Review of the Book

How Capitalism Saved America
by Thomas J. DiLorenzo

Edward J. Dodson

[This review was added to the School of Cooperative Individualism online library with the title, "A Libertarian Historian's Analysis Ignores 'the Land Question'," 2004]

ABOUT THE AUTHOR

Thomas J. DiLorenzo is a professor of economics in the Sellinger School of Business and Management at Loyola College in Maryland and a member of the senior faculty of the Mises Institute in Auburn, Alabama.

Thomas J. DiLorenzo begins his recent book, How Capitalism Saved America, with a central assertion: "Free-market capitalism, based on private property and peaceful exchange, is the source of civilization and human progress." A few sentences later he adds a qualifier - that exchange must be "voluntary." Readers who hold that nature is not and ought not to be treated as "private property" will find his overall analysis wanting.

One objective of the book is to respond to anti-capitalist myths, which the author states have been spread by "an entire class of intellectuals … and others." Over time, the broad acceptance of these myths has been to rely increasingly on government to intervene in economic affairs. DiLorenzo describes the results:

"… the more regulations, controls, taxes, government-run industries, protectionism, and other forms of interventionism that exist, the poorer a country will be. Big government invariably causes higher unemployment, higher prices, shortages of goods and services, and myriad other problems that can be eliminated only by more, not less, voluntary exchange on the free market - that is, by capitalism."[p.4]

From here, the author takes us on a journey through history to explore the evolution of the American System and examine what has gone right or wrong, and why.

DiLorenzo looks back to Adam Smith, who, he tells us, identified the "the most important elements of capitalism - the division of labor, social cooperation, and free exchange." He might have added that it is in the socio-political arrangements that promote or thwart social cooperation that history is most clearly explained. It is in this arena the author chooses to explore only the dynamics that support his assertions and conclusions. Almost immediately, he ventures away from the reality of the American System by asserting "one can only earn money by providing one's fellow man with a good or service…"[p.11] The major exception to this condition is, of course, the claim on goods or services by the landed, who command such a claim by virtue of their control over nature, such control orchestrated by the force of law or merely by force. His statement is true, therefore, only under circumstances where the system of law secures full liberty for every individual. The problem is that no such system exists. The failure of government in the United States has been the prolonged failure to purge the American System of entrenched privilege and of economic license as the basis for individual wealth accumulation.

DiLorenzo has accepted the libertarian construct of capitalism, from which he examines the historical record. His failure to understand the fundamental structure of the American System leads him to make another gross assertion; namely, that "most exceptionally wealthy people amassed their fortunes precisely because they provided valued products to millions of people all around the globe."[p.12] What good or service was provided by those who profited by exercising monopolistic control over the nation's land and natural resource-laden lands?

He examines the careers of Bill Gates, John D. Rockefeller and other successful entrepreneurs to support his case. To be fair, these individuals built huge productive enterprises and delivered greatly needed and desired goods to the market. But, full disclosure requires acknowledgement of the laws granting them economic license to satisfy their rent-seeking strategies as well. DiLorenzo might have grasped this distinction had he looked at the career of John Jacob Astor and other great land speculators.

The question not addressed by DiLorenzo is whether less government (i.e., what so-called most libertarians and conservatives call for under the chant of laissez-faire) would have resulted in improved conditions for the millions people who came to the United States as immigrants after the close of the frontier and after the availability of free land disappeared. A full understanding of how markets operate would direct the author to condition his forecast on implementing a solution to the land question. Unfortunately, he is oblivious to the fact that there exists a deep moral problem - with social and economic consequences - associated with law that allows the value of nature to be taken as private property.

DiLorenzo rightly champions "private ownership of the means of production" but acknowledges no distinction between what we produce with our labor and capital goods and nature as the source of what we produce. His references to the wisdom of Locke and Smith are, as is too often the case by libertarians, very selective. Both Locke and Smith devoted extensive parts of their works examining the moral basis for distinguishing between private versus societal property. The case DiLorenzo attempts to make is two-fold: first, government should own little or nothing; and, second, government should impose no restrictions on those who do own property. Market forces and self-interest will dictate behavior:

"Property owners who do not take good care of their property bear the full cost of their actions when their property - that is, their wealth - depreciates in value. The opposite is also true: those who take care of and improve their property reap the rewards when their property value goes up. This is why private homes are so much better maintained than government housing projects, for example, or why private lakes and streams are carefully maintained while government-owned ones are often overfished and overused, or why private forests that are harvested are often replanted with trees that mature in twenty-five years while public forests are not."

The failure of government to serve as an effective steward of the public domain is a fact. Government decisions are too often motivated by political expediency and the influence of vested interests with strong political connections. Mismanagement and corruption add to the negative effects. However, the solution DiLorenzo seems to favor (i.e., complete privatization) suggests that nature's only value is economic. "Whenever the present value of using a resource in the future is larger than the value of current use, that resource will be preserved," he writes; but only when private ownership exists. On the other hand, "political resource allocation under democracy tends toward immediate gratification." If DiLorenzo believes that our system of law is the result of effective participatory governance rather than corruption and entrenched privilege, I suggest to him that he seriously misunderstands our history. What is needed is more effective democracy (i.e., greater citizen participation in decision-making, in implementation of policies and in oversight and accountability of government officials and employees).

Another issue not addressed in this book is our responsibility to preserve the diversity of life by limiting the human footprint by deliberate and thoughtful steps. These are by their nature global issues that require enforcement of rules agreed to by the governments of sovereign nations. Government must have the power to ensure its own citizens act in accordance with these multi-national agreements.

Within the United States, our laws must come to terms with the moral distinctions between private and public property, as well as establishing reasonable restrictions on the use of such property. These are values shared by many citizens but which are consistently undermined by individuals committed to profit maximizing - or the theft of public goods for private benefit -- by whatever means can be employed, without regard to ethical considerations.

We have seen over the last half century that location decisions by corporate executives consistently reveal a detachment from the communities in which they operate. In fact, the very concept of community is suffering because fewer and fewer businesses are locally owned and operated. Adam Smith recognized that high wages created rather than reduced business opportunities. Yet, today's corporate executives are so focused on the short-term that they repeatedly relocate production facilities to countries where labor costs are insignificant, worker benefits are nonexistent and where corrupt governments impose few, if any, restrictions on pollution or disposal of toxic wastes. When a few companies do this, they may increase profits for a time. When a large number of companies try this, the very purchasing power they depend on for sales disappears. Moreover, a growing body of scientific research is telling us that the environmental costs of shipping goods around the globe will soon have to be paid. The air and the seas cannot indefinitely continue to absorb our toxic discharges. Should we, therefore, privatize the air and the seas and allow private interests to charge for their use?

The rational limits of government, DiLorenzo argues, should be "spending to protect property rights, enforce the law, and protect citizens from foreign aggressors." He argues against "taxation, price controls, regulation in general, and government control of production." Nothing to argue with here. Taxation of true private property is confiscation. (Issuance of paper currency by the central bank in exchange for government debt instruments is also confiscation - of purchasing power from holders of existing currency; but, that is a subject DiLorenzo does not cover in this book.) The real problem with his analysis is that DiLorenzo makes no distinction between income flows that are earned or unearned. Widespread prosperity occurs when equality of opportunity is broadly secured; and, this is a function of just socio-political arrangements (i.e., politics dictates economic outcomes).

DiLorenzo recognizes that societies differ by degree in the extent of "economic freedom" permitted. There are no examples of a society with the desired (and just) level of governmental intervention. The greater the track record for upward mobility, however, the greater the degree of economic freedom observed to exist. In this regard, the American System - with all its flaws -- sets the standard.

Of those who do not appreciate the virtues of capitalist organization (i.e., as he defines such organization), DiLorenzo agrees with Friedrich Hayek conclusion that they just do not understand economics. An important reason for this lack of understanding is the disposition of intellectuals to socialism as the most equitable societal structure. The socialist's faith in government - in centralized planning - is not lessened by failures of government policies and programs to achieve forecasted results. Yet DiLorenzo offers only human nature and the differences in individual potential as the reason for "material inequality," pointing out that such inequality occurs in every society, regardless of its socio-political structure. Such inequality is least, however, where there exists a "capitalist economy" to encourage and reward individual initiative and creativity. The problem is that this analogy is incomplete. Not since the closing of the frontier has the American System produced a full employment economy (unless one is willing to accept military service and weapons manufactures during wartime as integral to the market economy).

With regard to the U.S. economy, DiLorenzo presents the case for the dismantling of almost all government interventions. "These measures are always instituted for political reasons," he writes, "and almost inevitably create even greater problems than the ones they were supposed to fix."[p.46] There is, of course, an almost endless list of examples proving his point. Where government is concerned, the most powerful law at work is the law of unforeseen consequences. Max Hirsch made much the same arguments over a century ago in his book Democracy vs. Socialism. The function of government as operated has never been to create what Henry George called for as "a fair field with no favors." Even when the size of government was small, new laws more often than not created privilege and advantage. As time has gone on, liberalism and a desire on the part of our elected leaders to leave behind a favorable legacy in the history books has created the myth of public policy on behalf of equality of opportunity. Yet, the form that law and regulation have taken has been to protect entrenched privilege and reward "rent-seeking" behavior. This is the version of the "free market" championed by self-styled conservatives today.

DiLorenzo attacks minimum wage laws because they fail to recognize the limited contribution to a business made by unskilled (often teenage) workers who tend to fill these jobs. He also puts the majority of environmental activists into a block who "try to use politics to block the production of goods and services." These two seemingly very different facets of our social organization involve not just economic practices but important moral considerations. If one accepts that DiLorenzo's version of capitalism will result in a full employment society (i.e., more jobs looking for people than people looking for jobs), then employers will be forced to compete with one another for workers by offering higher wages and good benefits. That is not the case today, resulting in the fact that many workers are forced by circumstances to accept a wage that does not allow them to live a decent, human existence. Millions of low-income workers must work 60 to 80 hours a week and still are not able to meet the cost of basic living expenses.

Where the environment is concerned, neither DiLorenzo nor very many environmentalists have bothered to factor in "rent theory" to the equation. Every parcel of land has some potential rental value in the market. This rental value is affected by whatever restrictions on use are imposed by the community. The fewer the restrictions, the greater will be the rental value. While the private owner of the land might exercise restraint in order to preserve the quality of the land, there is little incentive to install production methods that eliminate waste, pollutants or toxins if these can be dumped into the commons. DiLorenzo suggests the solution is to enact "sound liability laws" to seek payment for damages. The problem with such remedies is that they come to late for individuals whose health is destroyed and may not come at all because of the other laws (e.g., bankruptcy protection). The list of business owners is long who have dumped toxic chemicals in the air, into streams and rivers or even on their own property, then eventually abandoned the entire site when profits fell or markets contracted - leaving remediation to the community. Effective regulation with periodic inspections and the imposition of penalties for noncompliance are needed. If the community collected the rental value of land via taxation, at least there would be funds to cover the costs of such regulation and for remediation when preventive measures failed. DiLorenzo correctly points to state-socialist societies as having the worst environmental record of all. "Under communism, these sources belonged to the state; in other words, they belonged to no one," he writes. Under democracy, however, citizen groups exert direct and indirect pressure on public officials to fulfill their assigned responsibilities. Public hearings, required disclosures by agencies of their decisions and follow-thru, as well as the establishment of due process under law all contribute to better (but far from optimal) stewardship of the environment. The worst offenses have historically occurred where secrecy and national security prevail - with the military - and with the public utilities. For markets to operate as DiLorenzo suggests, not only "sound liability law" but the community collection of rent is required in conjunction with well-managed oversight.

Without realizing it, DiLorenzo stumbles across an important principle as he describes the transition in colonial Virginia that freed workers from indentured obligations to the Virginia Company and gave them ownership of small plots of land to farm. Although I have not examined other sources to confirm additional details, common sense tells us that the colonists had to have access to tools, to seed and to domesticated farm animals in order to make their farmsteads successful. Either they obtained these necessaries directly from the Virginia Company or were provided with credit by the British government. In return for the land grants (and whatever else was provided), the colonists were required "to work no more than one month per year … to pay the colony a lump-sum tax…"[p.55] Thus, their ownership of landed property was conditional upon a payment to the community treasury out of total production. Although not determined by market forces, this payment was essentially the "rent" that rightfully belonged to the community in return for the privilege extended. So long as land of equal potential productivity remained open to settlement, the new structure of private landholdings established a high degree of equality of opportunity. Yet, as we know, in but a few generations access to land along the Atlantic coast was no longer open to all newcomers. The communities became dominated by landed interests who saw to it that sources other than landed property were looked to for funding of public goods and services.

British Mercantilism eventually imposed heavy burdens on the descendants of the early colonial families and the flood of new colonists arriving each year. Yet, historian Charles Andrews described the long period from settlement of Jamestown and Plymouth until the years immediately following the end of the Seven Years' War (or, French and Indian War) as a period of "salutary neglect." The landed class of Britain recoiled at having to absorb the full cost of defending colonial property and interests during the war. This resulted in the passage of a series of revenue acts, objected to by the propertied colonials. At first, the colonials responded by resorting to widespread avoidance, smuggling and the boycotting of British goods. Eventually, unified political action was thought necessary, and the first "American continental congress" met to discuss how to best put their grievances before the King. When this proved to be ineffective, the colonials drifted from protest to armed resistance.

And so, we moved to the establishment of republican governance and the adoption of a written Constitution, a document acknowledged to incorporate "strong property rights protections." DiLorenzo makes passing reference to the analysis by Charles Beard, who suggested in his book, An Economic Interpretation of the Constitution, that the form of government structured by the framers had as much to do with vested interest as with philosophical principles. DiLorenzo concludes that even

"[i]f the founders were merely acting in their own vested interests in protecting property rights in the Constitution, then that should be considered a blessing to all future generations of Americans."[p.72]

Again, what is ignored in the debate is any distinction between land and what people produce from land using their labor and capital goods. To take from producers what is the rightful product of their effort is confiscation of wealth - whether by government taxation or by private appropriation. Even as early as the late eighteenth century, the stage was set for a never-ending pattern of private appropriation. Only when circumstances became so blatantly intolerable - when the nation's older cities were disintegrating under the weight of industrial pollution and grinding poverty - did those in government reluctantly begin to confiscate an ever-increasing amount of wealth from its producers. The part of the story ignored by DiLorenzo was succinctly captured by one of the great philosophers of individualism, Albert Jay Nock:

"With America opening as the land of unprecedented monopolistic opportunity, men would of course be impelled to get out of the producing class and into the exploiting class as quickly as possible. It was not hard to foresee a time when, for instance, the greatest producing industry of the country, agriculture, would be exploited to the point of bankruptcy as an industry, leaving the rise in land-values as the only source of profit to the agriculturalists."*

Much of this was already in evidence prior to the Seven Years' War. Those who controlled large plantations along the Atlantic coast called for restrictions against opening of the interior to maintain their control over the supply of labor and, therefore, over wages that had to be paid. When these measures failed, the landed resorted to the introduction of Africans to work the land as slaves, allowing the continuation of their leisurely existence as they confiscated the products of a captured labor force.

With an enormous continent to populate, govern and manage, what emerged during the early nineteenth century was a debate over whether government ought to take responsibility for making "internal improvements." And, one of the men most responsible for the American System was Henry Clay, "the great proponent of subsidies to canal, road, and railroad building corporations."[p.81] All of these subsidies made the interior more accessible to population migration and created a demand for land yielding enormous profits to those who were granted title to so much of the public domain as part of their subsidy deals. DiLorenzo argues that none of this was necessary to induce private investment in roadways or canals or railroads. For one thing, "[l]andowners would see their property values rise…"[85] - an acknowledgment that these increases in land values resulted not from what individual landowners did but from aggregate investment (mostly by others).

Absent the enormous gifts provided by government, development of the continent would have certainly proceeded in a more orderly manner, allowing time for citizens to reach consensus over management of the public domain. Economic theory supports the expectation that public appropriation of rent would have been a great asset as the nation grew in population. Fewer people living in the East would have felt compelled to move inland or to the West Coast in search of opportunity or improved quality of life. Producers rather than land speculators and the old "landed" families would have been rewarded financially. The history of the American continent in the nineteenth and early twentieth century would have been much different.

DiLorenzo tells us that another myth about capitalism is that workers have been exploited by employers. In most cases, he states, working conditions in the factories "were a significant improvement over the conditions the working class had previously endured."[p.94] For the millions of landless and propertyless peasants and unemployed poor reaching the newer American cities from the Old World, this was undoubtedly the case. Yet, when they arrived in New York, or Boston, or Philadelphia, their lives were often as wretched or worse than before. The American System has not succeeded in breaking with its past; many immigrant workers must endure severe working and living conditions at the bottom of the economic ladder. DiLorenzo believes government interference has thwarted the full potential of the market system to generate demand for more workers than are available. Had the Federal Constitution - and the state constitutions -- stipulated that government expenditures must be funded from revenue obtained by the taxation of land values (i.e., by annual rental values as determined in the market) and made unconstitutional the taxation of incomes gained from the production and sale of goods or services performed, or of the market value of assets such as personal homes, other buildings, equipment, etc. - then the American System would be a more complete form of capitalism. And, DiLorenzo's vision would materialize. As it stands, a more descriptive term than capitalism for the system that exists today is, I suggest, agrarian and industrial landlordism.

DiLorenzo does not even sense there is still a "land question" to be addressed. Yet, there is overwhelming evidence that we have failed to act to solve the land question. The solution requires a well-enforced change in how government raises its revenue; and, this requires changes in existing law. The full potential of capitalism cannot be realized until this is achieved. Even though over two-thirds of all households in the United States live in homes they own (subject, of course, to varying degrees of mortgage debt), most "land value" is held by a relatively small percentage of the population - between 3-5 percent. Federal, state and local governments control roughly half of the nation's land area but only a fraction of its land value. Another practice of government that creates entrenched privilege - one not mentioned by DiLorenzo -- is the leasing of public lands to private interests at fees far below what would be yielded under competitive bidding conditions. Access to the nation's remaining mineral-laden lands, its forests and grazing lands has been practically given away for more than a century.

Of particular interest is the book's chapter on the cause of the "Great Depression" of the 1930s. As the chapter began, I thought to myself, would DiLorenzo discuss the extensive credit-fueled speculation in Midwestern farmland or in Florida? He points to the social engineering, interventionist mentality of Herbert Hoover as important causes for the downturn. Hoover's support for labor and the use of Federal funds on public works projects prevented markets from adjusting to falling profits. The government needed additional revenue to pay for these projects, which "took money out of the private sector, extracted through taxes."[p.168] Nonetheless, "[b]y 1931 Hoover's uncontrolled government spending had created a $2 billion deficit, which induced him to sign the calamitous Revenue Act of 1932, one of the largest tax increases in American history up to that point."[p.168] All across the board, DiLorenzo points out, Hoover either failed to do what was needed, or prevented markets from adjusting to the changing reality: agricultural price supports were followed by the Smoot-Hawley tariff and the contraction of international trade.

DiLorenzo correctly states that the Great Depression "was caused by government, not capitalism."[p.177] However, he accepts the conclusion by von Mises and the Austrians that inflationary monetary policy was a first cause, ignoring the role played by dysfunctional land markets and the increasing share of production claimed by landed interests, the acceleration of such claims fueled by cheap credit. In his discussion of the Roosevelt years, DiLorenzo correctly challenges Roosevelt's neo-Keynesian attempts at spending the country back into prosperity, pointing out that "despite the fact that the federal budget more than doubled in eight years, the Depression did not end and, indeed, unemployment was higher in 1938 than it was in 1931."[p.199] However, so much had gone wrong leading up to 1933 that none of the measures initiated by Roosevelt ever had a chance. Among the handful of economists who actually understood what needed to be done to stabilize and correct the operation of land markets - so that "price" would actually clear these markets in the same way it cleared markets for labor, capital and credit - none had any influence in the halls of the Congress or the Administration.

In the end, what is most amazing is that we have prospered to the extent we have. DiLorenzo covers half but only half of the reasons why we have not prospered more. He brings together in a readable format much information that effectively challenges the American System. Unfortunately, he joins a long list of critics who hold to a very selective study of history and the writings of the great political economists of the last three centuries.


* Albert Jay Nock. Jefferson. 1926, p.274.