This essay was originally presented as a speech at the Ludwig von Mises Institute on October 19, 2002, under the title “Some Fundamental Insights into the Benevolent Nature of Capitalism.” It appears as the lead essay in my Amazon.com collection The Benevolent Nature of Capitalism and Other Essays. Some additional material has been included in the present version.
Introduction: What Is Capitalism?
As I explained in my book Capitalism: A Treatise on Economics, “capitalism is a social system based on private ownership of the means of production. It is characterized by the pursuit of material self-interest under freedom and it rests on a foundation of the cultural influence of reason. Based on its foundations and essential nature, capitalism is further characterized by saving and capital accumulation, exchange and money, financial self-interest and the profit motive, the freedoms of economic competition and economic inequality, the price system, economic progress, and a harmony of the material self-interests of all the individuals who participate in it.”
By the “benevolent nature of capitalism,” I mean the fact that capitalism promotes human life and well-being and does so for everyone. There are many aspects of capitalism’s benevolence, which have been discovered over more than three centuries by a series of great thinkers ranging from John Locke to Ludwig von Mises and Ayn Rand. I present as many of them as I can in my book.
I’m going to briefly discuss about twenty of these aspects that I consider to be the most important, and which I believe, taken all together, make the case for capitalism irresistible. I’ll discuss them roughly in the order in which I present them in my book. Let me say that I apologize for the brevity of my discussions. Each one of the insights I go into would all by itself require a discussion longer than the entire time that has been allotted to me to speak today. Fortunately, I can fall back on the fact that, in my book at least, I think I have presented them in the detail they deserve.
And now, let me begin.
1. Based on a Foundation of Individual Freedom, Capitalism Provides both Economic Security and Physical Safety
Individual freedom—an essential feature of capitalism—is the foundation of security, in the sense both of personal safety and of economic security. Freedom means the absence of the initiation of physical force. When one is free, one is safe—secure—from common crime, because what one is free of or free from is precisely acts such as assault and battery, robbery, rape, and murder, all of which represent the initiation of physical force. Even more important, of course, is that when one is free, one is free from the initiation of physical force on the part of the government, which is potentially far more deadly than that of any private criminal gang. (The Gestapo and the KGB, for example, with their enslavement and murder of millions made private criminals look almost harmless by comparison.)
The fact that freedom is the absence of the initiation of physical force also means that peace is a corollary of freedom. Where there is freedom, there is peace, because there is no use of force: insofar as force is not initiated, the use of force in defense or retaliation is not required.
The economic security provided by freedom derives from the fact that under freedom, everyone can choose to do whatever he judges to be most in his own interest, without fear of being stopped by the physical force of anyone else, so long as he himself does not initiate the use of physical force. This means, for example, that he can take the highest paying job he can find and buy from the most competitive suppliers he can find; at the same time, he can keep all the income he earns and save as much of it as he likes, investing his savings in the most profitable ways he can. The only thing he cannot do is use force himself. With the use of force prohibited, the way an individual increases the money he earns is by using his reason to figure out how to offer other people more or better goods and services for the same money, since this is the means of inducing them voluntarily to spend more of their funds in buying from him rather than from competitors. Thus, freedom is the basis of everyone being as economically secure as the exercise of his own reason and the reason of his suppliers can make him.
2. How Capitalism Provides a Continuing Increase in the Supply of Natural Resources
A continuing increase in the supply of economically useable, accessible natural resources is possible as man converts a larger fraction of the virtual infinity that is nature into economic goods and wealth, on the foundation both of growing knowledge of nature and growing physical power over it. (For elaboration of this important point, please see Chapter 3 of my book, and my essay “Environmentalism in the Light of Menger and Mises” in the 2002 summer issue of The Quarterly Journal of Austrian Economics.)
3. How Production and Economic Activity Improve Man’s Environment
Production and economic activity, by their very nature, serve to improve man’s environment. This is because from the point of view of physics and chemistry, all that production and economic activity consist of is the rearrangement of the same nature-given chemical elements in different combinations and their movement to different geographical locations. The guiding purpose of this rearrangement and movement is essentially nothing other than to make the chemical elements stand in an improved relationship to human life and well-being. It puts the chemical elements in combinations and locations where they provide greater utility, greater benefit to human beings.
The relationship of the chemical elements iron and copper, for example, to man’s life and well-being is greatly improved when they are extracted from beneath the earth and made to appear in such products as automobiles, refrigerators, and electric cable. The relationship of the chemical elements carbon, hydrogen, and oxygen to man’s life and well-being is improved when they can be made to yield electric light and power. The relationship of a piece of land to man’s life and well-being is improved when instead of his having to sleep upon it in a sleeping bag and take precautions against snakes, scorpions, and other wildlife, he can sleep in a well-constructed modern home that is built upon it, with all the utilities and appliances we take for granted.
The totality of the chemical elements in their relationship to man, constitutes man’s external, material environment, and precisely this is what production and economic activity serve to improve, by their very nature.[i]
4. The Division of Labor and the Fundamental Harmony of Interests
The division of labor, a leading feature of capitalism, which can exist in highly developed form only under capitalism, provides among other major benefits, the enormous gains from the multiplication of the amount of knowledge that enters into the productive process and its continuing, progressive increase. Just consider: each distinct occupation, each sub-occupation, has its own distinct body of knowledge. In a division-of-labor, capitalist society, there are as many distinct bodies of knowledge entering into the productive process as there are distinct jobs. The totality of this knowledge operates to the benefit of each individual, in his capacity as a consumer, when he buys the products produced by others—and much or most of it also in his capacity as a producer, insofar as his production is aided by the use of capital goods previously produced by others.
Thus a given individual may work as a carpenter, say. His specialized body of knowledge is that of carpentering. But in his capacity as a consumer, he obtains the benefit of all the other distinct occupations throughout the economic system. The existence of such an extended body of knowledge is essential to the very existence of many products—all products that require in their production more knowledge than any one individual or small number of individuals can hold. Such products, of course, include machinery, which could simply not be produced in the absence of an extensive division of labor and the vast body of knowledge it represents.
Moreover, in a division-of-labor, capitalist society, a large proportion of the most intelligent and ambitious members of society, such as geniuses and other individuals of great ability, choose their concentrations precisely in areas that have the effect of progressively improving and increasing the volume of knowledge that is applied in production. This is the effect of such individuals concentrating on areas such as science, invention, and business.
5. The Uniformity-of-Profit Principle: Consumer Control over Production and Its Progressive Increase
At least since the time of Adam Smith and David Ricardo, it has been known that there is a tendency in a capitalist economy toward an equalization of the rate of profit, or rate of return, on capital across all branches of the economic system. Where rates of return are above average, they provide the incentive and also the means for stepped up investment and thus more production and supply, which then operates to reduce prices and the rate of return. Where rates of return are below average, the result is reduced investment and reduced production and supply, followed by a rise in profits and the rate of return. Thus high rates of profit come down and low rates come up.
The operation of this principle not only serves to keep the different branches of a capitalist economy in a proper balance with one another, but it also serves to give the consumers the power to determine the relative size of the various industries, simply on the basis of their pattern of buying and abstention from buying, to use the words of von Mises. Where the consumers spend more, profits rise, and where they spend less, profits fall. In response to the higher profits, investment and production are increased, and in response to the lower profits or losses, they are decreased. Thus the pattern of investment and production is made to follow the pattern of consumer spending.
Perhaps even more importantly, the operation of the tendency toward a uniform rate of return on capital invested serves to bring about a pattern of progressive improvement in products and methods of production. Any given business can earn an above-average rate of return by introducing a new or improved product that consumers want to buy, or a more efficient, lower-cost method of producing an existing product. But then the high profit it enjoys attracts competitors, and once the innovation becomes generally adopted, the high profit disappears, with the result that the consumers gain the full benefit of the innovation. They end up getting better products and paying lower prices.
If the firm that made the innovation wants to continue to earn an exceptional rate of profit, it must introduce further innovations, which end up with the same results. Earning a high rate of profit for a prolonged period of time requires the introduction of a continuing series of innovations, with the consumers obtaining the full benefit of all of the innovations up to the most recent ones.
6. How Private Ownership of the Means of Production Benefits the Non-Owners
As von Mises has shown, in a market economy, which, of course, is what capitalism is, private ownership of the means of production operates to the benefit of everyone, the nonowners, as well as owners. The nonowners obtain the benefit of the means of production owned by other people. They obtain this benefit as and when they buy the products of those means of production. To get the benefit of General Motors’ factories and their equipment, or the benefit of Exxon’s oil fields, pipelines, and refineries, I do not have to be a stockholder or a bondholder in those firms. I merely have to be in a position to buy an automobile, or gasoline, or whatever, that they produce.
Moreover, thanks to the dynamic, progressive aspect of the uniformity-of-rate-of-profit or rate-of-return principle that I explained a moment ago, the general benefit from privately owned means of production to the nonowners continually increases, as they are enabled to buy ever more and better products at progressively falling real prices. It cannot be stressed too strongly that these progressive gains, and the generally rising living standards that they translate into, vitally depend on the capitalist institutions of private ownership of the means of production, the profit motive, and economic competition, and would not be possible without them. It is these that underlie motivated, effective individual initiative in raising the standard of living.
7. How the Institution of Inheritance Benefits the Non-Heirs
A corollary of the general benefit from private ownership of the means of production is the general benefit from the institution of inheritance. Not only heirs but also nonheirs benefit from its existence. The nonheirs benefit because the institution of inheritance encourages saving and capital accumulation, to the extent that it leads people to accumulate and maintain capital for transmission to their heirs. The result of the existence of this extra accumulated capital is more means of production producing for the market, and thus more and better products for everyone to buy.
The effect of additional capital, of course, is also an additional demand for labor, and thus higher wage rates. The demand for labor, it should be realized, is a major means by which all privately owned means of production operate to the benefit of nonowners. Capital underlies the demand for labor as well as the supply of products.
8. How in the Building of Great Industrial Fortunes, One Man’s Gain Is also All Other Men’s Gain
Under capitalism, not only is one man’s gain not another man’s loss, insofar as it comes out of an increase in overall, total production, but also—in the most important cases, namely, those of the building of great industrial fortunes—one man’s gain is positively other men’s gain. This follows from the fact that the sheer arithmetical requirements of building a great fortune are a combination of the earning of a high rate of profit on capital for a prolonged period of time, and the saving and reinvestment of the far greater part of the profits earned, year after year.
As we have seen, the earning of a high rate of profit for a prolonged period of time, in the face of competition, requires the introduction of a series of significant innovations. These innovations represent better and less expensive products for the consumers. The saving and reinvestment of the profits earned on the innovations constitute the accumulation of means of production, which also serves the consumers. Thus both in their origin, in high profits, and in their disposition, in the accumulation of capital, great industrial fortunes represent corresponding gains to the general consuming public. For example, old Henry Ford’s starting with a capital of $25,000 in 1903 and ending with a capital of $1 billion in 1946 was the other side of the coin of the average person becoming enabled to buy a greatly improved, far more efficiently produced automobile—produced largely in factories representing Ford’s billion.
9. How Economic Competition Is the Opposite of the “Law of the Jungle” and Instead Is the Basis of the Survival of All
As von Mises has shown, the economic competition that takes place under capitalism is radically different than the biological competition that prevails in the animal kingdom. In fact, its character is diametrically opposite. The animal species are confronted with scarce, nature-given means of subsistence, whose supply they are unable to increase. Man, by virtue of his possession of reason, can increase the supply of everything on which his survival and well-being depend. Thus, instead of the biological competition of animals striving to grab off limited supplies of nature-given necessities, with the strong succeeding and the weak perishing, economic competition under capitalism is a competition in who can increase the supply of things the most, with the outcome being practically everyone surviving longer and better.
Totally unlike lions in the jungle, who must compete for a limited supply of animals such as zebras and gazelles, by means of the power of their senses and limbs, producers under capitalism are in competition for a limited supply of dollars in the hands of consumers, which they compete for by means of offering the best and most economical products their minds can devise. Since such competition is a competition in the positive creation of new and additional wealth, there are no genuine long-run losers as the result of it. There are only winners.
The competition of farmers and farm-equipment manufacturers enables the hungry and weak to eat and grow strong; that of pharmaceutical manufacturers enables the sick to recover their health; that of eye-glass and hearing-aid manufacturers enables many who otherwise could not see or hear, to do so. So far from being a competition whose outcome is “the survival of the fittest,” the competition of capitalism is more accurately described as a competition whose outcome is the survival of all, or at least of more and more, for longer and longer and ever better. The only sense in which only the “fittest” survive is that it is the fittest products and fittest methods of production that survive, until replaced by still fitter products and methods of production, with the effects on human survival just described.
Notes
[i]. On this subject, and why the environmentalists fail to understand it, see also, the discussion of how production improves the environment in “The Toxicity of Environmentalism.”
Tags: Capitalism, economics, George Reisman
