Please Don’t Call It Capitalism: It’s Not Just about the Money!

AMAC Exclusive – By David Lewis Schaefer

This is the first installment of a two-part series.

Throughout the Cold War and beyond, it was common to describe the struggle between the United States (and its allies) and the Soviet Union as one of “capitalism” against “socialism.” Even today, foreign dictators and “democratic-socialist” advocates in the United States alike pin their grievances on “capitalism.” But this framing of the debate as a battle between socialism and capitalism adopts the favored terms of the left and misrepresents who actually benefits in “socialist” and “capitalist” societies.

Examples abound of contemporary socialists blaming their woes on the alleged predations of “capitalist” economies. During last November’s United Nations Conference on climate change, for instance, Venezuelan despot Nicolás Maduro blamed that supposed danger on the extraction of natural resources by “capitalism.” (Venezuela’s economy has long depended on the extraction of oil, though its production declined drastically once its socialist government took control of the industry.)

In the U.S., the current Hulu television series based on the New York Times’s “1619 Project” blames racial inequality in America on capitalism, when the real culprit, as two prominent economists note in their February 21 review in the Wall Street Journal, is actually socialist ideology.

Faculty at U.S. academic institutions that are supposed to train future business leaders now frequently call into question the morality of the economic system on which the country has relied throughout its history. The lead story in the New York Times Business Section this past November 28 was titled “Capitalism Is Up for Scrutiny at Elite Business Schools.” As an example of this scrutiny, the story quoted an exchange between Harvard professor Debora Spar and a student in her “widely sought-after course” on “Capitalism and the State” in which the two agreed that a “necessary condition” for capitalism is “scarcity, which is going to drive inequality.” (As if scarcity had not been the universal human condition prior to the coming of capitalism!) The course was cited as an instance of how today’s business school students are learning about “how to rethink capitalism.”

Meanwhile, over at Yale, the Times story reports, nearly half of the School of Management’s core curriculum is devoted to E.S.G., or “socially responsible” investing (a term that commonly refers to such activities of questionable public benefit as race-based hiring and the elimination of fossil fuels).

According to the story, even as most business students “are frank about the prestigious jobs they want, with hefty salaries attached,” they are “facing sharper questions from classmates about how to balance their ambitions with some sense of responsibility to the public good” – as if corporations do not normally, simply through productive (but honestly conducted) activities, benefit the public. Still, the story reports, “many of the students taking courses about challenging capitalism aren’t letting those big classroom questions overtake the ambitions that landed them in business school in the first place.”

These students are suffering from a considerable confusion, not to say contradiction, in their ambitions. “Educated” by instructors like Ms. Spar, although they are unlikely to forego their aspirations for wealth and status, those aspirations will nag at their conscience. They will have been taught as well that personal advancement in the business world, albeit by lawful means, is essentially at odds with promoting the public good, rather than being intertwined with benefiting one’s fellow citizens as well as oneself.

The truth that seems to be lost is that successful and law-abiding businessmen and women benefit other citizens by producing useful and valuable goods and services while also creating jobs. Americans, as a whole, exceed all other nations in their degree of charitable giving, as well as the amount of foreign aid they contribute through both public and private channels. While Americans of ordinary means display a high degree of charity, it is commonplace for the highest earners to donate large sums to colleges, hospitals, museums, and other philanthropic or civic institutions, as well as devote time to the support and governance of such institutions. Additionally, they pay by far the largest amount of taxes.

As for those tycoons who devote most of their time and wealth to trivial creature comforts like mansions and yachts, well, at worst, their crass materialism does no harm to anyone else. In fact, decades ago, when Congress enacted a special luxury tax on yachts, it was compelled, a short time later, to repeal the tax at the particular instigation of Democratic Rep. Patrick Kennedy, since those who worked in the boat building and maintenance industry in his state of Rhode Island had suffered mightily from the cutback in business.

At the same time, as social scientist Arthur Brooks demonstrated in his 2007 book Who Really Cares?, the tendency toward charitable giving is highly correlated with such “red-state” attitudes and practices as churchgoing, earning one’s own income (as opposed to receiving welfare), and the belief that individuals rather than government offer the best solution to social ills. While such outlooks and practices were portrayed by Alexis de Tocqueville as the key to the success of America’s democratic institutions in Democracy in America, they aren’t the sort of thing highlighted at America’s most prestigious business schools.

Therein lies the rub. For all the benefits that our so-called capitalist system provides, its survival depends on a continued appreciation of how it benefits the nation as a whole – in contrast to the morally self-indulgent but quite misleading doctrines espoused by instructors like Ms. Spar.

To start with, the very term “capitalism,” a coinage of communist theorists Karl Marx and Friedrich Engels, is a misnomer. As all economists know, the reliance on “capital” is not a peculiarity of one economic system. At least beyond the hunter-gatherer stage of existence, all economies depend on the combination of capital (farmland, farm animals, tools, workshops or factories, intellectual capital, cash available for investment, etc., in varying combinations) and labor. This was no less true of the Soviet Union, Communist China, Cuba, and other self-described communist or socialist political regimes than it was of the modern, industrialized West or of agrarian feudal regimes of the past.

The issue here is not merely verbal. The proper term for the economic systems of the industrialized nations for which Marx and Engels and their contemporary epigoni express undying hatred is “free enterprise.” Whereas socialist or communist regimes rest on government ownership of the means of production, the so-called capitalist systems depend on the enterprise and initiative of private individuals.

This doesn’t mean, of course, that free enterprise is incompatible with extensive government regulation of the economy, or generous welfare states. But the very capacity of free-enterprise economies to provide generously for the public welfare, in contrast to the poverty associated with socialism, derives from the labor and investment of private individuals – workers, scientists, inventors, entrepreneurs, and owners of corporations – animated by the pursuit of economic gain.

Free enterprise has made an enormous contribution to elevating the living standards of nations that adopted it under the influence of such modern liberal political philosophers as John Locke, Adam Smith, Baron de Montesquieu, and the American Founding Fathers. They all rejected the shackles that aristocratic or theocratic regimes had put on labor and commerce. This has been amply documented by the economic historian Deirdre McCloskey in her trilogy Bourgeois Virtue, Bourgeois Dignity, and Bourgeois Equality, among numerous other works that could be mentioned here.

In labeling the free-enterprise system “capitalist,” even its most distinguished advocates over the past century, such as Milton Friedman (Capitalism and Freedom) and Friedrich Hayek (for instance in his excellent edited volume Capitalism and the Historians) have surrendered their language to the enemies of freedom.

By calling the system of economic freedom, or (alternatively) commercial republicanism, by its Marxist label, its advocates are implying that the battle between socialist and free regimes was really about the competing interests of labor and “capital.” That is, socialist regimes supposedly advance the interests of workers (the vast majority of human beings) while capitalist ones just benefit greedy, materialistic plutocrats. As the current slogan of the American Communist Party puts it, Communists supposedly serve “People and Planet Before Profits.” (Stalin, Mao, and their cohorts, who lived in luxury while their subjects starved, would have a good, if private, laugh at that line!)

As already mentioned, the Times’s “1619 Project” exemplifies the error of blaming on “capitalism” what are really the consequences of arbitrary, corrupt, or merely private-interest-based government regulations that improperly interfere with the operation of the free-enterprise system – as well as, to the extent that their effects are still felt, of the pre-“capitalist” practices of slavery or serfdom.

As the Journal review of the Hulu series by economists David Henderson and Philip Magness demonstrates, the “1619 Project” inadvertently makes the case for economic freedom, since most of the contemporary injustices it cites resulted from government interventions that undercut free markets and property rights and therefore limited the opportunity for black advancement. These include the abuse of eminent domain, racial red-lining of Federally subsidized mortgages, minimum-wage laws originally designed to protect white workers in the North from competition by black migrants from the South who were willing to work for less, and governmental support and enforcement of labor monopolies by unions that systematically excluded blacks.

Stay tuned for the second installment of “Please Don’t Call It Capitalism” in the coming days.

David Lewis Schaefer is a Professor of Political Science at College of the Holy Cross.