U.S. capitalism and the threat of socialist ideals

By David Forstadt

Today it is popular to criticize capitalism. I defend capitalism because, quite honestly, capitalism could use some friends.

With the Obama administration coming to power, we find ourselves at a socioeconomic crossroads.

While we are not currently fighting a Cold War with the Soviets, we are certainly engaged in a philosophical battle pitting individualism against populist collectivism. The stakes, however, are the same — the survival of American capitalism.

In some respects it is unfortunate that the Soviet Union has fallen. Prior to the demise of our old foe it was easy to defend against collectivism in America by simply pointing to the human suffering in Eastern Europe. But with our adversary gone, memories fade and the false appeal of socialist ideals is gaining traction.

The world has never seen a pure capitalist economy. Every known economy has been based on the collectivist premise that the interest of the state supersedes the interest of the individual. The genius of the U.S. Constitution was that for the first time the rights of the individual were recognized as taking precedence over the interest of the state. Our government was expressly created to protect the life, liberty and pursuit of happiness of each individual. Only under this form of government has capitalism taken root.

But government intervention has grown steadily such that our economy today is a mixture of both capitalism and collectivism.

During the brief time since our founding, despite devastating world and civil wars and other disasters, the capitalist experiment in America has created the most powerful economy the world has seen. It has produced the highest standard of living in history, here and throughout the world.

Unfortunately, capitalism is misunderstood. Opponents claim that capitalism produces greed and greed translates into a desire for abusive power. But this criticism fails to recognize a fundamental distinction between economic power and political power. The capitalist seeks the power of independent production. The politician seeks the brute coercive power of the state to be used to control his fellow man — even if the politician genuinely believes that he is acting in “the public interest” or for the “common good.” In the end, political power is always used to subordinate individual interests to those of the society at large.

It is important to discuss corruption. There are corrupt capitalists as well as corrupt politicians. Both are criminals and should be removed from society. This discussion focuses on the vast majority of politicians and capitalists who are fundamentally honest.

Capitalism is often blamed for causing the Great Depression. But this is not true. The Great Depression was caused by government interference with the free market. Let’s look at the facts: In 1913 the Federal Reserve was established ostensibly to prevent bank panics and depressions. It was a government response to the Panic of 1909 wherein the stock market fell close to 50 percent, causing runs on many banks. The 1909 crisis was averted when industrialist J.P. Morgan and others used their own money to stabilize the banks. The Federal Reserve was an attempt by Congress to apply state power to stabilize future markets.

Things worked well until the Federal Reserve decided to stimulate the economy in the early 1920s by compelling banks to make loans at artificially low interest rates. This resulted in a huge expansion of the money supply and an artificial stock boom — with money being poured into highly speculative ventures. The crash was inevitable. The Fed reversed course in 1928, but by then it was too late.

After the market partially recovered the federal government decided to “help” again. It passed the Smoot-Hawley Tariff Act to protect American companies from foreign competition. The result was retaliatory tariffs by other countries and the devastation of our biggest exporter: the American farmer. Rural banks failed en masse and the depression deepened. When a drought struck in the Midwest (Dust Bowl), the Great Depression was set for the long haul.

The circumstances surrounding the depression are frighteningly similar to today’s economic situation. Substitute the actions of Fannie Mae for those of the Federal Reserve and our “protective” government bailouts to the actions of Smoot-Hawley and draw your own conclusions.

Capitalism is not without its problems. When a capitalist makes bad decisions it can result in the failure of his business. But as an individual business within a free market, such failures tend to be isolated and have little impact on the economy at large. Only mistakes made by a centralized government can affect entire economies — often with catastrophic result.

Perhaps the best defense of capitalism lies not in a complex discussion of economics but rather in a simple discussion of moral principles. Capitalism is based on the principle of individual freedom. Collectivism requires forced subordination of the individual to the collective ideal as determined by government. Some would correctly call that slavery.

(Forstadt lives in Napa.)

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