SOCIALIST MYTHS AND SUPERSTITIONS ABOUT CAPITALISM
It is easy to attack an institution if you define it in the most preposterous way possible. For well over one hundred years, socialists have built endless capitalist straw men to attack and have attacked them so often that they hope by sheer repetition people will actually believe their socialist arguments. A prime example is the socialist mantra of “People not Profit” or “Production for Use, Not for Profit.”1 Capitalists, allegedly, are only interested in profit and ignore the needs of “people.” This is the exact opposite of the truth.
No one can succeed in a system of free-market capitalism without serving “the people.” Competition in a market economy is all about better meeting the needs of customers. Businesses that excel at meeting customer demand are rewarded with profits, those that don’t suffer losses.
It is government that is guilty of ignoring the needs of the people, not capitalism. Governments simply announce to the public, “Here, we believe that you need this, and we will force you to pay for it.” “The fundamental principle of capitalism,” wrote Ludwig von Mises, is that competitive businesses produce “almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses.”2 The so-called “power” of big businesses in the free market comes entirely from “the people” who voluntarily purchase their products by “voting” with their dollars. And that “power” can be extinguished on a moment’s notice, as soon as a competing entrepreneur comes along with a cheaper or better-quality product. Consumer sovereignty reigns in a market economy.
The “power” of big government (or any government), in stark contrast, comes entirely from the government’s ability to coerce and force the people to bend to its will with intimidation, threats, and violence. That is always the modus operandi of socialism. When the Socialist Party USA or Democratic Socialists of America urge the greater politicization of all aspects of society, as they do on their websites with endless happy talk about “democracy,” this is really what they mean: subjecting more and more of society to bureaucratic plans and mandates imposed by a small political elite and enforced by threats, intimidation, and violence—the common everyday tools of all socialist governments. When the Democratic Socialists of America say, “Democracy and socialism go hand in hand,” what they mean is that they want every aspect of life to be politicized and brought into the realm of government supervision and control.
Capitalist entrepreneurs gain wealth by providing products and services that people buy of their own free will. John D. Rockefeller started out penniless and became the wealthiest man of his time by producing refined petroleum products at ever cheaper prices. In the process, he created tens of thousands of jobs, and billions of dollars of wealth (in both income and products) for the American economy. Rockefeller invested his profits in myriad businesses and industries, creating even more jobs and prosperity, and was a major philanthropist. (It was Rockefeller’s wealth that founded the University of Chicago, among other things.) Entrepreneurs who became wealthy through free-market competition always benefit their society through creating wealth and jobs, and almost invariably are leaders in charitable giving.3 As Ludwig von Mises wrote:
The history of capitalism as it has operated in the last two hundred years in the realm of Western civilization is the record of a steady rise in the wage earners’ standard of living. The inherent mark of capitalism is that it is mass production for mass consumption directed by the most energetic and far-sighted individuals, unflaggingly aiming at improvement. Its driving force is the profit motive, the instrumentality of which forces the businessman constantly to provide the consumers with more, better, and cheaper amenities. An excess of profits over losses can appear only in a progressing economy and only to the extent to which the masses’ standard of living improves. Thus capitalism is the system under which the keenest and most agile minds are driven to promote to the best of their abilities the welfare of the laggard many.4
THE MYTH OF “SUBSISTENCE WAGES”
One of the oldest socialist myths, invented by Karl Marx himself, is that capitalism’s “labor exploitation” dooms “the working class” to subsistence-level wages. This, too, is the exact opposite of the truth: capitalism has been the main cause of increases in wages, improved working conditions, and prosperity for the working class—and all other “classes.” It was under socialism in the twentieth century that the working class was paid near starvation-level wages and forced to toil in horrendous conditions. The last thing in the world the “working class” needs is socialism and economic stagnation.
During what historians call America’s “first industrial revolution” (1820–1860) the average worker’s paycheck increased by 60 to 90 percent.5 During the “second industrial revolution” (1860–1890) real wages (adjusted for inflation) rose another 50 percent while the average work week was shortened.6 While wages went up, production of new and better products improved dramatically, and prices went down with price deflation from the end of the Civil War to the turn of the century.
The shorter work week, which averaged sixty-one hours in 1870, was much more the result of capitalist investment and technology that improved productivity than it was the result of laws and regulations. These only confirmed the progress being made by capitalism. As Ludwig von Mises noted, “The 19th century’s labor legislation by and large achieved nothing more than to provide a legal ratification for changes that the interplay of market forces had brought about previously.”7 Capitalism, as economists Michael Cox and Richard Alm explain, is the reason, “American workers have become more efficient, applying technology, better tools, and improved skills to produce more goods and services on the job.”8 As workers become more productive, employers, in turn, compete for their services by offering them better pay and/or shorter hours.
Socialists like to argue that under capitalism the rich get richer and the poor get poorer; these days, it’s usually a matter of presenting statistics on “income distribution” to show that the top earners’ “share of national income” has gone up, while the bottom 10 or 20 percent of income earners have seen their share stay the same or go down. To get to this conclusion you have to assume that the same people are somehow stuck in an economic rut at the bottom of the income scale. Economists Michael Cox and Richard Alm exposed this by citing a University of Michigan study that tracked more than 50,000 Americans for three decades to discern the extent of economic mobility in America. They found that very few people are “stuck” at the bottom of the economic ladder; most rise quickly. Among their findings:
• More than three-fourths of families in the bottom fifth of income distribution in 1975 had made their way up to the two highest income quintiles in 1991.
• The poorest families made the largest gains. Those who started in the bottom 20 percent in 1975 had an inflation-adjusted gain in annual income of $27,745 by 1991; those who started in the top 20 percent in 1975 also improved, but only by $4,354.
• Less than 1 percent of the sample population remained in the bottom 20 percent during the 1975-1991 period.
• More than half of the families who were in the bottom 20 percent in 1975 made it to a higher bracket within four years.9
The greatest engine for economic mobility, progress, and opportunity is capitalism; and there is no way that socialists can get around their own history of economic stagnation and failure.
THE MYTH OF THE ABUSIVE FACTORY
Working conditions in nineteenth-century factories were often horrendous by modern-day standards, and socialists have used this fact to make the case that the invention of the factory system was harmful to workers, both physically and economically. But comparing working conditions in nineteenth-century factories to today’s working conditions is not the proper comparison. The proper comparison is with what the workers left behind when they left the farms to work in the factories. Because they voluntarily left the farms for the factories, it is obvious that they believed that their wages and working conditions were improved by doing so. Factory work, as difficult as it was, was obviously an improvement over back-breaking, six-teen-hour days of farm labor for miniscule wages. Interestingly, it was not socialist propagandists who first put forth the arguments about how factory work supposedly reduced the economic well-being of workers, but the landed aristocracy that was incensed by the higher wages paid by industry. Because the factories were offering higher wages than what could be earned as a farm laborer, the landed aristocracy was forced to compete by offering higher wages to farm workers.10
In the early days of capitalism it was not uncommon for mothers to bring some of their older children with them to work in the factories. This sounds deplorable by today’s standards, but, again, the alternative was farm labor at lower, and often more uncertain, wages; and child labor laws were, again, a result of capitalist economic progress, of increasing wages and wealth so that it was no longer necessary for families to put their children to work.
THE MYTH OF THE ROBBER BARONS”
For more than a century, socialists have smeared successful nineteenth-century American entrepreneurs as “robber barons.” These men were anything but “robbers” or “barons.”
Cornelius Vanderbilt got his start in business by breaking up a steamboat monopoly on the Hudson River enjoyed by crony capitalist Robert Fulton, who had secured a thirty-year monopoly license from the state of New York.11 Vanderbilt was hired by New York businessman Thomas Gibbons to defy the state’s steamboat monopoly, and he succeeded. He cut the fare from New York to Hartford eventually to zero and made money by selling food and drinks on the ships. The U.S. Supreme Court ended the steamboat monopoly licensing scheme with its 1824 ruling in Gibbons vs. Ogden, maintaining that only the federal government, not state governments, can regulate interstate trade under the Commerce Clause of the U.S. Constitution. This was a classic case of a genuine free-market entrepreneur (Vanderbilt) out-competing a crony capitalist favored by government (Fulton). Vanderbilt of course went on to become extremely successful in the railroad industry.
James J. Hill built a transcontinental railroad, The Great Northern, without any government subsidies and out-competed all the government-subsidized crony capitalists who operated the Union Pacific and Central Pacific Railroads.12 While the latter corporations were given hundreds of miles of land and per-mile building subsidies by the U.S. government, Hill boasted of having built The Great Northern “without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash.”13 The Great Northern became the “most profitable of all the world’s major railroads.” Hill refused to join in price-fixing cartels and instead steadily reduced the rates he charged. He generated good will with local communities along his route in myriad ways, such as donating land for parks, schools, and churches and helping to educate farmers in the latest developments in agricultural science.14
The crony capitalist railroads, on the other hand, were built in extraordinarily wasteful ways since all of their waste and cost over-runs were subsidized by the government. Indeed, much of the wastefulness was required by the government, subsidizing unprofitable small rail lines in certain congressional districts, in order to secure votes in Congress for more subsidies. The Union Pacific and Central Pacific were eventually exposed as the instigators of one of the then biggest political corruption scandals in American history, the Crédit Mobilier scandal.
Like James J. Hill and many other successful free-market capitalists of the nineteenth century, John D. Rockefeller started from nothing. His Standard Oil Company was praised by even his harshest and most envious critics as “a marvelous example of economy” in business.15 Because of Standard Oil’s outstanding efficiency and competitiveness, its share of the refined petroleum market increased from 4 percent in 1870 to 25 percent in 1874 and 85 percent by 1880. It did this by cutting the cost of refining a gallon of oil from three cents to less than half a cent, and passing the cost reductions on to its customers. The price of refined oil plummeted from thirty cents a gallon in 1869 to eight cents by 1885.16
Rockefeller was extremely generous with his employees, paying them more than the competition and rewarding his managers with bonuses and time off for good performance. Consequently, his workers were more productive and he was rarely slowed down by strikes.
THE MYTH OF “PREDATORY PRICING”
Socialists often charge that capitalists use “predatory pricing” to drive out competition and thus create monopolies that can then exploit consumers with high prices. One problem with this theory, however, is that no one has ever found a monopoly that was created in this way.17 Socialist folklore has it that John D. Rockefeller was a “monopolist,” but when his company was broken up by the antitrust authorities, he had more than 300 competitors, which is hardly anyone’s definition of a monopoly.
The reason why no one has ever found a monopoly created through predatory pricing is because no business leader would intentionally lose money for years in the uncertain hope that he might bankrupt his competitors and with the dangerous possibility that even if he somehow succeeded in establishing a monopoly, it wouldn’t be permanent, as new competitors tried to undercut his monopoly pricing. There are many other less risky ways to make money, such as simply expanding one’s core business. As for the hoary accusations that Standard Oil practiced predatory pricing, economist John McGee studied the entire Standard Oil antitrust case and concluded in the Journal of Law and Economics that there was no evidence in the trial that Standard Oil ever attempted predatory pricing; it was merely very good at old-fashioned price-cutting competition.18
THE CAPITALISM-CAUSES-WAR MYTH
Socialists like to allege that capitalism causes war. Capitalist economies, they say, produce too much for domestic consumption, and therefore invade other countries to dump products on their markets. One early twentieth-century proponent of this idea was the Marxist John A. Hobson, author of the book Imperialism. Lenin himself praised Hobson and repeated the notion in his Imperialism: The Highest Stage of Capitalism.
Like so many other socialist myths about capitalism, the truth is exactly the opposite. War and capitalism are in reality opposite extremes. Free market capitalism is all about trade, including international trade; it is about the free exchange of goods and ideas, which encourages peace and mutual understanding. There is an old saying, sometimes credited to the nineteenth-century French economist Frédéric Bastiat, that “If goods don’t cross borders, armies will.” Free trade encourages peaceful cooperation, while restraints on capitalism, like protectionism and tariffs, can create “trade wars” that become real wars.
The height of protectionism, or economic nationalism, is “autarky,” a policy of attempting to be economically self-sufficient as a nation, producing everything a population needs from domestic sources. Nazi Germany was one country that followed this policy, and since Germany did not have enough resources to achieve economic self-sufficiency, it invaded other countries to expropriate the resources it needed.19 Germany’s national socialists were not alone of course; governments have waged wars of economic conquest for centuries, but capitalism—which encourages international free trade—is almost by definition not the reason; wars of economic conquest are almost invariably the result of some variant of mercantilism, socialism, or autarky, three economic theories that put the interests of the state, which controls the military, first.
It is essential for citizens of a free and prosperous society to understand enough about economic logic (and economic reality) to see through socialist myths. I hope this book has gone some way towards helping expose just a few of the myriad problems of socialism and restoring the ideal of free markets and human freedom.