The Paradox of Capitalism and The Paradox of Socialism

“Capitalism has raised in an unprecedented way the average standard of living.  Nonetheless, many people passionately loathe capitalism.”—Ludwig von Mises

“In capitalism, man exploits man. In socialism, it’s the other way around.”—Twentieth century aphorism in socialist countries of Eastern Europe

SYNOPSIS

In capitalism, over the more than three centuries since the beginning of the age of enlightenment and the liberal and scientific revolutions described in Chapter 6, people acting both individually and cooperatively have achieved greater productivity and prosperity than ever could have been imagined possible in preceding epochs of human history. This growth in prosperity has spread from what is known as western civilization to every part of the world where capitalism has taken root.

Capitalism is not a new phenomenon. It originated in human creation of tools and labor-saving inventions and the development of agriculture. Without ever using the word “capitalism,” Jacob Bronowski, in his brilliant lectures and book entitled The Ascent of Man (1973) pointed out a capitalistic phenomenon—the early development of human invention to enhance mankind’s ability to create food, clothing and shelter.  ¹

That early manifestation of capitalism started with accumulating capital. Early capital consisted of things such as a harvest large enough to last from one year to the next, and the creation of tools to facilitate work.

Another very human idea inimical to capitalism has existed ever since people gave up the hunter-gatherer mode of life to settle down in villages and work the land to produce food. That is collectivism—the idea that all forms of wealth should be owned in common rather than being the several and separate property of individuals and families.

What sets human beings apart from all other living species is the unique human characteristic of choosing one action among two or more possible actions. In capitalism humans have the maximum freedom of choice; their choices are limited only by restrictions inherent in the laws of nature. One may prefer a starry night to a starless night but a human being cannot alter what can be seen in the night sky.

In socialism human choices are limited by political laws. One may prefer to offer his or her services to the general public as a self-employed entrepreneur rather than being confined to working in a state-controlled industry or occupation, but the state may not allow human action in furtherance of such preference. ²

In totalitarian, collectivist societies such as Russia, China, or Cuba under communism, the pursuit of happiness may motivate a person to emigrate, to leave the country, but the political laws of the state will not allow the freedom to emigrate. ³

Experience has shown that capitalism fosters relatively rapid growth in prosperity, and that collectivism stifles the creativity and productivity that produce growth in prosperity. Nevertheless, collectivism remains an ever present and influential idea. That is because in capitalism, operating within a free society, while there is equality of opportunity, there is inequality of outcome.

The United States of America is not a wholly free society according to the definition of freedom by Andrew Galambos, upon whose lectures this book is based. In Galambos’ lexicon freedom exists when each person has full, 100% control over his or her own property.

Property includes ones ideas, tangible assets, and one’s physical person. As just one example of the limitations on freedom that existed in the United States at the inception of the republic, the U.S. Constitution recognized and preserved slavery within the framework of society, going so far as to require the individual states to return runaway, fugitive slaves to their slave master. ⁴

Even after abolition of the Constitutional provisions for legally enforced slavery, the former slaves were not fully emancipated in a legal sense for another century. Furthermore, the legal institutions of the U.S. have always denied the entire population the right to full (100%) control over their property. For those who think this statement over broad or even unfounded, consider the American federal state’s war making, conscription, and taxation, in addition to its ever-growing restrictions on free enterprise.

In any capitalistic society some people will become prosperous and even rich. Others will prosper less. This contrast causes envy. As the great economist Ludwig von Mises pointed out, the anti-capitalistic mentality is based on envy.  ⁵

The paradox of capitalism is that it is disliked, even hated, by many even though it is through capitalism that they may enjoy a far higher standard of living than they would otherwise.

Socialism has its own paradox. That is, although the goal of socialism is economic equality, socialism fosters its own economic inequality all the while lowering the average standard of living.

Socialism can come about as the social order for a society only by political means—through the use of political power to confiscate property of the more prosperous members of society in order to redistribute wealth to others.  A socialist society has political rulers, whatever the title they take. Those political rulers always become a privileged class. In socialist societies the economic disparity between the rulers and the ruled, between the privileged and the rest of the people may be relatively even greater than the disparity in wealth that arises under capitalism.

This book focuses on the problems of socialist societies of the present and of the recent past and seeks to illustrate the continuing influence—even in the political democracies of the western world—of collectivist ideas that originated in ancient Greece, in Plato’s Republic. The ideal city portrayed by Plato nearly 2,500 years ago appears to be a precursor to modern totalitarianism.  ⁶

We can learn a great deal— and avoid tragic mistakes—by studying the calamities caused by collectivism.

While contemporary Americans may be unaware of it, we live in a society where collectivism is an increasingly powerful—and negative—influence in almost every aspect of life.

Nevertheless, barring war with weapons of mass destruction, the future of human beings is very bright. The growth in knowledge that started to accelerate in the seventeenth century is accelerating at an ever more rapid rate. Growth in knowledge goes hand in hand with growth in human prosperity and abundance.

The catastrophes wrought in the collectivist societies that sprang up in the twentieth century are now part of the accumulated knowledge of human society. Humanity will be better off even if in most countries the only consequence of this knowledge of collectivist catastrophe is repugnance to and rejection of the undemocratic means by which collectivists seized power in Russia, Germany, China, and elsewhere in the twentieth century.

List of topics

• Capital, Capital Formation, Capitalism and Capitalistic Societies
• Small-scale enterprise and creation of employment
• Alleviating poverty with capital
• Muhammad Yunus: Banker to the Poor
• The failure of foreign aid
  
• Capitalism and the state
• The paradox of capitalism
• Labor hypothesis of value as source of hatred of capitalism
• The paradox of socialism
• Corruption under socialism
• Special privileges of America’s political elite
• Choice and freedom
  
• The Bright Future of Humanity

Capital, Capital Formation, Capitalism and Capitalistic Societies

A lot of ink and blood have been spilled over political disputes concerning capital and capitalistic societies. However, these are simple concepts. A few definitions follow.

Capital is property that has been acquired and saved rather than being consumed. Seed corn is an example of capital. A farmer is creating capital who keeps some of the seed from a harvest to plant for next year’s harvest.

Capital formation occurs in societies where people generally consume less than they produce, saving the difference for future productive use. Poverty-stricken countries suffer from a lack of capital formation, as in the country of Bangladesh, described below in this chapter.

In the lexicon of Andrew Galambos, “Capitalism is that societal structure whose mechanism is capable of protecting all forms of private property completely.”

Property in Galambos’ lexicon has a far broader and richer meaning than the generally accepted and conventional understanding of the word as “something owned, a possession, especially a house, land, etc.”  ⁷

Galambos’ definition of property includes “primary property,” which is the property in ideas, thoughts, actions, discoveries and inventions.

Galambos believed that a socialist like George Bernard Shaw considered his literary works as his personal property—which they were—and that if society so defined and protected primary property, Shaw—and most other artists—would not have had such a negative view of capitalism.

A capitalist is a person who enables and facilitates production by providing capital for productive use by himself, or others, or both himself and others.

When Karl Marx and his colleague Friedrich Engels published their essay, The Communist Manifesto in 1848, they did not use the word “capitalist.” It had not yet come into common usage. Instead they use the word “bourgeoisie” to describe those people they say that they despise because they control “the means of production,” or capital, and thereby exploit the workers whose labor, they claimed, created all the value of the capital.

The Communist Manifesto of Marx and Engels depends almost entirely on their proposition that the measure of all value is the labor that goes into production of manufactured goods. That proposition—the labor hypothesis of value—and the horrendous consequences that it generated—are examined briefly below.

An entrepreneur is well described by its original meaning in French: someone who undertakes to do something, and that something is called an “entreprise” in French and an enterprise in English. In both languages the word entrepreneur means someone who organizes the factors of production, namely innovation, land, labor, and entrepreneurial activity.

John D. Rockefeller (1839-1937) was a capitalist and an entrepreneur whose name has become synonymous with nefarious, cut-throat competition designed to bankrupt competitors. The falsity of this view is documented in Chapter 13 of this book.

Steve Jobs (1955-2011) of Apple Computer fame was an entrepreneur, but one who is  widely respected rather than reviled, perhaps because the whole world loves his company’s innovative products, such as the Macintosh computer, iPod, iPhone, and iPad.

In chapter 13 of this book entitled “Monopolies—Coercive and Non-Coercive,” the achievements of John D. Rockefeller have been described in detail, including how small was Rockefeller’s fortune in comparison to the value he created for society through his entrepreneurial activities. Rockefeller had wealth of $900 million at age 70, an amount considered the greatest, inflation-adjusted fortune ever accumulated by an American. However, Rockefeller’s wealth was not represented by cash hidden under a mattress. Primarily, it was the value of his shares in Standard Oil, the company that he had created with his fellow entrepreneurs.

For this chapter, it is necessary only to point out what Rockefeller did in terms of the basic ideas of capital, capitalism and entrepreneurial activity.

Karl Marx said of such wealth of the people he called “the bourgeoisie,” namely the capitalists and entrepreneurs that the capital they owned was unearned, surplus treasure expropriated from the workers. By this reasoning, in Rockefeller’s company it was the workers who created the value that was Rockefeller’s fortune. How so? Because according to Karl Marx the measure of the value of everything is the labor that went into its production. However, who among all the thousands of people who labored in Rockefeller’s Standard Oil could or would have done any of the following?

Rockefeller graduated from high school at age 16 and went to work as an assistant bookkeeper for 50 cents a day, or $3.00 a week in that era of a six-day work week. That $3.00 a week is roughly equivalent to the legal minimum wage of the early 21^st century United States.

Rockefeller was thrifty. Incredible as it sounds, on his meager income he tithed 10% to his church, gave to charity, and still accumulated $2,000 to invest in a business before he was age 20. At not quite age 24 he invested $4,000 in an oil refinery. He took a risk in what he decided was the least risky element of a potentially profitable but new and chaotic industry.

By his business acumen Rockefeller attracted the attention of Henry Flagler who wanted to join Rockefeller’s company as a partner. Rockefeller agreed when a relative of Flagler offered to, and did, invest $100,000 in Rockefeller’s business. $100,000 of fresh capital was a large sum at the time, equivalent to roughly $5 million of after-tax capital in the early 21^stcentury. This fresh capital put the business of Rockefeller and Flagler on sound financial footing at a time when overall the petroleum industry was suffering financial losses and stress due to production capacity that had gotten ahead of the growing demand.

John D. Rockefeller was not a lone wolf. He attracted to his company other men of similar and complementary entrepreneurial ability. Some of these were former competitors who accepted Rockefeller’s invitation to join with him as partners in what had become known as Standard Oil. That name was adopted to signify the reliable quality of a product that could be fatally dangerous to users if not carefully produced to high standards of quality.

Even the most severe critics of Rockefeller’s competitive practices praised his entrepreneurial abilities and what they created. Ida Tarbell, author of a highly acclaimed and highly influential literary indictment of the competitive tactics of Rockefeller’s Standard Oil Company, expressed appreciation and approval of the company’s efficiency and productivity. ⁸

Small-scale enterprise and creation of employment

Relatively few people have the ability to be an entrepreneur. Of those who do have entrepreneurial ability, most operate businesses far smaller than Rockefeller’s Standard Oil. However, small-scale entrepreneurs provide a significant portion of total employment in America.

As of 2012 there were 28 million businesses in the U.S. 79% were self-employed people with no employees. 90% had fewer than 20 employees, and 99.7% had fewer than 500 employees.  ⁹

The author of this website knows well a small business in Los Angeles. It is a grocery store that employs a full-time staff of about 20 people and another 20 or so part-time staff. Several of the key staff members have worked in the store 20 to 30 years.

The owner-founder worked in his father’s grocery store until he was 33. Then he bought a store of his own. At one time he owned four, all on the west side of Los Angeles. He wasn’t making a profit, and felt that the only way he could take a vacation was to sell the stores. He sold all but one, which he still owns.

A core of staff has worked for him many years. Although he has an excellent manager, at age 81 he still enjoys coming into the store for a few hours most days.

In 1986 the owner bought the property where the current store is located at what he says was 4x what it was worth, but it turned out to be the best investment he ever made, because commercial rental costs in the neighborhood have escalated so much that now the store could not afford to pay the rent if it was a tenant rather than the owner of the property. By creating a pleasant ambiance and providing personal service unavailable in larger grocery stores, the owner competes successfully against much larger stores. By this it is meant that while he is no competitive threat to larger grocery stores, likewise they are no threat to his much smaller business.

This entrepreneur took several risks during his business career: going out on his own at age 33; buying and operating four separate stores; deciding to concentrate on just the one; and buying the store property at an exorbitant price to secure the future of the business.

Alleviating poverty with capital

A poor country is an under-capitalized country. It has a low level of per capita income. Nations rise out of poverty through capital formation, which occurs when individuals have enough property generated through savings to invest in businesses that create still more property. That is how material prosperity comes about. That is how the United States of America became the most prosperous country in the history of the world.

Muhammad Yunus: Banker to the Poor

One of the great contemporary benefactors of poor people is Muhammad Yunus (born 1940), a Professor of economics in Bangladesh.

Bangladesh is one of the poorest countries in the world, and one of the hungriest despite its location on the fertile Bengal Delta. Its 150 million people live in an area the size of the American state of Florida (population 19 million). ¹⁰

Professor Yunus was born into a prosperous Muslim family. He earned a PhD degree in economics (1971) from Vanderbilt University in Nashville, Tennessee. From 1969 to 1972 he was a professor of economics at Middle Tennessee State University.

Upon his return to his native country in 1972, Yunus became a university professor of economics. The country had just emerged from a war of independence, separating itself from Pakistan, in fighting marked by extraordinarily vicious and near-genocidal tactics by the army of Pakistan. ¹¹ Two years later, in 1974, Bangladesh suffered a nearly year-long famine in which roughly 1.5 million people died of starvation and disease.

Professor Yunus asked himself what good were all his elegant economic theories when people were starving to death in nearby villages. He went into the villages and tried a great number of things to alleviate the poverty and hunger.

He wrote a book about his experiences, in which he says “one [thing] that worked well was to offer people tiny loans for self-employment.  These loans provided a starting point for self-employment [in] . . . cottage industries and other income-generating activities that used the skills the borrowers already had.” ¹²

Yunus’ first loan was to a group of women who were barely surviving on earnings from making bamboo stools by hand. To get the money to buy bamboo they borrowed from village money lenders. The money lenders took the stools in payment of the loans, allowing the stool makers 10% of the cost of the materials, an equivalent of $0.02 (two cents) a day for their work. It took all day to make one stool by hand. The two cents a day of income was barely a subsistence wage.

Yunus saw that the stool makers were condemned to a life of hard work just for subsistence; that most of the benefit of their work was going to the money lenders, who had money, while the stool makers did not.

The Professor decided to try to reverse the cycle of dependency and poverty. He loaned US $27 to a group of forty-two stool makers, about US $0.64 each. It was enough for them to pay off the money lender and keep all the revenue from selling their stools.

From this minuscule transaction grew Grameen Bank (Village Bank), an institution which by 2013 had loaned a cumulative total of $11 billion to 8.5 billion borrowers. This so-called “micro-lending” and “micro-finance” has spread to almost every country in the world, including the United States.  ¹³

Yunus found that he had to organize Grameen Bank himself, with a great deal of help from his students and others, because the State Bank of Bangladesh would not make such loans. Yunus asked the State Bank to do the lending. Bank officials said these people are illiterate and cannot fill out a loan application or provide collateral security. Yunus replied, to no avail, their collateral is their lives—they need the money to survive and they will repay; they don’t need to fill out a loan application because bankers can go into the villages and keep records of who they lend to. Still, the State Bank would not lend to these poor people. The characteristics and achievements of Yunus’ micro-lending include the following.

• 97% of borrowers are women, all desperately poor to start with. Yunus found that women were more reliable in repayment than their husbands or other men, so the loans to women did more good for the women and children of the villages.
• 58% of borrowers have achieved incomes higher than the national poverty line.
• The loan repayment rate is 99%.
• The interest rate is 20% per annum, small relative to the cost of administering so many tiny loans, and minuscule compared to the charges of village money lenders.
• With the interest paid by borrowers Grameen Bank is self-financing and has been able to expand.
• Some major corporations are stepping up to help Grameen, including Adidas and Intel.

In an interview with USA Today on April 25, 2013, Professor Yunus told how Grameen Bank solved a major health problem in Bangladesh, as follows:  “Once we started making loans among poor women in Bangladesh, we saw other problems. Education problems of the children, housing problems, toilet problems, cooking stove problems. And it gave me an idea: Why don’t I try and solve one of those problems?

“The first one that I noticed was an ugly health problem—night blindness. We found sad, sweet children who could not see when the sun goes down. So I talked to doctors and they told me there’s a very simple cure: ‘Give them vitamin A and they’ll be as good as everyone else. Let them eat vegetables.’ But I found that the people couldn’t afford the seeds to grow vegetables. We started selling one-penny packets of seeds to sprinkle around the house. Our vegetable business grew. So we became the largest seed seller in the country, and in the process night blindness disappeared from Bangladesh. So I thought, ‘My God. This is so easy. You don’t need a doctor. You only need a business to cover the cost.’”

For his micro-lending achievements Muhammad Yunus was awarded the Nobel Peace Prize in 2006.  ¹⁴

The failure of foreign aid

It is not religious strife that causes destitution in Bangladesh. By all accounts in Yunus’ book, Banker to the Poor, in the villages in which he started his micro-banking, people of three religions—Muslim, Buddhist, and Hindu—live peaceably together. The land is fertile. The economic problem of Bangladesh is lack of economic freedom and opportunity. Bangladesh ranks 132nd out of 177 on the Heritage Foundation’s Economic Freedom Index. ¹⁵ That appears to be the best explanation why it is a poor country. There is a direct relation between poverty, lack of freedom, and a high level of extraction of wealth from the people by the state that rules them. ¹⁶

The Bangladesh state has been heavily dependent on foreign aid for its development. From 1977 to 1997 the Bangladesh state waged a war of repression against indigenous non-Bengali tribal people in the southeastern part of the country, an area known as the Chittagong Hills Tract (CHT). The Bangladesh state has moved Bengalis into the CHT en masse over objections of the local tribal peoples. The Bangladesh state persistently violates human rights of the people of the CHT and commits atrocities against them. Yet rich countries continue to send aid to the Bangladesh state.  ¹⁷

According to Damon Acemoglu and James Robinson, Professors at Harvard University and MIT respectively, in their book Why Nations Fail, ¹⁸ foreign aid from rich to poor countries has been an abysmal failure. They say that “many studies estimate that only about 10 or at most 20 percent of aid ever reaches its target . . . Throughout the last five decades [roughly the 1960s through the 2000s], hundreds of billions of dollars have been paid to governments around the world as ‘development’ aid.  ¹⁹ Much of it has been wasted in overhead and corruption . . . Worse, a lot of it went to dictators such as [Joseph] Mobutu,” (1930-1997) (dictator of the Congo, later renamed Zaire) who became fabulously wealthy by misappropriating foreign aid meant to help the people of his country.  ²⁰

Foreign aid consists of both payments by a state to another state, and also payments from the aid activities of Non-Governmental Organizations (NGOs). According to Acemoglu and Robinson, NGO money spent in Afghanistan was mostly wasted in administrative expenses and did little good for the people.

In comparison, Grameen bank makes no gifts to a state. It makes loans to individuals—who have a 99% repayment rate. The loans are capital placed in the hands of people who use it wisely, by all accounts from Professor Yunus’ book.

According to one source, foreign aid from rich to poor countries has totaled $3.19 trillion dollars from 1970 to 2010.  ²¹ That is 277x as much as the $11.5 billion in micro-loans made by Muhammad Yunus’ Grameen bank from 1983 to 2013.

It is reasonable to suppose that if even ten percent of the money squandered on foreign aid by “developed” countries since 1970 had been turned over to Yunus’ Grameen bank and similar organizations to increase their  micro-lending to individuals, far more good would have been done in alleviating global poverty.

Capitalism and the state

Much of the bad reputation of “capitalism” stems from anti-capitalistic activities by business people themselves, often in conjunction with the state. “Mercantilism” is a prime example.

Starting at the beginning of the seventeenth century in Europe the rule of absolute monarchs on the European continent and in England was bolstered by “. . . a series of alliances between the king, his nobles (who were mainly large feudal or post-feudal landlords), and [some] large-scale merchants or traders. . .

“Mercantilism [was] . . . a system of . . . state privilege [to business men], particularly in restricting imports or subsidizing exports . . . [based on] the alleged necessity for piling up [gold] bullion in a country. . . It was a comprehensive system of state-building, state privilege, and what might be called ‘state monopoly capitalism’ . . .

“[It was characterized by] . . . Big Government, . . . heavy royal expenditure, . . . high taxes, . . . inflation and deficit finance, . . . war [and] imperialism . . . [royal] . . . grant or sale of privileged ‘monopolies,’ i.e., the exclusive right granted by the Crown to produce or sell a given product or trade in a certain area . . . to . . . allies of the Crown, or to those groups of merchants who would assist the king in the collection of taxes.”  ²²

In the United States the mercantilist idea has been important since the inception of the republic. The Boston Tea Party of 1773 was a protest against a British law imposing a tax on tea sold to American colonists by the British East India Company.  Although this was not an import tariff, it had the same effect, namely a tax on consumption of imported tea.

Import tariffs were a primary source of revenue for the Unites States until enactment of income and estate tax laws in 1914.  Throughout the history of the United States, some American manufacturers have advocated import tariffs to protect them from foreign competition.

High federal tariffs on imported goods were enacted in 1921, 1922, and 1930. An unintended consequence of these tariffs was to limit drastically trade between America and other countries, which in turn was a principal cause of the Great Depression of the 1930s, not only in America but in the foreign countries that traded with America.  ²³

In the 1980s American auto and steel manufacturers, having failed to compete successfully with foreign auto and steel manufacturers—in America itself—lobbied Congress and the President for high tariffs on steel and automobiles imported into America, especially from Japan.

Businesses also seek subsidies from the state, most noticeably in agriculture. Federal farm price supports have been a staple of federal policy since the 1930s. They were adopted ostensibly to protect small family farms, but the overwhelming bulk of the federal spending on farm price supports goes to large-scale farming operations, enriching them at the expense of consumers.

According to one source “the federal government has in one form or another provided lucrative subsidies to the corn ethanol industry for more than 30 years, wasting tens of billions of taxpayer dollars in the process. Corn ethanol lobbyists have secured favorable treatment under the tax code, tariff protection from foreign competition, and even a government mandate for its use.”  ²⁴

Since 1980, according to Wikipedia, the ethanol industry was awarded an estimated $US 45 billion in subsidies.  ²⁵ Federal legislation in 2005 and 2007 further increased the federal subsidies and incentives for production of ethanol from corn.  ²⁶ The farm lobby in America has been active in advocating federal subsidies for corn ethanol production.

The federal subsidy for production of corn ethanol is an especially egregious example of laws intended to promote an activity which is not only costly to the public, but harmful to the environment, notwithstanding the arguments that ethanol use as a fuel reduces greenhouse gases, and thereby reduces global warming. The use of ethanol as an additive to gasoline makes no sense since “. . . more fossil [fuel] energy is used to produce ethanol than the energy contained within it.”  ²⁷ Use of corn ethanol reduces greenhouse gases very little compared to fossil fuels, and for that reason corn ethanol is probably the worst biofuel in terms of the environmental goal of reducing greenhouse gases.  ²⁸

Subsidies for production of corn ethanol in America and in Brazil have “. . . had a damaging impact on food markets, especially in poorer countries. In the United States, ethanol is mostly made from yellow corn, and as the market boomed for alternative fuel, yellow corn went up in price. Many farmers saw the potential to make more money, and switched from white corn to yellow corn. White corn is the main ingredient of tortillas in Mexico, and as the supply dropped, the price doubled, making the base of most Mexican foods unaffordable.”  ²⁹

Though the Federal anti-trust laws of 1890, 1914, and 1935 were ostensibly enacted to protect consumers, businessmen who sought protection from the competition of other businessmen were among the strongest advocates of anti-trust legislation. Again, as in agriculture, these laws benefited some domestic producers against others, at the expense of higher costs to consumers. This subject is discussed in some detail in a preceding chapter entitled “Monopolies—Coercive and Non-Coercive,” especially under the caption “State micromanagement of prices in business and industry.”

The American “defense” industry is a particularly costly example of companies using the state to obtain business at public expense, although this is not to argue that the United States does not require military procurement from industrial companies for reasons of national security. Defense industry contracts with the state are by and large entered into on a “cost plus” basis. The contractor is allowed its costs plus an extra amount for profits. Cost plus contracts provide no incentive for the contractor to keep costs down. Rather, there is a perverse incentive for higher costs, which mean higher profits under the cost plus formula.

Large companies that produce military equipment work closely with top military officers to develop plans for new military equipment. Once the federal Department of Defense approves a project, military contractors spend lavishly in lobbying Congress to get approval of projects in which they would be awarded a contract.

Defense contractors employ large numbers of people whose jobs are dependent on a continuing stream of federal payments. The money spent on military procurement circulates through the local economies of states where defense contractors are located. The award or denial of contracts for military spending can have a large impact on the local economy. Consequently, members of Congress representing states in which such companies manufacture military equipment often become vigorous advocates for awarding contracts, sometimes for military equipment of questionable utility. ³⁰

In his Farewell address of January 17, 1961 outgoing President Dwight D. Eisenhower, himself a former General of the U.S. army, observed that the U.S. had created “. . . a permanent armaments industry of vast proportions . . . [and that] . . . in the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.” ³¹ President Eisenhower also said that “in our defense policy . . . good management dictates that we resist overspending as resolutely as we oppose under-spending. Every dollar uselessly spent on military mechanisms decreases our total strength and, therefore, our security.” ³²

Large commercial banks and Wall Street investment banks provide another prominent example of businesses seeking the aid of the federal state, and thereby imposing a large cost on the American public. After the 1929 stock market crash Congress required the separation of commercial banking and investment banking on the premise that the combination of the two functions in one company involved unacceptable risk of the failure of large banks. This restriction was repealed in 1999 by dint of banking industry lobbying aided by large banks’ influence in the federal state. ³³

According to a knowledgeable analyst of the banking industry, in the financial crisis of 2008, “. . . twelve of the thirteen largest banks would have failed if not for [federal] intervention [i.e., bailouts].” ³⁴ The bailouts were provided under a policy known as “too big to fail” that was not part of the laws of the U.S., but was an implicit policy of the federal state dating back to the mid-1980s. The existence of the “too big to fail” policy seems to have eliminated the fear of failure that otherwise would motivate prudence and caution in banking; that lack of prudence in large banks seems definitely to have been an important factor causing the financial crisis of 2008.

The response of Congress to the big bank woes in the financial crisis of 2008 was to enact a new law in 2010 that codified the “too big to fail” rule, making it virtually certain that the federal state would protect big banks from their own errors and mismanagement. ³⁵ Five years after the financial crisis of 2008 several of the largest banks are larger than they were before the crisis. ³⁶

The general public does not recognize that much of what is considered the evils or faults of capitalism in America is actually the product of collusion between businesses and the state, for example business seeking state protection from competition, seeking subsidies from the state, seeking bailouts when they get into trouble and seeking low interest rates and lax regulation of lending in order to stimulate economic activity during an economic downturn. It is not capitalism as defined by Andrew Galambos when companies and industries are for free enterprise only insofar as it suits them, but want state aid to help them out or to rescue them from failure. It is no wonder that capitalism in America (and elsewhere) has a negative image. Not only is capitalism maligned by critics who favor collectivism, but some supposed capitalists are their own worst enemies due to the consequences of their collusion with the state.

The paradox of capitalism

There is a paradox in capitalism. It is beneficial—but much maligned. It allows people to maximize their individual and collective economic well being through individual and cooperative work and effort.

The paradox of capitalism arises because in a capitalistic society there is equality of opportunity but inequality of outcome. Some people become more prosperous than others. Some people are relatively poor while others may appear inordinately rich. Some people are born bright; others dull; some people possess high inborn capabilities while others struggle even to be average in what they do.

This disparity in economic rewards engenders envy and resentment, especially among intellectuals, artists, scientists, educators, and creative people in general. Their unhappiness with contemporary capitalism is not without justification. They see their own contributions to society rewarded less well—and often far less well—than popular entertainers and business people, whose activities they may disdain. The plight of the innovator under the primitive capitalism so far known to humanity is addressed in the later chapters of this book which focus on rewarding innovation and protecting intellectual property.

In the quest for economic equality, collectivists seek to control human activity in order to redistribute property and wealth by taking from those who have more than average to transfer to those who have less. Political imposition of income redistribution and other collectivist measures quickly lowers the standard of living of most people. But to people who think of themselves as socialists that does not matter. Thus, in the British parliament in 1990, a Labor Member of Parliament voiced a chief socialist criticism of then Prime Minister Margaret Thatcher, leader of the British Conservative Party, that:

“. . . over her eleven years [in power since 1979] the gap between the richest 10% and the poorest 10% has widened substantially.”

Mrs. Thatcher replied:

“All levels of income are better off than they were in 1979. . . You would rather the poor were poorer provided that the rich were less rich. . . You do not create wealth and opportunity in that way.” ³⁷

The British Labor Party is a self-described party of socialism. The British Conservative Party, at least under the leadership of Margaret Thatcher, made efforts to promote free enterprise by undoing the nationalization of industries and reducing the increased power of labor unions under prior Labor administrations.

Labor hypothesis of value as source of hatred of capitalism

Adam Smith, in his book The Wealth of Nations (1776), propounded a labor hypothesis of value; that is, all things owe their value to the amount of labor that goes into their production. That this is patently false is the reason Galambos refers to it as the labor “hypothesis” of value. In science, a hypothesis is a proposed explanation for something that remains to be corroborated by observation, whereas a theory is a corroborated hypothesis. That is if, after extensive consideration of events, it is found there are no exceptions to predictions made by the proposed hypothesis, it is elevated to the status of a theory.

The labor hypothesis of value is belied by everyday experiences in life. Value depends not on the labor cost of production, but rather on the subjective determination of people as expressed by their actions in the market place. As mentioned elsewhere herein a mass-produced pencil selling for less than the cost of an inexpensive piece of candy is worth as much, if not more, than a handmade pencil that required a single individual to labor many hours, if not hundreds of hours, to produce. This example is elaborated in clear and colorful description in the essay entitled I, Pencil (1958) by Leonard E. Read. ³⁸

Value is subjective. It is determined by the subjective opinions expressed by individuals in their transactions in the market place. The subjective theory of value was suggested by some French economists contemporary with and after Smith. It was worked out in elegant detail, independently, by the Austrian Carl Menger (1840-1921), the Englishman William Stanley Jevons (1835-1882), and the Frenchman Léon Walras (1834-1910). ³⁹

Karl Marx rested much of his communist ideology on the labor hypothesis of value, namely that since labor is the source of all value, capitalists and entrepreneurs provide nothing of value, and whatever they take out of society is “surplus” value extorted through exploitation of the working class.

That idea has permeated all of western society and is credited to some extent even by people who consider themselves conservatives, or anti-communists. If the reader finds this statement incredible, consider the chances of success in a political campaign for high federal office, in the United States, by a candidate who advocated eliminating the progressive income tax. ⁴⁰

The labor hypothesis of value idea has generated envy and hatred of entrepreneurs and capitalists. In communist societies that loathing has been evoked as justification for “liquidating” (a euphemism for murdering) the exploitative capitalists and entrepreneurs. In political democracies the labor theory of value has evoked political action to impose heavy taxation on the incomes and estates of capitalists, entrepreneurs, and also anyone else who somehow manages to earn or acquire more than the average of his fellow humans.

The paradox of socialism

Socialist ideologue Karl Marx held that there would be an inevitable struggle for power in a capitalistic society, in that the working class would have to get rid of the capitalist ruling class in order to achieve economic equality. The paradox of socialism became evident when socialism in power fostered an inequality more pronounced than the inequalities of the past, an inequality that was apparently unexpected by idealistic socialists before they achieved total political control of various nations.

The rise of a privileged class under Russian communism was the theme of the famous novella Animal Farm (1945) by George Orwell (1903-1950), English socialist, novelist and journalist. ⁴¹ Orwell’s views were shaped by first-hand exposure to communists and fascists in political power during the time he spent in Spain during the Spanish Civil War (1936-1939). According to Orwell himself, Animal Farm is a satirical exposé of life in communist Russia from the time of the Russian Revolution of 1917 through Joseph Stalin’s consolidation of dictatorial power as head of the communist party.

In Animal Farm, the pigs led a rebellion to run the farmer off the property—in order to end human exploitation of the animals. The pigs then enunciated Seven Principles of “animalism,” to govern the farm and all its animal inhabitants. The last of the Seven Commandments stated that “All Animals Are Equal.” Over time the pigs became privileged overlords, eliminated the Seven Commandments, and replaced them with a single principle:

“All animals are equal, but some animals are more equal than others.”

In his famous book The Road to Serfdom (1944), Nobel Laureate F.A. Hayek posits that a socialist state will evolve into dictatorship in which a privileged class rules with the help of unscrupulous underlings who enjoy special privileges themselves and positively delight in having authority over others, and using it to enforce rules handed down from above.

In The New Class: An Analysis of the Communist System (1957) by Milovan Djilas, a former high official in communist Yugoslavia describes the ruling class of bureaucrats and Communist Party functionaries who enjoyed special privileges throughout the socialist countries of Eastern Europe, a privileged status replicated in every country still ruled by a socialist dictatorship, from Cuba to China and North Korea.

Numerous books about the Soviet Union, of which Russia was the center, describe the privileges of the political upper crust in the purported “classless society” that the communists said they had created: special doctors and hospitals for the elite; special stores where they could buy the finest food in a country where food was of meager quality and inadequate quantity for most; relatively high quality housing in a society where housing was notoriously of poor quality and in short supply; and much more. The difference between the lifestyle of the communist party elite as compared to most citizens of the country was of far greater relative magnitude than the lifestyle of the rich in the west in comparison to “ordinary” people in western societies.

In China, beginning in 1976 upon the death of the incredibly brutal and murderous Mao Zedong, top coercer in the Chinese Communist Party (CCP or “the Party”), the ruling elite turned away from the ideology of communism, while continuing to assert that they were still socialists. ⁴²

Under Deng Xiaoping (1904-1997), Mao’s successor as paramount leader of the CCP (1978 to 1992), the Party instituted new policies that it called “socialist modernization,” which, however, was permitting some economic freedom, not any “modernization” of socialism. ⁴³ That process has transformed China from a poor, backward, inward looking country into a society where, with the approval of the Party, it is considered glorious to get rich. Still, there is a ruling elite consisting of an oligarchy comprising several hundred people.

Among this ruling elite of China it is common to become gloriously rich, even super-rich by any international standard. In the Chinese political elite there are more than a few billionaires. They become rich through “guanxi,” a Chinese term that can be described approximately in English as influence, connections and nepotism. In exchange for facilitating business dealings, politicians receive lavish rewards from the proceeds garnered by entrepreneurs of state-protected enterprises.

For example, according to a Los Angeles Times correspondent covering China, a prominent party official, Bo Xilai (Bo), rose through the political ranks to the position of CCP Minister of Commerce, member of the ruling Central Politburo and Secretary (chief) of the Chongqing branch of the CCP.

Bo Xilai and his wife become fabulously wealthy. However, they over-stepped some limit, especially when Bo’s wife was implicated in the apparent murder of an English business man.

The Los Angeles Times article states: “In announcing his [Bo Xilai’s] indictment last month, the official New China News Agency reported, ‘Bo took the advantage of his position as a civil servant to seek gains for others, as well as accepted bribes in the form of large amounts of money and property.’ It said he also embezzled public money and abused his power.

“The charges date back to the 1990s, when Bo served as mayor and later party secretary of Dalian, a port city of 6 million people. He cultivated a close relationship with a young businessman, Xu Ming, and together their fortunes soared. The owner of a small seafood refrigeration warehouse, Xu was awarded no-bid contracts for redevelopment projects that transformed Dalian into an urban showcase.

“Just 21 when Bo came to Dalian, Xu became a billionaire within a few years. At one point, according to Forbes,  he was the eighth-richest man in China. He showed his appreciation by showering the Bo family with his largess.”

“‘It was a typical relationship between a politician and a businessman — they traded power and money,’ said Jiang Weiping, a Chinese journalist who was imprisoned after reporting on corruption in Dalian. . .

“Bo’s upcoming trial is a gamble for the Chinese government, given that many Communist Party leaders are wealthy. Last year, an obscure bureaucrat from the southern city of Guangzhou earned the nickname ‘Uncle House’ after it was revealed that he had acquired 22 homes worth $6 million. The New York Times reported last year that the family of then-Premier Wen Jiabao was worth $2.7 billion.”

On September 21, 2013 the Los Angeles Times reported that Bo Xilai had been sentenced to life imprisonment at the conclusion of a five-day trial. ⁴⁴

The cases of Bo Xilai and his wife cited above are exceptional only because of the widespread interest they evoked outside China. The problem of corruption in China’s ruling elite has become the subject of frequent reports. The headline of another article in the Los Angeles Times, on September 1, 2013, states that “A powerful Chinese government official who oversees state-owned companies is the latest senior Communist Party official to come under investigation for ‘serious disciplinary violations,’ which is code for corruption.”  ⁴⁵

Corruption under socialism

There are no capitalists present to corrupt public officials in communist countries. Nevertheless, there is corruption causing suffering and loss of life in the totalitarian regimes of countries where the ruling people operate under the name communist or socialist.

88,000 people died in China in an earthquake on May 12, 2008. Much of the loss of life was due to political corruption. “Four months after the massive earthquake in Sichuan province on May 12, a Chinese government committee finally admitted last month that shoddy workmanship and substandard materials—the result of corrupt collusion between local officials and construction companies—were behind the collapse of 7,000 school classrooms. . .

“Of the 70,000 killed (not including 18,000 still missing and almost certainly dead), a large number—some 10,000—were students who died as school buildings collapsed.

“In many cases, relatively new schools were flattened in a matter of seconds, making it impossible for children to escape. By contrast, the surrounding buildings were often still standing, indicating serious structural problems in school construction.” ⁴⁶

In Armenia, in 1988 during the rule of the Soviet Union, an earthquake claimed the lives of 25,000 people. In 1994, sixteen people died in an earthquake of similar magnitude centered in the San Fernando Valley area of the City of Los Angeles.  ⁴⁷ A principal cause of the much higher loss of life in the Armenian earthquake was “. . . the shoddy Soviet-style construction of the region’s buildings. . . The designs of many of the buildings were faulty, and substandard materials had been used in the buildings’ construction.” ⁴⁸

How can such things happen under socialism? This is further evidence of the paradox of socialism as discussed in the preceding section. Below is an example which serves as an explanation for the events in Armenia and China described above.

In the Soviet Union, air force pilots were an elite and a relatively highly paid group. In 1967 some Russian air force pilots were delighted to be assigned to a brand new apartment building—a rare privilege in the Soviet Union. Their pleasure was short-lived. The apartments were uninhabitable due to shoddy construction. The pilots confronted a Communist Party political officer who explained the situation as follows.

“The building had not been inspected. The military builders sold substantial quantities of allotted materials on the black market, then bribed the chairman of the regimental acceptance commission and took the whole commission to dinner. There the acceptance papers were drunkenly signed without any commission member’s ever having been inside the building. What was done could not now be undone.” ⁴⁹

The pilots did their best to make their apartments habitable by procuring construction materials “. . . from the construction superintendent in exchange for Vodka.” But not long after they moved in the entire building began splitting, and was saved only by massive emergency measures that made it barely habitable. ⁵⁰

In the Soviet Union everybody assumed—in fact they knew—that nothing could be done about such corruption and tragedies. They were a part of what passed for normal life under the Communist Party of the Soviet Union. The absolute rule of the Party did not permit assigning blame, responsibility, or accountability to the state or any of its agents.

This sorry state of affairs was documented extensively in USSR: The Corrupt Society: The Secret World of Soviet Capitalism (1982) by Konstantin M. Simis, a Soviet lawyer who wrote this book in Russia, and left his country after the manuscript was discovered by the KGB.  ⁵¹ Because the KGB knew a copy of the book was already in the west, they gave Simis the choice of exile or prison. The author’s sub-title about the “Secret World of Soviet Capitalism” signifies his observation that much of the productive activity in the Soviet Union occurred illegally, because entrepreneurial activity was outlawed.

Special privileges of America’s political elite

America’s political elite enjoy special privileges. As of 2013 Members of Congress (Members) paid themselves an annual salary of $174,000, about four times greater than the median annual income for Americans.  ⁵² In addition, each Member has an impressive array of perquisites:

• Allowance of roughly $750,000 for a staff which may number as many as eighteen persons
• Free services of the Capitol’s attending physician
• The best available medical insurance
• A private, deluxe ward for Members only at the Walter Reed National Military Medical Center in Washington, DC
• Free use of two private gyms, one for members of the House of Representatives and one for Senators
• Exemption from parking restrictions in Washington, DC
• Retirement on full pension at age 60
• Free postage for anything a Member cares to claim is “official business,” a privilege often abused by use in reelection campaigns ⁵³
• Taxpayer-paid travel for just about any trip remotely related to their duties
• Private parking lots at the two airports serving Washington, DC ⁵⁴

Responding to bi-partisan lobbying by Members of Congress, in early August 2013 President Obama’s personnel team issued a regulation that, in effect, exempts Members of Congress and their staffs from provisions of the Affordable Care Act of 2010, or ACA, also known as ObamaCare. The exemption for Congress and their aides allows them federal subsidies worth $5,000 for individuals and $11,000 for families. Because of the income level of Members and their aides, those subsidies would have been denied them under ACA. There is no basis in the ACA or any other federal law for such an exemption. ⁵⁵

The use of political power for self benefit is not unique to members of the U.S. Congress. It is an enormous problem in state and local government, as documented in a number of recent books and a plethora of news reports and editorial opinion essays. Abuses range from outrageous pay for public officials to legislating unaffordable benefits to public employees in tacit consideration of electoral support from public employee unions.  ⁵⁶

In a prosecution by the Los Angeles District Attorney, five officials of the small city of Bell, California, population 35,000, were convicted of misappropriation of $5.5 million in public funds.  ⁵⁷

Choice and freedom

In 1949 the great economist Ludwig von Mises (1881-1973) published a lengthy treatise to sum up the knowledge he had acquired over a lifetime of study in economics. He called it “Human Action,” because it is about far more than economics. Rather, it is about all aspects of the unique human characteristic of choosing one action among two or more possible actions.

In capitalism humans have the maximum freedom of choice; their choices are limited only by restrictions inherent in the laws of nature. One may prefer a starry night to a starless night but a human being cannot alter what can be seen in the night sky.

In socialism human choices are limited by political laws. One may prefer to offer his or her services to the general public as a self-employed entrepreneur rather than being confined to working in a job in a state-controlled industry or occupation, but the state does not allow human action in furtherance of such preference. NOTE: The statement in the preceding sentence is about socialist or communist dictatorships, not the democratic socialism such as exists in the countries of Western Europe—England, France, Germany, etc.—where people are free to choose their occupation.

In totalitarian, collectivist societies such as Russia, China, North Korea, or Cuba under communism, the pursuit of happiness may motivate a person to emigrate, to leave the country, but the political laws of the state will not allow the freedom to emigrate. As of the early 21st century, restrictions on emigration no longer exist in Russia, are not absolute in China, but still are enforced rigorously in North Korea and Cuba.

An important distinction between capitalism and socialism lies in the treatment of choice.  Choosing is an essential characteristic of humans. Being free to choose allows people to express their individuality and humanity. Pure capitalism, as defined by Galambos, allows complete freedom of choice so long as one does not interfere with the freedom and property of others. Pure socialism in operation imposes drastic limits on human choice, and thus on human freedom.

The existence of a person under pure socialism is little better than that of a slave. In fact, humans were virtually slaves on farms in the Soviet Union (1918-1991), communist China until very recently, and in every walk of life in Cuba and North Korea up through this writing (in the year 2013).

In social democratic societies, such as the democracies of Western Europe, even though humans are far freer than under pure socialism, their choices are curtailed. Taxation, for example, moves the choice of how to use one’s earnings and assets from the individual to the state. The state may take over half an individual’s earnings in the welfare states of Europe, and even in America. The more socialistic a country, the less freedom of choice is left for its residents.

THE BRIGHT FUTURE OF HUMANITY

Jacob Bronowski (1908-1974), a great scholar, scientist, and teacher, provided an insight about the history of human civilization during the transition from life as hunters and gatherers, always on the move, to settled village life after the development of agriculture. Bronowski’s observation is as relevant to the future of mankind as it is to our past. It is as follows.

For some thousands of years after the first development of agriculture, fierce nomads came out of the desert to rob the village farmer of his surplus harvest, stored against a barren time until the next harvest.  Ultimately, the victory of the warrior-nomads was in vain. They, too, eventually had to settle down and become farmers or starve. ⁵⁸

It appears that a similar process will occur in the not too distant future of our species.

As human society has developed into the 21^st century, we remain afflicted by a different class of predators: the kleptocratic rulers of the state and their minions. Everywhere, the state rules, controls, and taxes productive people, while producing itself nothing but coercion—and in the extreme, war, slavery, poverty, and misery. The supposed justification of the state is to provide security from domestic crime and foreign aggression. However, judging from the 185 million violent deaths in the 20^th century alone (from war, poverty, famine, terrorism, corruption) the state’s promise to protect its citizens appears to be empty. According to Professor R. J. Rummel of the University of Hawaii, the state in its various national manifestations during the twentieth century caused 170 million non-war killings. ⁵⁹ If true and correct that would make the total state-caused deaths significantly higher than the 185 million mentioned immediately above.

The state everywhere is in process of self-destruction—in the political democracies as much as in the tyrannies by which political people rule others with an iron fist. This self-destructive process of the state may take several generations to complete, but that amount of time is insignificant in the long span of  human history.

The self-destruction of the state will be finished sooner or later. It may occur sooner rather than later because the kind of people who aspire to control others through the mechanism of the state have shown that they do not know how to reduce their coercion enough to prolong their rule.  How so? Because, for example, it has been evident for the past several generations in America that as the debts and unfunded liabilities of the state grow larger than the ability of the American people to pay through taxes, politicians react to this problem like the proverbial ostrich with its head in the sand.

Meanwhile, solutions are emerging already to the problem of organizing society without coercion. We make observations about this process in the introductory chapter entitled “Replacements for the Political State.” The prosperity that will come from the withering away of the state and the end of its depredations seems likely to be far greater than any so far enjoyed by humans.  ⁶⁰

Our species’ knowledge is advancing at an accelerating rate. The biggest danger to human existence is the use of science and technology to build and use weapons of mass destruction. However, our species has among it a few highly capable people who may be able to innovate and create real and reliable defenses against weapons of mass destruction. Each year on earth more such people are born. Human ingenuity most likely will obviate weapons of mass destruction by developments of a scientific and technological nature. Work and investigation of defense against such weapons is already ongoing in leading countries.

Anyone with imagination and appreciation of the positive achievements of humanity in science and the arts as well as the spontaneous and gradual development of a more progressive social order ought to be optimistic about the long term future. We live already in an era when human ingenuity and creativity from almost every culture on planet earth is spreading around the world.

Biological science has led to enormous advances in medical care, enabling humans to live longer, healthier lives than at any point in history. Information technology has made it possible for individuals to communicate at the speed of light from the farthest corners of the globe. The emancipation of women, long delayed, is spreading across the planet. And many more examples abound.

The catastrophes wrought in the collectivist societies that sprang up in the twentieth century are now part of the accumulated knowledge of human society. Humanity will be better off even if in most countries the only consequence of this knowledge of collectivist catastrophe is repugnance to and rejection of the undemocratic means by which collectivists seized power in Russia, Germany, China, and elsewhere in the twentieth century.