We need to turn the tables on capitalism’s foes, who have a lot more to answer for than capitalism’s defenders. President Trump’s economic advisor Larry Kudlow wisely urges us to take the offensive in this battle against Democratic Party socialists. So, let’s review capitalism in theory and in practice. Our defense of capitalism must include a comparative critique of socialism, because capitalism should not be judged against a standard of perfection but against socialism. We can’t allow socialists to get away with critiquing capitalism against their unachievable utopian dreams. We must highlight the flaws and false promises of socialism as we ask if it really make sense on paper and how it has fared in history.
SOCIALISM “DOES NOT BUILD; IT DESTROYS.”
Austrian economist Ludwig von Mises explains that socialist theorists believed they were advocating a rational economic system to replace the irrational, chaotic system of capitalism. In a socialist system, they argued, intelligent, knowledgeable men could plan and manage the economy. This would be far superior to capitalism, which involves “anarchy of production” and “unreasonable and self-interested individuals.” The planners would rectify the unjust distribution of goods, which would eliminate “want and misery” and produce “wealth for all.”56 Socialists believed that socialism was not only more rational and produced a more just distribution of income but that “historical evolution is driving man inexorably in that direction.”57
But at its core, von Mises explains, socialism doesn’t withstand scientific scrutiny and is rooted in “petty resentments.” Socialist assumptions about capitalism are false, and socialism would not only fail to make economic life more rational but “would abolish social cooperation outright.” Its promise of a fairer distribution of goods is arbitrary and false, based on a misperception of the operation of capitalism. “In fact, Socialism is not in the least what it pretends to be,” writes von Mises. “It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created.”58 Socialism acts as a parasite on an existing capitalist system, and each incremental step toward socialism contributes to the destruction of the existing order.59 In other words, socialism cannot produce wealth; it can only redistribute what capitalism produces. “Government can’t create wealth,” argues Thomas Sowell, “but it can prevent the private sector from doing so.”60
Leftists have a much loftier view of government and its role in wealth production. Still subscribing to failed Keynesian economic theory, they believe that government stimulus spending, such as Obama’s colossally wasteful trillion-dollar stimulus plan, can generate economic growth. Even when the plan failed to produce anything but more debt, Obama swore that the economy would have been much worse without it. Likewise, FDR’s revisionist defenders baselessly claim that his federal spending orgy delivered the United States from the Great Depression, while sober analysts, as noted, recognize it prolonged the Depression, which we escaped only because of the war.61 As progressives, their faith is in government, not in free people operating in a free market. They undervalue liberty, which is the centerpiece of America’s founding ideas. It is liberty—the freedom of people to create and produce—that fosters wealth creation.
Leftists reject this notion, which is why they dispute the supply-side claim that reducing marginal income tax rates can increase revenues. It is why they reject dynamic scoring of the economy, which factors in the potential effects of government taxes and regulatory policies on producers. Their refusal to consider taxpayers’ and consumers’ responses to positive and negative incentives also contributes to their gross miscalculations in projecting the costs of government programs.
“Wealth is created when our creative freedom is allowed to prosper in a free-market environment undergirded by the rule of law and suffused with a rich moral culture,” Jay Richards observes, noting that this idea is intrinsically Christian. Christians believe that God created man in His image and that our creative freedom reflects the divine image.62
It should be obvious that economic pies are not finite. We often see expansions and contractions of the economy where GDP increases or decreases. Wealth isn’t just a matter of accumulating material things, however. More wealth is created all the time with fewer material products—from the digital world to intellectual property.
Admittedly, with explosions of wealth in the modern era, there will probably be a greater gap between the world’s richest and poorest people—not due to the rich exploiting the poor but because some places in the world are experiencing greater wealth creation than others. This disparity can widen even while the standard of living for the poor also increases, just not as much.63 Free markets lead to a better standard of living for the most people. If they lead to greater income disparities while still greatly benefiting the most people, should we forego that greater overall prosperity just to prevent the wealthiest from getting more wealth? It is destructively covetous to advocate harming everyone—even the poor—just to prevent some from disproportionately benefiting! This is what we mean by socialists “spreading the misery.”
We should strive to generate prosperity and eradicate poverty, not to equalize incomes, and the best way to do that is to unleash the power of the market at home and abroad. Leftists overlook the fact that government can’t tax or redistribute income that isn’t produced and that prioritizing redistribution over production stifles economic growth and generates poverty, not wealth.64 In their compulsion to impose fairness, they strangle the goose that lays the golden egg. The only way these comatose dreamers will ever approach equal income distribution is to impoverish everyone—though under socialism a ruling elite is always excepted. Hello, Venezuela!
THE “TRICKLE-DOWN” STRAW MAN
If you believe that wealth is finite, you might think that unequal distribution is unfair—people won’t get rich except at the expense of others, and as the rich get richer, the poor get poorer. But if you understand that in a free-market system the overall economic pie can be enlarged through pro-growth incentives, you might not be so preoccupied with wealth disparities, realizing that one person’s gain does not necessarily result in another’s loss. President Bill Clinton popularized the idea that so-called “trickle-down economics” is a myth. The wealth of the rich, he argued, doesn’t trickle down to the middle class and the poor. This was partisan propaganda—a straw man to defeat President George H. W. Bush. Conservatives don’t believe that wealth magically trickles down the economic ladder. We believe, and history has shown, that free markets produce wealth and that the surest way to minimize poverty is through wealth production.
Confiscatory tax rates diminish wealth. Conversely, less burdensome taxes, other things being equal, stimulate growth and income across the board. It’s not a matter of wealth trickling down, as in lower-income groups gobbling up bread crumbs spilled by rich elites. “Trickle-down” is a misnomer calculated to malign supply-side economics and its conservative advocates.65 The term is part of the left’s class warfare arsenal for inflaming the poor and middle classes against upper-income groups by falsely implying the rich believe economic policy should be directed toward their own benefit while lower-income groups should be left to fight over the scraps.
Conservatives don’t seek to favor the rich with tax cuts but to incentivize economic growth across the income spectrum. Indeed, contrary to leftist demagoguery, tax cuts proposed and implemented by supply-siders have been across the board, not just for the rich, and lower-income groups have usually received a proportionately greater cut than upper-income groups. The only people excluded were those paying no income taxes in the first place.
Free-market economists don’t propose policies specifically to benefit the wealthy, thinking that lower-income groups will collaterally benefit. Rather, they support growth-stimulating policies to increase o
pportunity directly—for everyone. A rising tide lifts all boats. Following the Reagan tax cuts, incomes increased for all income groups, from poorest to richest.66 Upward mobility, which had received its last rites under President Carter, roared back in 1979, as 86 percent of households in the lowest 20 percent income group graduated into higher income groups during the eighties. More people in every group moved up than down except the top 1 percent of earners.67 Capitalists’ goal isn’t to transfer wealth up and down the income ladder but to create universal opportunity that will lead to widespread growth and upward mobility, as also happened with the Reagan cuts. “Wealth does not ‘trickle down’ from rich to poor,” writes economics professor Steven Horwitz. “It is created by all of us when we develop new ideas, skills, and products as either workers or owners of capital.… And history tells us that the improving standard of living for everyone that results from more economic freedom will be more of a flood than a trickle.”68 The rich don’t transfer wealth to the poor, but in a free market the rich do help provide the poor opportunities to help themselves. There is truth in the adage, “I never got a job from a poor person.”
“YOU DIDN’T BUILD THAT”
Progressives believe the rich don’t deserve their wealth because they don’t actually produce it; the common laborers under them do, and as evil capitalists, the rich help themselves by exploiting the lower classes through excessive profits—echoing Karl Marx’s theory of “surplus value.” A kernel of this idea was evident in President Obama’s exclamation, “If you’ve got a business—you didn’t build that. Somebody else made that happen.”69 Obama was correct that in an interactive economy every person benefits from others along the way. We all use roads or bridges on our way to work and benefit from skilled builders who constructed the buildings in which we work. Obama was also correct that there are a lot of hardworking people who don’t make as much money as other hardworking people. But there’s a lot more to it than Obama’s class-oriented perspective.
Marxists consider profits to be theft, or at least a gross overcharge. Marx argued that labor is the only source of value—“the labor theory of value”—and that profits are “surplus value” because they are arbitrarily added on to the costs of producing goods and services, which both drives up the costs to consumers and deprives the laborers who produce them of their just recompense. Marx taught that a product is worth the value of labor involved in producing it, and that the price should be roughly equivalent to the wages paid to the laborer. Capitalists, by contrast, believe a product is worth what one can sell it for in a free marketplace.70
Marxists maintain that under a government-directed economy you could eliminate those gratuitous charges, and prices would automatically decrease. That sounds fine in theory, but when socialism got a chance to prove itself in the real world it consistently failed, as production went down and prices increased. The problem is that socialist theorists don’t acknowledge that competition and profit are incentives to more efficient production. The businessman’s goal—to be profitable and avoid losses—motivates him to produce at the lowest possible cost and sell his products at the highest price customers are willing to pay.71 Under socialism, where government manages and subsidizes production, there is far less incentive to produce efficiently and at lower costs. The same is true for workers. If the government gets to spend what you earn, what incentive do you have to earn it?72 Eliminating profits in socialist countries doesn’t increase the standard of living but decreases it.73 Removing the profit motive eliminates the incentive to innovate to stay competitive with other producers, which hurts consumers who would benefit from innovation. Socialists strut their supposed moral superiority in supporting workers, but their “good intentions” actually harm both workers and consumers.
NO, COMMUNISM IS NOT BETTER IN THEORY
When I was growing up we frequently discussed Communism in our home. Our dad was a conservative’s conservative, a passionate patriot, a lover of free markets, and a student of Marxism. He once gave a speech to my seventh-grade class on Marxism, and I distinctly remember him explaining Marx’s distorted notion of surplus value to hundreds of kids in the school auditorium. While most people in our hometown obviously didn’t discuss Marxism in depth, the ideas of Communism were on people’s minds. This was a time when the Cold War was raging. People were building bomb shelters in the event of nuclear war with the Soviet Union. I remember walking out of my fourth-grade classroom after the bell rang at Franklin School and encountering a fifth grader in the hall proclaiming that World War III had started. It turned out President Kennedy had ordered the Soviets to remove their missiles from Cuba, marking the onset of the Cuban Missile Crisis.
Probably because our dad was so into politics and current events, we grew up fascinated by these subjects and thought about the relative virtues of capitalism and Communism at a young age. I remember people always mouthing the cliché that Communism is good in theory but not in practice. Maybe I was just a contrarian, but that never rang true with me. I didn’t understand how everyone receiving the same amount, no matter how much effort they exerted, was fair. If it violated my sense of fairness and justice, how could it be ideal? I was sensing what I later learned to be true: Communism and socialism don’t square with human nature.
I had a fortuitous opportunity to test my belief a few years later when my seventh-grade math teacher told us that on the next test he was going to give everyone an M—the equivalent of a C—regardless of our performance. I don’t remember what his rationale was, but this struck me as outrageously unfair, and I told him it was Communistic. I can’t remember if he was amused or annoyed, but he was serious about it—and wrongheaded. Whether you are a good, mediocre, or poor student, you innately know that such a system is unfair. If everyone were inspired to learn apart from the incentives of good grades and the deterrent of bad ones it might not be as bad, but people aren’t wired that way.
Socialism appeals to naïve and well-meaning people who have a heart for the poor, which is a commendable sentiment. They want everyone to share in material prosperity, and they believe socialism ensures that. But it doesn’t. And promoting an economic system that forcefully transfers some people’s money to others is not a mark of personal compassion or generosity.
Research consistently shows that political conservatives make greater charitable contributions, on average, than liberals.74 This is partly because they attend church more frequently and contribute through their congregations.75 But their greater charitable giving extends also to other types of charities. One recent study showed that those with a religious affiliation (mostly Christian) were more than twice as generous as those without it.76 Before the advent of the modern welfare state, American charity abounded—mostly from Christian congregations, which in 1926 donated more than $150 million to charity apart from contributions toward church maintenance. At that time state governments gave $23 million and local governments $37 million. But an economic study found that the role of churches as crucial providers of social services shrank dramatically (30 percent) with the expansion of government spending under the New Deal, and that “government relief spending can explain virtually all of the decline in charitable church activity observed between 1933 and 1939.”77
“IF SOCIALISTS REALLY WANTED TO HELP PEOPLE, THEY’D BE CAPITALISTS”
Overburdening taxpayers with punitive taxes disincentivizes work. A familiar maxim applies—when you tax something more, you get less of it, and when you tax something less, you get more of it. Imposing onerous taxes on one’s work and earnings generally results in less work and earnings, reducing growth and the overall economic pie. When you transfer people’s earnings to others you reduce the incentive of the recipients to earn, thereby further stunting economic growth and the economic pie.
It’s certainly not morally commendable to implement policies that reduce overall prosperity just so you can virtue signal your concern for the poor. As entrepreneur and author Andy Puzder says, “If socialists really want
ed to help people, they’d be capitalists.”78 But there’s another moral component involved. Discouraging able-bodied people from working, producing, and contributing to their own families and to society diminishes their self-respect. The same holds true for able-bodied people paying no income taxes when other people are. If we’re going to have an income tax, then everyone needs to have some skin in the game, even if it’s only a little bit, unless they are disabled or otherwise incapable of earning. When the federal income tax was instituted in 1913 only 2 percent of American households paid. But the percentage steadily increased, topping out at 85 percent with FDR’s post–World War II Victory Tax. The percentage has decreased since then, with only 45 percent of households paying federal income tax today.79 It’s hardly healthy for society when fewer than half of all households pay income tax.
It’s also incomprehensible that people can look at these numbers, along with the disproportionate percentage of income tax the upper-income groups pay, and conclude the rich “aren’t paying their fair share,” as the left insists. Most Washington politicians don’t exempt more than half of American households from paying income tax out of compassion but as part of their cynical class warfare strategy to attract voters. Need proof? The famed socialist, millionaire senator, Bernie Sanders, rails against the rich for not paying their fair share but admitted in a Fox News town hall that he won’t pay higher taxes until he’s forced to.80
Socialists sometimes point to the Bible to justify their ideology, but the Bible teaches that God ordained work for man, and it is sinful for able-bodied men to disobey that ordinance. In his Second Letter to the Thessalonians, the apostle Paul writes, “For even when we were with you, we gave you this rule: ‘The one who is unwilling to work shall not eat.’ ”81 This was not Paul’s only statement on the matter. In his First Letter to the Thessalonians, he writes, “You should mind your own business and work with your hands, just as we told you, so that your daily life may win the respect of outsiders and so that you will not be dependent on anybody.”82 He also tells them, “And we urge you, brothers and sisters, warn those who are idle and disruptive, encourage the disheartened, help the weak, be patient with everyone.”83
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