Spending too much time talking with people that share your views can skew your perception of public opinion. Once you are close to any subject, there are certain conclusions that you accept as self evident because their validity has been proven over and over again. As time goes by, and you have discussions with people that are equally convinced of the validity of those conclusions, it is easy to begin assuming that everyone recognizes them. It is only by talking with people outside your group that you realize that, however valid your beliefs may be, the vast majority of people are either ignorant of them or remain unconvinced. This is undeniably true for me regarding the 19th century.
Despite irrefutable evidence to the contrary, there is a popular view of that period that I call The Populist Myth of the 19th Century. Before dismissing its relevance, consider the fact that this myth has been and remains the driving force behind most public policy from the turn of the 20th century to the present day. Belief in this myth has been behind the gravest errors made by government, not only in domestic policy, but in foreign policy as well. The great wars of the 20th century may well have been avoided and the defeat of poverty might be within our grasp had this Myth not gained acceptance with the great majority of people. These are extraordinary claims, to be sure. However, not only are they provable with diligent research, they can be proven theoretically as well. However, before getting to the proof, let us first define our terms. What is the Populist Myth of the 19th Century? It goes something like this.
After the United States won its independence from Great Britain, it established a system of government that placed priority of individual rights over all others. As a natural result of its system of laws, an economic system of unprecedented free trade, or laissez faire capitalism, naturally emerged. As a result, the Industrial Revolution came to America and flourished even more so than it had in Great Britain. Unencumbered by government control, America became a great wealth-producing engine and hotbed of innovation that resulted in a reshaping of the way human beings lived their lives and made great fortunes for captains of industry that lead the way in this period of explosive progress.
However, the price of this unencumbered freedom was oppression of the working and poorer classes by these same captains of industry. Unrestricted by government regulation, large corporations were free to drive down the price of labor, cut their costs by skimping on safety and other protections in the work environment, and increase their vast fortunes at the expense of misery for the working class, which was reduced to virtual slavery. Eventually, even the children of working class families were sent into the factories to help families on the brink of starvation try to earn enough to survive.
By the turn of the 20th century, it was apparent that reform was needed to save the working class from the victimization inherent in laissez faire capitalism. The social reform movement began, establishing social programs for those left behind, imposing tighter regulation on business, giving a fair chance to workers to unionize, and preventing the natural inclination towards monopoly that was also apparently inherent in capitalism. The fight for the common man had begun, with its champions Woodrow Wilson, Teddy Roosevelt, Franklin Roosevelt, and other bright lights of the 20th century. That fight goes on to this day, championed by the “liberal” or “progressive” parties in politics, with the goal of someday achieving the economic equality that a free society desires.
This is a compelling story. It appeals to the natural instinct in humans to pull for the underdog and fight against injustice. The basic tenets of this myth have inspired great works of literature and iconic films over the past century. It remains the core belief of most celebrities in America, an assumption of the media when looking for compelling news or attempting to appear “on your side” to the average reader/viewer, and most importantly, a fundamental assumption of government in making the laws which determine what we can and cannot do. There is only one problem. None of it is true.
Certainly, the general “solutions” alluded to occurred, but the problems did not exist. This may seem ridiculous to most 21st century Americans. EVERYBODY knows that working conditions were poor in the 19th century, workers were economically oppressed, that unrestricted capitalism naturally results in monopolies, and that, however distasteful it might seem, some government control of the economy is necessary or most of society’s wealth ends up in the hands of the wealthy few at the expense of the starving masses. Let us take a look at the fallacies of the Myth one at a time.
First, the quality of life of the working class did not deteriorate as the industrial revolution progressed, it rose dramatically. Pictures of what we would consider today squalid living conditions and relative poverty are extremely misleading when viewed in a vacuum. When one considers the quality of life for the working classes – the peasants of the old world – for all of history before the Industrial Revolution, it is apparent that the quality of life during the 19th century was much better. More importantly, IT WAS CONSTANTLY IMPROVING. This was the natural result of innovations like mass production. A simple understanding of supply and demand dictates that when the supply of goods and services is increased, their prices go down. The supply of goods and services, especially manufactured goods, exploded in the 19th century. Products that had previously been only available to the rich were now available to everyone, and their prices had dropped low enough that even those on an average income could afford them. For the first time in history, the primary market for the output of society’s production was the common people themselves, rather than the rich.
Detractors of capitalism often point to periods of decline in average wages as “proof” of the inherent oppression of the worker in laissez faire capitalism. This argument demonstrates either an attempt at deliberate distortion or a pitiable lack of understanding of basic economics. While wages sometimes did go down, prices declined at a much faster rate, resulting in a dramatic rise in “real wages” for the average working class American. Money is only the medium of exchange, and its nominal value is irrelevant without considering its corresponding purchasing power. If one had the power to cut all wages by 10%, but also to cut all prices by 50%, one would have the power of making everyone much, much richer. That is exactly what laissez faire capitalism did during the 19th century. It not only made the captains of industry richer, it made the working class richer. This trend was still continuing when the social reform movement started. Had it not been interrupted, one can only imagine how much better off the working class might be today.
There is also the myth that laissez faire capitalism naturally results in monopolies for large corporations, which then use their advantage in the market to raise prices for consumers and drive down wages, resulting in a general impoverishment of the working class. Again, the most basic understanding of economics (or even simple logic) refutes this claim easily. First, one must consider that there are two kinds of monopolies. One certainly can result from laissez faire capitalism. The other kind is a government created monopoly. The first kind of monopoly actually benefits society, while the second harms it.
Monopolies occur naturally in a laissez faire system only one way: when one company is able to deliver better products at lower prices than any of its competitors. Contrary to the Myth, this type of monopolist cannot then use its advantage to drive up prices and drive down wages. It must continue to keep its quality higher and prices below that of its competitors, or its monopoly status will cease to exist. Similarly, it is also competing with other firms for quality labor. If it offers lower pay or poorer working conditions than its competitors, its labor force will naturally migrate to the higher pay and better conditions of the competitors. While it might be argued that neither of these can happen once the monopolist’s competition has been eliminated, competition is NEVER eliminated. If there are no active firms competing at the moment, the possibility of investors entering the market is always present, and new firms enter the market the minute that a monopolist shows signs of vulnerability in its domination of a particular industry. Thus, the possibility of competition hangs over the head of the natural monopolist like an economic sword of Damocles.
A government-imposed monopoly, on the other hand, suffers from none of these pressures. Since no other firms are ALLOWED to compete, the monopolist is free to set prices wherever it sees fit. For any workers that desire to work in that particular industry, they must accept the wages offered by the monopolist or not work in that industry at all. It is within the government-imposed monopoly that all of the evils associated with monopolies exist.
Government-imposed monopolies can occur in two ways. One is where the government simply passes a law saying that a particular firm will be the sole provider of a particular good or service. This was common in the 20th century for public utilities. The flawed logic that inspired these policies was rooted in the Myth. It was thought that for basic necessities, which everyone was entitled to, businesses should not be allowed to profit from providing them. Therefore, government would allow one company to sell those services to the public, with strict control over their prices. The obvious failure of this logic resulted in the deregulation movement later in the 20th century. Detractors of this will point to power shortages and blackouts such as those experienced in California earlier in this decade. However, analysis of those crises consistently reveals that they were caused by those government controls left in place after deregulation, rather than the deregulation itself. For example, in California, the mass blackouts of 2001 were the result of price ceilings left in place in the supply chain. A free market makes no compromises.
The other, more common type of government monopoly results from excessive regulation. This is the unforeseen result of copious regulations imposed on industry in trying to solve the imaginary problems of the Myth. When it becomes so expensive to comply with regulation that only the largest firms can operate in a given industry, you have a trend toward government-created monopoly. More often than an outright monopoly by one firm, a few large firms emerge and do compete with each other, but they are insulated from new competition by the cost-prohibitive aspect of complying with regulations. While competition amongst themselves brings some of the forces of capitalism to bear, a status quo emerges in how the industry does business and what the limits on price and wages are. The economic sword of Damocles does not hang over the heads of these protected firms, other than to the extent that they compete with each other. Only a new competitor can shake the industry up, and government has insured that new competition is unlikely.
John D. Rockefeller’s Standard Oil was an example of a natural monopoly. It resulted in oil being delivered to the market at higher quality and lower prices than any other company could compete with. Standard Oil’s monopoly was maintained by CONTINUING to deliver that high quality and those low prices. Rockefeller was later a major player in creating the Federal Reserve and other government interventions into the economy, which are harmful to the market. However, he attained his vast wealth and eventual monopoly in oil by benefitting customers, not harming them.
In contrast, the government-created monopolies in the public utilities sector resulted in poorer service and higher prices for consumers. This is the reason that deregulation was eventually pursued. Immediately upon introducing competition and a FREER MARKET, supply and quality rose, while prices fell dramatically. Only in cases where government controls were left in place did adverse results occur, as previously noted.
One more aspect of the Myth that immediately comes to mind is the specter of child labor. The Myth says that child labor was a natural result of the Industrial Revolution, and that only government intervention ended it. Again, a compelling story, but completely untrue. As Andrew Bernstein insightfully points out in his book, The Capitalist Manifesto, the Industrial Revolution didn’t create the practice of child labor, IT ENDED IT. Child labor had been a fact of life for the working class throughout history. Indeed, one of the reasons (and there were many) for the migration of people away from the country and into the factory jobs in the city was the fact that the jobs their children would do in the factories were far easier than the back-breaking work they did on the farm. After less than a century of industrialization, real wages rose to the point that most families did not have to send their children to work at all. Thus, government did not end the practice of child labor, laissez faire capitalism did. This is a verifiable fact of history.
This is only a brief and incomplete critique of the Myth. It has many other components, each of which can be shown to be equally false. The Myth is based upon a core misunderstanding of capitalism. Today, capitalism is wrongly characterized as a system that gives an advantage to the rich, or to employers. It is no such thing. Capitalism is the system of freedom, where every transaction between buyer and seller is undertaken by mutual, voluntary consent. In this system, all participants make the best decision that they can based upon their rational self interest. Sellers attempt to sell at the highest price that their goods or services will fetch on the market, while buyers attempt to buy at the lowest prices that they can. Buyers seek the highest quality for their dollar, while sellers seek to provide higher quality for the same money in order to win business away from their competitors. The sum total of all of these voluntary transactions results in the economy becoming a wealth-generating engine. The secret is the ability of all participants to choose freely. By acting in their rational self interest they benefit both themselves and society as a whole. Without this free choice, the wealth-creating mechanism breaks down.
Many might argue that “buyer and seller” immediately excludes “worker,” but that is a tragic misunderstanding as well. In a capitalist system, labor is a market like everything else. “Workers” are really SELLERS. They are selling their services to employers. They compete with each other for the best jobs, and employers compete with each other for the best employees. When not disrupted by government, all of the benefits that accompany the free market for other goods and services occur in the labor market as well. Detractors of capitalism attempt to portray workers as servants that must be protected from their oppressive masters. They are no such thing. They are sellers that require no more protection from their customers than a car dealer requires protection from its customer shopping for the best car at the lowest price. By offering higher quality work, workers can demand higher prices for their services. They are free to accept an offer of employment or turn it down, or to leave their present employment for a better offer. In a truly free market, workers are empowered as the owners of the original means of production that they are.
There is even a benefit to the worker of this free buying and selling relationship when it results in lower wages. Remember that in a laissez faire capitalist system, the workers are also the chief market of the mass supply of goods that results. Thus, if the market lowers the price of labor, the corresponding price of consumer goods also falls. Therefore, even if the worker is earning less money, his purchasing power increases. His real wages go up. He becomes wealthier. Just as wages never rise nearly as rapidly as the general price level of consumer goods in an inflationary pattern (making workers poorer over time), wages never fall as quickly as the decrease in the general price level that is the result of natural economic growth (making workers wealthier over time). That real wages went up during the 19th century is a verifiable fact, and is not in dispute.
At the turn of the 20th century, even the proponents of the social reform movement recognized that capitalism was making the working class wealthier and eliminating poverty. They did not start the reform movement because capitalism was not helping the lower classes, they started it because they did not feel the improvements were occurring fast enough. This fact, too, has faded from memory, but a little research will bear it out. With all of the achievements of the century behind them, and the marvelous innovations that mankind had accomplished, they felt that there was no reason that anyone should ever want for anything again. Within 50 short years, the telephone, the moving picture, the automobile, and most of the rest of what we think of as the modern world had been invented, mostly in America. Surely, they thought, poverty could be eliminated as well. They attempted to use the power of government to ACCELERATE the progress that laissez faire had resulted in.
However, there was a fundamental flaw in their thinking. They failed to understand the mechanism that made all of that wealth creation and innovation possible. The mechanism relies on the choices between buyers and sellers being VOLUNTARY. Once the introduction of force is introduced, the process is disrupted. Detractors of capitalism consistently fail to recognize or are able to ignore the reality of what “social reform” is. It is GOVERNMENT USING THE THREAT OF VIOLENCE TO SEIZE AND REDISTRIBUTE PROPERTY, AND TO FORCE BUYERS AND SELLERS TO MAKE CHOICES THAT THEY OTHERWISE WOULDN’T MAKE. However they try to euphemize it, THIS is the alternative to laissez faire capitalism that they offer. Most non-economists probably do not realize this when they advocate for most government economic policies. They would probably find them morally repugnant if they understood them properly. However, this is the REALITY of even the “mixed economy.”
This use of force is not without consequences, however. By disrupting the voluntary nature of the transactions, capitalism’s wealth-creating mechanism breaks down. The more property is stolen for welfare programs, the less capital is left to expand production. The more government intervention there is, the less wealth is created. Productivity and innovation cannot be forced. That is the reason that free people are more productive than slaves. It is the reason that communism has failed wherever it has been practiced. Russia had a larger population and more natural resources than the United States, but tens of millions of their people died amidst those vast resources because they were practicing an economic system that did not allow the wealth-creating mechanism of capitalism to function. The same can be said of China, Viet Nam, and every other country that practiced communism. As they have moved toward a free market economy, they have become more and more prosperous. As America has moved toward a less free market economy, it has declined.
Today, the United States practices a “mixed economy” because of the persistent belief in the Myth. Refusal to recognize the plain facts of history, that the working class was becoming richer under laissez faire, rather than poorer, is the only reason that laissez faire is not still the economic system of the United States. It is also the reason for the socialist movement throughout the world, which directly led to the World Wars and the ensuing Cold War. Despite the fact that both economic systems have been taken to their logical extremes, and socialism produced mass starvation while capitalism produced mass prosperity, America continues to try to mix socialism with capitalism. After a century of “government reform” of capitalism, the gap between rich and poor is far wider than it was under laissez faire capitalism, the quality of life of the working class is declining, and a much greater concentration of wealth in the hands of the very few is occurring. Everything that the social reformers set out to do has not only failed, but resulted in the exact opposite of what their intention was. It is not a matter that the reform was not done skillfully or completely enough. It is a matter of the “reform” being the use of coercion to force people to make choices against their will. It is morally repugnant, and it does not work.
Politicians are naturally disposed to believe and promote the Myth. It gives them a reason to do a whole lot more than they would be allowed to do otherwise. Promoters of the Myth cite their “heroes” of the 20th century. Only by believing the Myth can you admire the policies of Woodrow Wilson, Teddy Roosevelt, or FDR. These men were great destroyers of prosperity and violators of individual rights, not heroes. They attacked capitalism under the pretense of solving the imaginary problems of the Myth. When crises occur in our “mixed economy,” politicians consistently blame the capitalist aspect of our society rather than the socialist aspect, and suggest more socialism as a solution. “Coincidentally,” this results in more power for the politician.
The Myth is pervading our current presidential election campaigns. McCain claims Teddy Roosevelt as his hero. Obama has invoked FDR. Both agree that more regulation is needed to solve the current financial crisis. Popular acceptance of the Myth allows them to frame the debate where only less freedom can solve our problems. It is up to the American people to choose. The proof that the Myth is false is everywhere, even in public records maintained by the government itself. However, there will never be a large movement to truly solve our problems until Americans learn accurate history and stop believing in the Myth. Once they do, they will see that the great experiment has been completed, and the results are indisputable. Only laissez faire capitalism – the economics of freedom – can restore America’s prosperity. It is the only moral and practical choice.
 Bernstein, Andrew The Capitalist Manifesto: The Historic, Economic, and Philosophic Case for Laissez Faire. University Press of America 2005