John Mackey (the libertarian-leaning founder of Whole Foods) in his recent speech to the Federalist Society gave a full-throated defense of capitalism: “It’s capitalism that creates innovations that create the progress in the world…And it’s lifting humanity literally out of the dirt.”[i] While I am fully in accord with these sentiments, I believe it is worth pausing a few moments to consider the nature of “capitalism,” so as to better understand its origins and consequently the fragile nature of its virtues.
One conventional definition of this term is “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.” However, we should understand that “capitalism” is not fundamental; it is not the intellectual analogue to one of the 118 elements displayed on the Periodic Table, but rather a “derivative,” meaning a compound that can be synthesized from one or more of these elements. In political economic terms what we call “capitalism” is the byproduct of and depends upon ordered liberty, or what we typically call today the rule of law.
If the strong or politically powerful simply take what they like from the weak, most economic agents have no incentive to produce more than what is required for mere survival, since any surplus will likely be stolen away. Conversely, if persons are left to the own devices, without fear of rampant predation, they will inevitably seek to improve their lot and that of their loved ones by means of voluntary exchanges with others that will unfold over a longer term, including the development of far-reaching trading networks and the accumulation and investment of capital.[ii] In short, what we call “capitalism” is not the product of any conscious human design, but emerges spontaneously when certain conditions are present.
Accordingly, I believe it is worth inquiring into the circumstances that tend to produce the rule of law. I believe the dominant variable is the separation of political and economic power. The intellectual historian Robert Heilbroner describes this dynamic as follows:
Under capitalism two realms of authority existed where there had formally been only one–a realm of political governance for such purposes of law and order and a realm of economic governance over the processes of production and distribution. Each realm was largely shielded from the other. The capitalists who dominated the market system were not automatically entitled to governing power, and the members of the government were not entrusted with decisions as to what goods should be or how social rewards should be distributed.[iii]
This process of separation is illustrated in the history of certain feudal societies, which evolved in such a way as to promote property rights, first for the nobles and then more broadly. In Chapter 5 of my Nozick’s Libertarian Project I describe, with critical assistance from Richard Pipes, the noted historian of Russia, how feudalism developed in Britain in a benign way, eventually resulting in liberal democracy, and in a malignant way in Russia.
Classical liberals understood the tight connection between economic and political liberty, and therefore envisioned a strictly limited role for the state, consisting primarily of the provision of military defense, and the enforcement of criminal and civil law. This laissez faire approach would enable Adam Smith’s “invisible hand” to operate freely, creating affluence out of the financial self-interest of economic actors. Of course, the barrier separating state and economic power has never been impermeable, but polities that have kept it largely intact have experienced healthy economic growth, while preserving individual rights.[iv]
The US has witnessed a steady drift away from this ideal, starting in the Progressive Era, accelerating with the New Deal, and deteriorating further with the Great Society and the creation of an all-encompassing regulatory apparatus. At this point the state coercively governs every aspect of what used to be our private sphere, writing laws and pursuing policies that satisfy powerful political constituencies, enrich government cronies, and advance grandiose social engineering projects, all at the expense of ordinary citizens and future generations.[v] In short, with each generation we become less capitalistic, and the virtues identified by Mackey have become and will continue to be less evident.
We take the benefits of free markets for granted, and are woefully ignorant of what makes them so productive and rights-preserving. I am afraid it will get much worse before it gets better, both in terms of prosperity and our liberty.
[i] Mackey himself may well understand what follows, but it is impossible to tell from the story as reported.
[ii] It is remarkable just how widespread trade was even in the Bronze Age with, for example, copper from Wales reaching far across Europe.
[iii] Heilbroner, “Economic Systems: The Evolution of Capitalism.” In Encyclopaedia Britannica, online edition. Milton Friedman makes the same point: “The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.” Friedman goes on to observe that he knows of no example in history of a society that enjoys political freedom whose economy was not organized along largely capitalist lines. Friedman, Capitalism and Freedom, p.9.
[iv] The much-maligned (“Dickensian”) Victorian England, perhaps the purest example of laissez faire, was not only progressive politically relative to global peers, but enjoyed the world’s highest standard of living.
[v] The subject of my Libertarian Philosophy in the Real World.
