Wednesday, June 26, 2013

11 Unpopular Facts About Capitalism

"The rulers of America are despotic elites who are living in fear and trepidation of their own people and of people power around the world rising in rebellion against the misrule of capitalism." - Finian Cunningham of Veterans News Now

Cunningham's statement is true except the reference on capitalism.

With the increasing tension in global politics and economics, expect that capitalism will be continually associated with the despotic elites. It is natural, for misconceptions about capitalism is widespread. In this article, I glean eleven unpopular facts about capitalism from the book of the strongest defender of free market economy - Ludwig von Mises himself. 

In chapter 1 of "Economic Policy: Thoughts for Today and Tomorrow", Mises presents the true nature of capitalism. By reading the chapter, I encounter at least eleven misconceptions about capitalism. The distinction among these misconceptions is fluid and you can find an overlapping among them.

First, most people are unaware about the historical and social settings where capitalism emerged. In studying these settings, you will see how capitalism improved the life of the people by opening the opportunity to upward social mobility and accessibility to products and services, which formerly enjoyed only by the aristocracy. 

Feudalism was the dominant economic system prior to the entry of capitalism. Here we will see a big difference between the top minority who "rule" the society. Under capitalism, the "rulers" are those who serve the consumers. Unlike in feudalism, the rulers are secured of their social standing even though they would ignore the needs of the masses. The capitalist rulers cannot sustain their economic power if they will follow the feudal lords in that path. So in feudalism, we find that the door to social mobility was closed. As a rule, man's social status was fixed. Capitalism changed this social structure. Any individual from the bottom of society can climb up to the social ladder through innovative ideas and entrepreneurship. 

Two great social problems brought about the existence of capitalism. These are the increasing number of the outcasts and lack of raw materials. Outcasts were surplus people out of rural communities who did not own a land, did not have any work and society had no place for them. In dealing with this problem, the outcasts organized themselves and set up small shops to produce something. They produced affordable goods. This marked the beginning of mass production.

Second, most people fail to understand the basic difference between the economic condition in feudalism and capitalism. In feudalism, expensive products were manufactured exclusively for the wealthy. On the other hand, capitalism as mentioned above pioneered the production of affordable goods for mass consumption. In capitalism, the two important factors that products must possesss are quality and low price. Any entrepreneur who can provide products with either of these advantages to customers is destined to be prosperous. It is the basic principles of capitalism that any individual has a right to compete in market economy by serving the customer better and/or at an affordable price.

Third, most people do not realize the important contribution of capitalism in the increase of human population. The economic principle identified above had a corrolary result and that is, population growth. Mises wrote that the best way to answer those who hate capitalism is to give them this reply: 

"You know that the population of this planet is now ten times greater than it was in the ages preceding capitalism; you know that all men today enjoy a higher standard of living than your ancestors did before the age of capitalism. But how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has succeeded, whether or not you consider your own life very valuable." (pp.5-6). 

Fourth, most people do not know the origin of animosity against capitalism. Mises argued that hatred towards capitalism did not originate from the "proletariat" or the working class, but from the aristocracy. The aristocrats did not like the new system that replaced feudalism. As they observed the way capitalists paid their workers with higher wages, they were forced by necessity to pay equally higher wages to their peasants. Two quotes from Mises confirmed this:

"It is a fact that the hatred of capitalism originated not with the masses, not among the workers themselves, but among the landed aristocracy—the gentry, the nobility, of England and the European continent." (p.6).

"They blamed capitalism for something that was not very pleasant for them: at the beginning of the nineteenth century, the higher wages paid by industry to its workers forced the landed gentry to pay equally higher wages to their agricultural workers. The aristocracy attacked the industries by criticising the standard of living of the masses of the workers." (ibid.)

Fifth, most people are victims of historical distortion about capitalism. These people thought they are familiar with the so-called "unspeakable horror of capitalism." Mises describes such distortion, which he designates as "one of the greatest falsehoods of history": 

"...that the factories employed women and children and that these women and children, before they were working in factories, had lived under satisfactory conditions..." (ibid.).
Mises corrects such story: 

"The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying." (pp.6-7).

Sixth, most people fail to appreciate the higher standard of living in capitalist countries. Compared to previous century, capitalism blurred the distinction among different social classes. See how Mises understands such difference: 

"Today, in the capitalist countries, there is relatively little difference between the basic life of the so-called higher and lower classes; both have food, clothing, and shelter. But in the eighteenth century and earlier, the difference between the man of the middle class and the man of the lower class was that the man of the middle class had shoes and the man of the lower class did not have shoes." (p.9).

Seventh, most people think that employers determine wage rate. This misconception is about the source of wage rate. Anti-capitalists fail to see that ultimately, consumers determine the wage rate of employees. Mises explains this:

"Wage rates under capitalism are not set by a class of people different from the class of people who earn the wages; they are the same people. It is not the Hollywood film corporation that pays the wages of a movie star; it is the people who pay admission to the movies." (p.9).

Eighth, just like me, most people are not aware that capitalism was originally coined by its strongest enemy. Mises wrote: "The capitalist system was termed 'capitalism' not by a friend of the system, but by an individual who considered it to be the worst of all historical systems, the greatest evil that had ever befallen mankind. That man was Karl Marx." (p.10).

Ninth, most people do not know about the long-term benefits of savings. In order to produce business capital, savings is important. The use of savings as business capital benefits not only savers, but other players in the market such as the entrepreneurs, unemployed, producers of raw materials and existing wage-earners. Mises exlains the process:

"...savings mean benefits for all those who are anxious to produce or to earn wages...the money goes into the hands of an entrepreneur...What will the businessman do now with the additional capital? go out and hire workers and buy raw materials - in turn causing a further demand for workers and raw materials to develop, as well as a tendency toward higher wages and higher prices ofr raw materials." (p.11).

Tenth, most people think that the gap between the rich and the poor in capitalism will continually increase. This idea about capitalism thinks that the door for the economic improvement of the working class is closed. Anti-capitalist mentality teaches that as times pass, wealth will be concentrated in the hands of the privilege few. In the end, when "capitalism" reached its most corrupt stage, mass revolution is inevitable. For Mises, based on historical records, we could not see any capitalistic country that did not improve the condition of the masses. So this idea about capitalism is completely mistaken. Mises asserts, "The scornful depiction of capitalism by some people as a system designed to make the rich become richer and the poor become poorer is wrong from beginning to end." (p.12).

Eleventh, there are people who think that those who oppose capitalism such as the labor unions could improve the economic condition of the working class. Labor unions in their advocacy for higher wage rate, shorter work hours, and public ownership of means of production, some people believe are the means to improve the economic condition of the working class. Mises refutes these arguments in depth elsewhere. But here he mentioned Marx's theory of "iron law of wages" specifically as fallacious for its model was taken from biology. 

In closing, let us be reminded that higher standard of living depends on the supply of capital. As Mises emphasized: "A country becomes more prosperous in proportion to the rise in the invested capital per unit of its population" (p.14). 

Source: Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.