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above: Assembling department, National Cash Register, Dayton, Ohio demonstrates mass production of precisely made complex products achieved during the 19th century (Everett Collection Inc/Alamy Stock Photo)

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The Case for Laissez-Faire Capitalism

The Most Moral and Pragmatic Economic System

Under laissez-faire capitalism, government is limited to armies, which keep foreign bad guys from attacking us; police, to quell local criminals; and courts, to determine guilt and innocence.

This is roughly the position of minimal-government libertarians, or minarchists. The foundation of law in this system is the non-aggression principle (NAP). The NAP provides that anyone may legally do anything he wishes, provided that he respects the sanctity of everyone else’s person and private property. There would indeed be rules and regulations: against murder, rape, trespass, etc.

There would be no minimum wage laws, no rent controls, no anti-trust regulations—no economic restrictions of any kind. In this system, there is no welfare, no too-big-to-fail bailouts, no Social Security, no public schools, no zoning laws, no public housing. Apart from armies, police, and courts, everything would be privatized. This includes highways, streets, and roads; lakes and rivers; parks, museums, libraries, and the post office. The Federal Reserve would end and money would be based on gold.

What is the case for such a pared-down government system? I offer a two-pronged answer. First, on moral principle. Government is a coercive institution. It relies on taxation, but no one now living signed any contract obligating him to pay. According to economist Joseph Schumpeter, “The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind.” In other words, no one consented to join the U.S. “club.” There were occupants of this land before the advent of the U.S. government. In this view, the state may be necessary, but it cannot be denied that it is evil. Thus, the less of it the better.

Second, pragmatism. The market is more efficient than government enterprise. Why is this? It is due to competition. A businessman who does a bad job loses money, and automatically faces bankruptcy if he does not correct the error of his ways. Competition brings about a better, cheaper product than governmental monopoly. Also, as emphasized by Ludwig von Mises, chief figure of the laissez-faire Austrian School of economics, a rational economy is impossible without competitive market prices which reflect relative scarcities of goods and services.

The Army Corps of Engineers killed some 1,900 people in the aftermath of Hurricane Katrina due to the failure of its levies, yet they are still in business. A private corporation that allowed anything like that would soon go the way of Blockbuster Video. Some 40,000 poor souls perish annually on our nation’s highways. Yet, the people responsible for this outrage, the National Highway Traffic Safety Administration, cannot stop the speeding, drunken driving, and motorist inattention that cause crashes. Surely a private highway industry, competitively innovating, would vastly improve matters. And private peak-load pricing would end traffic congestion.

What would take the place of the Food and Drug Administration (FDA)? A private certification industry, modeled after those in other sectors, such as the Better Business Bureau, Consumer Reports, Good Housekeeping Institute, Moody’s, Fitch, or Standard & Poor’s. The FDA approved thalidomide, which created birth defects in babies. They do not now allow terminally ill patients to experiment with drugs without their approval—which is rarely given. Who are they to pass judgments of life and death? To ask this question is to answer it.

Further, the government welfare system breaks up families and, paradoxically, creates the very poverty it presumably attempts to fight. Minimum wage laws consign unskilled workers to lives of unemployment. Rent controls create housing shortages and homelessness. Subsidies to farmers, to students, to just about anyone else with political power, misallocate resources away from the sectors of the economy favored by the owners of these funds.

Social Security is incompatible with democracy. If people are so feebleminded they cannot save for a rainy day, or their retirement, why allow them to vote? And if they are given access to the ballot box, this implies they are not quite so bereft of their senses. What about the deserving poor? A laissez-faire society will be a very rich one, and the American people have always been very charitable.

It is crucially important to distinguish laissez-faire from the crony capitalist system of today. Bernie Sanders and his ilk inveigh against billionaires (he had excoriated millionaires too, until he became one), but, surely, we should distinguish between those who earned vast fortunes based on “capitalist acts between consenting adults” in the felicitous words of Robert Nozick, and those who were enriched through the intermediation of government compulsion. Bill Gates earned a vast fortune by benefitting all of his customers, suppliers, and employees. Every time he sold a computer for $500, he earned a profit, but so did the buyer, who valued this item more than that amount of dollars. On the other hand, there are billionaires who amassed great wealth through government largesse, which is disgraceful.

Economic nationalism is one alternative to laissez-faire capitalism. This philosophy incorporates protectionism, immigration restrictions, infrastructure spending, and welfare and/or universal basic income.

Protectionism is an evil that impoverishes us. Why should American citizens be dissuaded, or prevented, from purchasing wine from France, or an auto from Germany? This constitutes naked aggression against innocent people. According to the hoary economic doctrine of absolute advantage, if Canada trades maple syrup for Costa Rican bananas, both countries gain. The latter must be grown in hot houses in the northern country, while the southern one would need gigantic and very expensive refrigerators to produce the former product. But according to the dismal science’s equally hoary principle of comparative advantage, both nations can gain even if one is more efficient than the other in all lines of production.

Let’s consider a two-country, two-product model. The super-duper Japanese can produce 100 units of corn, and 80 units of computers for a GDP of 180 units. We Americans are pathetic in this example. If we also divide our labor force into two equal parts, we can come up with 90 units of corn, but only 20 computers, for a GDP of 110. The total of the GDP of both countries is thus 110 + 180 = 290.

But now trade begins. Each country specializes not where it has an absolute advantage (as Japan beat us in both products) but where it has a comparative advantage. We are 90 percent as efficient as they are in corn, but only 25 percent as efficient in computers. So we specialize in corn, producing a total of 90 times 2 = 180. For Japan’s part, it would be to their best advantage to specialize in computers, with the result of 80 times 2 = 160. The total of the GDP of both trading partners rises from the initial 290 units to 180 + 160 = 340. Because each country focused on its comparative advantage, the combined production created an additional 50 units, thus demonstrating the mutal benefit of this system of voluntary trade.

But what about the loss of U.S. jobs in computers? If we are concerned with prosperity, Americans in this example shouldn’t be working in that field in the first place, any more than we should protect the Canadian banana industry, the Costa Rican maple syrup industry—or for that matter the horse and buggy industry.

If protectionism made any sense, Louisiana should refuse to export sugar to Texas for cattle, and New Orleans should cancel its trade with the rest of Louisiana for seafood in exchange for jazz and tourism. In this direction lies self-sufficiency down to the individual level—and death for some 99 percent of the world’s population. No, protectionism is a snare and a delusion.

Immigration restrictions, apart from reducing the spread of COVID-19, are a very complicated issue. Libertarians, as most of the general public, are deeply divided on this issue. My own analysis is as follows: the goal should be to allow in only immigrants who will contribute to society: the productive, the wealthy, the entrepreneurial. We want to avoid deadbeats, criminals, and their ilk.

But further, there is only room for so many people, even of the former category. We wouldn’t want 6 billion people to move here, even if they were all salt of the earth. The solution: privatize every square inch of the country, then we can pick and choose which immigrants to allow in, on the grounds that unwanted ones would be trespassers.

Infrastructure spending? Sure, we need plenty of it. Our roads, bridges, and tunnels are in a state of disrepair, to say nothing of our trains and their tracks. All of these amenities should be privatized. Their owners will take far better care of them than the all-loving state.

What of welfare? Charles Murray’s 1984 book Losing Ground has demonstrated that this program is responsible for family breakup, which leads to too-early school departure, unemployment, drug and alcohol problems, and crime. It should be ended forthwith. And the same goes for universal basic income. It promotes sloth and constitutes blatant theft from the rich to the poor. Taking money from rich Peter and giving it to poor Paul reduces the incentives of both to engage in gainful employment.

For Christian distributism, a good society is one where wealth is widely distributed. Concentration is looked upon with great suspicion. Some of its prominent advocates are Pope Leo XIII and Pope Pius XI. Based on Catholic social teaching, this perspective sees both extreme capitalism of the sort I am espousing, as well as extreme socialism (Communism as exhibited in the USSR, Cuba, and North Korea) as highly problematic.

Distributism is predicated upon the doctrine of social justice; its motto might almost be “small but beautiful.” It welcomes not gigantic conglomerates, but small businesses, cooperatives, workers’ collectives, close-knit farming communities, etc. In order to keep enterprises from growing excessively, it supports anti-trust legislation. Centralization is opposed, whether state capitalism or socialism.

What is the laissez-faire assessment of this perspective? Not all of it is rejected. For example, free-market advocates support small businesses, co-ops, condominiums, and farming collectives, as long as they are voluntary. We can even welcome the Marxian notion: “from each according to his ability, to each according to his need,” provided that this is not imposed on anyone by force. Indeed, the average family lives, happily, according to this Marxist doctrine.

However, there are also divergences. We have no dog in the fight between Walmart and mom-and-pop grocers. McDonald’s was very small at its inception, but grew to gigantic proportions thanks to reliability, good food, and excellent prices. Bigness is not necessarily badness. If a firm grows based upon laissez-faire capitalist principles as these firms have done, we take our hats off to them.

Laissez-faire advocates oppose anti-trust legislation, root and branch. It penalizes business success, which can only be obtained by making beneficial commercial offers to all and sundry. It is all too often used as a political attack mechanism, where politicians target those who do not donate to their coffers. Monopoly and oligopoly are attacked by the trust-busters as being too highly concentrated. But this depends entirely on definitions. If it is defined in terms of all food, then Wheaties is small potatoes. But if the industry includes only dry breakfast cereals, then, all of a sudden, this product becomes highly concentrated. The defence prefers the former, the plaintiff the latter, but there is simply no rational rhyme or reason to prefer either calculation.

To close, distributism and economic nationalism have moments, but give me that old-time laissez-faire capitalism!

Walter Block

Walter Block is an economics professor at Loyola University and a Mises Institute senior fellow. He is author or several books, including Defending the Undefendable (1976). 

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Alistair Cookie
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Granting that market definition in monopoly cases will always present tricky questions and present the possibility for abuse . . . surely some of the roots and branches of our antitrust laws are worth maintaining? Even the arch-capitalist recognizes the harm in naked price-fixing, does he not? In any case, cheers to Chronicles for publishing this worthy series. If the Right cannot figure out its economic vision, then the Left will certainly be waiting with its own consistent (and wrong) answers to these important questions.
 
 

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