Free Enterprise Capitalism:
The Logical Answer
by Tim Fisher
When someone says "capitalism," most who think they know what it means usually have a tendency to respond in a negative fashion. Many people see capitalism as a ruthless, evil system where everyone is mean and greedy and businesses are designed for deception and theft. Neither this nor the opposite is true. Capitalist business has no agenda and no moral stance or intentions. Most people with either perception misunderstand the fundamentals and logic of capitalism or they have failed to fully understand the fallacies of the views of those who oppose it.
The definition of capitalism is one that few authors or lexicographers can agree on. Webster’s New World College Dictionary defines capitalism as, "the economic system in which all or most of the means of production and distribution, as land, factories, railroads, etc., are privately owned and operated for profit" (207). Other definitions are as simple as "production for a market by enterprising individuals" (Berger 19). Both of these statements are correct. As one can see, one definition does not seem to fit the entire picture.
Laissez-faire, free enterprise (free market) capitalism is the socioeconomic system that provides the maximum benefits to all participants. As Ayn Rand, the originator of the Objectivist philosophy, states,
Capitalism, by its nature, entails a constant process of motion, growth, and progress. It creates the optimum social conditions for man to respond to the challenges of nature in such a way as best to further his life. It operates to the benefit of all those who choose to be active in the productive process, whatever their level of ability (146).
Beyond the technical definitions of capitalism, there are great disagreements over to what extent capitalism should be implemented. Rand states, "When I say 'capitalism,' I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism – with a separation of state and economics" (37). This is what capitalism really is. This is how it was founded and how it must function to be the most advantageous and profitable system it can be. Capitalism is the only moral and constitutionally legal socioeconomic system in existence. Rand’s interpretation is the least accepted in today’s society, but it is the most economically, socially, morally, rationally, and logically sound explication there is: "Capitalism is the only system that functions in a way which rewards rationality and penalizes all forms of irrationality" (150-151).
These statements are facts, proven over the course of history, but mutilated by non sequiturs and other fallacies. Capitalism has produced and will continue to produce everlasting values far into the future. Industrial capitalism has created the greatest productive power in all of our history. To this day, no other system has been able to generate productive power to any extent that it has. An economy focused toward production for market exchange provides the perfect conditions for long lasting and ever-expanding productive ability based on modern technology. Advanced industrial capitalism has created, and continues to create, the highest standard of living for large masses of people in human history (Berger 211).
The theories of the origin of capitalism range from the English Industrial Revolution in the 18th century to as far back as traders in Phoenicia in 2500 BC (Fraser 12):
Phoenician swimmers gathered murex shells for dye along the eastern Mediterranean shores of ancient Tyre, while their wives wove cloth at home. This cloth was dyed and sold to traders, who hired ships powered by sail and oar to carry the Tyrian purple across the sea to Egypt, Carthage, and Syracuse. Sometimes, needing money to finance their journeys, traders had recourse to the booths of money lenders in the narrow lanes of Tyre. This was capitalism in action, thousands of years ago. (Ellis 176-177)
More recently though, in the late 18th century, an economist, Adam Smith, is said to have effected Western thought more than anyone else in history. His greatest contribution to this system of thought was his tenacity that the freedom of individuals to pursue their own selfish interests sets into effect an "invisible hand" that creates an ultimate social good. Basically, it states that "if individuals are left alone and allowed to contract voluntarily, the welfare of society will be enhanced. Any intervention in this process is bound to make things worse" (Schotter 134). This idea was first propagated in Smith’s book, An Inquiry into the Nature and Causes of the Wealth of Nations and later in his Theory of Moral Sentiments (Schotter 11):
They are led by an invisible hand to make nearly the same distribution of the necessities of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interests of society and afford means for the multiplication of the species (qt. in Schotter 11).
Adam Smith’s Invisible Hand Theory is mentioned even today in many American social debates. The notion that individuals free of control, left to barter and exchange, will determine a "perfect" social environment is a basic idea of the belief in free enterprise (Schotter 28).
Capitalism is the most logical of all of the social and economic systems. The foundation of this logic is the real, natural fact of the rights of the individual. Capitalism is based on the rights of the individual. "The term 'individual rights' is a redundancy: there is no other kind of rights and no one else to possess them. Those who advocate laissez-faire capitalism are the only advocates of man’s rights" (Rand 117).
Individualism is the philosophy that encompasses this idea.
[Individualism is] a political philosophy that looks to the individual as the ultimate reservoir for all rights and obligations in society. From this philosophy follows the normative belief that all social decisions ought to be mere reflections of individual preferences and that no outside authority should have the right to impose his preferences on society. (Schotter 134)
This idea is observed in John Locke’s explication of how the political state originated from a "state of nature." Locke views humanity as absolutely free and bequeathed with its full array of natural rights. The "state" is created by the will of the individuals exclusively to uphold their rights and property (Schotter 6-7).
The right of the individual to keep all of the products of his work and the right to his property is truly the fundamentals of the entire philosophy of individualism. It basically comes down to the idea that the "individual" is the supreme cause – not society or a higher power.
Quoting Locke on property rights:
Though the earth, and all inferior creatures be common to all men, yet every man has a property in his own person. This nobody has any right to but himself. The labor of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labor with, and joined to it something that is his own, and thereby makes it his property. (qtd. in Schotter 7)
Capitalism and individual rights are inseparable. As Ayn Rand states, "If one wishes to advocate a free society – that is, capitalism, – one must realize that its indispensable foundation is the principle of individual rights. If one wishes to uphold individual rights, one must realize that capitalism is the only system that can uphold and protect them" (Rand 108).
With the preservation of individual rights in a free society, people would then have the freedom to make judgments based on their rational self-interest (a.k.a. selfishness). Adam Smith said that no more than selfishness is required for a society to achieve optimal social results:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens. Even a beggar does not depend on it entirely. The charity of well-disposed people, indeed, supplies him with the whole fund of his subsistence. But though this principle ultimately provided him with all the necessaries of life which he has occasion for, it neither does nor can provide him with them as he has occasion for them. The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. (qt. Schotter 2-3)
Schotter says that Smith’s idea of selfishness doesn’t mean that "socially minded behavior" (3) among rational members of society is inappropriate. It only means that such conduct is neither necessary nor a "sufficient condition for markets to maximize social welfare" (3). Just using the word "selfishness" turns away most people, but what we’re talking about isn’t really "selfishness" as is it typically applied. It is a healthy, rational self-interest where the benefits effect all people on all levels.
Benefits come to all people if and only if productive people produce more values than they consume. This is another major fundamental of a capitalist economy.
In a free market, men are encouraged to increase their output so that they will have more goods and services to exchange for things they want. Their income depends on their production, at fair prices, of things that others want. Men are rewarded in accordance with their contributions to the economy. It rarely happens that anyone benefits unfairly at another’s expense in such a market. When unfair benefits appear, look for government intervention in favor of some pressure group. The essence of the free market is individual freedom. The free market is the most democratic institution on earth. It is a vast auction, where a jury of millions of consumers passes daily judgment on the goods and services offered. It is the fairest market ever devised, for seller, buyer, and public. It is the main source of economic justice and, while imperfect, it is the best means of assuring the people a fair relationship between the price of what they produce and the price of the goods and services they buy. (Belknap 60-61)
Even with industries that are monopolized, the ubiquitous "invisible hand" will take control. Imagine, for instance that Company A is a very large corporation that has complete control over the floppy disk production industry. Company A could charge any price for a floppy disk because people must have floppy disks to store vital information. If Company A decides to drastically raise its floppy disk prices, another wealthy company, Company B, in a similar industry (computer hardware) would begin the manufacturing of floppy disks for the sole, "selfish" reason of gaining a profit by selling disks cheaper than Company A. Company A will, of course, respond with cheaper prices, and better quality – perhaps creating a new type of floppy disks, better than any seen before (all, again, for "selfish" reasons).
With this new competition, new floppy disk technologies would be created faster, cheaper, and more efficiently all because of the "selfishness" of both companies. This is a very good explanation of how monopolies would eventually be forced to compete and how rational self-interest benefits everyone involved. The main reason monopolies exist today is because we do not live in a completely free society. Government interventions in the form of anti-trust laws and utility laws ultimately preserve monopolies and indirectly create price floors. This hampers the free market system and everyone looses money.
Any monopoly that would exist in a free society would be a business that served every individual satisfactorily, so it would be to no one’s advantage to create a competing business. The probability of this occurrence is slim, though, since competition drives businesses and people to their best.
Thomas Jefferson once said, "Government that governs least governs best." Why then, today, does government play such a very large part in people’s lives? Economic planning, social security, welfare programs, and especially taxes effect everyone every day in our society. With such "wealth distribution" and "help-everyone" practices in a country for which we pledge every morning with the words "...and for the republic for which it stands..." it crosses one’s mind, "If we are supposed to live in a democratic-republic, why today do we see government referred to as a democratic-socialist union and see these socialistic agendas on the news every evening?"
What is necessary at this point is to define the purpose of government from an honest, logical, and objective point of view. Ayn Rand again states it best by stating that the only correct, moral purpose of a government is to protect individual’s rights. This would include a protection from physical violence and a protection of one’s own life, liberty, property, and pursuit of happiness. Without property rights, no other rights are possible. (36)
With the purpose of government clear, what functions would this government serve? The proper functions of a government in a true free market system would fall into three extensive categories, all of them involving the issues of physical force and the protection of one's rights.
First, the police, to protect individuals from criminals. Second, the armed services, to protect individuals from foreign invaders. Finally, third, the law courts, to settle disputes among men according to objective laws (Rand 131). In a free market, a government serving these and only these purposes would be extremely productive and the most adequate system in serving the individuals that comprised that particular society.
The three categories mentioned above have many consequential issues and their performance in practice, is incredibly complex. Various errors and misunderstandings are possible, but what is primary here is the principle to be implemented: the principle that the purpose of law and government is the protection of individual rights (Rand 131).
This is not the way our government works today, though. You may be saying to yourself that the government works fine, so it must be the right form of government. I believe that our current political system is on thin ice. It is also interesting to note that today’s system is not the same system installed by our founding fathers; the actual foundation of our system has literally changed beneath our feet. We seceded from England for the very reason that it had too much control over us, something that is becoming far too obvious in our own country today.
Contrary to currently held beliefs, the Constitution, the Bill of Rights, and the other documents of the original United States were not declarations of the powers of the government. Rather, they were assertions of the power of the people over the government.
The Declaration of Independence laid down the principle that ‘to secure these rights, governments are instituted among men.’ This provided the only valid justification of a government and defined its only proper purpose: to protect man’s rights by protecting him from physical violence. Thus the government’s function was changed from the role of ruler to the role of servant. The government was set to protect man from criminals – and the Constitution was written to protect man from the government. The Bill of Rights was not directed against private citizens, but against the government – as an explicit declaration that individual rights supersede any public or social power. (Rand 111-112)
When I speak of capitalism, remember, it is a laissez-faire free enterprise capitalism with zero external controls. According to Webster’s New World College Dictionary, laissez-faire means "the policy or practice of letting people act without interference or direction; noninterference; specif., the policy of letting the owners of industry and business fix the rules of competition, the conditions of labor, etc. as they please, without governmental regulation or control" (755). In other words, government has no say whatsoever in any economic matter.
Copyright © 2001 Tim Fisher