In 1776, two publications influenced the world for the better. The Declaration of Independence, written mostly by Thomas Jefferson, became the basis and model for liberty.
The other became the basis for unparalleled prosperity and wealth. The Wealth of Nations, written by Scotsman Adam Smith (1723-1790), set forth the basic principles of modern capitalism.
Smith put forth the principles of free market capitalism and is considered the father of economics. His Wealth of Nations fertilized the ground of the Industrial Revolution. Great Britain became both a world and economic power because of policies favoring capitalism. Many entrepreneurs, factory owners, coal mine owners, and investors became extraordinarily rich almost overnight.
Smith reasoned that those in a free society work for their self-interest and only for his own gain. Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."
Yet, by the butcher’s “selfishness,” the butcher promotes society's prosperity because of the jobs and other businesses that are supported by his business and the spin off of other businesses from his productive output. The butcher supports the cattleman who raises the beef, the teamster who transports the meat, the man who makes the butcher knife, and many others. All work for their self-interest of making money for themselves, and in an interrelated way create prosperity for many.
Further, Smith believed that the free market would serve as the regulator for goods and services. If a company did not make products that consumers needed and wanted, the free market would cause that business to fail. The company would have to change what it produced or close. For example, Ford put the horse and buggy shops out of business. Cell phone companies are making the land line phone businesses obsolete. The free market does that without government bail-outs.
Smith believed that government should be limited. He foresaw that limited government over the affairs of a nation’s economy would result in limitless economic prosperity under a free-market, capitalistic economy.
Smith had a keen eye on the American Revolution and urged for a peaceful resolution of the conflict between his nation, England, and America.
In America, he saw a major point of application for his economic theories on free market capitalism as opposed to the old colonial British system of economic restraints, regulations, and prohibitions.
The United States won independence from England after a long, hard fought war. By the time America’s political leaders decided to scrap the old government under the Articles of Confederation (1781) and replace it with the United States Constitution adopted on September 17, 1787, Smith’s capitalistic values had soaked into the thoughts of the writers of the Constitution and the other founders of our nation.
James Madison, the principal author of the Constitution and considered the “Father of the Constitution,” put a government into place that paralleled Smith’s capitalistic free-market approach to commerce.
Madison wrote, “A just estimate of the happiness of our country will never overlook what belongs to the fertile [economic] activity of a free people and the benign influence of a responsible government." In other words, the federal government would have limited powers over the economy. Free markets and not government would rule over the economy.
Jefferson was also influenced by Smith. He wrote, "Agriculture, manufactures, commerce, and navigation, the four pillars of our prosperity, are the most thriving when left most free to individual enterprise."
The Constitution did not mention freedom of enterprise per se, but it did set up a system of laws to secure individual liberty and free market capitalism in keeping with the endowed natural rights given by our Creator.
The ideas from the writers of the Constitution secured freedom for prosperity and posterity.
Madison and the other founding fathers saw Smiths’ free market, capitalistic economy as the natural result of liberty. They feared that the concentration of government power would rule every aspect of the nation’s economy and every aspect of its citizens. They valued freedom of choice. A person’s decision would result in reward or consequence. This was the very essence of liberty.
Moreover, they envisioned a large and prosperous republic of free people not burdened by the heavy hand of government interference.
The Founders believed the American people, possessors of deeply rooted character and values based on religion, could prosper if left free to:
Acquire and own property
Have access to free markets
Produce what they wanted
Work for whom and at what they wanted
Travel and live where they would choose
Acquire goods and services which they desired.
Their economic and political ideas encased in the Constitution enlarged freedom by encouraging free-market commerce and securing individual rights.
Adam Smith’s economic system envisioned by the Founders and encouraged by the Constitution allowed individual enterprise to flourish. Free market capitalism, unfettered by government interference, triggered the greatest explosion of economic progress in all of history. Americans became the richest people in the history of the world and the first people truly to realize the economic dimension of liberty in addition to individual liberties such as free speech, worship, and assembly.
But, Smith warned of the dangers of unchecked capitalism. There is this big problem with humanity called greed. While greed and self-interest are motivators for making a capitalistic system work, excessive greed can wreck it. Thus, Smith accepted the necessity of government protecting laborers from the excesses of capitalism caused by excessive greed. He wrote, “In any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits."
Smith also warned that a true capitalistic, free-market economy could quickly become a conspiracy of businesses and industry against consumers and workers. He was especially opposed to monopolies which could “fix the highest price and squeeze the buyers.” Thus, some government oversight was needed but in a limited way.
The founding Fathers of America got it perfect. Free-market capitalism with limited government to protect against excessive greed and exploitation of consumers and workers. The federal government would act as a referee on the economic playing field.
However, because of the excessive greed of many capitalists, fair wages were not paid and thousands of impoverished laborers, particularly in Europe, suffered terrible living conditions. Little children and their mothers went to work in the mines and factories along with the men. Their hours were long. They were barely able to make enough to provide for the basic necessities. Although there were many exceptions, the workers were exploited by the super rich. In reaction to the evils caused by the excessive greed of many capitalists, a Welch capitalist, Robert Owen (1771-1858), built a model mill village using socialistic ideas.
Owen created wealth in his business, but it was tempered by his caring and humane management. Owen’s model at New Lanark, Scotland, gained an international reputation for social and educational reforms. Owen created the first day care school in the world. He provided free medical care and a comprehensive education system for children, including evening classes for adults. Children under 10 were not allowed to work in his mill.
Owen’s goal, as is for all socialists, was to form a perfect society. He wrote, “I know that society may be formed so as to exist without crime, without poverty, with health greatly improved, with little, if any misery, and with intelligence and happiness increased a hundredfold; and no obstacle whatsoever intervenes at this moment except ignorance to prevent such a state of society from becoming universal.”
He proved that commercial success could be achieved without exploitation of the working class. His approach to social and economic organization was extended beyond the mill into every aspect of village life. He built a model community with decent housing for his workers, a school, a day nursery, a playground, evening classes, and a store.
In 1813, Owen published, A New View of Society which became to socialists what Wealth of Nations was to capitalists. Owen even proposed to do away with government issued money and replace it with mill issued labor vouchers or script to be used by the workers in the company store.
In America, Owen’s ideas were manifested in the mill villages that sprang up across the land. These villages were centered around the mill where most everything was provided for the workers. They even adopted Owens’ ideas on abolishing government issued money. Instead, they issued tokens or script which could only be used in the company store.
Karl Marx was greatly influenced by Owen’s writings and model village. He did extensive historical research and called his conclusions “scientific socialism.” In his famous and influential book, The Communist Manifesto, published in 1848, Marx and his fellow German and co-author, Friedrich Engels, argued that all of history is the history of war and conflict between the rich and the poor.
Marx and Engels proposed that true world peace and prosperity for all would occur only if rich and poor became one. The working class, the Proletariat, as they called it, along with the Bourgeois, the middle and upper classes, which had been created by capitalism would have to be eliminated. In its place would be a classless society of neither rich nor poor. Everyone would be truly equal. Economic injustice and the historical conflict between rich and poor would end with the elimination of greed by the rich and envy of the rich by the poor. Peace and happiness would ensue forever through a fair and just socialistic economic system.
Of course, individual initiative would be abolished. In its place, “Every person contributes according to his or her ability but consumes according to his or her needs,” according to Marx. So, if a person has a need for housing, food, medical care, etc., those with the ability build the house, provide food, medical care, and provide all of the basic necessities for those in need. That way, people with little or no ability to provide for their own care would be taken care of by those with greater ability.
A powerful, centralized government would decide who had the ability and who had the need. The government would be in charge of wealth distribution, health care, housing, and food distribution.
Private and corporate ownership of business would be abolished. Government would control every aspect of goods and services produced by workers and managers, and then, a strong central government would distribute them equitably to the needy.
Private and corporate ownership of farms would be abolished. The centralized, all powerful government, decides and controls the production of crops and meat according to the needs of its citizens so that none would suffer from hunger.
Marx regarded human beings as perfectible through economic justice. The result of “scientific socialism,” in Marx’s words, is that, “The world will be for the common people, and the sounds of Happiness will reach even the deepest springs.”
Marx was the consummate Humanist and believed that people had it within themselves to build a perfect society where all basic human needs and wants would be met through socialism. Economic justice achieved through socialism eliminates all rivalry, selfishness, possessiveness, competition or inequality. People will live in complete harmony with one another, and the flow of material goods will be endless and distributed fairly to all.
To paraphrase Adam Smith’s statement on self-interest, a socialist would say, “It is from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner from their regard to the interest of society.”
The United States’ economy was built on free-market capitalism, but the government has increasingly implemented socialism since President Franklin D. Roosevelt and Congress adopted his New Deal and passed the Social Security Act in 1935 in reaction to the Great Depression.
Under President Lyndon B. Johnson’s leadership, Congress passed his Great Society legislation which included Medicare (1965) and Medicaid (1966)
Presidents Richard Nixon and Gerald Ford expanded Great Society programs.
Under Presidents George W. Bush and Barack Obama, economic socialism has been on steroids. President Bush justified enormous government economic intervention in bailing out the automobile and banking industries with government loans and grants totaling $25 billion and $700 billion respectively in the Fall of 2008. Bush said, "I've abandoned free-market principles to save the free-market system."
The federal government was no longer “benign” as designed by James Madison and the founding fathers. It was actively involved in every phase of American economic life affecting every citizen.
At a whirlwind pace, President Obama continued injecting socialistic principles into the American economic system. On February 17, 2009, President Obama signed The American Recovery and Reinvestment Act which infused $787 billion from the government into the economy and was increased to $840 billion in 2011.
Further, President Obama led and Congress adopted the Patient Protection and Affordable Care Act which was signed into law by the President on March 23, 2010. This law is commonly referred to as “Obamacare” which requires all Americans to obtain health care insurance either from a government or private health insurance program.
To enforce the law, every person without health care will have to pay $695 tax or penalty and up to three times that per family in 2016. After 2016, these amounts will increase at the rate of inflation.
Of course, socialistic programs must be paid for by free-market capitalistic businesses and their workers in the form of taxes paid to the federal government.
Taxes are not keeping up with financing socialistic government intervention into the economy. So, the government must borrow money to pay its obligations. Since September 28, 2007, the federal government’s debt increases at an average of $3.88 billion a day. The total debt is over $16 trillion or about $52,000 per citizen.
To fund a growing socialistic economy, the federal government borrowed from Social Security. Taxes which were supposed to fund the Social Security program went to fund other government obligations. The government has never paid this back. There is no money in Social Security accounts. The FICA tax for Social Security taxes paid by workers go to fund Social Security benefits being paid out. Today 3.3 workers fund the benefits for one person. In other words, today’s workers fund today’s retirees.
There are other examples of how the government robs Peter to pay Paul.
So, our federal government has had to turn to sources outside the United States to borrow capital to fund socialism. As former British Prime Minister Margaret Thatcher, a contemporary of President Ronald Reagan, said, “The trouble with socialism is that sooner or later you run out of other people’s money.” It is said that Thatcher carried a copy of The Wealth of Nations in her purse!
Since American capital was depleted, the government has had to turn to foreign investors. One of the primary sources for new capital is borrowing money from the government of China which ironically is officially socialist but has increasingly adopted free-market capitalistic policies.
This fiscal year, the federal government will spend about $1.1 trillion more than it receives in taxes. This follows years of such deficit spending to fund socialistic programs that the federal government is obligated by their own laws to pay.
Under President Obama’s direction, the federal government has invested capital into the start up of private companies, particularly “green energy” companies, that have failed. These include A123 Systems, makers of electric car batteries, and Solyndra, makers of solar panels with losses to the government of $249 million and $535 million respectively. Because of the federal government’s involvement, these losses went against the tax-payers instead of against private investors. These are just two of many.
Socialistic programs are now forever embedded into the American economy. I have benefitted from socialism. We all have. I will file for Social Security benefits next month! But, it will take Adam Smith’s free-market capitalism to pay the debt caused by socialism and fund present socialistic programs.
President Bush abandoned free-market principles. President Obama has followed Bush’s lead. In arguing for Congress to borrow $787 billion in 2009 to stimulate the economy, he said, “At this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy—where a lack of [government] spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit.”
On the other hand, Governor Mitt Romney is a free-market capitalist having created 100,000 jobs through his work at Bain Capital. Romney said,
“My view is capitalism works. Free enterprise works. Private equity and venture capital work. They're successful and create jobs. I'm someone who believes in free enterprise. I think Adam Smith was right. And I'm going to stand and defend capitalism across this country.
“I think a society based upon a government-centered nation where government plays a larger and larger role, redistributes money, that's the wrong course for America. ... The right course for America is to create growth, create wealth."
Americans will decide Tuesday. You and I will decide Tuesday. Capitalism with a little socialism or Socialism with a little capitalism. Adam Smith or Karl Marx. Barak Obama or Mitt Romney.
It is one of the most crucial elections in the history of economic theory and will decide the course for our nation’s economy for years to come.
Read more articles by Pastor Dan White or search for articles on the same topic or others.
Thank you for this excellent, even-handed history lesson. It is thoughtful, without being alarming (or inflammatory). From a more urgent perspective, I recently watched the documentary titled "Agenda: Grinding America Down." [Trailer at: http://agendadocumentary.com/trailer/ and full movie at: http://vimeo.com/52009124 People need to know what we're facing with the economic situation and more: the moral collapse of society. I cannot help wondering if this is God's work of judgment, beginning at the household of God. God bless you, Pr. Dan!