XVIII. The Influence of the Division of Labor on the Institutions of Capitalism I

A. Private Ownership of the Means of Production

1. The prevailing view of private property, including private ownership of the means of production, as serving only the interests of the owners.

a. The alleged need for redistribution or socialism.

b. The assumption that the advocacy of capitalism implies that one is a capitalist.

c. The media's treatment of voting patterns.

d. The belief that fighting communism requires creating capitalists.

2. Prevailing view ignores the division of labor and the fact that under capitalism privately owned means of production serve the market, and thus provide a general benefit.

a. The benefit of the buyers of products served by the means of production—if you can buy the products, you don't have to own the means of production to benefit from them.

The buyers' control over production in contrast with the powerlessness of the consumers under socialism—Gorbachev and the people's shoes, the lack of stores in Moscow's suburbs.

b. The benefit of the wage earners from the demand for labor.

3. The increasing general benefit from private capital.

a. Profit and loss incentives and the freedom of competition and individual initiative; the chances for new ideas being tried.

b. Gains to non-owners greater, the more the property rights of capitalists respected: stronger incentives; higher demand for labor and capital goods relative to consumption; more efficient production of capital goods—all result in capital accumulation and rising productivity of labor and real wages.

4. The special benefits of private ownership of the means of production to the owners: not profits or interest, but limited personal consumption—probably less than ten percent of the national income—and the psychological benefit of the potential of personal consumption.

5. The absurdity of “redistributionism.”

a. Already have the benefit of almost all the capitalists' wealth without redistribution—the wealth is in means of production; and the benefit steadily growing

b. An open demand for capital decumulation and impoverishment.

c. If not such a demand, then a demand for at most a one-time, non-repeatable transfer of about ten percent of the national income; capitalism gives the equivalent over and over again every few years, through economic progress.

6. Consequences of redistributionism:

a. Can't achieve even the one shot transfer—the destruction of incentives to maintain and manage capital; collapse into the chaos of socialism.

b. The lesser case of isolated nationalized industries: the destruction of profit and loss incentives and the freedom of competition and individual initiative—the Post Office case; nationalization and the destruction of the special benefits of ownership: the inability to sell one's “shares”; instead of dividends to consume, taxes to cover losses brought on by the nature of government ownership—no profit and loss incentive, uncontrolled costs, run up costs in vote-buying employment and contracts.

7. Conclusion: the institution of private ownership of the means of production in a division of labor, capitalist society serves everyone—non-owners as well as owners; the real self-interests of everyone lie with capitalism, not just the interests of the capitalists; better to be a non-owner under capitalism than an equal owner under socialism.

B. Private Property Continued: the Special Case of Inheritance

1. The prevailing view: only the heirs gain; the non-heirs gain by a policy of confiscation and redistribution.

2. Fact: the institution of inheritance promotes capital accumulation, from which all gain, non-heirs as well as heirs.

3. Confiscatory inheritance taxes destroy the incentive to accumulate capital insofar as the motive of accumulation is to leave wealth to heirs; the collection of inheritance taxes diverts capital into consumption: if estates did not have to be sold to pay taxes, the buyers would have used their funds to purchase capital goods that would have existed in addition to the estates; with the inheritance taxes, their funds are diverted to the purchase of existing capital goods, and from there to the Treasury.

C. Private Property Continued: the Taxation of Profits, Interest, and Capital

1. As far as the taxes come out of capital or additions to capital, they reduce or hold down the demand for labor and capital goods—cause lower wages relative to the demand for consumers' goods and lower productivity of labor.

2. Also retard innovation—reduce incentive and means for implementing new ideas; especially destructive for new firms, which are prevented from growing large.

3. These the effects in whole or part not just of inheritance taxes, but of corporate income tax, progressive personal income tax, capital gains tax, social security taxes, and government deficits. Need to reduce or abolish these taxes and the deficits to restore economic progress; need to cut government spending.

4. Self-interest of everyone lies with ability of business to save and invest and innovate: interests of non-owners hurt by whatever keeps down the demand for labor and supply of products.

D. Private Ownership of Land

1. Ricardo's doctrine on land rent, and Georgism: land rent, population growth, diminishing returns, and subsistence; the “unearned gains of the landowners.”

2. Seeming application of the doctrine in the period l250-l750.

3. The real problem: too slow progress caused by the lack of private property and property rights in land—the common lands, feudal restrictions on selling and alienating land, the impossibility of firing unnecessary agricultural workers under serfdom.

4. Private property in land provides the incentive basis for rapid enough progress to more than offset the operation of the law of diminishing returns and the need for inferior lands; it thus works to hold down and actually reduce land rent as a share of national income.

a. Historical confirmation: the decline in the economic significance of land rent coincides with the enclosure movement in England, the privatization of North America, and the establishment of property rights on the European continent.

b. Further confirmation: the case of oil today.

5. Conservationist criticisms of private property in land: deforestation, the near extermination of the buffalo. Rebuttal:

a. Deforestation because of lack of private property rights—the land didn't belong to the logging companies, thus they had no incentive to replant; if it did, they would have.

b. The buffalo not raised on ranches because of the competition of cattle—the price of buffalo meat limited by the price of beef; the price of beef too low to enable buffalo ranching to be profitable. A waste to use labor and capital to raise buffalo when it's better employed raising cattle.

E. Private Property and Political Sovereignty

1. Mistaken view on the need for extensions of sovereignty; what is really needed is free trade and respect for the property rights of foreigners; then the whole world gains all that can be gained from the territory of each country; extensions of sovereignty made unnecessary; implications for world peace.

2. The general interest in free government everywhere—the historic role of the British Empire.

3. The exportation of natural resources not an exploitation but a source of benefit to the countries in which found: higher demand for local labor, the import of goods otherwise impossible to obtain.

4. How the backward countries could be rapidly developed and how their policies prevent it: property rights vs. confiscations and restrictions on dividend remissions.