Has Capitalism Failed

by Robert Villegas

  We are often consoled by the slogan that declares, “I was a socialist when I was in college and became a conservative when I got a job and had a family.” Some would call this person a sellout but the truth is that he is merely recognizing the important fact that in order to have a good life he must produce and in order to have a very good life, he must produce abundance and spend it wisely.

  Capitalism is the only system that operates according to the principle of rewarding the productive and able and this very fact makes it possible for people to be satisfied with their purchases, improve their lives and earn more than they consume. Capitalism is the just society because it prohibits governmental interference in the lives of individuals and business organizations. Capitalism does not foster guilt over having produced abundance and instead rewards that activity. That is why capitalism is moral and that is why capitalism cannot fail.

  Inflation and Monetary Policy

  The practice of money manipulation by government is one of the major causes of failed economic policies. When interventionists play with the money supply, they wind up causing many of the problems which they blame on capitalism.

  To illustrate the truth of this, we’re going to look at history. Below is a summary of the events that took place in a country that tried to stimulate its economy by means of expanding the currency. I have edited some terms to remove the country and specific names:

  “And, first, in the economic department. From the early reluctant and careful issues of paper we saw, as an immediate result, improvement and activity in business. Then arose the clamor for more paper money. At first, new issues were made with great difficulty; but, the dyke once broken, the current of irredeemable currency poured through; and, the breach thus enlarging, this currency was soon swollen beyond control. It was urged on by speculators for a rise in values; by demagogues who persuaded the mob that a nation, by its simple fiat, could stamp real value to any amount upon valueless objects. As a natural consequence a great debtor class grew rapidly, and this class gave its influence to depreciate more and more the currency in which its debts were to be paid.

  “The government now began, and continued by spasms to grind out still more paper; commerce was at first stimulated by the difference in exchange; but this cause soon ceased to operate, and commerce, having been stimulated unhealthfully wasted away.

  “Manufactures at first received a great impulse; but, ere long, this overproduction and overstimulus proved as fatal to them as to commerce. From time to time there was a revival of hope caused by an apparent revival of business; but 'this revival of business was at last seen to be caused more and more by the desire of far-seeing and cunning men of affairs to exchange paper money for objects of permanent value. As to the people at large, the classes living on fixed incomes and small salaries felt the pressure first, as soon as the purchasing power of their fixed incomes was reduced. Soon the great class living on wages felt it even more sadly.

  “Prices of the necessities of life increased: merchants were obliged to increase them, not only to cover depreciation of their merchandise, but also to cover their risk of loss from fluctuation; and, while the prices of products thus rose, wages, which had at first gone up, under the general stimulus, lagged behind. Under the universal doubt and discouragement, commerce and manufactures were checked or destroyed. As a consequence the demand for labor was diminished; laboring men were thrown out of employment, and, under the operation of the simplest law of supply and demand, the price of labor-the daily wages of the laboring class-went down until, at a time when price's of food, clothing and various articles of consumption were enormous, wages were nearly as low as at the time preceding the first issue of irredeemable currency.

  “The (merchant) classes at first thought themselves exempt from the general misfortune. They were delighted at the apparent advance in the value of the goods upon their shelves. But they soon found that, as they increased prices to cover the inflation of currency and the risk from fluctuation and uncertainty, purchases became less in amount (in other words, people bought less of their products) and payments less sure; a feeling of insecurity spread throughout the country; enterprise was deadened and stagnation followed.

  “New issues of paper were then clamored for as more, (drink is) demanded by a drunkard. New issues only increased the evil; capitalists were all the more reluctant to embark their money on such a sea of doubt. Workmen of all sorts were more and more thrown out of employment. Issue after issue of currency came; but no relief resulted save a momentary stimulus, which aggravated the disease. The most ingenious evasions of natural laws in finance which the most subtle theorists could contrive were tried-all in vain; the most brilliant substitutes for those laws were tried; "self-regulating" schemes, "interconverting" (mutual conversion into like denominations before a trade) schemes - all equally vain. All thoughtful men had lost confidence. All men were waiting; stagnation became worse and worse. At last came the collapse and then a return, by a fearful shock, to a state of things which presented something like certainty of remuneration to capital and labor. Then, and not till then, came the beginning of a new era of prosperity.

  “Just as dependent on the law of cause and effect was the moral development. Out of the inflation of prices grew a speculating class; and, in the complete uncertainty as to the future, all business became a game of chance, and all business men, gamblers. In city centers came a quick growth of stock-jobbers (those who deal only with brokers or other jobbers) and speculators; and these set a debasing fashion in business which spread to the remotest parts of the country. Instead of satisfaction with legitimate profits, came a passion for inordinate gains. Then, too, as values became more and more uncertain, there was no longer any motive for care or economy, but every motive for immediate expenditure and present enjoyment. So came upon the nation the obliteration of thrift. In this mania for yielding to present enjoyment rather than providing for future comfort were the seeds of new growths of wretchedness: luxury, senseless and extravagant, set in: this, too, spread as a fashion. To feed it, there came cheatery in the nation at large and corruption among officials and persons holding trusts. While men set such fashions in private and official business, women set fashions of extravagance in dress and living that added to the incentives to corruption. Faith in moral considerations, or even in good impulses, yielded to general distrust. National honor was thought a fiction cherished only by hypocrites. Patriotism was eaten out by cynicism.

  “Thus was the history of (country) logically developed in obedience to natural laws; such has, to a greater or less degree, always been the result of irredeemable paper, created according to the whim or interest of legislative assemblies rather than based upon standards of value permanent in their nature and agreed upon throughout the entire world. Such, we may fairly expect, will always be the result of them until the fiat of the Almighty shall evolve laws in the universe radically different from those which at present obtain.

  “And, finally, as to the general development of the theory and practice which all this history records: my subject has been Fiat Money in (country); How it came; What it brought; and How it ended.

  “It came by seeking a remedy for a comparatively small evil in an evil infinitely more dangerous. To cure a disease temporary in its character, a corrosive poison was administered, which ate out the vitals of (country’s) prosperity.

  “It progressed according to a law in social physics which we may call the "law of accelerating issue and depreciation." It was comparatively easy to refrain from the first issue; it was exceedingly difficult to refrain from the second; to refrain from the third and those following, was practically impossible.

  “It brought, as we have seen, commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It brought on these the same destruction which would come to a Hollander opening the dykes of the sea to irrigate his garden in a dry summer.

  “It ended in the complete financial, moral and political prostration of
(country), a prostration from which only a (dictator) could raise it.

  “But this history would be incomplete without a brief sequel, showing how that great genius profited by all his experience. When (the dictator) took the consulship the condition of fiscal affairs was appalling. The government was bankrupt; an immense debt was unpaid. The further collection of taxes seemed impossible; the assessments were in hopeless confusion. War was going on (several fronts). All the armies had long been unpaid, and the largest loan that could for the moment be effected was for a sum, hardly meeting the expenses of the government for a single day. At the first cabinet council (dictator) was asked what he intended to do. He replied, "I will pay cash (meaning gold and silver) or pay nothing." From this time he conducted all his operations on this basis. “He arranged the assessments, funded the debt, and made payments in cash; and from this time-during all the campaigns of (the war) there was but one suspension of specie payment, and this only for a few days. When the first great (deleted word) coalition was formed against the (country), (dictator) was hard pressed financially, and it was proposed to resort to paper money; but he wrote to his minister, ‘While I live I will never resort to irredeemable paper.’ He never did, and (country), under this determination commanded all the gold she needed. When (military defeat) came, with the invasion of the Allies, with war on her own soil, with a change of dynasty, and with heavy expenses for war and indemnities, (country), on a specie (gold and silver) basis, experienced no severe financial distress.

  “If we glance at the financial history of France during the Franco-Prussian War and the Communist struggle, in which a far more serious pressure was brought upon French finances than our own recent Civil War put upon American finance, and yet with no national stagnation or distress, but with a steady progress in prosperity, we shall see still more clearly the advantage of meeting a financial crisis in an honest and straightforward way, and by methods sanctioned by the world's most costly experience, rather than by yielding to dreamers, theorists, phrase-mongers, declaimers, schemers, speculators or to that sort of "Reform" which is "the last refuge of a scoundrel.

  “There is a lesson in all this which it behooves every thinking man to ponder.”[14]

  "But though there soon came a degree of prosperity-as compared with the distress during the paper-money orgy, convalescence was slow. The acute suffering from the wreck and ruin brought by (money inflation) in process of repudiation lasted nearly ten years, but the period of recovery lasted longer than the generation which followed. It required fully forty years to bring capital, industry, commerce and credit up to their condition when the Revolution began,..."[15]

  If you agree that what happened in France before Napoleon can happen here, please let people know about this article. We need “thinking men” who can recognize the folly of today’s policies and stop them.[16]

  Also note that the rich, the very people that France needed to invest in the future, left the country during this period of inflation in France. Likewise, our leaders, in inflating the currency, are not making things better. Their actions are known by competent economists around the world to be the very actions that make things worse; we are talking here of massive unemployment, decline of our standard of living, food lines, starvation, rampant crime and corruption in our future.

  You are being lied to, you are being bamboozled; you are being made into the fool of history if you do not protest the ignorant and destructive economic policies of the Federal government.

  Economics in One Lesson by Henry Hazlitt

  Henry Hazlitt may never be hailed as one of the world's greatest economists, but judging from today's dominant theories, neither would Ludwig von Mises. Indeed, these disciples of Adam Smith bring little value that would appeal to today's economists except for one disturbing fact: they have been predominantly right in exposing the fallacies and consequences of socialism and central planning.

  Henry Hazlitt's short book, ECONOMICS IN ONE LESSON[17] may never be hailed as a classic, but neither would Mises’ HUMAN ACTION[18]. Galbraith’s THE NEW INDUSTRIAL STATE[19] would grab all the honors, even though it is consistently wrong.

  If you want to find a book that gives a quick view of what economics is about, don't look in your local book store. The book needed most by today's thinking American is not going to be there. Yet, Hazlitt's ECONOMICS IN ONE LESSON is truly a classic of economic literature.

  Hazlitt expounds on one example, the broken window that brings business to the glazier and consequently to others who deal with him. Hazlitt uses this example to show how people can convince themselves that the vandal who breaks the window is providing a service by making countless transactions necessary. But the broken window analysts neglect the fact that the owner of the window is out the cost of the repair, so that the gain for the glazier is a genuine loss to the owner of the store.

  Hazlitt takes the broken-window fallacy and shows how it applies to economic principles, and he exposes how economic analysts use the fallacy to justify their own pet schemes. "...the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics." says Hazlitt.

  For instance:

  -Wars do not spur economic activity by making replacement of the goods destroyed necessary.

  -Government spending does not cure economic ills but diverts funds to generally non-productive activities.

  -New machinery introduced into industry does not create unemployment.

  -Full employment schemes launched by government end in more unemployment.

  -Minimum wage laws assure that those they are designed to help do not get jobs.

  Hazlitt has managed, in a minimum number of pages, to destroy virtually every fallacy adhered to by John Maynard Keynes in all of his voluminous writings. In fact, Hazlitt refutes Keynes in one breath: "Economics, as we have now seen again and again, is a science of recognizing secondary consequences. It is also a science of seeing general consequences. It is the science of tracing the effects of some proposed or existing policy not only on some special interest in the short run, but on the general interest in the long run." (The Lesson Restated, Page 135)

  Although Hazlitt is largely correct about the unintended consequences of bad economic policies, such arguments do not make the case. They are unconvincing to the socialist or statist intellectual. This is because progressives have cornered the market for economic thought by making a moral argument against capitalism. To socialists, capitalism is evil – who cares about unintended consequences?

  I would argue the moral case for capitalism and say instead: “Economics, as we have now seen again and again, is a science of recognizing the rights of man and calculating the economic consequences of protecting those rights. It is the science of tracing the effects of freedom not only on society as a whole but upon the interests of individuals as economic actors.”

  Yet, for the most part, ECONOMICS IN ONE LESSON is a defense of reason in economics. As a consequence of his approach Hazlitt defends "the Forgotten Man ... He is the man who is never thought of. He is the victim of the reformer, social speculator and philanthropist (Quotation from William Graham Sumner.)"

  The reader of ECONOMICS IN ONE LESSON will quickly learn that he is that Forgotten Man.

  How to See the Unseen

  I was recently re-reading Henry Hazlitt’s “Economics in One Lesson” and was inspired by his discussion of the advantage that liberals have when they recommend large spending programs:

  “…there is a…factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

  “In this lies the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. Th
e bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”[20]

  Hazlitt accuses progressives of pointing to a problem and then recommending government spending as the solution; focusing on the problem but ignoring the “unintended consequences” of government action. He says elsewhere that you can easily point to the job or money that the government beneficiary receives but you cannot point to what was lost - because it does not exist. The loss is in the products the taxpayer could not buy and the job that was not created because the money went to the government or the beneficiary.

  I would like to suggest a way that you can see the unseen consequences of government action as they affect you personally. But first you have to connect re-distribution with the idea of altruism. You’ll also have to acknowledge the role of abstractions in human understanding. You will recall Marx’s axiom “from each according to his ability to each according to his needs.” This is a statement of altruism and it establishes the enslavement of ability for the sake of the needy, the person who cannot survive by means of his own effort.