Preface

This book is the product of a labor of love extending over many years. I conceived of it as an explicit project at least as far back as the spring of 1977, when I made a several-page-long list of the major points it would contain. Although I was eager to begin writing it at once, one thing after another interfered, the most important being finding a publisher for my previous book The Government Against the Economy, which I had only recently completed. As a result of this and a considerable variety of less important projects, I was not able actually to begin work on the present book until sometime in 1981.

In that year and the next, I completed the first draft of what are now the Introduction and first three chapters.

In 1982, my wife Edith Packer and I, together with our friend Jerry Kirkpatrick, founded what later became known as The Jefferson School of Philosophy, Economics, and Psychology (TJS). I agreed to deliver eight lectures on the institutions and functioning of a capitalist society for TJS’s first summer conference, which was held the following year on the campus of the University of California, San Diego. Those lectures, which were fully written out, constituted the first draft of what are now Chapters 4 and 9 and the first part of Chapter 5.

The writing out of my lectures for succeeding TJS summer conferences in 1985, 1987, and 1989, which were also held on the UCSD campus, represented drafts of what are now chapters 11 and 13–17. 1 My 1986 TJS Fall seminar lecture was the first draft of what is now Chapter 20, which bears the same title as the lecture, namely, “Toward the Establishment of a Capitalist Society.” Thus, this book is a lasting legacy of the TJS conferences and seminars.

By 1990, my progress on the book had decisively outstripped my lecture preparations and I was using material from the manuscript as the substance of my lectures. 2 By this time, I at last had a complete draft of the book, which included an updated and expanded version of The Government Against the Economy as Chapters 6–8. Extensive editing, reorganization, and rewriting occupied another five years, with the result that the work that is offered now is as well organized, well-written, and clear as I have been able to make it.

I want to say that a very important element in the pleasure I have derived from the writing of this book rested on my use of a personal computer. When I wrote The Government Against the Economy and when I began writing this book, I experienced it as me, a fountain pen, and a yellow legal pad against the world. I fully believed, of course, that the pen is mightier than the sword and that with my pen I would ultimately prevail. But however mighty is the pen, the personal computer is far mightier. And every morning, since the fall of 1983, when I entered my office and sat down at my desk I would eagerly watch my computer as it went through its startup routine. My thought was, in effect, “Here is this wonderful, extremely powerful machine that is my ally in the work I am doing and that makes the doing of it so much easier and more enjoyable.” To me, as a writer, the personal computer is the greatest of all the remarkable goods supplied by capitalism, surpassing even the personal automobile in its contribution to the ease and enjoyment of life. Without

xl CAPITALISM it, the writing of this book would probably not have been possible.

On a vacation early in the course of writing this book, I read a Western novel by the late Louis L’Amour. I don’t remember the story itself, but one brief portion of the novel has stood out in my mind ever since and was a significant help to me in the rest of my writing. It was about the journey of pioneers traveling west in covered wagons, and described how on some days they would make so little progress that after a whole day’s march, they could still see the remains of their campfires of the night before. The important thing to those pioneers, L’Amour stressed, was that each day they did make some progress—they always finished the day further west than they began it. This became an inspiration to me on all those days when the end result of many hours of work was that I had gotten only a few paragraphs beyond where I had finished the night before. At those times, I contented myself with the knowledge that at least I was that many paragraphs further ahead and that I was still moving “west,” so to speak. In retrospect, I think of things somewhat more humorously, and say to myself, “Even if you average just half a page a day, after five or ten years it adds up.”

I said that I conceived of this book as an explicit project in 1977. It was an implicit project long before that time. It is the culmination of practically a lifetime of concern that I have had for the protection of property rights and for the right of individuals personally and selfishly to enjoy all the prosperity they can peacefully achieve. I remember identifying as a boy of no more than ten or eleven years of age that what the tenants and city government of New York, which is where I then lived, were doing with the property of the landlords of that city, by means of rent control, was exactly the same in principle as what schoolyard bullies often did with my baseball or football—namely, seize it against the will of its owner and arbitrarily use it for their own pleasure, without a thought for the rights of the owner, mine or the landlords’.

From that early age, I was very much aware of a widespread contempt and hostility toward property rights and property owners—a contempt and hostility manifested in such comments as the one I heard a little later from a junior high school teacher that she did not care about the fact that there were people paying ninety percent of their incomes in taxes (which was then the maximum federal surtax rate), “because they still had a lot left.” When I encountered the same attitude of contemptuous philosophic indifference to the violation of property rights in one of my own close relatives, I came to the conclusion that property rights were very much in need of defense, and that I must write a book on their

behalf. I actually set out to write such a book at the time, and succeeded in putting together about one or two paragraphs.

It was clear to me that such contemptuous attitudes and the violations of property rights that they supported were contrary to everything that the Declaration of Independence and Constitution of the United States stood for, which above all was the right of the individual to the pursuit of his own happiness, which included his material prosperity and enjoyment of same. Indeed, my first serious professional ambition, which I held around the age of twelve, was to become a Constitutional lawyer, so that I might best defend that right.

I can trace my admiration for the United States’ Constitution back to about the age of five. I remember early in World War II, asking my father why the United States deserved to win all the wars it had ever fought, as well as the one it was now in. He answered that the United States was the world’s best country. And when I asked what made it the world’s best country, he answered “the Constitution.” I don’t know what understanding I could have had of such an abstraction at that very young age, but I am quite sure that very early, at least implicitly, I grasped that the Constitution was a body of principles controlling the behavior of the government of the United States and defining the character of that government as good. The Constitution, I came very early to understand, made the United States the world’s best country because it created a government that, totally unlike the governments of the countries of Europe and the rest of the world, did not harass its citizens, but instead left them free to pursue their happiness. This, I understood, was why both pairs of my grandparents had come to the United States and why all the immigrants, starting with the Pilgrims, had come to America. I wondered why all other countries did not adopt the Constitution of the United States.

Until the age of eleven or twelve, I took for granted that practically every American recognized the value of his country because he loved its freedom and supported the principles on which the United States was based. Based on my reading of editorials and columnists in the Hearst Press, then represented in New York by The Daily Mirror and the Journal American, I thought that now that the Nazis had been defeated, the only exceptions were a handful of communist or socialist crackpots.

I had had an inkling, at the age of ten, that this sanguine view of things might not be altogether accurate. This occurred when someone pointed out to me that the paper currency of the United States had imprinted on it a promise to pay the bearer on demand the number of dollars on the face of the bill, that until 1933 this had meant a promise to pay those dollars in gold coin, which was the money of the country affirmed by the Constitu—

PREFACE xli tion, but now meant the utter absurdity of paying the bearer merely the very same kind of paper notes that he already possessed. I was astounded that such an obvious absurdity was tolerated—that it was accepted routinely, everyday, by everyone, without protest.

My cheerful confidence in the popularity of individual freedom did not begin to erode, however, until I reached junior high school. There, after a few months’ attendance, I came to the conclusion that a disproportionate number of the communist and socialist crackpots I had read about were to be found among my teachers. In addition to numerous such remarks by teachers as the one I described above, I encountered teachers who openly confessed to being socialists, including one who regretted that he lived just inside the border of a conservative Republican’s congressional district because if he lived across the street he could have voted for Representative Vito Marcantonio, then the most far-leftwing member of Congress. The same man described the Soviet Union as a great experiment. He and his colleagues dismissed questions that challenged any of their interpretations by referring to the presumed size of the bank account or stock portfolio of the questioner’s father. I clearly remember this man’s response to what I thought was an astonishing fact that all by itself proved the value of the United States and what it stood for, a fact which I happily conveyed to my classmates in the seventh grade in an oral report, and which I had learned from a motion-picture documentary shortly before. This was the fact that with only six percent of the world’s population, the United States produced fully forty percent of the world’s annual output of goods and services. The man’s reply was yes, but so what; ten percent of the country’s population owned ninety percent of its wealth.

I soon realized that no one I knew, neither other students, nor any of the adults I knew, was able to answer the leftwing arguments I was encountering daily at school. For a time, I thought, the explanation was that this was New York City. The people here have been intellectually corrupted. But the rest of the country is still full of people who support the principles of individual rights and freedom and know how to defend them. Over the next two summers, I learned that the problem was nationwide. I made this discovery as the result of my experiences at a vacation camp in Maine, where I met a wide variety of college students from all over the country who were working as camp counselors, as well as occasional local citizens. The college students too included a goodly proportion of self-confessed “social democrats.” I remember one of them telling me with obvious contempt how ignorant the parents of many of the campers were. They had been to see a local production of a play by George Bernard Shaw that made their type of people its targets, and they all loved it.

There was a flood of leftist arguments against individual rights and freedom, and nowhere were there answers being given, at least nowhere that I had found. I reluctantly came to the conclusion that the principles of individual rights and freedom enshrined in the Declaration of Independence and Constitution had largely lost their influence on the American people and that these glorious documents themselves were on the way to becoming items of merely historical interest, rather than living documents controlling the conduct of our country’s government.

It quickly became obvious to me, from the arguments of my teachers and the college students I met, and from those even of my own dentist, who favored socialized medicine, that what gave rise to the contempt for property rights and property owners, and the readiness to discard everything that the United States as a country had stood for in defending those rights, was a set of economic beliefs. Respect for property rights, it was held, was tantamount to respecting the right of a handful of capitalist exploiters to impoverish the masses by paying them starvation wages on the one side while charging them outrageous, monopoly prices on the other. Respecting the rights and freedom of businessmen and capitalists, it was claimed, was also the cause of terrible depressions and mass unemployment, as well as the cause of unsafe food and drugs, child labor, sweat shops, poverty in old age, wars, and countless other evils. Again and again, I saw, the assault on property rights was based on ideas about economics. It was ideas about economics that were destroying the concepts of individual rights and freedom. And, thus, by the age of thirteen, I gave up my ambition to become a Constitutional lawyer and began the study of economics instead.

I undertook the study of economics for the explicit purpose of finding economic arguments in defense of individual rights, i.e., property rights. In my first year of study, with the aid of a dictionary by my side, I read substantial portions of Adam Smith’s The Wealth of Nations and David Ricardo’s Principles of Political Economy and Taxation, as well as the whole of a book on the history of economic thought. I started with Smith and Ricardo in the belief that their books would provide the arguments I was seeking, for they had the reputation of having been the leading defenders of capitalism in the system’s heyday. Although my mature evaluation of them is that they do in fact have some very important things to say in the defense of capitalism, I was greatly disappointed in them at the time, because it seemed to me that with their support for the labor theory of value, they served merely to prepare the ground for Marx. 3 None of the other authors described in the book I read on

xlii CAPITALISM the history of economic thought appeared to offer any serious arguments in defense of capitalism.

I turned to browsing the card catalog of the public library for any author who might be a defender of capitalism and from whom I might learn something. In my search, I came across Capitalism, Socialism, and Democracy by Joseph Schumpeter, and Capitalism: The Creator by Carl Snyder, both of which books I quickly gave up on. I considered Schumpeter valueless as soon as I came across his statement that while socialism looked better than capitalism on paper, capitalism had proved superior to socialism in practice. To me this meant that Schumpeter was saying that socialism seemed better as far as we could think and speak about it, but that somehow, for reasons that we could not understand or verbalize, capitalism turned out to be better in the real world. That was not what I was looking for, which was to know why capitalism was right in theory, and not just in some realm of practice that could not be understood in theory. I immediately gave up on Snyder for essentially the same reason—namely, his book appeared to be largely descriptive and statistical and to have little or nothing to say in the essential realm of conceptual understanding, i.e., of theory. I experienced great disappointment even in Thomas Jefferson, when I read that he thought that the preservation of an agricultural society was essential for liberty. I realized that the modern world depended vitally on such things as steel mills and all other forms of heavy industry, and I wanted authors who would defend individual rights in that context.

At the age of fourteen, I discovered William Stanley Jevons’s The State in Relation to Labour and The Theory of Political Economy. 4 While the first of these titles began with major concessions on the side of government intervention, the substance of the book was a brilliant analysis of the destructive consequences of labor unions. 5 The second was an exposition of the theory of marginal utility, which I valued greatly, inasmuch as it seemed to provide an essential part of the answer to Marxism— enough, at least, to convince me that Marx and all of my Marxist high-school teachers were wrong in economic theory.

During this period, I had come to subscribe to a fortnightly magazine called The Freeman. At that time, Henry Hazlitt played a major role in writing the magazine’s editorials and in determining its content. So long as he continued in that role, I found the magazine so valuable that I read every issue from cover to cover.

It was in one of the early issues of The Freeman that I had my first exposure to the writings of Ludwig von Mises. It was his essay “Lord Keynes and Say’s Law.” 6 From reading the essay, I could see that Mises knew the history of economic thought and that he was presenting a strong, self-assured position in defense of an important and relatively complicated aspect of the functioning of capitalism, a position that Say and Ricardo had taken in the early nineteenth century, which was that general business depressions could never be caused by any socalled excess of production. I knew immediately that here was a man I must read further. And, a few months later, at the age of fourteen, I borrowed his classic Socialism from the public library. 7 Unfortunately, the book was then beyond me and I was not able to gain very much from the parts I attempted to read. But less than a year later, with some of the money I had been given on my fifteenth birthday, I bought Socialism and over the coming months had one of the very greatest intellectual experiences of my life, before or since. In the intervening months since my previous attempt, my mental powers must have grown the intellectual equivalent of the several inches that boys of that age are capable of growing in such a short time, because I was now able to understand a very great deal of what I read. And what I read filled me with a sense of utter enlightenment.

Mises argued that real wages were determined by the productivity of labor, which in turn depended on capital accumulation, which was accomplished by the saving and investment of businessmen and capitalists and was undermined by progressive income and inheritance taxation. He explained the operations of the price system and showed that the businessmen and capitalists were not a law unto themselves but, in order to make profits and avoid losses, had to produce the goods the consumers wanted to buy. He showed how price controls destroyed the price system and resulted in the establishment of de facto socialism, of which Nazi Germany was the leading example. He explained why socialism had to fail economically, because of its lack of markets and consequent inability to have a price system and thus to perform economic calculations. He showed how political freedom depended on economic freedom and thus why socialism, with its utter lack of economic freedom, was necessarily a system of dictatorship. He showed how under capitalism, the privately owned means of production operated to the benefit of the great mass of nonowners of the means of production to almost as great an extent as they did to the benefit of the owners and that economic progress, based on the profit motive and saving and capital accumulation, brought about a steadily rising standard of living of the nonowners. He showed how the law of comparative advantage made room for virtually everyone, however unskilled, to participate in the great world-embracing system of division of labor and to obtain all of its essential benefits. He showed that unemployment and the consequent inability of people to participate in the division of labor was the result of government

PREFACE xliii interference with the height of wage rates. He showed why the economic interests of all individuals and groups, of all countries, races, and economic classes were fundamentally harmonious and were made to conflict only by means of the adoption of the irrational ideologies of nationalism, racism, and Marxism and the policies of government intervention based upon them. He demonstrated that the existence of society—a division-of-labor society—and of all the other people who participated in it, was in the material self-interest of every individual, and thus that there was a profoundly rational, self-interested basis for social cooperation and such ethical norms as not killing or injuring other people.

These essential points were amplified and additional major arguments were added to them in his other writings then available in English, above all, Human Action and The Theory of Money and Credit, as well as Planning For Freedom, Bureaucracy, and Omnipotent Government, all of which I read over the next three years. In these other works Mises added vigorous defenses of the gold standard, brilliant analyses of inflation, compelling demonstrations that depressions were the result of government-sponsored credit expansion, and much else besides. Reading Mises on a random day, I would encounter such brilliant observations as that even if a chorus of people were simultaneously to say “We,” it would still be individuals who were saying it, which served as an illustration of the fact that collectives and groups of any kind had no real existence apart from the individuals who comprised them; that high profits provided not only an incentive to stepped-up investment, but also the means of stepped-up investment, inasmuch as the high profits would themselves be largely reinvested; that war and division of labor were incompatible, inasmuch as war represented a situation of the baker fighting the tailor, with the result that both parties were deprived of vital supplies; that democracy was necessary as the means of making possible peaceful changes in government, so that a dissatisfied majority would not have to resort to revolution or civil war to have its way; and so on. Looking back, I do not recall a single paragraph of von Mises that did not serve as an inspiration to my own thinking, even in the cases (which were relatively few) in which I ultimately came to disagree with him.

Mises was clearly the man whose writings I had been searching for. Here at last was a great, articulate defender of the economic institutions of capitalism, who wrote with all the power that logical argument could provide and with the authority of the highest level of scholarship. (Socialism and Human Action abound with references and quotations in German, French, Latin, and Greek. 8 )

One of the great good fortunes of my life, that profoundly contributed to my subsequent intellectual development, was to be invited by von Mises to attend his graduate seminar at New York University. I received this invitation shortly after my sixteenth birthday, in the last part of my senior year in high school. It came about as the result of a meeting, arranged by The Foundation For Economic Education, between Mises, myself, and Ralph Raico, who was then a fellow student of mine at the Bronx High School of Science (Raico is now Professor of History at the State University of New York, Buffalo). After several hours of conversation, spent mainly answering our questions, Mises invited us both to come to his seminar—provided (in reference to our extreme youth) that we did “not make noise.” We both eagerly accepted his invitation and began attending the very next week.

The format of the seminar was that each semester it was devoted to some topic of special current interest to von Mises, such as inflation or the epistemology of economics. It met on Thursday evenings from 7:25 to 9:05 PM, and, for most of the period in which I attended, at the Gallatin House, which was a fine old town house (once the home of the British consul) located at 6 Washington Square North, in New York’s Greenwich Village. It would open each evening with Mises himself speaking from a few notes for about twenty minutes to half an hour, followed by a general, cross discussion among the various seminar members who wished to participate or who Mises occasionally called upon. Often, a portion of the discussion was devoted to some paper that a seminar participant had prepared for the occasion.

I regularly attended the seminar for about seven and a half years, through the remainder of high school, all through my college years at Columbia University, and then as an enrolled student in NYU’s Graduate School of Business Administration, which was where Mises taught. I stopped attending only when I myself began to teach and had a class of my own to conduct on Thursday evenings.

At the seminar, I had the opportunity of hearing many observations by Mises that were not in his books that I had read. Equally important, I had the opportunity of asking him questions. Uncharacteristically, I did not raise any questions until after I had been in attendance for about a year and a half. Thereafter, I became a full-fledged participant, often being assigned papers to write and deliver.

My most outstanding memory of the seminar is that of Mises himself. I always experienced a heightened level of awareness when he entered the room and took his seat at the seminar table. What I was acutely aware of was that here, just a few feet away from me, was one of the outstanding thinkers in all of human history.

One of the things Mises stressed in his seminar was the importance of knowing foreign languages. One of the

xliv CAPITALISM reasons he gave for this was the frequent inadequacy of translation. In this connection, I was very surprised to learn that he was unhappy with the translation of Socialism.

I accepted his injunction to learn foreign languages and because there were important writings of his own not yet translated, as well as important writings of Menger and Böhm-Bawerk, his predecessors in the Austrian school, I put the opportunity I had of studying German at Columbia College to very good use. I wholeheartedly plunged into freshman and then sophomore German and memorized every new word I came across, sometimes to the extent of fifty or a hundred words a day. I memorized the declension of every model noun and the conjugation of every model verb, in every tense, mood, and voice, for every person, and every model sentence that I found. The result was that in the Christmas vacation of my sophomore year, I dared to translate a chapter of his Grundprobleme der Nationalökonomie (Epistemological Problems of Economics) and then show it to him. Although he had some misgivings, he supported my application for a grant from the William Volker Fund to translate the remainder of the book over the following summer. I obtained the grant and the next summer accomplished the translation at Columbia’s Butler Library. I translated four pages a day, Monday through Friday, and three more on Saturday, for ten weeks, until the whole book was done. I worked from nine in the morning until seven in the evening during the week, and from nine until five on Saturdays. When I finished, I typed the manuscript and had copies of it in the hands of the Volker Fund and Mises well before Columbia’s fall semester began. I know that both he and the Volker Fund were very favorably impressed, because he urged me to translate Heinrich Rickert’s Kulturwissen-schaft und Naturwissenschaft, which he considered a major answer to logical positivism, over the next summer, and, when I applied for a grant to do it, I got an immediate favorable response. Both translations were published a few years later by D. Van Nostrand, the latter under the title Science and History. I have to say that translating Mises, and being well paid to do it at that, was absolutely the most fabulous thing I could think of doing at the time, and to this day, I count it as a major accomplishment of my life.

Some of the credit for my having had the courage to start the translation belongs to the late Murray Rothbard, whom I met when I entered the seminar and became close friends with over the next five years. (Other members of the seminar when I arrived on the scene were Hans Sennholz, now President of the Foundation for Economic Education, and his wife Mary; Israel Kirzner, now a Professor of Economics at New York University; Professor William H. Peterson, then of New York University, and his wife Mary; and Percy Greaves, who later wrote Understanding the Dollar Crisis, 9 and his wife Bettina Bien Greaves, then and now a staff member of the Foundation for Economic Education. Prominent more or less frequent visitors to the seminar were Henry Hazlitt, then a regular columnist for Newsweek as well as the author of numerous books, the best known of which is Economics in One Lesson, 10 and Lawrence Fertig, who at the time was a columnist for the New York World Telegram and Sun.) Rothbard was then working on his Man, Economy, and State on a grant from the Volker Fund and urged me to apply, assuring me that a proposal to translate Grundprobleme would be considered both seriously and sympathetically. 11

By the time I had been in the seminar for about a year, Rothbard, Raico, and I, were joined by Robert Hessen (now a Senior Fellow at the Hoover Institution in Stanford) and Leonard Liggio (who later became President of the Institute for Humane Studies). About a year after that, Ronald Hamowy (now a Professor of History at the University of Alberta in Edmonton) also joined us. We almost always continued the discussions of the seminar until past midnight, usually at Rothbard’s apartment, and frequently met on weekends. We informally called ourselves “The Circle Bastiat,” after the leading nineteenth-century French advocate of capitalism, Frederic Bastiat.

At one of our gatherings, in the summer of 1954, over three years before the publication of Atlas Shrugged, Rothbard brought up the name Ayn Rand, whom I had not previously heard of. He described her as an extremely interesting person and, when he observed the curiosity of our whole group, asked if we would be interested in meeting her. Everyone in the group was very much interested. He then proceeded to arrange a meeting for the second Saturday night in July, at her apartment in midtown Manhattan.

That meeting, and the next one a week later, had an unforgettable effect on me. In the year or more before I entered Ayn Rand’s apartment, I held three explicitly formulated leading intellectual values: liberalism (in the sense in which Mises used the term, and which actually meant capitalism); utilitarianism, which was my philosophy of ethics and which I had learned largely from Mises (though not entirely, inasmuch as I had already come to the conclusion on my own that everything a person does is selfish insofar as it seeks to achieve his ends 12 ); and “McCarthyism,” which I was enthusiastically for, because I believed that the country was heavily infested with communists and socialists, whom I detested, and to whom Senator McCarthy was causing a major amount of upset. By the time I left Ayn Rand’s apartment, even after the first meeting, I was seriously shaken in my attachment to utilitarianism.

PREFACE xlv

Both meetings began at about 8:30 in the evening and lasted until about five o’clock the following morning. When I was introduced to her, I had no real idea of her intellectual caliber. I quickly began to learn her estimate of herself, however, when I offered her two tickets to an upcoming dinner in honor of Roy Cohn, Senator McCarthy’s chief aide, at which Senator McCarthy would be present. (I was scheduled to make a brief speech at the event, and when I mentioned to one of the event’s organizers that I was going to meet Ayn Rand, she asked me to extend the invitation.) Miss Rand declined the invitation on the grounds that to get involved as she would need to get involved, she would have to drop her present project (which was the writing of Atlas Shrugged) and do for McCarthy what Zola had done for Dreyfus. I had seen the Paul Muni movie Zola, and so had a good idea of Zola’s stature. I don’t quite remember how I experienced the comparison, but it was probably something comparable to the expression of a silent whistle. (After I came to appreciate the nature of Ayn Rand’s accomplishments, a comparison to Zola would seem several orders of magnitude too modest.)

At both meetings, most of the time was taken up with my arguing with Ayn Rand about whether values were subjective or objective, while Rothbard, as he himself later described it, looked on with amusement, watching me raise all the same questions and objections he had raised on some previous occasion, equally to no avail.

I had a sense of amazement at both meetings. I was amazed that I was involved in an argument that in the beginning seemed absolutely open and shut to me, and yet that I could not win. I was amazed that my opponent was expressing views that I found both utterly naïve and at the same time was incapable of answering without being driven to support positions that I did not want to support, and that I was repeatedly being driven into supporting such positions.

Neither of the evenings was very pleasant. At one point—I don’t know how we got to the subject, nor whether it occurred at our first or second meeting—I expressed the conviction that a void must exist. Otherwise, I did not see how the existence of motion was possible, since two objects could not occupy the same place at the same time. Ayn Rand’s reply to my expression of my conviction was that “it was worse than anything a communist could have said.” (In retrospect, recognizing that the starting point of her philosophy is that “existence exists,” I realize she took my statement to mean that I upheld the existence of “nonexistence” and was thus maintaining the worst possible contradiction.)

Because of such unpleasantness, I did not desire to see her again until after I read Atlas Shrugged. However, I could not forget our meetings and could not help wondering if somehow she might be right that values really were objective after all. I was very troubled by the implications of the proposition that all values are ultimately arbitrary and subjective, as Mises claimed. It no longer seemed enough that the great majority of people happened to prefer life to death, and health and wealth to sickness and poverty. For if they happened not to, there would be nothing to say to them that could change their minds, and if there were enough of them, no way to fight them, and, worst of all, no way even morally to condemn any slaughters they might commit, because if all values really were arbitrary and subjective, a concentration-camp sadist’s values would be as good and as moral as the values of the world’s greatest creators.

The years between my first meetings with Ayn Rand and the publication of Atlas Shrugged spanned my sophomore through senior years in college. In that time, I experienced serious intellectual doubt in connection with my ability to defend capitalism. What I had learned from Mises enabled me decisively to answer practically every argument that had been raised against capitalism prior to 1930, which was more than enough to answer my high school teachers. But my college professors presented a different challenge. They were teaching Keynesianism and the doctrine of pure and perfect competition/imperfect competition. Mises, I reluctantly had to conclude, had not dealt adequately with these doctrines. 13 At any rate, these were two major areas in which I found myself unable to turn to his writings for the kind of decisive help I had come to expect from him.

The doubts I experienced in college were not in response to any kind of solid arguments, but more in response to phantoms of arguments that could not be grasped in any clear, precise way and that in fact usually bore obvious absurdities. This last was certainly true of the Keynesian multiplier doctrine and of the claim on the part of the pure-and-perfect competition doctrine that competition implied the absence of rivalry. Despite the absurdities, all of the faculty and practically all of my fellow students at Columbia seemed perfectly at home with the doctrines and absolutely confident of their truth.

If any one concrete can convey the intellectual dishonesty of Columbia’s economics department in those days, it was this. Namely, while neglecting to provide a single copy of any of the writings of von Mises, or even so much as mention the existence of any of them in any of the assigned readings or, as far as I was aware, in a classroom, the department saw to it that literally dozens of copies of Oskar Lange’s attempted refutation of Mises’s doctrine on the impossibility of economic calculation under socialism were available on open reserve in the library—as an optional, supplementary reading in the introductory economics course. 14

xlvi CAPITALISM

Economics was not the only area in college in which I experienced revulsion for Columbia’s teachings. I had the same experience in the socalled contemporary civilization courses I had to take, and in history courses. I know I would have had it in philosophy courses, but I wisely dropped the one or two I enrolled in, after the first week. There were, to be sure, things I valued at college, having greatly gained from them: such as having to read the great classics of Western literature, which I would probably not have done on my own; the freshman English-composition course, which gave me the ability to write a solid essay; the German courses; and the mathematics courses. However, with the exception of three of the mathematics courses, almost all of these were in the first two years. By the time of my senior year, I had profoundly soured on Columbia University. I remember walking the campus and noting the names of the various buildings: “School of Mines,” “School of Engineering,” “Philosophy Hall,” and so on. I remember thinking that the first two served honorable purposes, while the third served no purpose but the emission of intellectual poison.

I do not know if my college education could have damaged my intellectual development permanently. It did not have the chance. For just a few months after graduation, Atlas Shrugged appeared.

I obtained a very early copy and began to read it almost immediately. Once I started it, I could not put it down, except for such necessary things as eating and sleeping. I was simply pulled along by what I have thought of ever since as the most exciting plot-novel ever written. Every two hundred pages or so, the story reached a new level of intensity, making it even more demanding of resolution than it was before. I stopped only when I finally finished the book, four days after I had started it. When I finished, the only thing I could find to say in criticism, tongue in cheek, was that the book was too short and the villains were not black enough.

The first thing I got out of Atlas Shrugged and the philosophical system it presented was a powerful reinforcement of my conviction that my basic ideas were right and a renewal of my confidence that I would be able to expose my professors’ errors.

Very soon thereafter, the whole Circle Bastiat, myself included, met again with Ayn Rand. We were all tremendously enthusiastic over Atlas. Rothbard wrote Ayn Rand a letter, in which, I believe, he compared her to the sun, which one cannot approach too closely. I truly thought that Atlas Shrugged would convert the country—in about six weeks; I could not understand how anyone could read it without being either convinced by what it had to say or else hospitalized by a mental breakdown.

The following winter, Rothbard, Raico, and I, and, I think, Bob Hessen, all enrolled in the very first lecture course ever delivered on Objectivism. This was before Objectivism even had the name “Objectivism” and was still described simply as “the philosophy of Ayn Rand.” Nevertheless, by the summer of that same year, 1958, tensions had begun to develop between Rothbard and Ayn Rand, which led to a shattering of relationships, including my friendship with him. 15

Shortly after that break, I took Rothbard’s place in making a presentation in Ayn Rand’s living room of the case for “competing governments,” i.e., the purchase and sale even of such government services as police, courts, and military in a free market. As the result of Ayn Rand’s criticisms, I came to the conclusion that the case was untenable, if for no other reason than that it abandoned the distinction between private action and government action and implicitly urged unregulated, uncontrolled government action, i.e., the uncontrolled, unregulated use of physical force. This was the logical implication of treating government as a free business enterprise. I had to conclude that government in the form of a highly regulated, tightly controlled legal monopoly on the use of force, was necessary after all, in order to provide an essential foundation for unregulated, uncontrolled private markets in all goods and services, which would then function totally free of the threat of physical force. This indeed, represented nothing more than a return to my starting point. It was what the government established by the United States’ Constitution had represented, and which I had so much admired.

At that time, and in later years, I came to be influenced by Ayn Rand’s ideas in numerous ways, thanks in part to the fact that over the years between 1957 and her death in 1982, I had the opportunity of frequently meeting with her and speaking with her extensively about her writings. The influence of her philosophy extolling individual rights and the value of human life and reason appears repeatedly in this book and sets its intellectual tone. To be specific, I have found her treatment of the concepts of individual rights and freedom to be far superior to that of anyone else, and I have taken it over and have applied it extensively both in Chapter 1 and as the foundation of my treatment of monopoly as inherently government created in Chapter 10. In Chapter 1, very much in the spirit of Ayn Rand, I have shown how the whole of capitalist development, including the development of the panoply of capitalism’s institutions from private ownership of land to the division of labor and continuous economic progress, can be understood as “a self-expanded power of human reason to serve human life.” 16 In Chapter 2, I have made her views on the role of reason in human life, on the objectivity of values, and on the integration of mind and body essential elements of my approach to the foundations of economics, that is, to

PREFACE xlvii man’s objective need both for the constantly growing supply of wealth that capitalism produces and for the science of economics itself. Her influence pervades my critique of environmentalism in Chapter 3. It is present in my discussion of competition in Chapter 9, where I have adopted her principle of the “pyramid of ability” and integrated it with the law of comparative advantage. It appears in my critique of the doctrine of pure and perfect competition in Chapter 10, much of which was originally published in The Objectivist under her editorship. It is also to be found in the epistemological aspects of Chapters 11, 15, and 18, that is, in my approach to definitions, axiomatic concepts, and the epistemological errors of Keynes and his followers. Her influence is probably to be found in some measure in every chapter, at the very least insofar as it has contributed to an improved ability on my part to know what is a forceful argument and what is not. Needless to say, it is very much present in my treatment of the philosophical influences that led to the development of capitalist civilization and the current philosophical influences that are threatening to destroy it, and, of course, everywhere insofar as I deal with such essential matters as egoism versus altruism, individualism versus collectivism, and reason versus mysticism.

Looking back over the past and all that has led to the writing of this book, I cannot help but take the greatest possible pride and satisfaction in the fact that along the way, in having been the student of both Ludwig von Mises and Ayn Rand, I was able to acquire what by my own standards at least is the highest possible “intellectual pedigree” that it is possible for any thinker to have acquired in my lifetime, or, indeed, in any other lifetime.

The year and a half or more following my abandonment of the doctrine of competing governments turned out to be the most intellectually productive of my life, and to provide most of what is original in this book. The distinctive intellectual background of that period included a longstanding disagreement I had had with Rothbard concerning whether or not the rate of profit (“originary interest” in the terminology of Mises) had to fall in connection with capital accumulation. Rothbard maintained that it did, as did the overwhelming majority of economists since the time of Adam Smith. To me, such a position seemed comparable to implying the gradual extinction of the sun as the necessary accompaniment of capital accumulation. For it was only the prospect of profit that provided motivational energy to the entire economic system. And while Mises’s own position on this subject was unclear, he held another doctrine of similar import. This was his doctrine of purchasing-power price premiums in the rate of interest, according to which the prospect of prices rising at any given rate added an equivalent percentage to the rate of interest, while the prospect of prices falling at any given rate resulted in an equivalent deduction from the rate of interest. Thus formulated, an implication of this doctrine, I concluded, was that rapid increases in production that caused a rapid fall in prices would result in a negative rate of interest and thus in a lack of all incentive to lend or invest, and thus in a depression. This conclusion too was unacceptable to me. It implied the overproduction doctrine, which Mises himself, of course, totally opposed. 17

I compiled a written list of such points, which also included numerous questions I had come to formulate in connection with my classes at Columbia and then at NYU, where I was now enrolled in the doctoral program.

By this time, in just a year and two summers, taking ten two-credit courses in the fall and ten in the spring, I had already completed all of the course work for a Ph.D., but I still had the written and oral exams and the dissertation in front of me. My original plan had been to go straight through for the Ph.D., in the shortest possible time. Now I found the prospect of the obstacles that still remained to be somewhat more daunting, and so I decided that it would be worthwhile to take a few months out and obtain an MBA degree. For this, all I needed to do was write an MBA thesis.

I decided to choose a topic that would require that I read only “good people”—i.e., sound authors. I had come to the conclusion that because the efforts of proto-Keynesians, such as Malthus and Sismondi, had been decisively defeated by the classical economists in the early nineteenth century, and because nothing like the pure-and-perfect-competition doctrine had ever even arisen in the nineteenth century, when classical economics was in vogue, there must have been something in classical economics that served to refute or thoroughly preclude such doctrines in the first place, and thus that I should turn to it once again as a source of knowledge. The thesis topic I chose was The Classical Economists and the Austrians on Value and Costs. This topic required that I read extensively in Menger, Böhm-Bawerk, and Wieser for the Austrian views, and not only in Smith and Ricardo, but also in James Mill, Say, McCulloch, Senior, and J.S. Mill, for the views of classical economics.

This project turned out to be a very good idea, indeed. I learned much more about the doctrine of diminishing marginal utility, including how it subsumes cases in which prices are actually determined in the first instance by cost of production. 18 In reading seven different classical authors, each one covering essentially the same ground, and doing so at the age of twentyone and twenty-two, instead of thirteen, I was able to come to a genuine understanding of their work. This included seeing how their views on the labor theory of value and the

xlviii CAPITALISM

“iron law of wages” greatly differed from those of Marx, whose views on these subjects are usually assumed to be the same as theirs, and that Ricardo’s doctrine that “profits rise as wages fall, and fall as wages rise” did not, despite all appearances, actually imply a conflict of interests between wage earners and capitalists. 19 I came to see, in fact, that very little substantive difference actually existed between the views of Böhm-Bawerk and those of John Stuart Mill concerning the determination of the prices of reproducible products. 20 Very importantly, I began to see how the whole contemporary approach of “imperfect competition” versus “pure and perfect competition” was a result of the abandonment of the classical economists’ recognition of the role of cost of production in the determination of the prices of reproducible goods, a recognition that Böhm-Bawerk and Wieser had retained but all others had apparently lost. 21

What I gained from the extensive reading I had done in connection with my thesis went far beyond the subject of value and costs. In the months immediately following, I knew that I had learned a great deal that had not gone into the thesis—knowledge that I could then not yet even explicitly formulate. I felt good about my state of mind and I am pretty sure that I described my mental condition to myself as one of being “intellectually pregnant.”

Back in the spring of 1958, I had succeeded in formulating to my own satisfaction a set of conditions in which capital accumulation could take place indefinitely with no accompanying fall in the rate of profit. I had tried to explain it to Rothbard, but without success. That demonstration was one element in the back of my mind, before I even got to the reading for my thesis. My exposure to principles of actual business accounting, as the result of having taken a number of courses on investments and corporation finance in the NYU program, provided another critical element besides what I had learned from my reading.

In July of 1959, it all came together. The precipitating event was my reading an extensive quotation from John Stuart Mill presenting the proposition that “demand for commodities is not demand for labour.” This was a passage I had not read before. It appeared in Henry Hazlitt’s newly published The Failure of the “New Economics.” 22

Very soon thereafter, I had a period of five successive days in which I was able to make one connection after another and to answer one question after another from my list. In essence, I had put together, and was able to hold in my mind all at the same time, an early version of what now appears in this book as Figures 16–2 and 17–1 and derive a succession of major implications from it. 23

I saw how Mill’s proposition was essential to explaining an excess of the demand for the products of business over the demand for factors of production by business. It was only because the demand for “commodities”—viz., consumers’ goods—was not a demand for labor that the demand for consumers’ goods could exceed the demand for labor, and thus that the demand for the products of business in general could exceed the demand by business for factors of production in general. This excess of demand for products over demand for factors of production was an essential cause of an excess of sales revenues over costs, and, therefore, of an aggregate profit in the economic system. I could see at the same time how with a given aggregate amount and average rate of profit, based on a given excess of the demand for the products of business over the demand for factors of production by business, both capital accumulation and falling prices caused by increased production could take place, with, of course, no effect whatever on the average rate of profit. I could also see other important relationships. In those five days, I was able to grasp essential portions of what are now Chapters 11 and 13–18 of this book. Virtually everything else that is in these chapters, and much that is in other chapters, is an elaboration or further implication of the discoveries I made in those five days, though in many cases, the elaboration or further implication did not occur to me until much later. Indeed, the process of tracing out the implications continues down to the present.

As I made the new connections I wrote them down, sometimes jumping out of bed to do so, lest I forget any of them. After the first five days, I had accumulated about 15 pages of notes, the most important part of which was an elaborate numerical example of the most essential points in a form consistent with the principles of business accounting. In August, I wrote a hundred-page-plus typed paper called “The Consumption Theory of Interest,” which I showed to Henry Hazlitt, who, as mentioned, sometimes attended von Mises’s seminar. He was generally impressed with it, and, starting with the third printing of The Failure of the “New Economics,” credited me with an important application I had made in the paper identifying a simultaneous breakdown of the Keynesian doctrines on consumption, employment, liquidity preference, and the rate of interest, though he did not refer to my manuscript specifically. 24

Not long after I made my discoveries, I decided that they should be the main subject of my doctoral dissertation, which I began to do research for soon after passing my oral examination in the spring of 1960. For the sake of thoroughness, I wanted to include not only my own views, but also a critical analysis of all significant alternative views. I set out to follow the example of Böhm-Bawerk, who had done just that. Thus, in preparation for writing my dissertation, I read virtually all of Böhm-Bawerk that I had not previously read, as well as major

PREFACE il selections from other authors whose views concerning the rate of profit/interest were prominent, such as Irving Fisher, Knut Wicksell, and Frank Fetter, as well as Smith, Ricardo, other classical economists, and Marx and Keynes.

I began writing the dissertation in May of 1961 and handed in a 625-page typed manuscript in the fall of 1962. The title was The Theory of Originary Interest. (At this time, I still followed Mises in describing what businessmen and accountants normally describe as profit, and which I too now refer to as profit, as “originary interest.”)

In January of 1963, I learned that one of the members of my reading committee had rejected the dissertation. In order to gain his approval, it was necessary for me to eliminate well over half of the manuscript I had submitted, and write approximately thirty new pages at the beginning and thirty more new pages at the end. (On my own initiative, I replaced “originary interest” with “profit” throughout.) The last time I spoke with this committee member, he said he liked the new version much better than the original one, except for the first thirty pages; he also said he had not yet read the last thirty pages. (Sometime later, I was told that this individual had left the university to write editorials for The Washington Post.) My dissertation, as finally approved, carries the title The Theory of Aggregate Profit and the Average Rate of Profit. 25

This situation constituted the one time in my life when I was seriously disappointed in von Mises. He told me that he found it amusing that I should receive such trouble from this particular committee member, whom he regarded as a Marxist, when what I was providing was a modernized, more scientific version of the very ideas that were the foundation of the man’s own beliefs. Mises believed that because of my resurrection of the classical economists, I was indirectly resurrecting Marx. (Happily, he changed his mind on this subject two years later, after hearing my lecture “A Ricardian’s Critique of the Exploitation Theory.” 26 But the same essential material had been available to him in my original dissertation.)

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As much of the preceding makes clear, this book is very much the product of ideas I first developed over thirtyfive years ago and have been further developing and elaborating ever since. Over this period, I have published various portions of my ideas in articles. In

Laguna Hills, California

June 1996 and March 1997 cases in which I have been unable to improve upon formulations I presented in those articles, I have retained the formulations. Appropriate acknowledgment is made to the publications in question in notes to the portions of the text where the formulations appear.

Here I wish to express my special thanks to Libertarian Press for its permission to include the very lengthy quotation from Böhm-Bawerk’s Capital and Interest that appears on pp. 414–416.

I have not sought permission from any publisher to quote passages in cases in which direct quotation is necessary to prove to the reader that the author in question really does hold the views I ascribe to him. Here I rely on the doctrine of fair use, which I believe provides protection against the intellectual hit and run that would be entailed in allowing authors to propound absurd and vicious ideas and then to hide behind copyright protection so that a critic could not prove what they had actually said and thus be placed at risk of being accused of having presented their views unfairly. This applies above all to my numerous quotations from various editions of the textbook Economics by Paul Samuelson. It also applies to my quotations from less wellknown textbooks, from The General Theory by Lord Keynes, The New Industrial State by John Kenneth Galbraith, and from sundry environmentalists.

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I would like to acknowledge here the very generous financial support provided by Mr. Michael Aronstein of New York, in making possible the first printing of this book. Mr. Aronstein is one of the very few businessmen and capitalists who understands both the truth of procapitalist economic theory and the importance of disseminating that truth to the educated public.

Above all, however, I want to acknowledge the very great contribution of my wife, Dr. Edith Packer, with whom I have now shared most of my adult life. I doubt very much that I could have undertaken, let alone carried to completion, a project of this size without her. She has provided both the necessary emotional framework and an extremely helpful intellectual framework. It was she who served as the first reader and editor of the manuscript of this book. An important part of the organization and much of the readability of my book are due to her suggestions.

G EORGE R EISMAN

l CAPITALISM

Notes

1. These were the tape-recorded lecture series that are known as An Introduction to Procapitalist ‘Macroeconomics,’ A Theory of Productive Activity, Profit, and Saving, and Capital, the Productive Process, and the Rate of Profit. These titles and the one described in the next sentence of the text are available on audio cassette from The Jefferson School at PO Box 2934, Laguna Hills, Calif., 92654.

2. Thus, my 1990 TJS Fall seminar lecture “The Nature and Value of Economics” was a portion of Chapter 1. My 1991 TJS summer conference series Wealth, Natural Resources, and the Environment and The Political Concept of Monopoly was drawn from Chapters 2, 3 and 10.

3. Concerning the errors of this view, see below, pp. 473–500. 4. William Stanley Jevons, The State in Relation to Labour (London: Macmillan and Co., 1894); The Theory of Political Economy, 4th ed. (London: Macmillan and Co., 1924).

5. I happened to buy The State in Relation to Labour as the result of not being able to afford Jeremy Bentham’s In Defence of Usury, a work whose title greatly appealed to me, and thus having to choose the substantially less expensive title by Jevons. 6. The essay has been reprinted in Ludwig von Mises, Planning For Freedom, 4th ed. enl. (South Holland, Ill.: Libertarian Press, 1980).

7. Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951); reprint ed. (Indianapolis: Liberty Classics, 1981). 8. Happily, these have been translated in the currently available Liberty Classics reprint edition of Socialism cited above. As a major aid to reading Human Action, see Mises Made Easier A Glossary for Human Action prepared by Percy L. Greaves, Jr. (Dobbs Ferry, N. Y.: Free Market Books, 1974).

9. Percy Greaves, Understanding the Dollar Crisis, (Belmont, Mass.: Western Islands, 1973).

10. Henry Hazlitt, Economics in One Lesson, new ed. (New Rochelle, N. Y.: Arlington House Publishers, 1979).

11. Murray N. Rothbard, Man, Economy, and State, 2 vols. (Princeton, N. J.: D. Van Nostrand Company, Inc., 1962).

12. This is a conclusion that I now consider to be mistaken, because it attaches no objective meaning to the concept of self. 13. This conclusion may appear somewhat ironic in view of the fact that what is today accepted as a new and convincing major critique of Keynesianism, namely, the “rational expectations doctrine,” is nothing more than arguments made by Mises and

Hazlitt in the 1950s, for which they have received no credit. See, for example, Paul Samuelson and William Nordhaus, Economics, 15th ed. (New York: McGraw Hill Book Company, 1995), Figure 31–5 on p. 613 and the surrounding discussion. Then see Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 792–793. See also below, p. 6 and p. 11, n. 15.

14. See Oscar Lange, On the Economic Theory of Socialism, Benjamin E. Lippencott, ed. (Minneapolis: University of Minnesota Press, 1938). See also below, my critique of Lange and his doctrine of the artificial market, on pp. 279–282.

15. When I knew Rothbard, he was a staunch pro-McCarthy, anticommunist. Later on, incredible as it may seem, he became an admirer of the Soviet Union! For evidence of this, see below, p. 11, n. 13.

16. See below, pp. 19, 27–28.

17. For demonstrations of why capital accumulation does not entail a falling rate of profit and of why falling prices caused by increased production do not reduce the rate of profit or interest, see below, pp. 569–580, 810–818, and 825–826. 18. On this point, see below the lengthy quotation from Böhm-Bawerk on pp. 414–416.

19. Concerning these points, see below, pp. 475–498.

20. See below, p. 218, n. 31.

21. On this subject, see below, pp. 408–417.

22. Henry Hazlitt, The Failure of the “New Economics” (New York: D. Van Nostrand, 1959), p. 363.

23. Figures 16–2 and 17–1 are shown facing each other on pp. 810–811.

24. See Henry Hazlitt, The Failure of the “New Economics,” 3d prntng. and later, p. 196, n. 6.

25. George Reisman, The Theory of Aggregate Profit and the Average Rate of Profit, Ph.D. diss., New York University Graduate School of Business Administration (1963; reprinted by University Microfilms, Inc., Ann Arbor, Mich.).

26. The substance of this lecture was published many years later as my essay “Classical Economics Versus the Exploitation Theory” in Kurt Leube and Albert Zlabinger, eds., The Political Economy of Freedom Essays in Honor of F. A. Hayek (Munich and Vienna: Philosophia Verlag, 1985). The same analysis, greatly elaborated, appears below, on pp. 473–498.