A proper understanding of capitalism is sorely lacking today. In order to gain such understanding, it is best to start with a true story that captures the spirit and sense of life of capitalism. Then it is possible to extract the deeper principles it embodies and the intellectual causes that give rise to it.

In the early 19th century, Robert Fulton, the inventor of the steamboat, held a monopoly granted by the state of New York to run all steamboat traffic in that state. The state-franchised monopoly legally prevented competition from entering the field, thereby keeping prices artificially high to the detriment of the customers, who detested the monopoly.

But in early 19th century America, men believed in their inalienable rights as free U.S. citizens, and did not bow compliantly to arbitrary government authority. In 1817, a New Jersey businessman hired 23 year old Cornelius Vanderbilt to ferry passengers between New Jersey and New York City in a direct challenge to the monopoly’s power. For the next six years, a cat-and-mouse game ensued between the monopoly and its challenger, with the young Vanderbilt at the epicenter of the struggle.

Vanderbilt hoisted a flag on the masthead of his boat, the Bellona, reading: “New Jersey must be free!” and for sixty consecutive days eluded capture by authorities who sought to arrest him and confiscate his vessel. To the delight of the passengers who loved his lower-priced service, he used every possible trick or subterfuge to avoid capture. He hid near the gangplank, then scurried off when police officers boarded so their papers could not be served. He constructed a secret closet in which to hide, so when law officers boarded him in the bay they found only a young woman steering the boat, whom they questioned to the taunts and derision of the other passengers.

The upshot was that in 1824, the Supreme Court – in the famous case of Gibbons vs. Ogden – declared the Fulton monopoly illegal, ruling that the states did not have the authority to regulate interstate commerce.

The breakup of the state-franchised monopoly led to a burst of technological innovations in the steamboat industry. With the market open and profit possible, entrepreneurs rushed in with new ideas, including tubular boilers rather than expensive copper ones and a cheaper fuel – coal – to replace cordwood. As costs dropped, steamboat companies were able to lower their fares.

Starting his own company, Vanderbilt proceeded to reduce rates all over the Northeast. He lowered the standard three-dollar fare on the New York to Philadelphia route to one dollar. He lowered the New York to Albany fare from three dollars to one, then to ten cents, then to nothing, making profit exclusively from the sale of food and drink on board. Commodore Vanderbilt’s fortune was made in open competition on a free market, without government aid or franchise, to the immense betterment of his customers.

Vanderbilt’s dashing, swashbuckling style, akin to that of a commercial buccaneer, has never been lacking among entrepreneurs, and captures what may be thought of as the sense of life or emotional ethos of capitalism. Capitalism is driven by bold, risk-taking entrepreneurs, and the Vanderbilt saga displays the essence of their spirit. 1

But what are the fundamentals of the capitalist system in literal, not emotional, terms? What are the principles that explain and give rise to the swaggering “can do” optimism of capitalism’s great inventors, innovators and entrepreneurs, the joyous confidence that enables them to make technological and industrial breakthroughs that create better lives for both themselves and millions of customers? The immediate pre-condition is political freedom.

Political freedom entails an individual’s legal right to engage in any activity he chooses, so long as he does not initiate force or fraud against other men. Capitalism is the system of freedom. It is the system in which the government is legally prohibited from initiating force against its citizens, confining itself to the protection of their rights. This was the great moral achievement of the U.S. Constitution and its Bill of Rights, providing American citizens an unparalleled degree of political liberty. Alexis de Tocqueville, who toured America in the 1830s, discussing freedom of the press in the United States, observed “that among the Americans I find the utmost national freedom combined with local freedom of every kind.” 2

But what is not clear to many people is the nature of freedom. For centuries, political philosophers have written about the virtues of freedom, and for millenia men have hungered, fought and died for it. However, no one until Ayn Rand defined its essential nature. In her influential novel, Atlas Shrugged, and in such non-fiction works as Capitalism: the Unknown Ideal, she shows that the fundamental attribute of freedom is: the absence of physical coercion. For men to be free, they must be able to act on the best rational judgment of their own minds without physical force initiated against them. “Freedom, in a political context, has only one meaning: the absence of physical coercion.” 3

A man’s freedom of action may be violated either by private individuals or by the government, and by one means only – by the initiation of force against him. Private individuals who initiate force are criminals, and men form governments to protect themselves from these. But the government itself is potentially the gravest danger to an individual’s freedom, because it has a legal monopoly on the use of force in a given geographical region. A government that is dictatorial threatens men in a manner far worse than that of a common criminal. Murderous tyrants like Adolf Hitler, Joseph Stalin, Mao tse Tung and Pol Pot killed vastly more innocent victims than did thugs like Al Capone and John Gotti. It is against the government that men’s freedom needs to be most urgently protected. It is well in this regard to remember George Washington’s famous warning that, “Government, like fire, is a dangerous servant.”

For men to be free, the initiation of force must be banned from human life. This is just as true of governmental force as of its private use. The use of force must be legally limited to retaliation against those who start it. Human beings require a written Constitution with a Bill of Rights to protect them from the state. The Constitution must legally outlaw the initiation of force by the government, as well as by private citizens. Capitalism requires, as a matter of principle, a universal ban on the initiation of force.

“America’s founding ideal was the principle of individual rights. Nothing more – and nothing less. The rest – everything that America achieved, everything she became, everything ‘noble and just,’ and heroic, and great, and unprecedented in human history – was the logical consequence of fidelity to that one principle. The first consequence was the principle of political freedom, i.e., an individual’s freedom from physical compulsion, coercion or interference by the government. The next was the economic implementation of political freedom: the system of capitalism.” 4

A right is a moral principle applicable only in a social setting. Robinson Crusoe, alone on his desert island, has no need and no use of such a concept. Men can derive great advantages from living in human society – education, love, family, friendship, a division of labor economy and many other benefits. But if men do not respect an individual’s rights, if they initiate force against him, then society will stop being a boon and commence being a hazard. An individual is vastly better off alone on a desert island than living in Hitler’s Germany or Stalin’s Russia, because he is at least free on the island to use his reason to confront the problem of survival in the face of physical nature. There are no evil men using brute force to apprehend him and construct camps for his confinement or extermination. For society to fulfill its promise as a potential boon to a man, it must respect his rights to life and property; more, it must protect them.

“A right is a moral principle defining and sanctioning a man’s freedom of action in a social context.” Without the concept of individual rights as inalienable properties of each individual, there exists no moral constraint preventing social intercourse from degenerating into the rule of brute force. Human society then devolves into either murderous tyrannies of a Nazi or Communist ilk, or the incessant violence of lawless chaos warned of by the English philosopher Thomas Hobbes, and perpetrated recently in such countries as Lebanon, Somalia and Rwanda. 5

The rule of law is fundamental to capitalism. The courts must protect all manifestations of individual rights, including property rights and the sanctity of contracts. They must protect honest men from thieves and criminals of every variety, whether they commit fraud or overt acts of physical coercion, whether they are private individuals or government bureaucrats or regulators. This is an especially urgent point in the early 21st century when former Communist nations seek to move to a capitalist system without first instituting the rule of law. Whether in states of the former Soviet Union or in Albania or elsewhere, if gangsters control significant elements of a society or its economy it will be impossible to protect property rights and enforce contracts. Legitimate businessmen will then be killed or intimidated, private investment will be withheld, and the attempt to implement a free economy will founder. Any hope to create a capitalist system rests on the antecedent requirement of establishment of the rule of law. In the absence of this, all such attempts are doomed to fail.


1. Burton Folsom, Myth of the Robber Barons (Herndon, Virginia: Young America’s Foundation, 1991), pp. 2-5.

2. Alexis de Tocqueville, Democracy in America (New York: Vintage Books, 1990), p. 113.

3. Ayn Rand, Capitalism: the Unknown Ideal (New York: Penguin Books, 1967), p. 46.

4. Ayn Rand, The Ayn Rand Letter (Gaylordsville, Ct.: Second Renaissance Inc., 1979), p. 109; quoted in Harry Binswanger, ed., The Ayn Rand Lexicon (New York: New American Library, 1986), p. 13.

5. Ayn Rand, The Virtue of Selfishness (New York: New American Library, 1964), pp. 92-93.

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Andrew Bernstein

Dr. Andrew Bernstein is an adjunct professor of philosophy at Pace University and at the SUNY. He is a senior writer for the Ayn Rand Institute.