The System of Free Enterprise and Its Caricature

Harry Gunnison Brown

[Reprinted from the American Journal of Economics and Sociology,
Vol. 4, No. 1 (October, 1944), pp. 87-98]

THE system of free enterprise ("capitalism") seems to receive a good deal of lip service from business executives. And it has the tacit -- if nevertheless uncomprehending -- support of those farm owners and owners of other property who dread the thought of socialism or communism.

But the kind of "free enterprise" system which many of the more vocal opponents of socialism and communism appear really to want is, at best, a miserable caricature of what a free enterprise system might be and ought to be. Each economic group is so intent on interferences with freedom, in its own group or class interest, that the end result can hardly be considered a free enterprise system at all. In various respects, it is already regimented much as socialism or communism would be although doubtless not to the same extent, and certainly it is not regimented advantageously to the poorest class with whose welfare advocates of communism -- and socialism -- feel they are especially concerned.

But these general statements will probably mean little to most readers unless accompanied by some sort of bill of particulars.


LET US BEGIN by considering the Agricultural Adjustment Acts of the New Deal. The provisions of these statutes certainly have interfered and those of the later statute under this title do interfere with the normal operation of the voluntary price or free enterprise system.

Under the original Agricultural Adjustment Act, passed in 1933 in the early days of the New Deal, owners of farms were paid a bounty or subsidy by the federal government to take land out of use. One result was that not a few landlords -- especially owners of plantations in the South-found it desirable to dismiss or discharge a considerable proportion of their tenants and laborers. The workers thus deprived of employment on the plantations and farms had then, in a period marked by widespread unemployment, to seek other jobs.

The purpose of the law was to hold up and even to raise appreciably the prices of agricultural products by limiting their supply. This is the method of privately established monopoly, too, and it is no more desirable or defensible when practiced by government than when practiced by individuals or by private companies.

As I have pointed out in my Basic Principles of Economics,[1] it is sometimes argued in this connection that since some manufacturers may have had a degree of monopolistic control and may have been able to restrict output and hold up prices, and since wheat farmers have been unable thus to establish monopoly by themselves, therefore the government should aid them to restrict the output of wheat so as to hold up wheat prices. The result may, of course, be a benefit to certain wheat growers, but life is thereby made harder than before for those persons who, not being in any privileged group themselves, must now contribute to a new privileged group just because they have previously had to contribute to an old one.

When individuals or small groups succeed by burglary, picking pockets or holdups, in abstracting wealth from others, those who are robbed at least have law on their side. But what if a larger and politically powerful selfishly interested group succeeds, by sophistical arguments, or by legislative bargaining with other selfish groups seeking privileges at the expense of the general public, or merely by gaining the support of legislators who are more afraid of losing the votes of an active and well organized privilege-seeking minority than of an unorganized and comparatively unaware and inert majority, -- what if such a group thus succeeds in using the tax system and the legislative appropriation machinery to abstract wealth from the rest of the people! In such a case, those from whom wealth is being abstracted find that even the law is against them and that, if they refuse to make the required tax contribution, it is they, and not those profiting at their expense, who are considered the criminals.

What if there should be a continued and progressive extension of government interference, regimentation and control in the interest of such privilege-seeking groups! Might we not finally discover, as we approach the end of this unhappy journey, that men's incomes depended mostly on their skill in political bargaining, threats and chicanery, and scarcely at all on their productive efficiency? And would it not then be widely argued that the voluntary price system ("Capitalism") had failed, and that the state must henceforth control all those economic activities which were previously guided, in a regime of economic freedom, by the market and by the lure of price?

If it were really conducive to prosperity to withdraw good land from use, does it not follow that the United States would be more prosperous if a Sahara desert were substituted by nature for a large part of our good farm land?

Indeed, such a calamity would be a definite advantage to the owners of what good land still remained. For in such a case the frantic competition of the landless for the use of land to work on would enable the landlords to charge higher rents to tenants and pay lower wages to laborers!

But after all, the thought that substitution of a Sahara desert for much of the good land in the United States would be a general benefit is consistent not only with the policy of paying landlords to take their land out of use. It is consistent also with our long continued encouragement of the holding of land out of use by speculators. Within and about American cities are vast numbers of vacant lots, many or most of which will remain vacant for years and not a few of which will remain vacant for decades. These lots have been made, usually, un-utilizable for agriculture. They do not serve, in any proper sense, the function of public parks and children's playgrounds! Nevertheless, their existence involves the extension of telephones and electric light wires and of gas, water and sewer mains over longer distances. It involves the necessity of walking or riding longer distances from home to work and from work back home on the part of thousands of city dwellers. It involves longer distances traversed for the delivery of purchased goods to the homes of purchasers and for the collection and delivery of laundry.

If we had the will, we could easily enough make the speculative holding of vacant land altogether unprofitable. A high land-value tax, levied in place of some of the burdensome and economically depressive taxes we now have, would accomplish the purpose completely and, indeed, would have various other definite advantages,-such as lowering the sale price of land and making easier the transition from tenancy to ownership of land by the user of it.

Is it really surprising, however, that a generation which will not even seriously consider such a reform should go still further in the encouragement of holding land unused, by providing that the rest of the public should be taxed in order to pay landlords for withholding land from use?

Let those anti-New Dealers, then, who are inclined to criticize the New Deal political leaders for their policy in regard to farm land, ask themselves how they feel about the economic waste of vacant land speculation! Here, perhaps, is the acid test of their understanding and sincerity!


WE NOW HAVE a new Agricultural Adjustment Act (1938), the first one having been declared unconstitutional by the Supreme Court. But the amended Act also-though not by paying subsidies for taking land completely out of use-applies the principle of limiting output for the purpose of holding up or raising prices. Subsidies are now paid for the planting of "soil restoring" and "soil maintaining" crops. This is somewhat as if owners of houses were paid subsidies for "restoring" their roofs by putting on new shingles and "maintaining" their walls by painting them! But the newer Act also makes provision for "quotas" to apply to the growers of wheat, corn, cotton, rice and tobacco. Those who produce and sell more than the quotas allotted to them are penalized by a heavy tax,-in effect, a fine. This, certainly, is supply-limiting legislation.

There is, in the Act, a sharp limitation of the amount of a particular crop-when quota limitations are voted-which can be produced in a county or state on land not recently used to grow that crop. For example, not more than three per cent of the county acreage allotment for wheat may be apportioned to farms on which wheat has not been planted during one or more of the three previous marketing years. In the case of cotton, not more than two per cent of a state's acreage allotment may be apportioned to farms which were not used for cotton production during at least one of the three preceding calendar years.

In the case of rice, the prohibition is against persons rather than particular pieces of land. Here it is provided that not more than three per cent of the acreage allotted to any state shall be apportioned "among persons who for the first time in the past five years are producing rice on the basis of the applicable standards of apportionment" and that no such person shall be allowed more than seventy-five per cent of the acreage in rice he could have if this were not the first time in five years he was so producing.

It can easily be seen that, when such a limited quota for all those persons who have not produced rice for five years has been asked for and allotted, an American citizen whose application was a little later would not have the liberty to produce rice at all for that year. As regards wheat and cotton, an American citizen desiring to produce one or the other of these and buying or hiring a piece of land for the purpose, might find that he was not free to produce the crop on that land because the particular piece of land had not been so used in recent years and because the acreage allowed for such land was all allotted.

Will our ultimate economic system be one in which every person is told in what industries he may engage and what occupations he must perforce forego? And this in a country where the words of the Declaration of Independence are still given lip service:

"We hold these truths to be self evident; that all men are created equal; that they are endowed by their Creator with certain inalienable rights; that among these are life, liberty[2] and the pursuit of happiness."

The question whether to establish a quota in any year is determined by the Secretary of Agriculture, with the proviso that the quota will not go into effect if opposed in a secret ballot by more than one-third of the farmers affected.

This arrangement has been euphemistically described on very high administration authority as "the democratic way." But to describe it thus is really a travesty on the word "democratic." Consumers do not vote on the matter. Millers (or other processors) do not vote on it. Would-be farm laborers for whom such quotas may mean no farm jobs do not vote on it. If such a system of deciding that there shall be a monopolistic limitation of output is "democratic;" then it would be "the democratic way" for the various gasoline companies to decide, by secret ballot, whether to limit the output of gasoline and for the owners and operators of coal mines to decide in like manner whether to limit the output-and thus raise the price -- of coal. Has it really become "democratic" nowadays to shut out from decision on such matters millions of consumers whose economic interests are acutely affected by the decisions reached?

When competitive forces are allowed to work themselves out without interference from government restrictions, prohibitions and quotas, excess production of any kind of goods operates to bring its own correction and, therefore, tends to be only temporary. For the resulting low price means smaller returns to those engaged in the business and these smaller returns induce some of them -- presumably those relatively not so well adapted to it and, also, the capital and land relatively not so well adapted -- to leave this line of production for various other lines. But when this fact is pointed out, the objection is frequently raised that, largely, workers cannot and will not change, that labor is "immobile," and that the economists who say they can and will move are "laissez-faire" economists who base their conclusions on mere "theory" rather than on observed facts.

Actually, it is the critics of these economists who fail to observe the facts. For just a little observation of what goes on about them daily ought to convince them that changes in occupation are by no means infrequent but are, in fact, common. And there is, too, in every year, a flood of unspecialized beginning workers who can go into one or another line according to where lies the greatest promise of substantial income. The recent rush of many thousands-not to say millions -- of workers into war industries previously unfamiliar to them offers an illustration of mobility on a vast scale. And in case the critics attempt to escape the logically inevitable conclusion by referring to this mobility as resulting from "abnormal" (i.e., war) conditions, then they should be required to note the migration from country to city between 1922 and 1930. During these eight years an average of about two million persons a year left the farms for the cities while an average of well over a million a year moved in the reverse direction, leaving a net movement from the farms of about two-thirds of a million annually.[3] Certainly, when there is such mobility as this, it is ridiculous to assume that the great majority of farmers cannot even change from one crop to another!

If, during the thirties, there was no such movement to the cities, this was almost certainly because of business depression in the cities, with wide unemployment and low average income.


HERE WE MAY NOTE briefly another angle to our sabotaging of the free enterprise system ("Capitalism"). This is that we have followed policies calculated to bring about recurrent depressions, with their incident failures and unemployment. Bank credit deflation has, indeed, brought drastic decreases in prices o' raw materials, including farm products, and farmers have certainly suffered acutely from such deflation. But so have jobless city workers and various other persons.

If it is a proper function of government to establish standards of length, volume and weight, it is also its proper function to establish, as nearly as may be, a stable standard of value. This means that the money and banking system should be so controlled as to avoid either inflation or deflation.

But having failed to perform this essential function of providing a stable standard of value and having thus contributed to the genesis and development of alternate inflations and deflations and of business depressions, the federal government has then tried to rescue a part of us from some of the evil consequences of its neglect by policies which have brought further injuries to others of us, which deprive our citizens of long-accustomed liberties and which are utterly inconsistent with the system of free enterprise and individual initiative to which not a few of our business leaders attribute our industrial dominance.

Our labor policy, also, has been not too intelligent. The Federal Fair Labor Standards Act of 1938 fixed wages per hour on an appreciably higher basis than had been previously enjoyed by the lowest paid workers in a considerable part of the country. To illustrate the effect such a minimum wage law may have, let us suppose the case of a coal mine worker the hiring of whom by an operating company will increase its output by not more than one ton of coal per day. At the mine mouth, with transportation and marketing costs to subtract from the retail price, the coal is worth only $3.00. If legislation makes it a misdemeanor to hire this worker for less than $4.00 per day-or even less than $3.20 per day-will the company hire him? Will he be hired if to hire him means he must be given $4.00 -- or even $3.20-for producing something that cannot be sold for more than $3.00? Surely wage-raising laws must bring about unemployment whenever the increased wages so required are higher than the value of the goods or services for which they are paid. The economically illiterate may object to this view on the ground that in order to raise wages we have only to increase prices!

Even though we assume that we could increase money wages by in- creasing proportionally the prices of goods, this would not mean any increase in the real wages (food, clothing, phonographs, refrigerators, motion picture entertainment, etc.) of workers and it is real wages which are important.

But without an increase in circulating medium (money and bank credit), we could not expect a rise of prices unless it occurs in consequence of decreased production. Do we desire decreased production and concomitant forced unemployment for many of our wage earners in order that we may have a scarcity of goods, in order that the prices of these goods may thus be kept high and in order that those workers who are lucky enough to be still employed may receive wages higher in dollars with which to purchase goods at these proportionately higher prices? Unless there is increase of circulating medium, then, making possible a rise of commodity prices, or unless the productiveness of labor quickly increases so that the higher wages are really earned, a law requiring that wages be raised appreciably above the level measuring the value of what labor produces must increase unemployment; and it might increase unemployment very greatly.

But, as suggested above, a sufficient increase of circulating medium, i.e., a sufficient inflation, would operate to rescue the wage earning population from the evil consequences of such a law. For such inflation would raise the general level of prices of the goods the labor produces and would thus make it possible to pay the wages which the law required.

Perhaps the Fair Labor Standards Act passed by Congress in 1938 has thus been, is being and will be kept from greatly decreasing the opportunities for employment. For since this Act was passed there has been a very considerable degree of inflation and it is not unlikely that there will be more. The Act fixed a minimum wage of 25 cents an hour, to become 30 cents per hour in 1939 and a minimum of 40 cents per hour in 1945. If, when the law went into effect in 1938, the provision that wages must not be less than 25 cents an hour was intended to have any effect at all in raising the wages of unskilled labor above what they already were in any part of the United States, must not 40 cents an hour, in the absence of any rise of prices, necessarily bring some degree of unemployment? And what if prices actually fell between 1938 and 1945 as they did greatly between 1926 and 1932!

If all that is necessary to improve the economic status of workers is to legislate wages upward, why not pass a law that no one shall pay wages of less than $1.00 an hour, or $10.00 an hour, or even $100.00 an hour! Or might it be, conceivably, that the view that we can force wages up greatly by law while still maintaining full employment, is just wishful thinking?

The Fair Labor Standards Act, however, does not apply to all industries. The statute specifically states that the minimum wages fixed are not to be required in certain occupations, e.g., agriculture and retailing. It would still be possible, therefore, for a worker deprived of employment in (say) manufacturing or mining by the requirements of the Act, to work on a farm, where the wages can be-so far as the law states -- as low as or lower than a cent a day, or to work in a retail store. Thus, we might expect to find some workers who were forced out of manufacturing and mining going into these other lines of work, increasing the competition for jobs in these other lines, and making wages in them even lower than such wages would be if the Fair Labor Standards Act had never been passed!

But here we come again face to face with the Agricultural Adjustment Act and the "quota" limitations of output provided for by it. By means of such quotas the opportunities of men to find employment in some lines of agriculture are reduced. And, obviously, the larger the number of lines of production from which workers are excluded, whether by minimum wage laws or by quotas or otherwise, and the fewer the lines of production into which they are permitted to go without restriction, the greater is the tendency to press wages down in the fields still remaining open!

Just as the quota system of the Agricultural Adjustment Act was euphemistically presented as "the democratic way," so has this fixing of wages been euphemistically described as putting "a floor under wages." But such a "floor"-if it does really and effectively require a wage level appreciably above the level of a free market-must either occasion large unemployment or, in case the wages fixed apply only to some lines of labor, must tend to crowd workers into other lines and so reduce wages in them. Limitation of the number of workers that can be employed in some lines must operate to the disadvantage of workers excluded and, in general, to workers in other lines, regardless whether the limitation is the policy of a monopolistically inclined union or is the policy of government acting under pressure from agriculturists, labor groups or just sympathetic "liberals."


BUT CERTAINLY it is not only under pressure from the spokesmen of farmers, manual labor groups and the sympathizers of these that legislatures apply restrictive policies. They do it as well under pressure from various business groups. A recent type of restriction is the heavy tax applied to chain store companies. In a number of states the tax on each store of a chain increases up to the point where added stores are taxed $500.00 a year each, or even more. It does not appear likely that this is done because of any serious fear of monopoly. The various chain stores compete with each other and they have to meet the competition, also, of efficient independent stores. But owners of independent stores who would like to be relieved of competition from a very efficient system of goods distribution are too eager and ready to bring pressure on legislatures for restriction on such competition. The to-be-expected consequence is higher prices or poorer service to consumers, -- or both.

Another illustration of the results of such pressure is to be found in our so-called "fair trade" legislation. Here, too, we are treated to euphemistic phrase making. What "fair trade" laws really mean is that manufacturers are permitted to dictate the prices that dealers may charge for the special goods made by these manufacturers, so that a more efficient dealer cannot express that efficiency in a reduction of the retail price. Still another, and certainly an old and familiar restriction of competition, is the so-called protective tariff. The economic objections to such legislation have been presented most effectively over and over again since the appearance of Adam Smith's Wealth of Nations and earlier. But the policy is still followed in every or almost every country. Indeed, one of the economic evils of the Treaty of Versailles following World War I was that, in setting up new nations on the basis of "self determination of peoples," it increased the number of national boundaries at which tariff restrictions could be and were levied. And in our own country, though we do not have, formally, protective tariffs between the separate states, we do have vexatious and conflicting truck regulations, multiplied license fees for trucks going through several states, heavy taxes in some states on certain goods that are the products of other states, inspections and inspection fees at state borders, etc. Perhaps in an earlier era the Supreme Court would have summarily forbidden such interferences as being merely camouflaged violations of constitutional provisions which were supposed to guarantee free trade among the states. But our present "liberal" Court seems inclined to allow them unless or until Congress asserts itself by some form of national control. Presumably, if and when Congress sets forth a broad federal policy in regard to interstate trade and all of its necessary mechanisms, such as trucks, any conflicting state regulations will be ruled out.

The system of free enterprise, at its possible best, would be a system in which individuals were free to choose their occupations and to produce as much or as little as they pleased of whatever they pleased.[4] (How much we have already departed from this, and how hard it is, against the pressure of interested groups or blocs, to retrace our steps!) It would be a system that relied for the provision of desired goods on the lure of profitable price, and for drawing labor into a desired line of production on the lure of relatively high wages. It would be a system in which men were free to save and to invest in the construction of capital or not to do so. It would be a system in which monopolistic restriction of output either by conspiring business groups or by government in the interest of privileged groups was impossible. It would be a system in which really unfair competition, e.g., misrepresentation of rivals' goods, discriminating transportation rates, etc., was outlawed and effectively suppressed. It would be a system in which, in general, the enjoyment of large income was the result of offering large and desired service, -- of efficiency in meeting the needs and desires of the public. It would be a system, therefore, in which men could do best for themselves and their families and the causes in which they were interested, by being the best possible servants of the community.

Before concluding this discussion, it should be pointed out that one of our policies which is most inconsistent with the principles a system of free enterprise ought to exemplify, is our policy regarding land, land rent and taxation. To allow individuals to receive income for effort contributed in production is consistent with this system. To see to it that individuals can receive income from capital which, except for their saving, would not have been brought into existence and which adds to the annual output of desired goods is equally consistent with this system. But so to arrange matters that individuals receive income because they are in a strategic position to make others pay them for permission to work and to live on the earth and to enjoy community-produced advantages of location, is definitely not consistent with this system. Nor is the interference with effective production, which comes from the speculative holding of land out of use, consistent with this system.

Pretended friends of the system of free enterprise may urge heavy taxes on the goods men buy, on the incomes -- even very small ones -- they earn by hard work, and on capital and the income from capital, in order that taxes on the geologically-produced and community-produced rent of land may be kept low. But no such policy can be urged by anyone who, with sincerity and understanding, seeks to further the development of a system of free enterprise consistent throughout with the ideals on which alone it can be convincingly defended.


IN SUMMARY, perhaps I cannot do better than to quote from the concluding paragraphs of one of the chapters of my Basic Principles of Economics,[5] where it is pointed out that

among persons who insist on a protective tariff which diminishes geo- graphical specialization and so lowers the effective productivity and earning power of labor, and among persons who never dream of questioning a system under which the majority must pay tribute to a minority for permission to live and to work on those parts of the surface of the earth where life is reasonably pleasant and where labor is reasonably productive,-among both of these we can continue to expect an amiable advocacy of interfering laws to accomplish ends which can be effectively accomplished only through an understanding of fundamental economic principles.
br> Suppose that the owner of a first class automobile, by the skillful use of wrench and hammer, twists the pipe leading from the gasoline tank so that only a trickle of gasoline can get to the carburetor. Suppose he then puts his pocket knife through three of the tires, making them completely flat. Next he crashes in one of the front fenders so that it presses against the one tire that still holds air. After that, he pounds the top of the car with a pickax until there is little or no protection against wind or rain. Finally, he runs out the brake fluid and rips out the brake linings. After completing these tasks he begins to complain that the car is not constructed on right principles, that its whole system of operation is fundamentally wrong, that it provides no "security" against either storms or wrecks, and that what is needed is some sort of "planning." What would be said of such a person? Might there not be at least a tiny bit of hesitation in crediting him with superlative intelligence?

Yet how do we -- and those we put into positions of power in government -- proceed in regard to our economic system? We institute recurrent deflations of bank credit (alternating with periods of inflation), that bring about unemployment and business depression. We interfere, by protective tariffs, with geographical specialization. We follow a policy which facilitates the speculative holding of land out of use and so reduces the opportunities for productive labor. Not content with this, we have even given owners of agricultural land special benefit payments at the general expense, to keep out of use some of the land they would otherwise have used, thus further curtailing the opportunities for productive activity, and have thus curtailed these opportunities at the very time that business depression was greatly reducing opportunities in the cities. We pass laws at the instigation of kind-hearted persons who have no real comprehension of the necessary relation of wages to productive contribution, which prohibit the employment of workers at wages below a fixed minimum. And . . . we adopt a tax policy that unnecessarily penalizes labor and industry, efficiency and thrift.

But when confronted with the evil consequences of these policies, we say-or, rather, some of us say -- that the difficulty is not in ill-advised government interference with matters that government might better leave alone, and that it is not in the failure of government to perform adequately and well such proper governmental functions as control of the monetary system and stabilization of the price level and the purchasing power of money. On the contrary we say -- that is, some of us say -- that what is needed is still more government interference, more regimentation, more government participation in productive industry, and more "planning."

In view of the number and, apparently, the growing influence of those who take such an attitude, it may easily come about that the evils in our economic life which we suffer just because of unwise government inter- ferences, will bring from a confused and half-convinced electorate a demand for even more of such interferences. And who can be certain that the ultimate result will not be a gradual replacement of the system of free industry by a completely regimented industry under the direction of an all-controlling State.

  1. Lucas Brothers, Columbia, Mo., 1942, pp. 171-172.
  2. The reader will recognize that the present writer has introduced italics.
  3. See U. S. Department of Agriculture, Agricultural Statistics, 1939, p. 414.
  4. Save for restrictions on obviously injurious drugs, the tools of crime, etc.
  5. Op. cit., chapter XIV, pp. 418-9.