far more damage than they propose to cure.

The Recent Past

Karl Marx expected industrial capitalism to produce increasing impoverishment of the workers, and finally to destroy itself in a series of boom-and-bust cycles. History has demonstrated that Marx was wrong on both counts. As George Taber has noted, “Rather than pushing workers deeper into poverty . . . capitalism has lifted the vast majority of laborers into the middle class.”[12] Workers in free market economies have far more influence on management’s decisions than their counterparts in Marxist societies.

Capitalism has weathered some severe fluctuations in the business cycle—the worst being the Great Depression—but the predictions of its demise have turned out to be premature. Even its critics have been forced to admit its staying power as an economic system. Writes Robert Heilbroner, a left-leaning economist and persistent critic, “History has shown capitalism to be an extraordinarily resilient, persisting and tenacious system, perhaps because its driving force is dispersed among so much of its population rather than concentrated solely in a governing elite.”[13]

In the Soviet Union, the inherent problems of a centrally planned economy have become increasingly evident during recent years. After dramatic productivity gains from initially low bases in the 1950s and 1960s, economic growth in Russia dropped to two per cent in 1979, the lowest since the 1930s.

Lagging farm productivity has long been a weak spot in the Soviet system. In 1930 the peasants revolted against Stalin’s forced collectivization and confiscation of their land and livestock. The subsequent famine was one of the worst in history, costing an estimated two to five million lives.

Problems with the collective farms have persisted down to the present day. In 1980 Soviet planners set a goal of 235 million tons of grain, but the actual harvest was only 189.2 million tons, according to official figures. Socialist Russia on many occasions has had to depend on the capitalist economies of the United States and Canada to provide bread for its own people. Late in 1981, facing another poor grain harvest, Soviet authorities mounted a public relations campaign designed to convince Russian housewives of the virtues of cooking with stale bread. “You will be rewarded by delicious, unusual dishes,” an official government leaflet promised.[14]

The system of forced collective farming has not succeeded in extinguishing the spirit of free enterprise in the hearts of the Russian people. Privately farmed plots in Russia, averaging less than an acre in size, represent only three per cent of Soviet farmland, and yet produce an astonishing one-fourth of all Russian farm products.[15] The “New Soviet Man,” when left on his own, can be as energetic and productive as his American counterpart.

Persistent Shortages

The chronic inefficiency of a centrally planned economy shows itself in persistent shortages of consumer goods in the retail stores. Towels, toothpaste, axes, locks, vacuum cleaners, irons, kitchen china, cameras, or cars—the list is virtually endless. Soviet women are accustomed to spending two hours in line, seven days a week, in hopes of finding the items they want. “I have known of people who stood in line ninety minutes to buy four pineapples,” writes former Moscow correspondent Hedrick Smith, “and three and a half hours to buy large heads of cabbage, only to find the cabbages were gone as they approached the front of the line.”[16] Bribery of clerks is a common way of trying to obtain retail items in short supply.

The political unrest in Poland and the rise of the independent labor union Solidarity has made the West much more aware of the economic problems in that socialist society. The frustrations of the ordinary Polish citizen express the crisis of the system in a very personal way. “I do not even want to talk about food supplies,” said one elderly man on a shopping trip. “There is nothing to buy, beginning with milk and ending in detergents. You have to have plenty of time or very good connections, but they do not even work anymore.”[17]

Concern over a possible Russian invasion and maneuvers by Soviet troops on Poland’s borders during 1981 were often overshadowed by a preoccupation with food shortages. “Maneuvers? Yes, I’m making maneuvers—trying to get some ham for me and my daughter,” commented Iadwiga Glowacka, a Warsaw technician standing in a meat shop line.[18]

A Christian minister from the United States was visiting in Gotzow, Poland during the summer of 1981. The hostess prepared a generous Polish meal, even borrowing sausage from a neighbor. But at the table she broke down and cried, “Forty years after the war, and this is all we have.” The Polish people are not starving, but staples are scarce, and meat is “all going to feed the Red Army,” as one person at the table said.[19]

Crisis in Cuba

In our own hemisphere, the Cuban economy is a prime example of the failures of a socialist system. Prior to Castro’s revolution Cuba was fourth among Latin American nations in per capita GNP; now it is 14th, with one-third the rate of Puerto Rico. Rationing, inefficiency, and waste characterize the system. Milk, fruit, and vegetables are in short supply, and rice is rationed at five pounds per person per month. The Cuban economy is being kept afloat by massive Soviet aid, to the tune of $3 billion a year, or $8 rail-lion a day. Castro’s socialist revolution failed to deliver the equality and abundance that it promised. “Cuba today is a totalitarian society in which nearly every form of dissent is severely punished,” writes John W. Cooper, a researcher for the American Enterprise Institute in Washington. “Castro and his ideology not only suppress the self- determination and freedom of conscience of the Cuban people; they have also created a stagnant economy with perpetual shortages, which is completely dependent on a foreign power, the Soviet Union.”[20]

In socialist states of Asia the spirit of free enterprise persists. A recent television newscast from Vietnam showed bare state-controlled food markets in Hanoi. The private street markets had plenty of food, and Vietnamese communist leaders have admitted they need Western help for economic development. In China, nearly 5,000 older entrepreneurs from an older generation have been given new jobs as factory managers and advisers. Hu Qiamu, director of the Chinese Academy of Social Sciences, has admitted that China has had to adopt such free market principles as “the pricing system, the rule of value, and the advantage of material incentives.”[21]

Asian states such as Japan, South Korea, Taiwan, Singapore, and Hong Kong, which have given free rein to free market principles, have surged far ahead of their socialist competitors. George Taber notes that the economy of Hong Kong grew at a phenomena] 12.75 per cent annual rate during four recent years, increasing per capita real income by 25 per cent. During the last twenty years the economy of Singapore has increased fivefold, giving its people a standard of living second in Asia only to Japan. So many new jobs have been created by Singapore’s free market economy, notes David Reed, that the residents shun menial work, “and reportedly some 100,000 ‘guest workers’ had to be recruited from Malaysia for this purpose.”[22]

Capitalism Produces

The record of history, then, seems clear. In the competition between capitalism and socialism to provide both individual freedom and material abundance, capitalism wins hands down. Even its critics have admitted the free market’s ability to produce and have reluctantly adopted some of its principles. The free enterprise system is consistent with biblical teachings concerning the rights and dignity of the individual, and heeds biblical warnings about the dangers of concentrating power in the hands of the state. “By limiting the state,” argues theologian Michael Novak, “democratic capitalism liberates the energies of individuals and whole communities.” Greater abundance for all is the result.

The free market has its imperfections and failings, to be sure, but history shows that those of its competitors are far worse. George Taber is surely correct in his assessment: “For all its obvious blemishes and needed reforms, capitalism alone holds out the most creative and dynamic force that any civilization has ever discovered: the power of the free, ambitious individual.”[23] When the dynamism of a society of free individuals is tempered and permeated by biblical values, the resulting system would appear to be the best one attainable by imperfect individuals still living under the conditions of history. []


1.   Hedrick Smith, The Russians (New York, 1976), p. 60.

2.   Paul Johnson, “Has Capitalism a Future?” The Freeman, January 1979, p. 48.

3.   Ibid.

4.   Ibid., p. 49.

5.   F. A. Hayek, ed., Capitalism and the Historians (Chicago, 1954), p. 159.

6.   Ibid., p. 158, n. 26.

7.   Susan L. Brown, et al., The Incredible Bread Machine (San Diego, 1974), p. 13.

8.   Lawrence W. Reed, “Witch-Hunting for Robber Barons,” The Freeman, March 1980, p. 169.

9.   Macon Telegraph and News, June 17, 1981, p. 1.

10.   Hans F. Sennholz, “The Great Depression,” The Freeman, April 1975, p. 206.

11.   Milton and Rose Friedman, Free to Choose (New York, 1979), p. 85.

12.   George Taber, “Capitalism: Is It Working?” Time, April 21, 1980, p. 55.

13.   Ibid., p. 45.

14.   Macon Telegraph and News, September 13, 1981, p. 11a.

15.   Shawn Tully, “Mapping the ‘Second Economy,”’ Fortune, June 29, 1981, p. 40.

16.   Smith, op. cit., p. 64.

17.   Boston Globe, March 2, 1981, p. 3.

18.   Macon Telegraph and News, September 13, 1981, p. 14a.

19.   Professor Gordon Fee, personal communication, 1981.

20.   John W. Cooper, “The Cuban Revolution,” Christianity and Crisis, July 21, 1980, p. 203.

21.   Time, April 21, 1980, p. 53.

22.   David Reed, “Singapore: Jewel of Prosperity,” Reader’s Digest, November 1979, p. 226.

23.   Taber, op. cit., p. 55.

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September 1982

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