The System of Free Enterprise and Its Caricature
Harry Gunnison Brown
[Reprinted from the American Journal of Economics
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, 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
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
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
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. 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
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
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
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. (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, 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
- Lucas Brothers, Columbia, Mo., 1942, pp. 171-172.
- The reader will recognize that the present writer has
- See U. S. Department of Agriculture, Agricultural Statistics,
1939, p. 414.
- Save for restrictions on obviously injurious drugs, the tools
of crime, etc.
- Op. cit., chapter XIV, pp. 418-9.