A growing number of countries–among them, Thailand, Indonesia, Malaysia, South Korea, and Russia–are in a state of financial turmoil. They are all suffering from the effects of currency devaluation, widespread bankruptcies and insolvencies, actual or impending bank failures, collapsing stock markets, and mounting unemployment. Venezuela, Mexico, China, Brazil, and Argentina may soon join the list. Far more ominously, so too may be Japan. And while their problems up to this point have not been the result of the developing financial crisis, the most important countries of continental Europe have for some years suffered from depression-levels of unemployment–i.e., double digit rates in France, Germany, and Italy. In a word, the world appears to be coming face to face with the closest thing to the conditions of a global depression since the 1930s.
Many people assume that such ills are the result of capitalism and ask if capitalism can survive in the face of them, especially in countries that until recently were members of the Third World or of the Communist bloc. Obviously, to the extent that people believe that capitalism is responsible for depressions and mass unemployment and the large-scale, protracted human suffering that goes with them and, at the same time, believe that their fate would be materially better if they were to establish or re-establish some form of government dictatorship over the economic system, then the result is, indeed, very likely to be a pronounced movement away from capitalism and toward such dictatorship.
The fundamental question, however, is not what people will do on the basis of the ideas they hold, though that is certainly an important question, but whether or not those ideas are true. Is capitalism responsible for depressions and mass unemployment? Is it responsible for today’s crises and mass unemployment?
If one understands both the nature of capitalism and economic theory as it has been developed by its ablest practitioners from Adam Smith to Ludwig von Mises, it becomes clear that capitalism is not the source of these evils. Capitalism is a politico-economic system based on private ownership of the means of production and characterized by the pursuit of material self-interest under freedom. (For all the details concerning its nature and operation and comprehensive answers to virtually all of the arguments raised against it, I urge the reader to consult my thousand-page-plus book Capitalism on the subject.)
Nowhere in the world does the capitalist economic system exist in its logically consistent form. This is true even of the United States, which can be called the world’s freest and most capitalistic country only in a comparative sense. (To think of Russia and the other countries of the former Soviet Union as having become capitalistic is such a distortion of the concept that it implies that the virtual total absence of secure private ownership of the means of production can somehow constitute capitalism.)
The freedom that characterizes capitalism is freedom from one specific thing: the initiation of physical force, above all, by the government. Under capitalism, government exists to protect the individual citizen from the initiation of physical force by others, including their use of fraud, which is a species of theft. The only restraint it imposes on the individual is that he too is not to initiate the use of force against others.
Under such freedom, each individual is able to use his mind to look at the world and the opportunities it offers for his betterment and to choose the best of the opportunities open to him. His efforts are almost always enormously aided by the cooperation of other people, who are the suppliers of everything he buys and the customers or employers for the goods or labor that he sells. Under capitalism, each individual obtains the cooperation of others by means of a process of voluntary exchange, in which both parties gain.
The greatest, most extensive mutual gains under capitalism occur as the result of the activities of fortune builders. Fortunes are earned under capitalism by introducing new and improved products and methods of production, which is the source of earning a high rate of profit. The fortune builder saves and reinvests the far greater part of his high profit. The physical wealth that his growing fortune represents–the factories, machinery, and so forth–is used in producing goods that the general public consumes. At the same time it is the foundation of his growing demand for the labor that other people sell. The general public, in its capacity as sellers of labor and buyers of consumers’ goods is actually by far the major beneficiary of the fortunes built under capitalism. (Just think of how many houses, automobiles, television sets, and practically every other consumers’ good are owned by average working men and women in the United States compared with how many are owned by the tycoons.) Furthermore, the high rates of profit earned by the introduction of improvements soon invite competition, which reduces those rates of profit to a more modest level. To go on earning a high rate of profit, the fortune builder must repeatedly introduce fresh improvements. The net upshot is a continually rising standard of living for everyone.
To abandon this fabulously successful system of mutual cooperation in the pursuit of individual self-interest and replace it with one whose essential characteristic is the government’s pointing a gun at people’s heads precisely in order to prohibit them from pursuing their self-interests and to compel them to act against their self-interests is an act of colossal self-destruction. If this is what the people of any country choose to do, that is the nature of their choice.
The absurdity of such a choice is compounded by the fact that what is actually responsible for the existence of such evils as economic crises and mass unemployment is precisely major violations of capitalism, specifically in the form of government interference with wage rates and government interference with money and banking. The latter interference is responsible for the existence of a financial system with the potential both for unlimited inflation and catastrophic deflation. (The monetary system of a full-bodied capitalist society in contrast would be virtually incapable of either inflation or deflation.)
When the system goes into deflation, mass unemployment develops as spending drops and unsold goods pile up. The unemployment is then perpetuated by government policies that prevent a fall in wage rates, costs of production, and prices, which fall would enable full employment to be reestablished in the face of a lower level of spending.
In the case of the recently communist or Third World countries now in a state of economic crisis, deflation has been brought about as a direct result of their governments’ policy of domestic inflation. Sharply increased supplies of such currencies as bahts, rupiahs, and rubles have resulted in an even greater depreciation of these currency units against the dollar, mark, and yen, with the result that the larger supplies of these currencies actually turn out to be the equivalent of a smaller number of dollars, marks, and yen than before. The consequence has been that many business firms in those countries have found their earnings insufficient to pay their foreign debts and have gone bankrupt.
Instead of compounding this anticapitalistic policy by blaming its effects on capitalism and then adopting new and additional anticapitalistic policies as the alleged remedy, the rational procedure for these countries would be to attempt to cope with their problems by adopting policies that would make them more capitalistic rather than less capitalistic. This, of course, would include abstaining from all further domestic inflation. It would also include doing everything in their power to make investment in their territory as attractive as possible.
This last would first of all entail establishing secure private ownership of the means of production to the extent that it did not yet exist. That, of course, should be priority number one for the countries of the former Soviet Union, where today fortune building is more a process of temporary possession of the fruits of political plunder than of productive achievement and saving.
It would also entail fully respecting the right of foreign investors to remit dividends and interest payments and to withdraw their investments if they wish, all of which is essential for getting any new foreign investors to invest in the first place. (Foolishly, the government of Malaysia has just imposed a series of restrictions totally abrogating this right.) In addition, it would include a policy of the lowest possible taxes on profits and the elimination of as much government interference as possible that stands in the way of a fall in costs of production in their territory.
Following a procapitalistic policy will enable these countries to recover and to return to the path of rapid economic progress that within a single generation can lift their populations from poverty to the prosperity of a modern country. That, obviously, is their rational choice. What they will actually do is another matter.
To learn about every aspect of the case for capitalism, read my Capitalism: A Treatise on Economics. This article appeared in the Sunday, September 6, 1998 issue of The Orange County Register under the title “Will capitalism survive this test?” and also at the blog of George Reisman. Copyright 2019 George Reisman. All rights reserved.
Notes
For further reading on this subject, see George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996), Chapters 12, 13, and 19. Ludwig von Mises, Human Action (Chicago: Henry Regnery Company, 1966), Chapters XVII, XX, and XXXI.
