Mr. Anderson is Executive Secretary of The Foundation for Economic Education.
One of the sad political paradoxes of our times is the simultaneous assault on capital throughout the world and the continual clamor, often from the same sources, for greater worldwide prosperity.
Perhaps the affliction can best be described as “political schizophrenia.” Political rhetoric extols the virtues of the good life and greater material abundance for humanity, and yet, in the next outburst, attacks the very foundation of such a society. The demagoguery and nonsense of such political outbursts are most discouraging to those who understand the economic policies required for human progress.
Mankind’s evolution into the modern era of the industrial society was not an historical accident. It was, instead, the direct result of forces that brought into existence the private property order and its concomitant free market economy.
The market system of social organization opened to man the full potential of the social division of labor and the efficient employment of the scarce economic resources at his disposal.
The history of material progress relates directly to an increase in productive capacity. Material advancement for mankind simply means, “getting more goods out of the woods!” And from the dawn of human existence this process has been primarily accomplished through the substitution of capital for human energy in the means of production.
What distinguishes a so-called “rich nation” from a “poorer nation” is the abundance of productive capital employed in the social division of labor. The productive output of a worker moving dirt with his bare hands can hardly be compared with the accomplishments of a worker operating a giant bulldozer. The capital tools with which they work make the difference. While greater work effort and better work techniques have certainly contributed to greater productive output, the accumulation of ever-greater quantities of capital employed in production has been the essential “key” to prosperity.
The “key” to greater prosperity, therefore, is more capital. Societies become rich because individuals within the society become more productive. And this greater productivity of the individual is attainable only through the effective employment of more capital—multiplying the product of his efforts through the use of tools.
The assault on capital throughout the world today has become a direct attack on man’s material prosperity. Even worse is the planned and systematic destruction, through political interference, of the institutions that are essential to the creation of capital. This combination of consuming accumulated capital and destroying any incentive to replace capital is leading to the impoverishment and suffering of millions of people throughout the world.
For an example of what is happening, look at the United States, the “richest” nation in the world today in terms of the material well-being of the people. It attained this enviable status as a result of a lengthy historical record of being “friendly” to the accumulation of capital.
Throughout the nineteenth and early twentieth centuries, millions of individuals were drawn to the United States by the vast opportunities for personal economic advancement.
From the period following the end of the Civil War in 1865 until the beginning of World War I, unbelievable change and advancement took place in the United States. The degree of individual freedom that prevailed during this period led to an expansion of economic activity and an accumulation of capital unmatched in human history. Neither before nor since has a more rapid rate of growth been experienced by a group of people than during the twenty years from 1870 to 1890 when the real incomes of the people more than doubled.
During this same period of phenomenal growth in prosperity, entire new industries were born. The oil industry, railroads, electricity, and modern steel making are among the better known examples. Methods of agriculture, which had remained unchanged from the dawn of history, were radically altered. The introduction of capital equipment vastly increased the productivity of the individual farmer in the planting and harvesting of his crops.
This remarkable era of economic freedom and improvement also brought other changes in the structure of life and industry. The productive employment of increasing quantities of capital literally annihilated many ancient and established industries. We may look back now with amusement at some of the individual failures that occurred in those early days, from the prairie schooner to the pony express. But with the individual’s freedom to fail came also the chance for success. Man’s creative energies were unleashed in such a setting of economic freedom, and the outcome was a material progress that became the envy of the world.
Reaction to Change
In 1859 Colonel Edwin Drake successfully drilled for oil in Western Pennsylvania, and the petroleum industry was born. The subsequent competition of kerosene took a heavy toll on the whaling industry of New England. But what electricity later did to the candlestick makers, and the internal combustion engine did to the blacksmiths and horsebreeders was even more devastating to the old ways. The changes imposed by economic progress were dramatic, to say the least.
The point is that this entire transformation of society was made possible only because individuals possessed economic freedom, and were able to freely accumulate and employ the needed capital to compete against existing industry. And while greater prosperity was a direct result, so too was the demise of the old ways. The price of prosperity is always change, and for many the price seems too high.
A reaction to such rapid change may have been inevitable. In any event, such a reaction has been most evident in the United States during these past fifty years. Powerful political forces have assaulted, directly and indirectly, both individual freedom and private property in an attempt to “preserve” the status quo. Disguised as “progressive programs” to benefit “the people,” political intervention is consuming the wealth of the citizenry and hampering the incentive to replace it.
The source of the wealth and material abundance of the United States citizen today is to be found in the accumulations of private capital made possible in an earlier era. The continued prosperity stems from the momentum of the past, not from the political intervention of recent years. The losses of individual freedom have been so gradual and subtle that perhaps only within the past decade are there clear signs of a declining standard of living.
It is of the utmost urgency that this development be seen. Given the dynamic history of economic freedom and prosperity that was once the hallmark of the United States, the identity of these recent destructive forces must be disclosed—at home, as well as abroad. The people of other nations, who would emulate the United States, otherwise might misconstrue these forces to be the causes of our wealth today. To pattern political intervention after the example of the United States government today would be nothing less than a human tragedy. The resurrection of individual liberty and continued material prosperity demands the repudiation of this intervention, and not its expansion.
The “key” to prosperity is capital. To consume more, a people must first produce more, and to produce more requires more and better tools. Real economic growth is a direct consequence of ever-greater quantities of capital being employed in the tools of production.
The greatest service a government can render its citizenry is to safeguard and encourage this process of capital accumulation. Protecting the lives and property of citizens by keeping the peace is absolutely vital to an orderly society. The law thus serves as an instrument of justice. Such a government has always enjoyed the popular support of its citizenry, for in a society of peace and harmony, the individual citizen is freed to produce and serve the consumer through the market.
In the United States today government is far more engaged in plundering property and controlling people’s lives than in pursuing its traditional role of protecting life and property. In the name of “progressive government,” we see the law being used in the most reactionary way to destroy private capital and human liberty.
The accumulation of capital requires both productive effort and saving on the part of individuals. There is an old adage that “anyone can make money—it’s keeping it that is difficult.” The point is that saving rather than consuming will occur only if there exists an incentive to do so. Production and saving requires the personal sacrifice of not consuming. Only when the potential for greater future consumption can be clearly seen from saving and working today, will individuals willingly produce and save. As the theoretical economist usually states it,—”all other things being equal, leisure and consumption are preferred over work and saving!”
Government intervention in the United States during the past fifty years has time and again undermined this process of production and capital accumulation. While no one law or policy can be isolated as the cause of our lost freedoms and falling standard of living, the combined intervention is generating a burden that is destroying the material welfare of society.
The manner of government’s assault on capital is varied, but of all these actions, nothing inflicts more damage on productive effort, saving, and capital accumulation than a policy of monetary inflation. The insidious effects of inflation disrupt the entire pricing structure of the market, the sole guide for the actions of traders in the marketplace.
The destruction of money through a policy of inflation consumes every form of monetary saving. Individuals quickly learn the bitter consequence of conserving money in the form of bonds, savings accounts, or cash balances. Monetary holdings of liquid capital become nothing but certificates of guaranteed confiscation of wealth.
Inflation Disrupts Market and Consumes Capital
The disruption of the price system through inflation generates awesome losses of capital. Both consumers and producers are led into economic chaos. The false signals of inflated prices alter the allocation of economic resources in production and encourage artificial levels of consumption. The ultimate result is a general impoverishment, as capital is taxed and destroyed.
Inflation imposes a heavy penalty tax on productive activity. Any incentive to employ capital in productive activity is soon lost to the urgent necessity of preserving what little capital remains. Individuals turn to speculation in an effort to survive.
The result is not economic survival, but instead market disruption and capital consumption. Money markets no longer perform the function of serving producers and consumers, but instead become devices for speculators. Long-term capital markets vanish with the creditors, as everyone tries to become a debtor. The order of the day in an age of inflation is to consume capital in “things” before it is consumed by the ravages of inflation.
Inflation’s message is clear to all. Increase consumption, save nothing. The outcome is the inevitable destruction of accumulated capital with no incentive to replace it. The tragic price is lost prosperity.
While inflation is one of government’s oldest weapons in the assault on capital and productive effort, it is by no means the only tool of such destruction. A multitude of laws, edicts, and policies are joined in the attack.
In the United States, modern tax theory often is more concerned with penalizing capital or redistributing wealth from savers to spenders than with the acquiring of public funds. The federal inheritance tax is a classic example of such a practice, many larger estates being wholly consumed by the tax rather than transferred to the heirs.
The accumulation of private capital and its productive employment is the cornerstone of an advancing market economy. Inheritance taxes have consumed untold billions of dollars that would otherwise have been productively employed. Productive individuals are left with no choice but to consume their wealth. Luxury cars, fancy yachts, and exotic homes have replaced job-creating productive investments. Enjoy it today rather than have it taxed away tomorrow becomes the rule of productive people confronting such confiscatory tax policies.
The Impact of Taxes
The taxation of corporations is another weapon in the assault on capital. While a corporation, as a legal entity, can be a collector of taxes, the burden of corporate taxes must always fall upon the corporate owners, employees, customers, or some combination of these three. The corporation is merely an institutional entity productively employing the capital of its owners. The result of corporate taxation is a political transfer of capital away from private corporate use and productive employment.
The individual income tax is another example of a tax policy that is specifically structured to discourage productive activity and capital accumulation. The percentage rate of taxation on personal incomes is highly graduated, assuring an ever-larger seizure of the private capital of those who are most productive. Wealthy individuals are subject to a Federal income tax rate of up to seventy per cent, a rate that imposes a severe penalty on the expansion of productive capital and work effort.
Perhaps the most subtle tax against capital, in the sense that it silently erodes the personal incentive to save, is the social security tax. This tax transfers wealth from productive workers to the elderly members of society in retirement and thereby reduces the personal concern for one’s welfare in old age. The expectation of a government source of income in later years thus leads to a reduction in personal savings.
But inflation and taxation are only the beginning of government’s assault on productive capital. The competition for votes among politicians has led to a mass of legislation providing all manner of special-interest political largess. The redistribution of wealth through the political process has become firmly entrenched in the United States. Every sector of society is clamoring for more. Everyone is plundering everyone with the cry that, “we’re paying for it, so let’s get our fair share.” The result is a society of political victims and beneficiaries, all using the political process to further consume private capital.
Such a system breeds politicians rather than statesmen. Politicians, responding to a “now mentality” among voters, win elections. The statesman, expressing concern for the future consequences of such political plunder, is the loser at the polls. The result is that democracy becomes synonymous with demagoguery, a vehicle for the political plunder of capital.
The Welfare State
This political transformation is well illustrated in the United States by the growth of the welfare state. Vast quantities of capital are being transferred today through the political process from those who work to those who don’t. Without exception, every welfare reform increases the individual’s incentive to choose leisure over work. Low-productivity labor is literally priced out of the market by the welfare benefits from the state.
The withdrawal of welfare recipients from the labor market stalls the further creation of capital. The heavy burden upon the productive persons who support the welfare programs again drains the capital so essential to progress. The bias against work and against the productive employment of savings is a built-in wedge hampering economic growth.
The final assault against capital, and against the very structure of the market economy itself, comes by way of direct controls upon prices and wages. As long as market prices remain free to reflect the actions of traders, the market can absorb massive doses of hostile government intervention. The assault against capital from inflation, taxation, and the redistribution of wealth through the political process certainly reduces the magnitude of productive capital, and thus the material standard of living. But these forms of government intervention do not in themselves destroy the essence of the market process.
The imposition of direct wage and price controls, however, terminates the market price system of allocating economic resources. The economic freedom of buyers and sellers to engage in voluntary exchange on their own terms is denied. The result of such government intervention is the massive destruction of capital and productive effort.
There is, of course, even under wage and price controls, some escape from the economic chaos that the controls inevitably generate. The escape route is by way of “black markets.” While “black markets” are merely the practice of freedom of choice among traders when their liberties have been denied by the state, such illegal markets can never attain the efficiency of free and open competition.
A point to remember about government-imposed wage and price controls is that governments don’t control wages and prices, they control people. A price or wage control is simply a disguised way of denying the voluntary choices of traders. The establishment of government-imposed prices or wages below or above the market rate assures either shortages or surpluses, and the loss of freedom.
With a government biased against capital, the direct controls are nearly always established below the market for prices, and set above the market for wages. The result is the certain destruction of capital productively employed and the creation of a permanent barrier to new productive activity.
Wage and Price Controls
The imposition of wage and price controls by government always creates an allocation crisis. In the United States today an “energy crisis” exists in the form of uncertain gasoline supplies. The reason is simply explained. The price of retail gasoline is established by government rather than by the voluntary actions of buyers and sellers. And the government-imposed legal price is now less than market prices. With demand exceeding supply at this government-imposed price, arbitrary limits on gasoline sales and long lines before the pump are inevitable.
Price and wage controls symbolize the end of the market economy and individual freedom of choice. Such government interference transforms society from a nation of free traders into a society of regulated consumers and plundered producers. The imposition of direct controls upon the market process is truly the final assault on capital and the private property order.
Far advanced in the United States today is the economic chaos and destruction of capital that government inflicts upon society through inflation, taxation, transfer policies, and direct controls. There are serious threats of private property seizure through nationalization and the erection of economic barriers to international trade. The market economy which had brought forth prosperity in an atmosphere of peace and harmony is becoming a battleground of internal conflict. Bitterness and disillusionment are expressed everywhere one turns in the United States.
If the assault on capital continues, the result will be, not the good life that is enjoyed today, but conflict, hardship, and a return to poverty.
So the people of the United States stand at a point of decision—either to abandon the private property order for socialism, or to return to freedom and the free market. Two points must be clear. First, it must be understood that prosperity can only come through freedom, and second, that the political institutions of society must support this freedom rather than deny it.
Throughout the world are tens of thousands of individuals who understand this relationship between prosperity and freedom. In addition, literally millions of individuals have been the beneficiaries of the prosperity and material abundance market economies have provided. The world has seen and experienced the good life under freedom. It is inconceivable that such a system of social organization could ever be abandoned for the impoverishment and serfdom of socialism.
The intellectual arguments that have been advanced in defense of socialism are bankrupt. Socialism has been a dismal failure wherever tried or found. From the slaughtering of Kulaks by Stalin to the holocaust of Cambodia today, socialism has been synonymous with human misery and death. Socialism is not the wave of the future. It is the sickness of the past.
The way of the future is freedom. The assault on capital is too costly to be continued. There are signs that the intellectual tide has turned in favor of freedom. There are signs of dwindling support for overextended government, as individuals demand to be free.
Freedom will prevail because freedom works. The creative potential of individuals in sovereign control over their own lives and property is an established fact. The hampering of productive people through the assault on their capital will be repudiated. The failure of socialism and overextended government will be the great lesson learned from the twentieth century. The people of the United States have enjoyed freedom of choice for over two hundred years, and it must never be forgotten that the market society they created was the generating source of the great wealth that exists today. The destruction of the market order, like any social order, occurs slowly. To mistake what is occurring in the United States today as a source of this nation’s wealth and material abundance would be the ultimate human tragedy.
What good life still prevails is in spite of the government policies of these past fifty years, and not because of such intervention. A nation of great wealth may be able to sustain an assault on its capital for a while, but to the poorer nations of the world such an assault would be instantly fatal.
The lesson to be learned is simple. It is that the hope of the future is not to be found in government management of the economy. Future productivity depends upon the individual, and it can be brought forth whenever he is free.