Capitalist Secrets Archives — Laissez FaireLaissez Faire

Under laissez-faire capitalism, there are no regulatory agencies controlling the food that grocery stores and restaurants can sell or the drugs that pharmaceutical companies can offer. But the result is not a flood of dangerous food and drugs. Far from it.

First of all, the government does play a crucial role when it comes to food and drugs. A capitalist government punishes force and fraud. If a restaurant negligently serves you tainted meat, or a drug company sells you snake oil disguised as cancer medication, the government will step in to protect your rights.

Second, the market provides powerful incentives for safety and quality. On a free market, where caveat emptor rules, consumers place a high value on reputation. What that means is that companies that have established themselves as reliable and trustworthy reap higher profits. Just think: Are you more likely to buy lunch from McDonald’s, with its proven track record of safe and tasty food—or from Marie’s Discount Beef Joint, which just opened last week?

Third, there are all sorts of ways that consumers in a laissez-faire society can check on the safety and quality of businesses.

They can, for example, read reviews at websites such as Angie’s List or Zagat.

They can turn to private certification agencies, which would independently verify the safety and quality of businesses. A new restaurant might hire Food Inspectors Incorporated to check out its kitchen, and Food Inspectors would stake its reputation (and bottom line) on the reliability of its assessments.

Insurance companies, too, would play a role here, just as they do today. Before agreeing to insure a given business against liability for tainted food or medicine, an insurance company would insist on inspections, oversight, and specific policies and procedures to encourage safety and quality.

(If you’re wondering about Upton Sinclair’s The Jungle, which claimed to describe the stomach-turning conditions of Chicago meat packing factories during the early nineteenth century, I recommend you check out this article.)

Under laissez-faire capitalism, the profit motive drives businessmen to pay careful attention to issues of safety and quality, while a rights-protecting government polices force and fraud. That—not some politically motivated bureaucrat—is what actually ensures our welfare.

If you would like to ask me a question, you can submit it here.

The enemies of capitalism attack laissez-faire in two basic ways: they misrepresent what life under freedom looks like, and they judge it by a wrong moral standard (altruism and collectivism). Our primary focus here is on the moral perspective that’s required to understand and value capitalism. But it is absolutely crucial that people understand the truth about how people live and have lived under free markets.

One particularly pernicious myth says that, in the days before America had an entitlement state, Americans “starved in the streets.” Yaron and I recently wrote a Forbes.com column on this very question (subsequently published in Forbes magazine), which I’ve reproduced below the fold.

Read the rest of this entry »

The 19^th century, many people believe, was an era when workers were forced to toil in sweatshops for five cents an hour, twenty-eight hours a day. It was only when governments intervened, either directly on behalf of workers or indirectly by empowering unions, that conditions improved.

The facts tell a different story.

First, recall the historic context. As Ayn Rand reminds us, “Capitalism did not create poverty—it inherited it.” Here is a famous chart based on the research of the economist Angus Maddison.

What it shows is that for much of human history, the vast majority of the population was mired in poverty. All too often, the average individual lived in unimaginably wretched conditions. It was only in the 19^th century, and then only in the West, that the masses started to achieve anything approaching a modern standard of living.

Keep that in mind when you hear about living and working conditions during the 19^th century. Because it’s true—by today’s standards, the working conditions of the time were often wretched. But as Rand notes, “They were all that the national economies of the time could afford.” And for the men and women working those jobs, they were often a godsend.

Remember, the population of the time was growing at a rate never before seen in human history—so fast that early economists like Malthus wrung their hands over whether such growth could be sustainable. How did the West actually sustain those growing numbers? Only through the rising productivity made possible by capitalism. Many of the workers who manned the factories would not have been able to survive at all in the era before capitalism.

Indeed, two basic facts speak louder than any statistical study could. First, factory owners did not have the power to force workers to labor in their factories; all they could do was offer work at a given wage to people who were free to accept the offer, or reject it and look for work elsewhere. Second, people flocked to those jobs, emigrating to the cities from America’s farms and from abroad.

How, then, did conditions for workers improve? Just as businessmen had to compete for customers, offering better products and lower prices, so they had to compete for workers, offering them better wages and better working conditions. This process of competition led businessmen to bid wages up to the level of workers’ productivity: the more productive workers become, the higher their wages tended to rise.

As a result of the era’s mounting productivity, the statistics show steadily rising wages and steadily declining working hours—long before the government intervened to “protect” workers. Real wages more than quadrupled over the course of the 19^th century, even as people worked less.

In 1870, for instance, the average worker worked 3,069 hours a year. But as his productivity increased, by 1913 he could enjoy a much-improved standard of living working only 2,632 hours. Or consider how much easier it’s gotten to earn the money for a half-gallon of milk (56 minutes in 1900, down to 31 minutes in 1930) or 100 kilowatt hours of electricity (107 hours in 1900, but only 11 hours in 1930).

Life during the early days of capitalism was hard (as life had always been), but for anyone willing and able to work, life was getting better. The lesson for us today is that laissez-faire doesn’t impoverish workers, but makes them progressively richer.

Books

• F.A. Hayek – Capitalism and the Historians
• Ayn Rand – Capitalism: The Unknown Ideal
• Michael W. Cox and Richard Alm – Myths of Rich and Poor
• Julian Simon – The State of Humanity

Online Resources

• Ludwig von Mises – Remarks About the Popular Interpretation of the “Industrial Revolution”
• Burton Folsom – The Industrial Revolution and Free Trade
• Henry Hazlitt – The Conquest of Poverty

Today environmentalists bemoan the state of the environment. But the truth is that the human environment has never been better.

Undeveloped nature is a brutal, filthy, dangerous place for human beings. It’s filled with dirt, disease, uncooperative weather, unfriendly creatures, and occasional natural disasters.

Transforming nature into a place hospitable to human life is a daunting challenge. It is no accident that, for most of human history, our standard of living hovered just above the level of subsistence and most people died before they hit thirty.

It was capitalism, and the Industrial Revolution it spawned, that changed the equation. Starting toward the end of the 19^th century, human beings began improving their environment in incredible ways. They:

• Employed industrial scale energy to develop nature on an unprecedented scale
• Solved the problem of hunger, producing abundant amounts of food even as fewer people worked in food-related industries
• Created modern medicine, eradicating many diseases that had plagued men throughout history
• Created new modes of sanitation, including sewage treatment plants and indoor plumbing, thereby removing waste that had once crowded the human environment
• Invented new modes of transportation, like trains and cars, that eliminated horse dung from the streets, while expanding people’s ease of movement
• Created air conditioning and smoke-free indoor heating
• And much, much more.

What were the results? Population exploded, life-expectancy more than doubled, and for the first time in history each generation lived better than the generation that came before.

Now what about dirty air and water? First of all, pollution must be looked at in the larger context of our need to develop nature so as to constantly improve the human environment. Greens often point to real or alleged side-effects of industrial progress and argue that the solution to any problem is to ban or restrict industrial development. But this is simply foolish. No human activity is free of risks or undesirable secondary effects. (Should prehistoric man have banned fire because of the dangerous smoke it produced?) Industrial development keeps us alive—the goal must be to minimize its less-desirable byproducts without undercutting its life-giving benefits.

That said, something like air pollution is often viewed as a problem created by industrial capitalism and solved only by interventionist government. In fact, the problem of air pollution is as old as human history—and it’s a problem that capitalism has largely solved. The most dangerous elements of air pollution are particles (smoke and soot) and sulfur dioxide (SO₂). In London, the area for which the best data are available, these contaminants started increasing around the 16^th century, peaking in the late 19^th century. Since then, however, air pollution in London has plummeted; by the end of the 20^th century, there was less smoke, soot, and SO₂ in London’s air than in 1585.

What explains that decline? It can’t be government—the British Clean Air Act wasn’t passed until 1956, and studies haven’t shown a significant decrease in the rate of decline before and after the Act. Instead, the explanation is technological innovation—more efficient production processes yield less and less pollution. Pollution is not primarily a political problem, but a scientific and technological one.

There is a role for government when it comes to pollution—not to intrude on individual rights, but to protect them. The application of property rights to pollution is no simple matter, but the basic point is straightforward: no one has the right to cause physical damage or physical harm to another person or his property. If emissions from a specific individual or business pose a genuine threat to you, a proper government will (under the appropriate circumstances) provide an effective remedy (injunctions, damages, etc.).

Laissez-faire Capitalism is concerned with the constant improvement of the human environment. It is not, however, concerned with the non-human environment—it is not concerned with preserving untouched wilderness at the expense of human beings. If, under capitalism, someone wants to protect a given patch of land or a given animal, he is free to do so using his own property. But he cannot expect the government to sacrifice human well-being for the sake of bugs and weeds.

Books

• Julian Simon – The State of Humanity
• Jay Lehr – Rational Readings on Environmental Concerns
• Bjørn Lomborg – The Skeptical Environmentalist

Online Resources

• Julian Simon – The Ultimate Resource 2
• Onkar Ghate – What’s Wrong With Environmentalism
• Keith Lockitch – Climate Vulnerability and the Indispensable Value of Industrial Capitalism
• Keith Lockitch and Alex Epstein – The Ayn Rand Center Responds to Earth Day
• Keith Lockitch and Onkar Ghate – Earth Day: A Day Worth Celebrating?
• Heartland Institute – Climate Change Reconsidered
• Alex Epstein – The Industrialist Manifesto