The Lessons of History; J. J. Davis

554 progressive impoverishment of the workers, and that the system itself would be destroyed by a succession of boom-and-bust cycles of increas ing intensity. Leon Trotsky, one of the key fig ures in the earlier phases of the Russian Revolution, had even more grandiose hopes for socialism. He believed that in a socialist society man would become "... incompara bly stronger, wiser, finer. His body more harmonious, his movements more rhythmical, his voice more musical ... The human average will rise to the level of an Aristotle, a Goethe, a Marx. Above these other heights new peaks will arise." History has not been kind to the utopian hopes of Marx and Trotsky. The "New Socialist Man" is yet to appear, and, as we shall see, the his torical record shows that capitalism has been far more effective than soTHE LESSONS OF HISTORY 555 cialism in improving the lot of the common man. We will also be examining some popular but mistaken notions about the track record of the free market system. Did not the "Robber Bar ons" of the nineteenth century dem onstrate that industrial capitalism is a predatory and oppressive sys tem? Did not the Great Depression demonstrate once and for all the in herent instability of the free mar ket? We will attempt to show here that the common perception on both these questions is mistaken, and only serves to obscure the real merits of the free market approach.

The Longer View Without an adequate knowledge of the past it is easy to lose sight of the fact that the material abun dance produced by industrial capi talism is a very recent phenomenon in human history. Poverty has been the usual lot of mankind for most of recorded history. The concept of a steadily growing economy was vir tually unknown in ancient times. Growth rates through most of hu man history have been very low, zero, or negative. Pre-industrial societies were caught in a Malthusian trap of slow growth, increasing population, outstripping of food supplies, and demographic disaster. As the British historian Paul Johnson has pointed out, prior to the eighteenth century, "it was rare for even the most advanced economies, those of Engialld and Holland, to achieve one per !cent growth in any year."2 Beginniqg in the 1780s, En gland achieved a then-unprece dented annual gnowth rate of two per cent. By the end iofthe decade a rate of four per cent ~ad been attained a rate which waS to be sustained for the next 50 year~.

During the nineteenth century Britain increased the size of its work force by 400 per cent. Real wages doubled during i the period 1800 1850, and doubled again from 1850 1900. "This meant," notes Johnson, "there was a 16@O per cent increase in the production and consumption of wagegoods during the century. Nothing like this had happened anywhere before in the whole of his tory."3 After 185p, even higher rates of growth were] being attained in Belgium, France, Austria-Hungary, Germany, and ~he United States. Marx's predictipn that industrial capitalism woulp progressively im poverish the workers was falsified by the facts of history. Technological and Intellectual What produced this great "lift off' in the Western nations? The experi ence of England!, the pioneer in the new industrial revolution, is quite instructive. The, sources of the dra matic progress were both technolog ical and intellectual. Harnessing the new energy of coal and steam lifted 556 THE FREEMAN September English society to a new plateau of productivity far higher than the old economy based on the muscle of horse and man.

The new ideas of Adam Smith ex ploded the old mercantilist notions which measured the nation's wealth by stocks of silver and gold amassed through plunder and the cumber some operations of a centrally con trolled economy. Adam Smith's Wealth ofNations portrayed a vision of a society in which the initiative, energy, and imagination of count less enterprising individuals would produce a more abundant society for all. The Protestant Reformation, and later the Wesleyan revival, rein forced the biblical values of work, thrift, and personal responsibility, and thus helped create a moral cli mate which contributed to economic progress. "In short," writes Paul Johnson reviewing the trend of events, "after nearly five recorded millennia of floundering about, in relative or ab solute poverty, humanity suddenly in the 1780's began to hit on the right formula: industrial capitalism."4 And the progress was indeed dramatic.

During the 1780s, 80 per cent of the people of France were spending 90 per cent of their income on bread, merely to stay alive. Today France has more automobiles per capita even than Germany, and more second homes than any other European country. It is important to keep facts such as these in mind as we examine some particular issues relating to the nineteenth century experience. "Robber Barons" and "Dark, Satanic Mills" Despite the impressive historical evidence for dramatic economic progress in Western society during the last several centuries, there is the widespread belief in the popular mind that capitalism produced enor mous degradation, impoverishment, and oppression for the common man. This view can be found in novels, textbooks, newspapers, and televi sion and radio productions today. How did it arise? Curiously enough, this view was spread not only by Karl Marx and his followers, but also by countless nineteenth century social reformers, educators, writers, and clergymen who had no particular sympathy for the doctrines of Marx.

One can recall the lurid descriptions of the factory system in the novels of Charles Dickens, and the English poet William Blake's characteriza tion of these factories as "dark, sa tanic mills." The English industrial revolution had not only improved the living conditions of the masses, but also produced a fundamental alteration in society's perception of poverty. Since poverty no longer appeared to be the inevitable lot of mankind, in stances of it seemed all the more to call for vigorous reform. Industrial 1982 THE LESSONS OF HISTORY 557 capitalism produced a "revolution of rising expectations," and its very success provoked an outpouring of criticism. A social conscience quick ened by the evangelical revivals of the nineteenth century was made more sensitive to such criticisms. But were the English factories really "dark, satanic mills"? There is no question that conditions in many of the factories were far from ideal, but careful historical research has exploded the myth that the sys tem led to the progressive impover ishment of the workers. Exactly the opposite was the case. Economic his torians W. H. Hutt and T. S. Ashton have demonstrated that while there were some areas of unevenness, the general trend for English workers in the nineteenth century was one of improving standards of living. Real wages were increasing; the price of textiles fell, increasing the avail ability of clothing; after 1820, the price of consumer items such as tea, coffee, and sugar fell substantially.

Ashton concludes that "the number of those who were able to share in the benefits of economic progress was larger than the number of those who were shut out from those benefits."5 Countless thousands of English men and women voluntarily left the farms in order to work in the factories, be lieving that the new system offered greater opportunities for economic betterment. And more often than not, those hopes were realized. In 1837 or 183~, Thomas Holmes, aged 87, gave t~ a member of the Liverpool Statist~cal Society his rec ollections of the ¢hanges in English society during His lifetime. "There has been a very great increase in the consumption of IIlreat,wheaten bread, poultry, tea and sugar," he said. "The poorest are not s~ well fed. But they are better cloth~d, lodged and pro vided with furniture, better taken care of in sickness and misfortune. So they are gainers. This, I think, is a plain statement of the whole case."6 Robber Barons It is a commoI\lly held belief that nineteenth century America was the age of the "robb~r barons." John D.

Rockefeller, Comeli us Vanderbil t, Leland Stanford~ and other preda tory capitalists ,were milking the country dry with their rapacious, dog eat-dog form of i economic warfare. This is the pictur~ presented in Mat thew Josephson'~ influential 1934 book, The Robben Barons. According to Josephson, the l capitalistic system was the proble~, and government intervention was the solution. In spite of Josephson's claims, how ever, a closer e~amination of the record discloses tp.at the real culprit 'was not the free, market system as such, but governril£nt intervention on behalf of privileged business interests. . A good case iIi point is provided by the "Credit Mobilier" scandal of 558 THE FREEMAN September the 1860s. The Credit Mobilier was a "construction" company directed by those who had controlling interests in the Union Pacific Railroad. Through their political influence Congress passed the Pacific Rail road bill in 1862, granting the Union Pacific Railroad 12,000,000 acres of land and $27,000,000 in six per cent, thirty-year government bonds as a first mortgage, and 9,000,000 acres of land and $24,000,000 in govern ment bonds to the Central Pacific Railroad. The project was to estab lish rail connections between Omaha, Nebraska and the Great Salt Lake.

Financial interests in the Union Pacific Railroad used the Credit Mobilier to subcontract the con struction work to themselves, and when construction costs mysteri ously skyrocketed, the profits reaped by the Credit Mobilier were enor mous. When the swindle became known, the public outcry against "laissez faire capitalism" was im mediate. But as Susan L. Brown and other authors in The Incredible Bread Machine have pointed out, capital ism was being blamed unfairly. The promoters of the Credit Mobilier raised their capital not by private investment but by government sub sidy-by "subsidies, franchises, land grants and associated government involvements which are not charac teristic of laissez faire capitalism."7 The Credit Mobilier was not a true example of the free market, but of its perversion through the use of government power for the sake of special privilege. In this case "big business" was reaping profits not through fair competition on the open market, but through manipulating the political system for its own ends.

John D. Rockefeller's Standard Oil Company is frequently cited as the prime example of the evils of mo nopoly capitalism in the nineteenth century. According to the authors of one popular college text, "Rockefel ler was a ruthless operator who did not hesitate to crush his competitors by harsh and unfair methods." Rockefeller's Efficiency As economist Lawrence W. Reed has pointed out, such charges present a distorted picture of the reasons for Rockefeller's financial success. Ac cording to Reed, Rockefeller's profits stemmed not from a coercive monop oly produced by government grants of exclusive privilege, but from an efficiency monopoly-a concentra tion of the market produced by a company's excellence in satisfying its customers. Even Ida Tarbell, one of Rockefeller's most persistent critics, admired the efficiency of his opera tions. Tarbell, describing one of Standard Oil's refineries, admitted that it was "a marvellous example of economy, not only in materials, but in time and in footsteps." Eco nomic historian D. T. Armentano has pointed out that between 1870 and 1982 THE LESSONS OF HISTORY 559 1885 Standard Oil reduced its refin ing costs for kerosene from 3 cents per gallon to less than .5 cents per gallon. "Clearly," notes Armentano, "the firm was relatively efficient, and its efficiency was being translated to the consumer in the form of lower prices for a much improved product, and to the firm in the form of addi tional profits."8 Did Standard Oil ruthlessly drive out its competitors through preda tory price cutting? Reed cites the conclusion of historian Gabriel Kolko: "Standard attained its con trol of the refinery business primar ily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refin ery owners later reopened new plants after selling to Standard."

Unlike the Credit Mobilier, John D. Rockefeller's profits did not de rive from special subsidies and priv ileges granted by the government. While it was certainly the case that Rockefeller wanted to make money, a fair reading of the facts discloses that he succeeded in doing so by the socially beneficial mechanism of the free market-by efficiently produc ing a quality product that the public really wanted to buy. The Great Depression More than any other event in the twentieth century, the Great Depression succeeded in convincing a generation of Americans that the free market system, left to itself, simply could not work. The social impact of this ev~nt was enormous. Some 12 millioq Americans were unemployed; so~e 5,000 banks and 86,000 business~s failed; in 1932 alone, 273,000 families were evicted from their hom~s. Despair and a sense of helplessness gripped the country. People kp.ocked on doors for handouts, and some even fought over leftovers in the ~lleys behind res taurants. The jOlflrnalist Saul Pett expressed the co:(nmon view of the lnatter in his observation that the Depression was "the watershed, the great turn in history in which lais sez-faire died and the basic philoso phy of American, government was profoundly altered."9 Only the re sources of the federal government, so it seemed, coulclirescue the nation from the wreckag~ of the free enter prise system.

But was this r~ally the case? Re cent economic research has been questioning this common view, and presenting facts ,which show that government intenvention was more a cause than a cure of the nation's economic crisis. A good measure of the blame must be laid at the feet of the Federal Resetve System, which presided over a ~eckless expansion of credit during th~ years 1924-1929. Professor Hans •$ennholz, a noted conservative econpmist, has argued that this credit e~pansion made the crash of 1929 inevitable. "Inflation 560 THE FREEMAN September and credit expansion always precip itate business maladjustments and malinvestments that must later be liquidated," he writes. lO Even after the monetary collapse began, the Federal Reserve did not take re sponsible countermeasures. Accord ing to Prof. Milton Friedman, the evidence is now quite conclusive that "the System not only had a legisla tive mandate to prevent the mone tary collapse, but could have done so if it had wisely used the powers that had been granted to it in the Federal Reserve Act."11 The Lesson of 1929 The Smoot-Hawley Tariff Act of 1930 represented another mis guided government intervention which only served to deepen the eco nomic crisis. By raising U.S. tariffs to record levels, this action virtually closed our borders to foreign goods, provoked retaliatory tariffs on American products, and contributed to unemployment at home and abroad. Sennholz points out that U.S.

exports dropped dramatically from $5.5 billion in 1929 to $1.7 billion in 1932. The federal government com pounded the nation's economic woes with the Revenue Act of 1932, dou bling the federal income tax burden. This sharpest tax increase in the na tion's history designed to "soak the rich," contributed greatly to the downward spiral. "This blow alone," notes Sennholz, "would bring any economy to its knees, and shatters the silly contention that the Great Depression was a consequence of economic freedom." Franklin D. Roosevelt's "New Deal" received the lion's share of credit for lifting the country out of the Depression, but it was really due to circumstances beyond govern ment's control-the beginning of the Second World War-that the na tion's unemployment problems were solved. The real lesson of 1929 is not that the free market system can't work, but that misguided govern ment interventions in the market can produce far more damage than they propose to cure.

The Recent Past Karl Marx expected industrial capitalism to produce increasing im poverishment of the workers, and fi nally to destroy itself in a series of boom-and-bust cycles. History has demonstrated that Marx was wrong on both counts. As George Taber has noted, "Rather than pushing work ers deeper into poverty ... capital ism has lifted the vast majority of laborers into the middle class. "12 Workers in free market economies have far more influence on manage ment's decisions than their counter parts in Marxist societies. Capitalism has weathered some severe fluctuations in the business cycle-the worst being the Great 1982 THE LESSONS OF HISTORY 561 Depression-but the predictions of its demise have turned out to be pre mature. Even its critics have been forced to admit its staying power as :;in economic system. Writes Robert Heilbroner, a left-leaning economist and persistent critic, "History has shown capitalism to be an extraor dinarily resilient, persisting and te nacious system, perhaps because its dri ving force is dispersed among so much of its population rather than concentrated solely in a governing elite."13 In the Soviet Union, the inherent problems of a centrally planned economy have become increasingly evident during recent years. After dramatic productivity gains from initially low bases in the 1950s and 1960s, economic growth in Russia dropped to two per cent in 1979, the lowest since the 1930s.

Lagging farm productivity has long been a weak spot in the Soviet sys tem. In 1930 the peasants revolted against Stalin's forced collectiviza tion and confiscation of their land and livestock. The subsequent fam ine was one of the worst in history, costing an estimated two to five mil lion lives. Problems with the collective farms have persisted down to the present day. In 1980 Soviet planners set a goal of 235 million tons of grain, but the actual harvest was only 189.2 million tons, according to official fig ures. Socialist Russia on many occasions has had to depend on the capitalist economies of the United States and Canada to provide bread for its own people. Late in 1981, fac ing another poor grain harvest, So viet authorities mounted a public relations compa~gn designed to con vince Russian hOllsewives of the vir tues of cooking with stale bread. "You will be rewarded by delicious, un usual dishes," ian official govern ment leaflet promised. 14 The system pf forced collective farming has no~ succeeded in extin guishing the spirit of free enterprise in the hearts of!the Russian people.

Privately farm~d plots in Russia, averaging less than an acre in size, represent only tihree per cent of So viet farmland, ~nd yet produce an astonishing on~-fourth of all Rus sian farm prod~cts.15 The "New So viet Man," when left on his own, can be as energetic and productive as his American counterpart. PersistentShortages The chronic inefficiency of a cen trally planned e~onomy shows itself in persistent sh<>rtagesof consumer goods in the retail stores. Towels, toothpaste, axes, locks, vacuum cleaners, irons, kitchen china, cam eras, or cars-the list is virtually endless. Soviet) women are accus tomed to spendi~g two hours in line, seven days a week, in hopes of find ing the items ~hey want. "I have known of people who stood in line 562 THE FREEMAN September ninety minutes to buy four pineap ples," writes former Moscow corre spondent Hedrick Smith, "and three and a half hours to buy large heads of cabbage, only to find the cabbages were gone as they approached the front of the line."16Bribery of clerks is a common way of trying to obtain retail items in short supply.

The political unrest in Poland and the rise of the independent labor union Solidarity has made the West much more aware of the economic problems in that socialist society. The frustrations of the ordinary Polish citizen express the crisis of the sys tem in a very personal way. "I do not even want to talk about food sup plies," said one elderly man on a shopping trip. "There is nothing to buy, beginning with milk and end ing in detergents. You have to have plenty of time or very good connec tions, but they do not even work anymore."17 Concern over a possible Russian invasion and maneuvers by Soviet troops on Poland's borders during 1981 were often overshadowed by a preoccupation with food shortages. "Maneuvers? Yes, I'm making maI neuvers-trying to get some ham for me and my daughter," commented Iadwiga Glowacka, a Warsaw tech nician standing in a meat shop line.1s A Christian minister from the United States was visiting in Gor zow, Poland during the summer of 1981. The hostess prepared a generous Polish meal, even borrowing sausage from a neighbor. But at the table she broke down and cried, "Forty years after the war, and this is all we have." The Polish people are not starving, but staples are scarce, and meat is "all going to feed the Red Army," as one person at the table said. 19 Crisis in Cuba In our own hemisphere, theCu ban economy is a prime example ·of the failures of a socialist system.

Prior to Castro's revolution Cuba was fourth among Latin American na tions in per capita GNP; now it is 14th, with one-third the rate of Puerto Rico. Rationing, inefficiency, and waste characterize the system. Milk, fruit, and vegetables are in short supply, and rice is rationed at five pounds per person per month. The Cuban economy is being kept afloat by massive Soviet aid, to the tune of $3 billion a year, or $8 mil lion a day. Castro's socialist revolu tion failed to deliver the equality and abundance that it promised. "Cuba today is a totalitarian society in which nearly every form of dissent is severely punished," writes John W. Cooper, a researcher for the American Enterprise Institute in Washington. "Castro and his ideol ogy not only supress the self-deter mination and freedom of conscience of the Cuban people; they have also created a stagnant economy with 1982 THE LESSONS OF HISTORY 563 perpetual shortages, which is com pletely dependent on a foreign power, the Soviet Union."20 In socialist states of Asia the spirit of free enterprise persists. A recent television newscast from Vietnam showed bare state-controlled food markets in Hanoi. The private street markets had plenty of food, and Vietnamese communist leaders have admitted they need Western help for economic development. In China, nearly 5,000 older entrepreneurs from an older generation have been given new jobs as factory managers and advisers. Hu Qiamu, director of the Chinese Academy of Social Sci ences, has admitted that China has had to adopt such free market prin ciples as "the pricing system, the rule of value, and the advantage of ma terial incentives."21 Asian states such as Japan, South Korea, Taiwan, Singapore, and Hong Kong, which have given free rein to free market principles, have surged far ahead of their socialist competi tors. George Taber notes that the economy of Hong Kong grew at a phenomenal 12.75 per cent annual rate during four recent years, in creasing per capita real income by 25 per cent. During the last twenty years the economy of Singapore has increased fivefold, giving its people a standard of living second in Asia only to Japan. So many new jobs have been created by Singapore's free market economy, notes David Reed, that the residents shun menial work, "and reportedly some 100,000 'guest workers' had to be recruited from Malaysia for this purpose. "22 Capitalism Prod!uces The record of history, then, seems clear. In the competition between capitalism and ~ocialism to provide both individual freedom and ma terial abundan~e, capitalism wins hands down. Even its critics have admitted the fre~ market's ability to produce and have reluctantly adopted some of its prinCiples. The free en terprise system·, is consistent with biblical teachings concerning the rights and dignity of the individual, and heeds bibli¢al warnings about the dangers of concentrating power in the hands of the state. "By limit ing the state," '. argues theologian Michael Novak,! "democratic capi talism liberates 1the energies of in dividuals and whole communities."

Greater abundance for all is the re sult. The free mark~t has its imperfec tions and failings, to be sure, but history shows th~t those of its com petitors are far worse. George Taber is surely correct i in his assessment: "For all its obviious blemishes and needed reforms,' capitalism alone holds out the mqst creative and dy namic force that finy civilization has ever discovered: tp.e power of the free, ambitious indivldual."23 When the dynamism of a society of free indi564 THE FREEMAN viduals is tempered and permeated by biblical values, the resulting sys tem would appear to be the best one attainable by imperfect individuals still living under the conditions of history. ® -FOOTNOTESIHedrick Smith, The Russians (New York, 1976), p. 60. 2Paul Johnson, "Has Capitalism a Future?" The Freeman, January 1979, p. 48. 3Ibid. 4Ibid.,p.49. 5F. A. Hayek, ed., Capitalism and the Histo rians (Chicago, 1954), p. 159.

6Ibid., p. 158, n. 26. 7Susan L. Brown, et al., The Incredible Bread Machine (San Diego, 1974), p. 13. 8Lawrence W. Reed, "Witch-Hunting for Rob ber Barons," The Freeman, March 1980, p. 169. The American Concept 9Macon Telegraph and News, June 17,1981, p.1. lOHans F. Sennholz, "The Great Depression," The Freeman, April 1975, p. 206. llMilton and Rose Friedman, Free to Choose (New York, 1979), p. 85. 12GeorgeTaber, "Capitalism: Is It Working?" Time, April 21, 1980, p. 55. 13Ibid.,p. 45. 14MaconTelegraph and News, September 13, 1981, p. lla. 15Shawn Tully, "Mapping the 'Second Economy,'" Fortune, June 29, 1981, p. 40. 16Smith, op. cit., p. 64. 17BostonGlobe, March 2, 1981, p. 3. 18MaconTelegraph and News, September 13, 1981, p. 14a. 19Professor Gordon Fee, personal communi cation, 1981. 2°John W. Cooper, "The Cuban Revolution," Christianity and Crisis, July 21, 1980, p. 203. 21Time, April 21, 1980, p. 53.

22David Reed, "Singapore: Jewel of Prosper ity," Reader's Digest, November 1979, p. 226. 23Taber,op. cit., p. 55. IDEAS ON LIBERTY The American concept of government did not spring into being full blown from a few brains; it was hammered out in the course of long experience and debate. By the middle of the eighteenth century Ameri cans were protesting that the exactions of the British crown were vio lating their rights as men, whereas but a generation earlier they had demanded their rights as Englishmen. A revolution in thought and outlook separates the former concept from the latter. In drawing the lines of battle on their rights as Englishmen, the colonists had in mind the concessions which their ancestors, beginning with the barons at Runnymede, had wrung from their sovereigns. In standing on their rights as men, the colonists drew upon another dimension, the theolog ical. This is probably what de Tocqueville had in mind in 1835 when he wrote of Americans that "religion ... is the first of their political insti tutions."

EDMUND A. OPITZ, "Capitalism and Our Culture"