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A Treatise on Economics

George Reisman

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By George Reisman**


1. Economics, the Division of Labor, and the Survival of Material Civilization

Economics has been defined in a variety of ways. In the nineteenth century it was typically defined as the science of wealth or of exchangeable wealth. In the twentieth century, it has typically been defined as the science that studies the allocation of scarce means among competing ends.1

I define economics as the science that studies the production of wealth under a system of division of labor, that is, under a system in which the individual lives by producing, or helping to produce, just one thing or at most a very few things, and is supplied by the labor of others for the far greater part of his needs. The justification of this definition will become increasingly clear as the contents of this book unfold.2

The importance of economics derives from the specific importance of wealth—of material goods—to human life and well-being. The role of wealth in human life is a subject that will be examined in Chapter 2 of this book, but provisionally its importance can be accepted on a common-sense basis. Obviously, human life depends on food, clothing, and shelter. Moreover, experience shows that there is no limit to the amount of wealth that practically all civilized men and women desire, and that the greatest part of their waking hours is actually spent in efforts to acquire it—namely, in efforts to earn a living.

Yet the importance of wealth, by itself, is not sufficient to establish the importance of economics. Robinson Crusoe on a desert island would need wealth, and his ability to produce it would be helped if he somehow managed to salvage from his ship books on various techniques of production. But it would not be helped by books on economics. All that books on economics could do for Crusoe would be to describe abstractly the essential nature of the activities he carries on without any knowledge of economics, and, beyond that, merely to provide the possible intellectual stimulation he might feel as the result of increasing his knowledge of the society from which he was cut off. Something more than the importance of wealth is required to establish the importance of economics.

As Chapter 4 of this book will show, the production of wealth vitally depends on the division of labor. The division of labor is an essential characteristic of every advanced economic system. It underlies practically all of the gains we ascribe to technological progress and the use of improved tools and machinery; its existence is indispensable for a high and rising productivity of labor, that is, output per unit of labor. By the same token, its absence is a leading characteristic of every backward economic system. It is the division of labor which introduces a degree of complexity into economic life that makes necessary the existence of a special science of economics. For the division of labor entails economic phenomena existing on a scale in space and time that makes it impossible to comprehend them by means of personal observation and experience alone. Economic life under a system of division of labor can be comprehended only by means of an organized body of knowledge that proceeds by deductive reasoning from elementary principles. This, of course, is the work of the science of economics. The division of labor is thus the essential fact that necessitates the existence of the subject of economics.3

Despite its vital importance, the division of labor, as a country's dominant form of productive organization—that is, a division-of-labor society—is a relatively recent phenomenon in history. It goes back no further than eighteenth-century Britain. Even today it is limited to little more than the United States, the former British dominions, the countries of Western Europe, and Japan. The dominant form of productive organization in most of the world—in the vast interiors of Asia, Africa, and most of Latin America—and everywhere for most of history, has been the largely self-sufficient production of farm families and, before that, of tribes of nomads or hunters.

What makes the science of economics necessary and important is the fact that while human life and well-being depend on the production of wealth, and the production of wealth depends on the division of labor, the division of labor does not exist or function automatically. Its functioning crucially depends on the laws and institutions countries adopt. A country can adopt laws and institutions that make it possible for the division of labor to grow and flourish, as the United States did in the late eighteenth century. Or it can adopt laws and institutions that prevent the division of labor from growing and flourishing, as is the case in most of the world today, and as was the case everywhere for most of history. Indeed, a country can adopt laws and institutions that cause the division of labor to decline and practically cease to exist. The leading historical example of this occurred under the Roman Empire in the third and fourth centuries of the Christian era. The result was that the relatively advanced economic system of the ancient world, which had achieved a significant degree of division of labor, was replaced by feudalism, an economic system characterized by the self-sufficiency of small territories.4

In order for a country to act intelligently in adopting laws and institutions that bear upon economic life, it is clearly necessary that its citizens understand the principles that govern the development and functioning of the division of labor, that is, understand the principles of economics. If they do not, then it is only a question of time before that country will adopt more and more destructive laws and institutions, ultimately stopping all further economic progress and causing actual economic decline, with all that that implies about the conditions of human life.

In the absence of a widespread, serious understanding of the principles of economics, the citizens of an advanced, division-of-labor society, such as our own, are in a position analogous to that of a crowd wandering among banks of computers or other highly complex machinery, with no understanding of the functioning or maintenance or safety requirements of the equipment, and randomly pushing buttons and pulling levers. This is no exaggeration. In the absence of a knowledge of economics, our contemporaries feel perfectly free to enact measures such as currency depreciation and price controls. They feel free casually to experiment with the destruction of such fundamental economic institutions as the freedom of contract, inheritance, and private ownership of the means of production itself. In the absence of a knowledge of economics, our civilization is perfectly capable of destroying itself, and, in the view of some observers, is actually in the process of doing so.

Thus, the importance of economics consists in the fact that ultimately our entire modern material civilization depends on its being understood. What rests on modern material civilization is not only the well-being but also the very lives of the great majority of people now living. In the absence of the extensive division of labor we now possess, the production of modern medicines and vaccines, the provision of modern sanitation and hygiene, and the production even of adequate food supplies for our present numbers, would simply be impossible. The territory of the continental United States, for example, counting the deserts, mountains, rivers, and lakes, amounts to less than nine acres per person with its present population—not enough to enable that population to survive as primitive farmers. In Western Europe and Japan, the problem of overpopulation would, of course, be far more severe. Needless to say, the present vast populations of Asia, Africa, and Latin America would be unable to survive in the absence of Western food and medical supplies.



2. Further Major Applications of Economics

Solving Politico-Economic Problems

Apart from the very survival of a division-of-labor society, and all that depends on it, the most important application of economics is to provide the knowledge necessary for the adoption of government policies conducive to the smooth and efficient functioning of such a society.5 On the basis of the knowledge it provides, economics offers logically demonstrable solutions for politico-economic problems. For example, it explains very clearly how to stop such major present-day problems as inflation, shortages, depressions, and mass unemployment, and how to turn capital decumulation into capital accumulation and a declining productivity of labor into a rising productivity of labor. In addition, economics can very clearly show how to achieve economic progress all across the world, and is potentially capable of playing an enormous role in eliminating the intellectual and economic causes both of domestic strife and of international conflict and war. As I will show, the essential nature of the policies economics demonstrates to be necessary to solve all such problems is respect for property rights and economic freedom.

Understanding History

Because it explains what promotes and what impairs the functioning of the division of labor, economics is an essential tool for understanding the world's history—the broad sweep of its periods of progress and its periods of decline—and the journalistic events of any given time. Its applications include a grasp of the causes of the decline of ancient civilization and of the rise of the modern, industrial world, both of which can be understood in terms of the rise or fall of the division of labor.

Economics brings to the understanding of history and journalism a foundation of scientific knowledge which can serve historians and journalists in much the same way as a knowledge of natural science and mathematics. Namely, it can give to historians and journalists a knowledge of what is and is not possible, and therefore a knowledge of what can and cannot qualify as an explanation of economic phenomena. For example, a knowledge of modern natural science precludes any historical or journalistic explanation of events based on Ptolemaic astronomy or the phlogiston theory of chemistry, not to mention beliefs in such notions as witchcraft, astrology, or any form of supernaturalism. In exactly the same way, it will be shown in this book that a knowledge of economics precludes any historical or journalistic explanation of events based on such doctrines as the Marxian theory of exploitation and class warfare, or on the belief that machinery causes unemployment or that depressions are caused by "overproduction."6

Economics can also serve historians and journalists as a guide to what further facts to look for in the explanation of economic events. For example, whenever shortages exist, it tells them to look for government controls limiting the rise in prices; whenever unemployment exists, it tells them to look for government interference limiting the fall in money wage rates; and whenever a depression exists, it tells them to look for a preceding expansion of money and credit.7

Implications for Ethics and Personal Understanding

Economics has powerful implications for ethics. It demonstrates exhaustively that in a division-of-labor, capitalist society, one man's gain is not another man's loss, that, indeed, it is actually other men's gain—especially in the case of the building of great fortunes. In sum, economics demonstrates that the rational self-interests of all men are harmonious. In so doing, economics raises a leading voice against the traditional ethics of altruism and self-sacrifice. It presents society—a division-of-labor, capitalist society—not as an entity over and above the individual, to which he must sacrifice his interests, but as an indispensable means within which the individual can fulfill the ultimate ends of his own personal life and happiness.8

A knowledge of economics is indispensable for anyone who seeks to understand his own place in the modern world and that of others. It is a powerful antidote to unfounded feelings of being the victim or perpetrator of "exploitation" and to all feelings of "alienation" based on the belief that the economic world is immoral, purposeless, or chaotic. Such unfounded feelings rest on an ignorance of economics.

The feelings pertaining to alleged exploitation rest on ignorance of the productive role of various economic functions, such as those of businessman and capitalist, retailing and wholesaling, and advertising and speculation, and on the underlying conviction that essentially only manual labor is productive and is therefore the only legitimate form of economic activity.9 Feelings pertaining to the alleged purposelessness of much of economic activity rest on ignorance of the role of wealth in human life beyond the immediate necessities of food, clothing, and shelter. This ignorance leads to the conviction that economic activity beyond the provision of these necessities serves no legitimate purpose.10 Feelings pertaining to the alleged chaos of economic activity rest on ignorance of the knowledge economics provides of the benevolent role of such institutions as the division of labor, private ownership of the means of production, exchange and money, economic competition, and the price system.

In opposition to feelings of alienation, economic science makes the economic world fully intelligible. It explains the foundations of the enormous economic progress which has taken place in the "Western" world over the last two centuries. (This includes the rapid economic progress that has been made in recent decades by several countries in the Far East, which have largely become "Westernized.") And in providing demonstrable solutions for all of the world's major economic problems, it points the way for intelligent action to make possible radical and progressive improvement in the material conditions of human beings everywhere. As a result, knowledge of the subject cannot help but support the conviction that the fundamental nature of the world is benevolent and thus that there is no rational basis for feelings of fundamental estrangement from the world.11

The above discussion, of course, is totally in opposition to the widely believed claims of Marx and Engels and their followers, such as Erich Fromm, that the economic system of the modern world—capitalism—is the basis of alienation. Indeed, it is consistent with the above discussion that the actual basis of "alienation" resides within the psychological makeup of those who experience the problem. Ignorance of economics reinforces feelings of alienation and allows the alleged deficiencies of the economic system to serve as a convenient rationalization for the existence of the problem.12

Economics and Business

Despite popular beliefs, economics is not a science of quantitative predictions. It does not provide reliable information on such matters as what the price of a common stock or commodity will be in the future, or what the "gross national product" will be in the next year or quarter.13

However, a knowledge of economics does provide an important intellectual framework for making business and personal financial decisions. For example, a businessman who understands economics is in a far better position to appreciate what the demand for his firm's products depends on than a businessman who does not. Similarly, an individual investor who understands economics is in a vastly better position to protect himself from the consequences of such things as inflation or deflation than one who does not.

But the most important application of economics to business and investment is that only a widespread knowledge of economics can assure the continued existence of the very activities of business and investment. These activities are prohibited under socialism. In a socialist society, such as that of the former Soviet Union, which is governed by the belief that profits and interest are incomes derived from "exploitation," individuals who attempt to engage in business or investment activity have been sent to concentration camps or executed. Business activities can endure and flourish only in a society which understands economics and which is therefore capable of appreciating their value. The value of economics to businessmen should be thought of not as teaching them how to make money (which is a talent that they possess to an incalculably greater degree than economists), but as explaining why it is to the self-interest of everyone that businessmen should be free to make money. This is something which businessmen do not know, which is vital to them (and to everyone else), and which economics is uniquely qualified to explain.

Economics and the Defense of Individual Rights

Knowledge of economics is indispensable to the defense of individual rights. The philosophy of individual rights, as set forth in the writings of John Locke and the Declaration of Independence and Constitution of the United States, has been thoroughly undermined as the result of the influence of wrong economic theories, above all, the theories of Karl Marx and the other socialists. The essential conclusion of such theories is that in the economic sphere the exercise of individual rights as understood by Locke and the Founding Fathers of the United States serves merely to enable the capitalists to exploit the workers and consumers, or is otherwise comparably destructive to the interests of the great majority of people. Precisely as a result of the influence of these vicious ideas, culminating in the victory of the New Deal, the Supreme Court of the United States has, since 1937, simply abandoned the defense of economic freedom. Since that time it has allowed Congress and the state legislatures, and even unelected regulatory agencies, to do practically anything they wish in this area, the Constitution and Bill of Rights and all prior American legal precedent notwithstanding.14

A thorough knowledge of economics is essential to understanding why the exercise of individual rights in the economic sphere not only is not harmful to the interests of others, but is in the foremost interest of everyone. It is essential if the American people are ever to reclaim the safeguards to economic freedom provided by their Constitution, or if people anywhere are to be able to establish and maintain systems of government based on meaningful respect for individual rights. Indeed, in demonstrating the harmony of the rational self-interests of all men under freedom, this entire book has no greater or more urgent purpose than that of helping to uphold the philosophy of individual rights.

* * *

The nature and importance of economics imply that study of the subject should be an important part of the general education of every intelligent person. Economics belongs alongside mathematics, natural science, history, philosophy, and the humanities as an integral part of a liberal education. It deserves an especially prominent place in the education of lawyers, businessmen, journalists, historians, the writers of literary works, and university, college, and secondary-school teachers of the humanities and social sciences. These are the groups that play the dominant role in forming people's attitudes concerning legislation and social institutions and whose work can most profit from an understanding of economics.



This book shows that the laws and social institutions necessary to the successful functioning, indeed, to the very existence, of the division of labor are those of capitalism. Capitalism is a social system based on private ownership of the means of production. It is characterized by the pursuit of material self-interest under freedom and it rests on a foundation of the cultural influence of reason. Based on its foundations and essential nature, capitalism is further characterized by saving and capital accumulation, exchange and money, financial self-interest and the profit motive, the freedoms of economic competition and economic inequality, the price system, economic progress, and a harmony of the material self-interests of all the individuals who participate in it.

As succeeding chapters of this book will demonstrate, almost every essential feature of capitalism underlies the division of labor and several of them are profoundly influenced by it in their own operation. When the connections between capitalism and the division of labor have been understood, it will be clear that economics, as the science which studies the production of wealth under a system of division of labor, is actually the science which studies the production of wealth under capitalism. Economics' study of the consequences of government intervention and of socialism will be shown to be merely study of the impairment or outright destruction of capitalism and the division of labor.

1. The Philosophical Foundations of Capitalism and Economic Activity

Economic activity and the development of economic institutions do not take place in a vacuum. They are profoundly influenced by the fundamental philosophical convictions people hold.15 Specifically, the development of capitalist institutions and the elevation of the level of production to the standard it has reached over the last two centuries presuppose the acceptance of a this-worldly, proreason philosophy. Indeed, in their essential development, the institutions of capitalism and the economic progress that results represent the implementation of man's right to life, as that right has been described by Ayn Rand—namely, as the right "to take all the actions required by the nature of a rational being for the support, the furtherance, the fulfillment and the enjoyment of his own life."16 Capitalism is the economic system that develops insofar as people are free to exercise their right to life and choose to exercise it. As will be shown, its institutions represent, in effect, a self-expanded power of human reason to serve human life.17 The growing abundance of goods that results is the material means by which people further, fulfill, and enjoy their lives. The philosophical requirements of capitalism are identical with the philosophical requirements of the recognition and implementation of man's right to life.

It was no accident that the gradual development of capitalist institutions in Western Europe that began in the late Middle Ages paralleled the growing influence of prosecular, proreason trends in philosophy and religion, which had been set in motion by the reintroduction into the Western world of the writings of Aristotle. It is no accident that the greatest era of capitalist development—the last two centuries—has taken place under the ongoing cultural influence of the philosophy of the Enlightenment.

Philosophical convictions pertaining to the reality and primacy of the material world of sensory experience determine the extent to which people are concerned with this world and with improving their lives in it. When, for example, people's lives were dominated by the idea that the material world is superseded by another, higher world, for which their life in this world is merely a test and a preparation, and in which they will spend eternity, they had little motive to devote much thought and energy to material improvement. It was only when the philosophical conviction grew that the senses are valid and that sensory perception is the only legitimate basis of knowledge, that they could turn their full thought and attention to this world. This change was an indispensable precondition of the development of the pursuit of material self-interest as a leading force in people's lives.

The cultural acceptance of the closely related philosophical conviction that the world operates according to definite and knowable principles of cause and effect is equally important to economic development. This conviction, largely absent in the Dark Ages, is the indispensable foundation of science and technology. It tells scientists and inventors that answers exist and can be found, if only they will keep on looking for them. Without this conviction, science and technology could not be pursued. There could be no quest for answers if people were not first convinced that answers can be found.

In addition to the emphasis on this-worldly concerns and the grasp of the principle of cause and effect, the influence of reason shows up in the development of the individual's conceptual ability to give a sense of present reality to his life in decades to come, and in his identification of himself as a self-responsible causal agent with the power to improve his life. This combination of ideas is what produced in people such attitudes as the realization that hard work pays and that they must accept responsibility for their future by means of saving. The same combination of ideas helped to provide the intellectual foundation for the establishment and extension of private property rights as incentives to production and saving. Private property rights rest on the recognition of the principle of causality in the form that those who are to implement the causes must be motivated by being able to benefit from the effects they create. They also rest on a foundation of secularism—of the recognition of the rightness of being concerned with material improvement.

Thus, insofar as production depends on people's desire to improve their material conditions, and on science, technology, hard work, saving, and private property, it fundamentally depends on the influence of a this-worldly, proreason philosophy.

And to the extent that production depends on peace and tranquility, on respect for individual rights, on limited government, economic and political freedom, and even on personal self-esteem, it again fundamentally depends on the influence of a this-worldly, proreason philosophy.

From the dawn of the Renaissance to the end of the nineteenth century, the growing conviction that reason is a reliable tool of knowledge and means of solving problems led to a decline in violence and the frequency of warfare in Western society, as people and governments became increasingly willing to settle disputes by discussion and persuasion, based on logic and facts. This was a necessary precondition of the development of the incentive and the means for the stepped-up capital accumulation required by a modern economic system. For if people are confronted with the chronic threat of losing what they save, and again and again do lose it—whether to local robbers or to marauding invaders—they cannot have either the incentive or the means to accumulate capital.

During the same period of time, as part of the same process, a growing confidence in the reliability and power of human reason led to the elevation of people's view of man, as the being distinguished by the possession of reason. Because he was held to possess incomparably the highest and best means of knowledge, man came to be regarded, on philosophical grounds, as incomparably the highest and best creature in the natural order, capable of action on a grand and magnificent scale, with unlimited potential for improvement. In conjunction with the further philosophical conviction that what actually exist are always individual concretes, not abstractions as such, and thus not collectives or groups of any kind, the elevated view of man meant an elevated view of the individual human being and his individual potential.

In their logically consistent form, these ideas led to a view of the individual as both supremely valuable—as an end in himself—and as fully competent to run his own life. The application, in turn, of this view of the individual to society and politics was the doctrine of inalienable individual rights, and of government as existing for no other purpose than to secure those rights, in order to leave the individual free to pursue his own happiness. This, of course, was the foundation of the freedom of capitalism. The same view of man and the human individual, when accepted as a personal standard to be lived up to, was the inspiration for individuals to undertake large-scale accomplishments and to persevere against hardship and failure in order to succeed. It inspired them when they set out to explore the world, discover laws of nature, establish a proper form of government, invent new products and methods of production, and build vast new businesses and brand new industries. It was the inspiration for the pioneering spirit and sense of self-reliance and self-responsibility which once pervaded American society at all levels of ability, and a leading manifestation of which is the spirit of great entrepreneurship.

Finally, the ability of economic science itself to influence people's thinking so that they will favor capitalism and sound economic policy is also totally dependent on the influence of a proreason philosophy. Economics is a science that seeks to explain the complexities of economic life through a process of abstraction and simplification. The method of economics is the construction of deliberately simplified cases, which highlight specific economic phenomena and make possible a conceptual analysis of their effects. For example, in analyzing the effects of improvements in machinery, an economist imagines a hypothetical case in which no change of any kind takes place in the world except the introduction of an improved machine. The truths established deductively in the analysis of such cases are then applied as principles to the real economic world. Consequently, the ability of economics to affect people's attitudes depends on their willingness to follow and feel bound by the results of abstract reasoning. If economics is to have cultural influence, it is indispensable that people have full confidence in logic and reason as tools of cognition.

* * *

Not only are economic activity and economics as a science dependent on a proreason philosophy in all the ways I have described, but also it should be realized that economics itself is a highly philosophical subject, potentially capable of exerting an extremely important proreason influence on philosophy. As the subject that studies the production of wealth under a system of division of labor, economics deals both with essential aspects of man's relationship to the physical world and with essential aspects of his relationship to other men. Indeed, the subject matter of economics can be understood as nothing less than the fundamental nature of human society and the ability of human beings living in society progressively to enlarge the benefits they derive from the physical world. For this is what one understands when one grasps the nature and ramifications of the division of labor and its effects on the ability to produce. In this capacity, economics overturns such irrationalist philosophical doctrines as the notion that one man's gain is another man's loss, and the consequent belief in the existence of an inherent conflict of interests among human beings. In their place it sets the doctrine of continuous economic progress and the harmony of the rational self-interests of all human beings under capitalism, which doctrine it conclusively proves on the basis of economic law.


2. Capitalism and Freedom

Freedom means the absence of the initiation of physical force. Physical force means injuring, damaging, or otherwise physically doing something to or with the person or property of another against his will. The initiation of physical force means starting the process—that is, being the first to use physical force. When one has freedom, what one is free of or free from is the initiation of physical force by other people. An individual is free when, for example, he is free from the threat of being murdered, robbed, assaulted, kidnapped, or defrauded.

(Fraud represents force, because it means taking away property against the will of its owner; it is a species of theft. For example, if a bogus repairman takes away a washing machine to sell it, while saying that he is taking it to repair it, he is guilty of force. In taking it to sell, he takes it against the will of the owner. The owner gives him no more authorization to sell it than he gives to a burglar.)

Freedom and Government

The existence of freedom requires the existence of government. Government is the social institution whose proper function is to protect the individual from the initiation of force. Properly, it acts as the individual's agent, to which he delegates his right of self-defense. It exists to make possible an organized, effective defense and deterrent against the initiation of force. Also, by placing the use of defensive force under the control of objective laws and rules of procedure, it prevents efforts at self-defense from turning into aggression. If, for example, individuals could decide that their self-defense required that they drive tanks down the street, they would actually be engaged in aggression, because they would put everyone else in a state of terror. Control over all use of force, even in self-defense, is necessary for people to be secure against aggression.18

An effective government, in minimizing the threat of aggression, establishes the existence of the individual's freedom in relation to all other private individuals. But this is far from sufficient to establish freedom as a general social condition. For one overwhelming threat to freedom remains: namely, aggression by the government itself.

Everything a government does rests on the use of force. No law actually is a law unless it is backed by the threat of force. So long as what the government makes illegal are merely acts representing the initiation of force, it is the friend and guarantor of freedom. But to whatever extent the government makes illegal acts that do not represent the initiation of force, it is the enemy and violator of freedom. In making such acts illegal, it becomes the initiator of force.

Thus, while the existence of freedom requires the existence of government, it requires the existence of a very specific kind of government: namely, a limited government, a government limited exclusively to the functions of defense and retaliation against the initiation of force—that is, to the provision of police, courts, and national defense.19

In a fully capitalist society, government does not go beyond these functions. It does not, for example, dictate prices, wages, or working conditions. It does not prescribe methods of production or the kinds of products that can be produced. It does not engage in any form of "economic regulation." It neither builds houses nor provides education, medical care, old-age pensions, or any other form of subsidy. All economic needs are met privately, including the need for charitable assistance when it arises. The government's expenditures are accordingly strictly limited; they do not go beyond the payment of the cost of the defense functions. And thus taxation is strictly limited; it does not go beyond the cost of the defense functions.20

In short, in its logically consistent form, capitalism is characterized by laissez faire. The government of such a society is, in effect, merely a night watchman, with whom the honest, peaceful citizen has very little contact and from whom he has nothing to fear. The regulations and controls that exist in such a society are not regulations and controls on the activities of the peaceful citizen, but on the activities of common criminals and on the activities of government officials—on the activities of the two classes of men who use physical force. Under capitalism, while the government controls the criminals, it itself is controlled (as it was for most of the history of the United States) by a Constitution, Bill of Rights, and system of checks and balances achieved through a division of powers. And thus the freedom of the individual is secured.21

Given the existence of government and its power to restrain the private use of force, the concept of freedom must be defined in a way that places special stress on the relationship of the citizen to his government. This is because the government's capacity for violating freedom is incomparably greater than that of any private individual or gang whose aggression it fights. One has only to compare the Gestapo or the KGB with the Mafia, to realize how much greater is the potential danger to freedom that comes from government than from private individuals. The government operates through open lines of communication and has at its disposal entire armies that in modern times are equipped with artillery, tanks, planes, rockets, and atomic weapons. Private gangs number comparative handfuls of individuals, operating clandestinely and equipped at most perhaps with submachine guns. Thus, freedom must be defined not merely as the absence of the initiation of physical force, but, in addition, in order to highlight its most crucial aspect, the absence of the initiation of physical force by, or with the sanction of, the government. The very existence of government can easily secure the freedom of the individual in relation to all other private citizens. The crucial matter is the individual's freedom in relation to the government.

Freedom as the Foundation of Security

It is important to realize that freedom is the foundation of both personal and economic security.

The existence of freedom directly and immediately establishes personal security in the sense of safety from the initiation of physical force. When one is free, one is safe—secure—from common crime, because what one is free of or free from is precisely the initiation of physical force.

The fact that freedom is the absence of the initiation of physical force also means that peace is a corollary of freedom. Where there is freedom, there is peace, because there is no use of force: insofar as force is not initiated, the use of force in defense or retaliation need not take place. Peace in this sense is one of the most desirable features of freedom. Nothing could be more valuable or honorable.

There is, however, a different sense in which peace of some sort can exist. Here, one person or group threatens another with the initiation of force and the other offers no resistance, but simply obeys. This is the peace of slaves and cowards. It is the kind of peace corrupt intellectuals long urged on the relatively free people of the Western world in relation to the aggression of the Communist world.

Freedom is the precondition of economic security, along with personal safety, because it is an essential requirement for individuals being able to act on their rational judgment. When they possess freedom, individuals can consider their circumstances and then choose the course of action that they judge to be most conducive to their economic well-being and thus to their economic security. In addition, they can benefit from the like choices of those with whom they deal.

Under freedom, everyone can choose to do whatever he judges to be most in his own interest, without fear of being stopped by the physical force of anyone else, so long as he himself does not initiate the use of physical force. This means, for example, that he can take the highest paying job he can find and buy from the most competitive suppliers he can find; at the same time, he can keep all the income he earns and save as much of it as he likes, investing his savings in the most profitable ways he can. The only thing he cannot do is use force himself. With the use of force prohibited, the way an individual increases the money he earns is by using his reason to figure out how to offer other people more or better goods and services for the same money, since this is the means of inducing them voluntarily to spend more of their funds in buying from him rather than from competitors. Thus, freedom is the basis of everyone being as secure as the exercise of his own reason and the reason of his suppliers can make him.

The detailed demonstration of the fact that economic freedom is the foundation of economic security is a major theme of this book. This book will show, for example, that free competition is actually a leading source of economic security, rather than any kind of threat to it, and that such phenomena as inflation, depressions, and mass unemployment—the leading causes of economic insecurity—are results of violations of economic freedom by the government, and not at all, as is usually believed, of economic freedom itself.22

* * *

The harmony between freedom and security that this book upholds is, of course, in direct opposition to the prevailing view that in order to achieve economic security, one must violate economic freedom and establish a welfare state. The existence of the social security system, in the United States and other countries, both represents a leading consequence of this mistaken belief and provides essential evidence about what is wrong with it.

In the name of economic security, the freedom of individuals to dispose of their own incomes has been violated as they have been forced to contribute to the social security system. A major consequence of this has been that an enormous amount of savings has been diverted from private individuals into the hands of the government. Had these savings remained in the possession of the individuals, they would have been invested and would thus have helped to finance the construction and purchase of new housing, new factories, and more and better machinery. In the hands of the government, these savings have been dissipated in current consumption. This has resulted from the fact that the government has an overwhelmingly greater interest in its own immediate financial needs than in the future economic security of any private individuals and thus has spent the funds in financing its current expenditures. This has meant the dissipation of these savings and thus the serious undermining of the wealth and productive ability of the entire economic system.23

These results have proceeded from the essential nature of the case, which is that while private individuals have an interest in their long-run future economic security, and will provide for it if they are left free to do so, the government does not have such an interest. The interest of government officials is to get by in their term of office and leave the problems of the future to their successors. Thus the violation of economic freedom necessarily results in making individuals less economically secure. Indeed, having been deprived of the existence of actual savings to provide for their future economic security, individuals are now in the position of having to depend on the largess of future legislators, who will have to turn to future taxpayers for the necessary funds. This arrangement has much more in common with the gross insecurity of living as a beggar than it has with any actual economic security.24

In opposition to all such delusions, this book shows that to achieve economic security, the essential requirement is precisely economic freedom.

The Indivisibility of Economic and Political Freedom

Although the emphasis of this book is necessarily on the importance of economic freedom, this fact should not be taken in any way to mean a lack of concern for political freedom. Economic freedom and political freedom are indivisible. They are, in fact, merely different aspects of the same thing. The alleged dichotomy between economic freedom and political freedom, between property rights and human rights, is groundless. Virtually every human activity employs wealth—property. To respect the right and freedom to use property is to respect the right and freedom to carry on the activities in which property is used. To deny the right and freedom to carry on such activities is to deny the right and freedom to use the property involved.

For example, the freedom of speech is implied in a farmer's right to use his pasture as he sees fit. The farmer's property rights include his right to invite people onto his land to deliver and or hear a speech. Any effort by the government to stop or prevent such a speech is an obvious interference with the farmer's property rights. Property rights also include the right to build meeting halls and radio and television stations and to use them to propound whatever ideas one likes. Freedom of speech is fully contained in the economic freedom of the owners of property of the kind that facilitates speech to use their property as they see fit. By the same token, the freedom of speech of those who do not own such property is implied in their right and freedom to buy the use of such property from those who do own it and are willing to rent it to them. Government interference with any such speech is simultaneously an interference with the property rights of the owners of meeting halls or radio or television stations to use or rent their facilities as they see fit.

In the same way, freedom of the press is fully contained in the freedom of an individual to set his type to form the words he wants to form, and then to use his presses, paper, and ink to reproduce those words, and to sell the resulting product to buyers of his choice. Freedom of travel is contained in the property right to build railroads and highways, automobiles and airplanes, to drive one's automobile where one likes, or buy a bus, train, or plane ticket from any willing seller. It is contained in the freedom to use one's shoes to walk across the frontier.

In prohibiting the freedom of speech, press, or travel, one prohibits property owners from using their property as they wish. By the same token, in respecting property rights, one respects these freedoms. On this basis, one should observe the irony of alleged conservative defenders of property rights advocating such things as antipornography legislation—a violation of the property rights of press owners—and of alleged liberal defenders of civil liberties advocating the violation of property rights.25

The Rational Versus the Anarchic Concept of Freedom

The concept of freedom when employed rationally, presupposes the existence of reality, and with it the laws of nature, the necessity of choice among alternatives, and the fact that if one resorts to force, one must expect to be met by force. Of particular importance is the fact that it presupposes the necessity of having the voluntary cooperation of everyone who is to aid in an activity—including the owners of any property that may be involved. After taking for granted the presence of all this, the rational concept of freedom then focuses on the absence of one particular thing: the initiation of physical force—in particular, by the government.26

In sharpest contrast to the rational concept of freedom is the anarchic concept. The anarchic concept of freedom evades and seeks to obliterate the fundamental and radical distinction that exists between two sorts of obstacles to the achievement of a goal or desire: "obstacles" constituted by the ordinary facts of reality, including other people's voluntary choices, and obstacles constituted by the government's threat to use physical force. For example, by the nature of things, it is impossible for me to square circles, walk through walls, or be in two places at the same time. It is also not possible for me, in the actual circumstances of my life, to win the Nobel prize in chemistry or the Academy Award for best actor of the year, or to enter the automobile or steel business. There are all kinds of such things I simply cannot do. And among the things I could do, there are many I choose not to do, because I judge the consequences to myself to be highly undesirable. For example, I cannot arbitrarily decide to walk off my job in the middle of winter to take a vacation in the sun, without the very strong likelihood of being fired. I cannot drive down a city street at ninety miles an hour, nor can I strike or kill another, without running the risk of paying the penalty for violating the law. And then, there are things that are possible for me to do, and that I would very much like to do, but that would require the consent of other people, which consent they are unwilling to give. In this category, are such things as having my views published in The New York Times or having this book assigned in courses at leading "liberal" universities.

Absolutely none of these facts constitutes a violation of freedom, a denial of rights, or anything of the kind. In order for a violation of freedom to exist, it is not sufficient merely that someone be unable to achieve what he desires. What is necessary is that the specific thing stopping him be the initiation of physical force; in particular, the government's threat to use force against him in response to an action of his that does not represent the use of force.

The stock-in-trade of the anarchic concept of freedom, however, is to construe precisely such facts as a violation of freedom and rights. On the basis of the anarchic concept of freedom, it is claimed that freedom is violated any time there is anything that, for whatever reason, a person cannot do, from flying to the moon, to being able to afford a house or a college education that is beyond his reach, to committing murder.27

Ironically, the anarchic concept of freedom is implicitly accepted by conservatives and fascists, as well as by anarchists and hippies. This is evident in the arguments they advance when they seek to establish the principle that it is necessary and proper to violate freedom. For example, they argue that we do not allow a man the "freedom" to murder his mother-in-law or to speed through red lights and thereby threaten the lives of others. In propounding such arguments, the conservatives and fascists casually neglect the fact that such acts constitute the initiation of force, and are so far from representing freedom that their prohibition is what actually constitutes freedom.

The anarchic concept of freedom, of course, is present in the assertions of Communists and socialists that their freedom of speech is violated because they are threatened with arrest for attempting to disrupt the speech of an invited speaker by shouting him down or by speaking at the same time. This assertion by the Communists and socialists neglects the fact that their action constitutes the use of someone else's property against his will—namely, the use of the meeting room against the will of the owner or lessee, who wants the invited speaker to speak, not the disrupters. It is thus the action of the Communists and socialists which is a violation of freedom in this instance—a genuine violation of the freedom of speech.

It follows from this discussion of the erroneous claims of the Communists and socialists that a prohibition on arbitrarily shouting "fire" in a crowded theater should not be construed as any kind of limitation on the freedom of speech. Arbitrarily shouting "fire" constitutes a violation of the property rights of the theater owner and of the other ticket holders, whom it prevents from using their property as they wish. When one holds the context of the rational concept of freedom, it becomes clear that it is no more a violation of freedom of speech to prohibit such speech, than it is to prohibit the speech of disruptive hecklers, or the speech of an uninvited guest who might choose to deliver a harangue in one's living room. Violations of freedom of speech occur only when the speaker has the consent of the property owners involved and then is prohibited from speaking by means of the initiation of physical force—in particular, by the government or by private individuals acting with the sanction of the government.

Because of the confusions that have been introduced into the concept of freedom, it is necessary to set matters right in a number of important concrete instances. Thus, freedom of speech is violated not when an individual does not receive an invitation to speak somewhere, but when he does receive it and is stopped by the government (or by private individuals acting with the sanction of the government) from accepting the invitation or exercising it. It is violated precisely by Communist and socialist disrupters whom the police refuse to remove. Ironically, in the case of a live theatrical performance, it is violated precisely when someone arbitrarily shouts "fire." Such a person violates the freedom of speech of the actors on stage.

The freedom of the press is violated and censorship exists not when a newspaper refuses to publish a story or a column that, for any reason, it regards as unworthy of publication, but when it is prepared to publish a piece and is stopped from doing so by the government. Thus, if I want to print my views in The New York Times, but can neither afford the advertising rates nor persuade the publisher to give me space, my freedom of the press is not violated; I am not a victim of "censorship." But suppose I do have the money to pay the advertising rates or could persuade the publisher to print my views, and the government disallows it—that would be a violation of the freedom of the press; that would be censorship. It is a violation of my freedom of the press if the government stops me from mimeographing leaflets, if that is all I can afford to do to spread my ideas. Again, censorship exists not when the sponsor of a television program refuses to pay for the broadcast of ideas he considers false and vicious, but when he does approve of the ideas he is asked to sponsor and yet is stopped from sponsoring them—for example, by an implicit threat of the government not to renew the license of the television station, or arbitrarily to deny him some permission he requires in some important aspect of his business.28

In the same way, if I ask a woman to marry me, and she says no, my freedom is not violated. It is only violated if she says yes, and the government then stops me from marrying her—say, by virtue of a law concerning marriages among people of different races, religions, or blood types. Or, finally, if I want to travel somewhere, but lack the ability to pay the cost of doing so, my freedom of travel is in no way violated. But suppose I do have the ability to pay the cost, and want to pay it, but the government stops me—say, with a wall around my city (as existed until recently in East Berlin), a passport restriction, or a price control on oil and oil products that creates a shortage of gasoline and aviation fuel and thus stops me from driving and the airlines from flying—then my freedom of travel is violated.

What is essential in all these cases is not the fact that there is something I cannot do for one reason or another, but what it is, specifically, that stops me. Only if what stops me is the initiation of physical force—by the government in particular—is my freedom violated.

Subsequent discussions in this book will unmask the influence of the anarchic concept of freedom in the distortions that have taken place in connection with the antitrust laws—in the concepts of freedom of competition and freedom of entry, and in the related notions of private monopoly and private price control. They will also deal with the distortions to be found in the present-day notion of the "right to medical care."29

Here it must be pointed out that application of the anarchic concept of freedom operates as a cover for the violation of genuine freedom. If, for example, having to work for a capitalist, as a condition of earning wages and being able to live, is a violation of freedom and represents the existence of "wage slavery," as the Marxists call it, then it appears that when the Communists murder the capitalists, they are merely retaliating against the aggression of capitalists—indeed, of slave owners.30 Similarly, if, as the anarchic concept  of freedom claims, freedom of travel or movement requires the ability to be able to afford to travel or move, then a state's requirement of a year's residency, say, as the condition of receiving welfare payments, can be construed as a violation of the freedom of travel or movement. Maintenance of such alleged freedom of travel or movement then requires the continued corresponding enslavement of the taxpayers, who must pay to finance it under threat of being imprisoned if they do not.

What is essential always to keep in mind is that since freedom—real freedom—is the absence of the initiation of physical force, every attempt to justify any form of restriction or limitation on freedom is actually an attempt, knowingly or unknowingly, to unleash the initiation of physical force. As such, it is an attempt to unleash the destruction of human life and property, and for this reason should be regarded as monstrously evil.

What makes the anarchic concept of freedom so destructive is the fact that in divorcing freedom from the context of rationality, it not only seeks to establish a freedom to initiate physical force, as in the cases of "wage slavery" and the anarchic concept of the freedom of travel, but also, on the basis of the consequences of such a perverted concept of freedom, provides seeming justification for the violation of freedom as a matter of rational principle. For example, the anarchic concept of freedom of speech, which claims that hecklers can speak at the same time as a lecturer and thus prevent him from communicating his thoughts, not only serves to legitimize the violation of the lecturer's freedom of speech but also, if accepted as being a valid concept of freedom of speech, must ultimately doom the freedom of speech as a matter of rational principle. For if freedom of speech actually entailed the impossibility of communicating thought by speech, because hecklers could continually interrupt the speaker, respect for rationality—for the value of communicating thought—would then require the denial of the freedom of speech.

Such a vicious absurdity arises only on the basis of the anarchic concept of freedom. It does not arise on the basis of the rational concept of freedom. Freedom of speech rationally means that the lecturer or invited speaker has the right to speak and that hecklers and disrupters are violating the freedom of speech. The rational concept of freedom establishes freedom of speech precisely as the safeguard of the communication of thought, not its enemy. It is vital to keep this principle in mind today in an environment in which many university campuses have been transformed into virtual zoos, in which cowardly and ignorant administrators regularly tolerate disruptions of speech by gangs of delinquents masquerading as students. Such university administrators thereby abandon their responsibility to maintain their universities as the centers of teaching and learning that in their nature they are supposed to be. In tolerating anarchic violations of freedom of speech in the name of freedom of speech, they pave the way for the outright fascistic destruction of freedom of speech in the name of rationality.

The Decline of Freedom in the United States

In the twentieth century, freedom in the United States has been in decline. A twofold measure of this decline is the fact that, with little if any exaggeration, it is now the case that the average mugger has less to fear from the police and courts than the average successful businessman or professional has to fear from the Internal Revenue Service. In allowing common crime to go increasingly unchecked, the government has increasingly failed in its function of securing the individual's freedom in relation to other private individuals. At the same time, as the limits on its powers have been removed, it has itself increasingly violated the freedom of the individual. The government's energies and efforts have more and more been diverted from the protection of the individual's freedom to the violation of it.

To some extent, the process of the destruction of freedom has taken place under the code words of combatting "white-collar crime" instead of "blue-collar crime." The latter type of crime is genuine crime, entailing the initiation of physical force. The former type of crime incorporates some elements of genuine crime, such as fraud and embezzlement, but consists mainly of fictitious crimes—that is, perfectly proper activities of businessmen and capitalists which are viewed as crimes from the perverted perspective of Marxism and other varieties of socialism, such as charging prices that are allegedly "too high" or paying wages that are allegedly "too low."

A profreedom political party would have as the essence of its platform the replacement of the government's suppression of the activities of businessmen and other peaceful private individuals with the rightful suppression of the activities of common criminals, such as muggers, robbers, and murderers. Its essential goal would be the total redirection of the energies of the government away from interference with the peaceful, productive activities of the citizens to forcibly and effectively combatting the destructive activities of common criminals.

The extent to which this can happen, and thus the future of freedom in the United States, depends first of all on the concept of freedom being properly understood, and then on its being upheld without compromise in every instance in which freedom is violated or threatened, from the police turning their backs on campus disruptions and even open rioting and looting in major cities, to income tax audits and the ever growing array of government regulations.

All of the major problems now being experienced in the United States have as an essential element the inconsistent application or outright abandonment of the country's own magnificent original principle of a government upholding individual freedom. Every violation of that principle—every act of government intervention into the economic system—represents the use of physical force either to prevent individuals from acting for their self-interest or to compel them to act against their self-interest. It is no wonder that as the violations of freedom multiply, people are less and less able to serve their self-interests and thus suffer more and more. In order for the American people once again to succeed and prosper, it is essential for the United States to return to its founding principle of individual freedom.

The Growth of Corruption as the Result of the Decline of Freedom

Closely and necessarily accompanying the destruction of freedom in the United States has been the growing corruption both of government officials and of businessmen, who are increasingly under the power of the officials. The ability to violate the freedom of businessmen gives to the government officials the power to deprive businessmen of opportunities to earn wealth or to retain wealth they have already earned. The power of the officials is fundamentally discretionary, that is, it may or may not be used, as they decide. This is always the case with legislators contemplating the enactment of new laws. It is often the case with officials charged with the execution of a law—if they have the power to decide whether or not to enact this or that new regulation in the course of its execution, and whether or not to apply the regulation in any given case, or to what extent.

This situation inevitably creates an incentive on the part of businessmen to bribe the officials, in order to avoid the passage of such laws or the enactment or application of such regulations and thus to go on with the earning of wealth or to keep the wealth they have already earned. It is a situation in which businessmen are made to pay the officials for permissions to act when properly they should be able to act by right—by the right to the pursuit of happiness, which includes the right to the pursuit of profit.

At the same time, the government's ability to violate freedom gives it the power to provide businessmen with subsidies and to damage their competitors. This creates corruption of a much worse character, one in which businessmen are led to offer bribes not to defend what is theirs by right, but as part of an act of depriving others of what belongs to those others by right. Few businessmen are moral philosophers, and those who may have begun their practice of bribing government officials in order simply to avoid harm to themselves cannot be counted upon always to keep in mind the distinction between an act of self-defense and an act of aggression, especially when they must operate increasingly in the conditions of a virtual jungle, in which competitors are prepared to use the government against them and in which large and growing numbers of other businessmen are all too willing to gain subsidies at their expense. The result is a powerful tendency toward the destruction of the whole moral fabric of business.

The obvious solution for this problem of corruption is, of course, the restoration of the businessman's freedom and his security from the destructive actions of the government officials. When the businessman can once again act for his profit by right rather than permission, when the government has lost the power both to harm him and to harm others for his benefit, the problem of such bribery and corruption will shrivel to insignificance.31


3. Capitalism and the Origin of Economic Institutions

To the degree that they exist, freedom and the pursuit of material self-interest, operating in a rational cultural environment, are the foundation of all the other institutions of capitalism. And the study of these institutions and their functioning is the substance of the science of economics.

If individuals both possess freedom and, at the same time, rationally desire to improve their lives and well-being, then they have only to use their minds to look at reality, consider the various opportunities that nature and the existence of other people offer them for serving their self-interest, and choose to pursue whichever of the opportunities confronting them they judge best. They can do whatever they judge is most in their self-interest to do, provided only that they do not initiate the use of force against others.

What people do in these circumstances is spontaneously to set about establishing, or extending and reinforcing, all the other institutions, in addition to freedom and limited government, that constitute a capitalist economic system, such as private ownership of the means of production, saving and capital accumulation, exchange and money, division of labor, and the price system.

Thus, in pursuing their rational self-interest under freedom, they appropriate previously unowned land and natural resources from nature and make them into private property and thus privately owned means of production. Private property in products, including capital goods, then follows on the basis of private property in land and natural resources: the owners of land and natural resources own the products that result from them, including those which they use as means of further production. In addition, of course, they can exchange their products with others for services. These others then also own products, including capital goods, and can, of course, obtain land and natural resources from their original owners by means of purchase or, in primitive conditions, barter exchange.

Being secure in their possession of property from violent appropriation by others, and rational enough to act on the basis of long-run considerations, individuals save and accumulate capital, which increases their ability to produce and consume in the future (for example, following the appropriation of land, they clear trees, remove rocks, drain, irrigate, build, and do whatever else is necessary to establish and improve farms and mines and, later on, commercial and industrial enterprises).

They also perceive the advantages of establishing division of labor and performing exchanges with others. They perceive that some individuals are more efficient than others in the production of certain goods, whether by reason of personal ability or because of the circumstances of the territory in which they live, and that an advantage is to be gained by individuals concentrating on their areas of greater efficiency and exchanging the results.32

They perceive the advantages of indirect exchange—that is, of accepting goods not because they want them themselves, but because others want them and the goods can thus be used as means of further exchanges. Out of indirect exchange money develops, with the result that the division of labor is enabled radically to intensify—to the point where each individual finds it to his interest to produce or help to produce just one or at most a very few things, for which he is paid money, which he in turn uses to buy from others virtually all that he himself consumes.33

In the context of a division-of-labor, monetary economy, the individual's pursuit of his material self-interest gives rise to the narrower principle of financial self-interest—that is, of preferring, other things being equal, to buy at lower prices rather than higher prices and to sell at higher prices rather than lower prices. These are the ways to increase the goods one can obtain by the earning and spending of money. In combination they represent the profit motive—the principle of "buying cheap and selling dear."

The individual's pursuit of self-interest also gives rise to economic inequality, as those who are more intelligent and ambitious outstrip those who are less intelligent and ambitious; and to economic competition, as different sellers seek to sell to the same customers, and as different buyers seek to buy one and the same supply of a good or service.

The combination of the profit motive and the freedom of competition, in turn, constitutes the basis of the price system and all of its laws of price determination.

Thus, rational self-interest and the individual's freedom to act on the basis of it underlie private property and private ownership of the means of production, saving and capital accumulation, the division of labor, exchange and money, financial self-interest and the profit motive, economic inequality, economic competition, and the price system—in a word, the whole range of capitalism's economic institutions.

The combined effect of these institutions is economic progress—that is, the increase in the productive power of human labor and the consequent enjoyment of rising standards of living. Economic progress is the natural accompaniment of rationality and the freedom to act on it. This is so because the continued exercise of rationality creates a growing sum of scientific and technological knowledge from generation to generation. This, together with the profit motive, the freedom of competition, the incentive to save and accumulate capital, and the existence of a division-of-labor society, is the essential basis of continuous economic progress.34

Economic progress is the leading manifestation of yet another major institutional feature of capitalism: the harmony of the rational self-interests of all men, in which the success of each promotes the well-being of all. The basis of capitalism's harmony of interests is the combination of freedom and rational self-interest operating in the context of the division of labor, which is itself their institutional creation. Under freedom, no one may use force to obtain the cooperation of others. He must obtain their cooperation voluntarily. To do this, he must show them how cooperation with him is to their self-interest as well as his own, and, indeed, is more to their self-interest than pursuing any of the other alternatives that are open to them. To find customers or workers and suppliers, he must show how dealing with him benefits them as well as him, and benefits them more than buying from others or selling to others. As will be shown, the gains from the division of labor make the existence of situations of mutual benefit omnipresent under capitalism.35 The division of labor, in combination with the rest of capitalism, represents a regular, institutionalized arrangement whereby the mind of each in serving its individual possessor, serves the well-being of a multitude of others, and is motivated and enabled to serve their well-being better and better.

In sum, capitalism, with its economic progress and prosperity, is the economic system of a free society. It is the economic system people achieve if they have freedom and are rational enough to use it to benefit themselves. As I have said, it represents a self-expanded power of human reason to serve human life.36

4. Capitalism and the Economic History of the United States

The development of all the institutional features of capitalism is well illustrated by the economic history of the United States. Of course, the United States was by no means the perfect model of a capitalist country. Negro slavery existed, which denied all freedom to blacks and prevented them from pursuing their material self-interests. This was in total contradiction of the principles of capitalism. And other important contradictions existed as well, such as a policy of protective tariffs, public canal and turnpike building, the government's claim to ownership of the western lands and its consequent ability to use land grants to subsidize uneconomic railroad building, and, very important, the government's promotion of the use of debt as backing for paper money, which repeatedly resulted in financial panics and depressions when substantial debtors failed, as, in the nature of the case, they had to.37

Nevertheless, the history of the United States shows a government committed in principle to upholding the freedom of the individual and, for the white population, doing so in fact to a degree never achieved before or since. And thus, following the establishment of the United States, we observe a century-long process of the appropriation of land and establishment of private property and private ownership of the means of production, as people were made free to appropriate previously ownerless territory and moved west to do so. This period represents the most important historical example of the process of establishing private property and private ownership of the means of production described in the preceding section. By and large, the settlers simply moved into what was virtually an empty continent and made major portions of it into private property by direct appropriation from nature. The private property that exists today in the United States can generally be traced back, through intervening purchases and sales, to such original appropriations from nature.38

The history of the United States was also characterized by the rapid development of the division of labor and the growth of a monetary economy. The largely self-sufficient pioneers of colonial times were succeeded by farmers producing more and more for the market and buying goods in the market, including all manner of equipment and other aids that greatly increased their ability to produce. The result of the rising productivity of labor in agriculture was a steady shift in population away from farming and toward towns and cities, which sprang up in the wilderness and grew rapidly as centers of an ever more prosperous commerce and industry.

The growing concentration of farmers on producing for the market and the movement of more and more of their sons and daughters to the towns and cities to find employment constituted the actual building of a division-of-labor society. This was a process that was dictated by considerations of self-interest on the part of millions of individual people. Each individual farmer who devoted his labor to producing crops for the market did so because he judged that he would be better off with the products he could buy with the money he earned than he would be with the products he could produce for himself with the same labor. Each individual son or daughter of a farmer who moved to a town or city to find employment did so because he judged that he would be better off by doing so—that the income to be earned in a town or city exceeded the income to be made as a farmer and any allowance for the self-produced goods and other benefits associated with living on a farm. Thus, the self-interested actions of millions of individuals is what created a division-of-labor society in the United States and everywhere else that it exists.

The security of property made the American people both industrious and provident, because they knew that they could keep all that they earned and be able to benefit from all that they saved. (There was no income tax prior to 1913.) Not surprisingly, they were considered to be the hardest-working people in the world. And their consequent high rate of saving ensured that each year a substantial proportion of their production took the form of new and additional capital goods, which had the effect of increasing their ability to produce and consume in succeeding years.

The freedom of production in the United States led to an unprecedented outpouring of innovations—to the steady introduction of new and previously unheard of products and to the constant improvement of methods of production. This, along with the constant availability of an adequate supply of savings to implement the advances, produced the most rapid and sustained rate of economic progress in the history of the world.39

In the process, some individuals achieved enormous personal wealth and distinction. But their success was not the cause of anyone else's impoverishment. It was, on the contrary, precisely the means whereby the general standard of living was raised and all were progressively enriched. For these individuals made the innovations and built the industries that were the source of the growing volume of goods enjoyed by all.

And, overall, guiding the entire process of production in the American economy were the profit motive and the price system. The "dollar-chasing Americans," as they were called, were vitally concerned with earning money. Calculations of profit and loss governed every business decision and, therefore, practically every decision concerning the production of goods and services. Because of the freedom of competition, those business firms succeeded which found ways to reduce their costs of production and offer better goods at lower prices—earning high profits by virtue of low costs and large volume.

The economic history of the United States can be understood on the basis of a single fundamental principle: people were free and they used their freedom to benefit themselves. Each individual was free to benefit himself, and the necessity of respecting the freedom of others necessitated that he benefit them as well if he was to have them as workers, suppliers, or customers. Because people had the freedom and the desire to benefit themselves, they went ahead and virtually all of them actually succeeded in benefitting themselves.

In 1776 the present territory of the United States was an almost empty continent, whose cities either did not exist or were little more than coastal villages. Its population consisted of approximately half a million Indians, who lived on the edge of starvation, and three million settlers, most of whom were semi-self-sufficient farmers living in extreme poverty. In less than two centuries, it was transformed into a continent containing the two hundred million richest people in the history of the world; a continent crisscrossed with highways, railways, telephone and telegraph lines; a continent filled with prosperous farms and dotted with innumerable towns and cities that were the sites of factories using methods of production and producing all manner of goods that probably could not even have been imagined in 1776.

One should ask how the United States' economy got from where it was then to where it is even now. One should ask how Pittsburgh, Cleveland, Detroit, Chicago, St. Louis, San Francisco, Los Angeles, Houston, and Dallas came to be the great cities they all were, not very long ago, and, for the most part, still are. One should ask how New York City grew from a population of twenty thousand to eight million, and how Boston and Philadelphia could increase in size thirty-five and one hundred times over. One should ask where all the means of transportation and communication, all the farms and factories, houses and stores, and all the incredible goods that fill them came from.

The answer, as I say, is astoundingly simple. What was achieved in the United States was the cumulative, aggregate result of tens of millions of people, generation after generation, each pursuing his individual self-interest—in the process, necessarily helping others to achieve their self-interests. And what made this possible was individual freedom.

Thus, eastern farmers realized that the land in the Midwest and West was better for many purposes than the land in the East, and that a higher income was to be made by moving there. And so they moved. Merchants realized that these farmers needed supplies and that money was to be made in supplying them. And so they opened clusters of stores and built their houses at supply points in proximity to the farmers, thus laying the base of towns and cities. They made money and expanded their operations. Others perceived the growing trade and the money to be made in improving transportation to the new regions. They built barge lines and stagecoach lines, then steamship companies and railroads, and made money.

Businessmen and inventors, often one and the same, were constantly on the lookout for the new and the better. They discovered and introduced thousands upon thousands of improvements both in products and in methods of production, with each new advance serving as the base for something still newer and still better. These businessmen and inventors built the factories and the industries that made the cities and towns. The rest of the population, always on the lookout for better jobs, recognized the advantages of employment in the new industries and the new cities and so took the ever improving, ever better-paying jobs they offered.

All this happened because it was to the rational self-interest of individuals to make it happen and because no one could use force to stop them from making it happen. The British had tried to prevent the development of the territory west of the Appalachian Mountains—to set it aside as a kind of gigantic wildlife preserve, so to speak—but the American Revolution overthrew their rule and cleared the way for the unprecedented economic progress I have described.

The rising prosperity of each generation brought about a continual doubling and redoubling of the population, as a higher and higher proportion of children survived to adulthood, and as an ever growing flood of immigrants bought, borrowed, and sometimes stole their way to the shores of what—in their awe and admiration for the United States and its freedom—they called "God's country."

* * *

In recent years, it is true, the economic glow of the United States has lost much of its luster. While advances continue in some fields, such as computerization, major areas of economic life, and the economic conditions confronting large numbers of people, have clearly fallen into a state of decline. Major industries, such as automobiles and steel, and entire industrial regions—the Northeast and the Midwest, once the backbone of the American economy—are in decline. What was once the industrial heartland of the United States is now known as the rust belt—a dreadful, but accurate description of its condition. Detroit, once the home of the American automobile industry and the leading industrial city in the world is now on the verge of losing its last automobile factory, and growing portions of it are becoming uninhabited. The housing stock, industry, and downtown shopping districts of many other large cities are also in a state of profound decay. For some years, homeownership has been beyond the reach of most people, and a sharp rise in the price of electricity, heating oil, and gasoline has made the operation of homes and automobiles far more costly and has undercut people's ability to afford other goods. The supply of power plants is becoming inadequate. A growing number of bridges, highways, and commercial aircraft are in need of major overhaul or replacement. Large-scale unemployment persists.

This book makes clear that the cause of such problems is the progressive abandonment of capitalism and the undermining of its institutions over a period of several generations. This is a process that has finally assumed dimensions so great as to jeopardize the continued functioning of the economic system.

There has been a steady increase in government spending for alleged social welfare, which has been financed by a system of progressive income and inheritance taxation and by budget deficits and inflation of the money supply. These policies, in turn, destroy incentives to produce and the ability to save and accumulate capital. They have been coupled with a steadily increasing burden of government regulations restricting or prohibiting economically necessary activities and encouraging or compelling unnecessary, wasteful, and even absurd activities. For example, the production of fuel has been restricted or even prohibited by price controls and so-called environmental legislation, while the hiring and promotion of unqualified employees has been encouraged and even compelled under systems of government imposed racial and sexual quotas.

The consequence of all of this has been growing economic stagnation, if not outright economic decline, a situation punctuated by rapidly rising prices, growing unemployment, and sporadic shortages.

In recent years, it appears that there has been some recognition of the nature of our problems. Unfortunately, the recognition does not yet go deep enough nor is it yet nearly widespread enough. Thus its benefits are likely to prove elusive or at least extremely short-lived. For example, a major undermining of the OPEC cartel and partial retracement of the price of oil took place in the 1980s, mainly as a result of the repeal of price controls on oil and the easing of "environmental" regulations early in the decade. But now this improvement is in the process of being reversed, through the reimposition and further extension of "environmental" regulations. At the same time, other forms of government interference and government spending continue to grow, and federal budget deficits continue at an alarming level, which makes it likely that the government will turn either to destructive tax increases or to a no less destructive acceleration of inflation. Even the sudden collapse of socialism in Eastern Europe and the former Soviet Union provide little cause for long-term optimism about the economic system of the United States. This is because, as will be explained later, all the essentials of socialism live on in the ecology movement, and are enjoying growing influence in the United States even while socialism in the form of Marxism is in decline in most of the world.40

5. Why Economics and Capitalism Are Controversial

In propounding sound economic theory and thus in presenting the case for capitalism, this book cannot avoid being highly controversial. It is necessary to explain the reasons.

The Assault on Economic Activity and Capitalism

Virtually every aspect of capitalism and thus of economic activity is savagely denounced by large segments of public opinion. The pursuit of self-interest is condemned as evil, and of material self-interest as "vulgar" besides. Freedom under capitalism is ridiculed as "the freedom to starve" and as "wage slavery." Private property is condemned as theft—from a patrimony allegedly given by God or Nature to the human race as a whole. Money is denounced as the "root of all evil"; and the division of labor, as the cause of one-sided development, narrowness, and "alienation."

The profit motive is attacked as the cause of starvation wages, exhausting hours, sweatshops, and child labor; and of monopolies, inflation, depressions, wars, imperialism, and racism. It is also blamed for poisoned foods, dangerous drugs and automobiles, unsafe buildings and work places, "planned obsolescence," pornography, prostitution, alcoholism, narcotics abuse, and crime. Saving is condemned as hoarding; competition, as "the law of the jungle"; and economic inequality, as the basis of "class warfare." The price system and the harmony of interests are almost completely unheard of, while economic progress is held to be a "ravaging of the planet," and, in the form of improvements in efficiency, a cause of unemployment and depressions. At the same time, by the same logic, wars and destruction are regarded as necessary to prevent unemployment under capitalism.

Virtually all economic activity beyond that of manual labor employed in the direct production of goods is widely perceived as parasitical. Thus businessmen and capitalists are denounced as recipients of "unearned income," and as "exploiters." The stock and commodity markets are denounced as "gambling casinos"; retailers and wholesalers, as "middlemen," having no function but that of adding "markups" to the prices charged by farmers and manufacturers; and advertisers, as inherently guilty of fraud—the fraud of attempting to induce people to desire the goods that capitalism showers on them, but that they allegedly have no natural or legitimate basis for desiring.

Despite the obvious self-contradictions, capitalism is simultaneously denounced for impoverishing the masses and for providing them with "affluence," for being a rigid class society and for being dominated by the upstart nouveau riche, for its competition and for its lack of competition, for its militarism and for its pacifism, for its atheism and for its support of religion, for its oppression of women and for its destruction of the family by making women financially independent.

Overall, capitalism is denounced as "an anarchy of production," a chaos ruled by "exploiters," "robber barons," and "profiteers," who "coldly," "calculatingly," "heartlessly," and "greedily" consume the efforts and destroy the lives of the broad masses of average, innocent people.

On the basis of all these mistaken beliefs, people turn to the government: for "social justice"; for protection and aid, in the form of labor and social legislation; for reason and order, in the form of government "planning." They demand and for the most part have long ago obtained: progressive income and inheritance taxation; minimum-wage and maximum-hours laws; laws giving special privileges and immunities to labor unions; antitrust legislation; social security legislation; public education; public housing; socialized medicine; nationalized or municipalized post offices, utilities, railroads, subways, and bus lines; subsidies for farmers, shippers, manufacturers, borrowers, lenders, the unemployed, students, tenants, and the needy and allegedly needy of every description. They have demanded and obtained food and drug regulations, building codes and zoning laws, occupational health and safety legislation, and more. They have demanded and obtained the creation of additional money, and the abolition of every vestige of the gold standard—to make possible the inflation of the money supply without limit. They have demanded this last in the belief that the additional spending the additional money makes possible is the means of maintaining or achieving full employment, and in the belief that creating money is a means of creating capital for lending and thus of reducing interest rates. The ability to create money has also been demanded because it is vital in enabling additional government expenditures to be financed by means of budget deficits and thus in fostering the delusion that the government can provide benefits for which the citizens do not pay. And when, as is inevitable, the policy of inflation results in rising prices, capital decumulation, and the destruction of credit, people demand price and wage controls, and then, in response to the shortages and chaos that result, the government's total control over the economic system, in the form of rationing and allocations.

In the face of such ideas and demands, which have swept over the country with the force of a great flood, traditional American values of individual rights and limited government have appeared trivial and antiquated—appropriate perhaps to an age of independent farmers, but by no means to be permitted to stand in the way of what a frightened and angry mass of people perceive as the requirements virtually of their self-preservation. Indeed, so complete has been the destruction of traditional American values, that the concept of individual rights has itself been made over into a vehicle serving demands for government subsidies and extensions of government power—in such forms as the assertion of "rights" to jobs, housing, education, pensions, medical care, and so on.

This book flies in the face of all such anticapitalistic ideas and demands. Its thesis implies that never have so many people been so ignorant and confused about a subject so important, as most people now are about economics and capitalism. It shows that in its logically consistent form of laissez-faire capitalism—that is, with the powers of government limited to those of national defense and the administration of justice—capitalism is a system of economic progress and prosperity for all, and is a precondition of world peace.

The Prevailing Prescientific Worldview in the Realm of Economics

There are a number of mutually reinforcing reasons for the prevailing mass of errors about economics and capitalism.

First, even though this is the late twentieth century, it is no exaggeration to say that in the realm of economics, the thought of most people continues to bear the essential characteristics of the mentality of the Dark Ages or of primitive peoples in general. What I mean by this is that prior to the development of a scientific worldview in the Renaissance, it was common for people even in Western Europe to interpret natural phenomena as the result of the operation of good or evil spirits. Thus, if a flood came and washed away their huts, or if their animals died of disease, polytheistic primitive peoples would think the explanation lay in the anger of a river god or some other deity. Similarly, the supposedly monotheistic Europeans of the Dark Ages would believe the explanation lay in the curse of some witch or other evil spirit. Both believed that their protection from such harm lay in securing the aid of a more powerful benevolent spirit, whether another deity or an angel, or simply the one and only deity. What was essential was that they believed that their harm resulted from the exercise of arbitrary power by evil forces and that their security depended on obtaining the aid of a greater, stronger arbitrary power who would act on their behalf.

As the preceding discussion of the assault on economic activity and capitalism should make clear, this is precisely the worldview people continue to apply in the present day in the realm of economics. Again and again they view their economic harm as caused by the ill will of an arbitrary power—above all, "big business." And they believe that their protection depends on the good will of a bigger, tougher, stronger arbitrary power—namely, the government—which will act on their behalf. If, for example, the level of wages or prices or the quantity or quality of housing, medical care, education, or anything else is not to people's satisfaction, the explanation, they believe, is that evil businessmen are responsible. The solution, they believe, is for the government, which is more powerful than the businessmen, to use its greater power on behalf of the people.41

In contrast, the view of the economic world imparted by economic science is as far removed from that of the primitive mentality as is the view of the physical world that is imparted by the sciences of physics and chemistry. The worldview imparted by economics is, like that of physics and chemistry, one of operation according to natural laws which can be grasped by human intelligence. The domain of the natural laws of economics is, of course, that of the rationally self-interested actions of individuals insofar as they take place under freedom and center on the production of wealth under a division of labor.

This scientific view of economic phenomena, even though in existence since the late eighteenth century in the writings of the Physiocrats and the early British classical economists, has been prevented from replacing the primitive worldview. It has been prevented by the combined operation of the factors explained in the remainder of this section.

Economics Versus Unscientific Personal Observations

Everyone is a participant in economic activity and as such develops or accepts opinions about economic life that seem consistent with his own observations of it. Yet those opinions are often mistaken, because they rest on too narrow a range of experience, which renders them inconsistent with other aspects of experience of the same subject. Examples of this phenomenon in the everyday world of physical reality are such naive beliefs as that sticks bend in water, that the earth is flat, and that the sun revolves around the earth. In contrast with such naïveté, a scientific process of thought seeks to develop the theory of a subject based on logical consistency with all the valid observations pertaining to it. Thus, the visual appearance of sticks being bent in water is reconciled with the fact that they continue to feel straight when subjected to touch; the reconciliation being by knowledge of the refraction of light caused by water. The earth's appearance of flatness is reconciled with such observations as the masts of ships first becoming visible on the horizon by knowledge of the very gradual curvature of the earth. The appearance of the sun's revolution about the earth is reconciled with knowledge of the sun's relationship to other observable heavenly bodies through knowledge of the earth's rotation about its axis.

Economics suffers from an apparent conflict between personal observation and scientific truth probably to a greater extent than most other sciences. This is because of the very nature of the system of division of labor and monetary exchange. Every participant in the economic system is a specialist, aware of the effect of things on his own specialization. As a rule, he does not stop to consider their effect on other specializations as well; nor, as a rule, does he consider what their longer-run effect on him might be were he to change his specialization. As a result of this, people have come to believe such things as that improvements in production, which can in fact necessitate the shrinkage or total disappearance of employment in any particular branch of the division of labor, are economically harmful. By the same token, they have come to believe that acts of destruction, which can in fact result in an expansion of employment in particular branches of the division of labor, are economically beneficial.42

Closely related to the failure to look beyond one's own current specialization is the widespread confusion between money and wealth. In a division-of-labor economy everyone is naturally interested in earning money and comes to measure his economic well-being by the amount of money he earns. Thus, it is extremely easy for people to conclude that anything that enables the average person to earn more money is desirable, while anything that results in the average person's earning less money is undesirable. It takes a scientific analysis to show that while each individual is always economically best off earning as much money as the freedom of competition allows him to earn, people are not economically better off when average earnings increase as the result of government policies of creating money, or because the government violates the freedom of competition. Indeed, economics shows that lower monetary earnings without money creation and without violations of the freedom of competition represent a higher actual standard of living than do higher monetary earnings with them.43 Along these lines, there are important cases in which, even in the absence of money creation, it turns out that a lower "national income" or "gross national product" signifies a more rapid rate of increase in the production of wealth and improvement in human well-being than does a higher "national income" or "gross national product."44

Economics Versus Altruism

If economics merely contradicted people's unscientific conclusions based on their personal observations, its path would be difficult enough. Its problems are enormously compounded, however, by the fact that its teachings also contradict some of the most deeply cherished moral and ethical doctrines, above all, the doctrine that the pursuit of self-interest by the individual is harmful to the interests of others and thus that it is the individual's obligation to practice altruism and self-sacrifice.

Economics as a science studies the rational pursuit of material self-interest, to which it traces the existence of all vital economic institutions and thus of material civilization itself, and from which it derives an entire body of economic laws. It cannot help concluding that rational self-interest and the profit motive are profoundly benevolent forces, serving human life and well-being in every respect, and that they should be given perfect freedom in which to operate. Nevertheless, traditional morality regards self-interest as amoral at best, and, indeed, as positively immoral. It considers love of others and self-sacrifice for the sake of others to be man's highest virtues, around which he should build his life.

Thus, the teachings of economics are widely perceived as a threat to morality. And, by the same token, the anticapitalistic slogans described earlier in this section are perceived as expressions of justified moral outrage. As a result, economics must make its way not merely against ignorance, but against ignorance supported by moral fervor and self-righteousness. Without the issue being named, economists are in a similar position to the old astronomers, whose knowledge that the earth revolved about the sun not only appeared to contradict what everyone could see for himself but also stood as a challenge to the entire theological view of the universe. Economics and capitalism are a comparable challenge to the morality of altruism.

* * *

It is almost certain that economics and capitalism will be unable to gain sufficient cultural acceptance to ensure the influence of the one and the survival of the other until there is a radical change in people's ideas concerning morality and ethics, and that this change will have to be effected in fields other than economics—notably, philosophy and psychology. But even so, economics itself has an enormous contribution to make in changing people's ideas on these subjects, which every advocate of rational self-interest would be well advised to utilize.

A major reason for the condemnation of self-interest is, certainly, beliefs about its economic consequences. If people did not believe, for example, that one man's gain is another's loss, but, on the contrary, that in a capitalist society one man's gain is actually other men's gain, their fear and hatred of self-interest could probably not be maintained. Yet precisely this is what economics proves. It proves what is actually the simplest thing in the world. Namely, that if individuals rationally seek to do good for themselves, each of them can in fact achieve his good. It proves that in a division-of-labor, capitalist society, in the very nature of the process, in seeking his own good, the individual promotes the good of others, whose self-interested actions likewise promote the achievement of his good. Economics proves the existence of a harmony of the rational self-interests of all participants in the economic system—a harmony which permeates the institutions of private ownership of the means of production, economic inequality, and economic competition. At the same time, it shows that the fear of self-interest and the consequent prohibition of its pursuit is the one great cause of paralysis and stagnation—that if individuals are prohibited from doing good for themselves, their good simply cannot be achieved.

Economics Versus Irrational Self-Interest

The teachings of economics encounter opposition not only from the supporters of altruism, but also from the practitioners of an irrational, short-sighted, self-defeating form of self-interest, as well. These are, above all, the businessmen and wage earners whose short-run interests would be harmed by the free competition of capitalism and are protected or positively promoted by policies of government intervention, and who do not scruple to seek government intervention. For example, the businessmen and wage earners who seek government subsidies, price supports, tariffs, licensing laws, exclusive government franchises, labor-union privileges, immigration quotas, and the like.

Such businessmen and wage earners form themselves into pressure groups and lobbies, and seek to profit at the expense of the rest of the public. They and their spokesmen unscrupulously exploit the economic ignorance of the majority of people by appealing to popular misconceptions and using them in support of destructive policies. Their action is self-defeating in that the success of each group in achieving the privileges it wants imposes losses on other groups that are greater than its gains; at the same time, its gains are canceled by the success of other groups in obtaining the special privileges they want. The net effect is losses for virtually everyone. For not only does each group plunder others and in turn is plundered by them, but, in the process, the overall total of what is produced is more and more diminished, as well.

For example, what farmers gain in subsidies they lose in tariffs, higher prices because of monopoly labor unions, higher taxes for welfare-type spending, and so on. Indeed, the gains of each type of farmer are even canceled in part by the gains of other types of farmers—for example, the gains of wheat farmers are lost in part in paying higher prices for other subsidized farm products, like cotton, tobacco, milk, and butter. In the same way, the benefit of the higher wages secured by a labor union is lost in the payment of higher prices for products produced by the members of all other unions, as well as in the payment of higher prices caused by subsidies, tariffs, and so on. The net effect works out to be that less of virtually everything is produced, because such policies both reduce the efficiency of production and prevent people from being employed. Virtually everyone is made worse off—those who become unemployed and those who continue to work. Because of the inefficiencies introduced, the latter must pay prices that are increased to a greater degree than their incomes, and they must also use part of their incomes to support the unemployed.

The pressure-group members may subjectively believe that they are pursuing their self-interests. The supporters of altruism and socialism may believe that the absurd process of mutual plunder carried on by such groups represents capitalism and the profit motive. But the fact is that self-interest is not achieved by pressure-group warfare. Nor is the activity of pressure groups a characteristic of capitalism. On the contrary, it is the product of the "mixed economy"—an economy which remains capitalistic in its basic structure, but in which the government stands ready to intervene by bestowing favors on some groups and imposing penalties on others.

(As used in this book, the term "mixed economy" is to be understood as what von Mises called a "hampered market economy." As he explains, an economic system is either a market economy, in which case its operations are determined by the initiative of private individuals motivated to make profits and avoid losses, or a socialist economy, in which case its operations are determined by the government. These two alternatives cannot be combined into an economy that would somehow be a mixture of mutually exclusive possibilities. Thus, the term "mixed economy" is to be understood in this book as denoting a hampered market economy.45)

In contrast, under genuine capitalism—laissez-faire capitalism—the government has no favors to give and no arbitrary penalties to impose. It thus has nothing to offer pressure groups and creates no basis for pressure groups being formed out of considerations of self-defense.

The absurdity of the pressure-group mentality manifests itself in the further fact that it provides powerful support for the fear and hatred of self-interest emanating from altruism, and thus leads to the suppression of the pursuit of self-interest. The practitioners of pressure-group warfare are in the contradictory position of wanting to serve their own particular interests and yet, with good reason, simultaneously having to fear and oppose the pursuit of self-interest by others, since under pressure-group warfare, one man's gain actually is another's loss. The result is that while people strive to achieve their self-interest in their capacity as members of pressure groups, yet, in their capacity as citizens, they strive to create social conditions in which the pursuit of self-interest of any kind becomes more and more impossible. Because, given their mentality, they cannot help but regard the pursuit of self-interest as antisocial and thus must oppose it for everyone else.

In these ways, the irrational pursuit of self-interest represented by pressure group warfare actually represents people actively and powerfully working against their self-interest.

* * *

The practitioners of pressure group-warfare condemn economics because they do not understand it—indeed, may have made themselves incapable of understanding it. Their mental horizon is so narrow and confined that it does not extend beyond what promotes or impairs their immediate self-interest in their present investments and lines of work. They perceive the doctrines of economics entirely from that perspective. Thus, a shoe manufacturer of this type, who could not withstand foreign competition, hears economics' doctrine of free trade from no other perspective than that, if implemented, it would put him out of the shoe business. And thus he concludes that he has a self-interest in opposing the doctrine of free trade. And, for similar reasons, virtually every other doctrine of economics is opposed by the pressure groups concerned. To use the analogy to astronomy once more, it is as though people mistakenly concluded not only that the sun circled the earth and that morality itself supported the proposition, but also that their personal well-being required them to oppose any alternative explanation.

Economics Versus Irrationalism

The preceding discussion points to the most fundamental and serious difficulty economics encounters, which is a growing antipathy to reason and logic as such. Economics presupposes a willingness of the individual to open his mind to a view of the entire economic system extending over a long period of time, and to follow chains of deductive reasoning explaining the effects of things on all individuals and groups within the system, both in the long run and in the short run.46 This broadness of outlook that economics presupposes is, unfortunately, not often to be found in today's society. Under the influence of irrationalist philosophy, people doubt their ability to achieve understanding of fundamental and broad significance. They are unwilling to pursue matters to first causes and to rely on logic to explain effects not immediately evident.

In large part, people's reluctance to think has been the result of a two-centuries-long attack on the reliability of human reason by a series of philosophers from Immanuel Kant to Bertrand Russell—an attack which began soon after the birth of economic science. More than any other factor, this attack on the reliability of reason has been responsible for the perpetuation of the mentality of primitive man in the realm of economics.47

A leading consequence and manifestation of this attack has been the appearance of a series of irrationalist writers, who have come to the fore in field after field, and who have taken a positive delight in establishing the appearance of paradox and in seeming to overturn all that reason and logic had previously been thought to prove true beyond doubt. The most prominent figure of this type in economics is Keynes, who held that "Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better."48 In other fields, renowned authorities proclaim that parallel lines meet, that electrons can cross from one orbit of an atom to another without traversing the interval in between, that an empty canvas or smears made by monkeys is a work of art, and that the clatter of falling garbage pails or a moment of silence is a work of music. And lest we should forget our recurrent example of the motion of the earth around the sun, contemporary philosophers assert that one cannot even be certain that the sun will rise tomorrow—that such a thing has no necessity, and will just "probably" occur.

The ability of such views to gain prominence already reflects an advanced state of philosophical corruption. Once established, they give the realm of ideas the aura of a dishonest game, a game that serious people are unwilling to play or to concern themselves with. At the same time, they open the floodgates to the dishonest. In the realm of economics, the establishment of such views has enormously encouraged the pressure groups and advocates of socialism, who have been enabled to propound their opposition to the teachings of economics under the sanction of an allegedly higher, more advanced "non-Euclidean economics." In addition, by depriving the intellect of credibility and substituting sophistry for science, their establishment has allowed demagogues to flourish as never before. The demagogues can count both on few serious opponents and on audiences not willing or able to understand such opponents. Thus, they have an open season in propounding all the absurd charges against capitalism that I described earlier.

Economics by itself certainly cannot reverse this epistemological current. Even more than in the case of ethics, that must come mainly from within philosophy. But economics, or any other special science, can certainly make an important contribution to that reversal by refuting the irrationalists within its own domain and by establishing the principle that within its domain intelligible natural law is, indeed, operative. In refuting the theories of Keynes and similar authors, it can show that in economics there is no basis for the advocacy of irrational theories and that reason prevails. This perhaps may help to set a pattern for the same kind of demonstration in other fields.

Economics, moreover, is uniquely qualified to demolish the apparent conflict between theory and practice which today's intellectuals experience in connection with the undeniable failure of socialism and success of capitalism. The overwhelming majority of today's intellectuals, it must be kept in mind, believe virtually every point of the indictment of capitalism described earlier in this section. Thus, from their perspective, socialism should have succeeded and capitalism have failed. They had to expect that Soviet Russia, with its alleged rational economic planning and concentration on the building up of heavy industry, should have achieved the kind of economic eminence that Japan has achieved under capitalism, and have done so long ago. At the same time, they had to expect that the United States and Western Europe should have fallen into greater and greater chaos and poverty.

Yet, despite everything they believe, and think they understand, socialism has failed, while capitalism has succeeded. Being unwilling to admit that they have been wrong in their beliefs—thoroughly, devastatingly wrong—they choose to interpret the failure of socialism and success of capitalism as proof of the impotence of the mind to grasp reality, and now turn en masse to supporting the ecology movement and its assault on science and technology.49 In this way, ironically, the failure of socialism and success of capitalism have played an important role in accelerating the growth of irrationalism.

In presenting a correct theory of capitalism and socialism—that is, in explaining why in reason capitalism must result in a rising productivity of labor and improving standards of living, while socialism must culminate in economic chaos and a totalitarian dictatorship—economics reunites theory and practice in this vital area. It thereby reaffirms the power of the human mind and removes the failure of socialism and success of capitalism as any kind of pretext for irrationalism.

6. Economics and Capitalism: Science and Value

This is not a book on philosophy. It is not its purpose to validate the philosophy of the Enlightenment with respect to the fundamental questions of metaphysics, epistemology, or ethics. It simply takes for granted the reliability of reason as a tool of knowledge and the consequent value of man and the human individual. It leaves to philosophers the job of convincing those who do not share these convictions. Its domain is merely the principles of economics and the demonstration that capitalism is the system required for prosperity, progress, and peace.

Nevertheless, one philosophical question that must be briefly addressed here is the assertion that science and value should be kept separate and distinct—an assertion that is often made by advocates of socialism and interventionism when they are confronted with the advocacy of capitalism. This book obviously flies in the face of that demand, for it consistently seeks to forge a union between the science of economics and the value of capitalism.

Despite the prevailing view, this procedure is perfectly sound. The notion that science and value should be divorced is utterly contradictory. It itself expresses a value judgment in its very utterance. And it is not only self-contradictory, but contradictory of the most cherished principles of science as well. Science itself is built on a foundation of values that all scientists are logically obliged to defend: values such as reason, observation, truth, honesty, integrity, and the freedom of inquiry. In the absence of such values, there could be no science. The leading historical illustration of the truth of these propositions is the case of Galileo and the moral outrage which all lovers of science and truth must feel against those who sought to silence him.

It is nonsense to argue that science should be divorced from values. No one who makes this demand has ever been able consistently to practice it. What it is proper to say is that science should be divorced from mere emotion—that it must always be solidly grounded in observation and deduction. Irrational emotion should not be confused with dedication to values, however.

The basis of the value of capitalism is ultimately the same as the basis of the value of science, namely, human life and human reason. Capitalism is the social system necessary to the well-being and survival of human beings and to their life as rational beings. It is also necessary to the pursuit of science—to the pursuit of truth without fear of the initiation of physical force. These are all demonstrable propositions. The advocacy of capitalism by economists, therefore, should be no more remarkable, and no more grounds for objection, than the advocacy of health by medical doctors.50

*Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George Reisman. All rights reserved. May not be reproduced in any form without written permission of the author, except by downloading onto a computer for personal, noncommercial use.

**George Reisman is Professor of Economics at Pepperdine University's Graziadio School of Business and Management.


1. For an account of the change that has taken place in the definition of economics, see Israel M. Kirzner, The Economic Point of View (New York: D. Van Nostrand, 1960).

2. I could also say that economics is the science which studies the production of wealth under a system of division of labor and monetary exchange, or under a system of division of labor and capitalism. (See below, p. 19, the first two paragraphs of Part B of this chapter.) Both of these statements would be correct, but they would also be redundant, because, as later discussion will show, a system of division of labor presupposes both monetary exchange and all the other essential institutions of a capitalist society. Finally, the expression goods and services could be substituted for the word wealth. This too would yield a true statement about what economics studies. But, as will be shown, a certain priority and emphasis must be given to wealth as opposed to services.

3. Secondarily and peripherally to its study of the production of wealth under a system of division of labor, economics also studies the production of wealth under the absence of division of labor. It does so insofar as by so doing it can develop its theorems under simplifying assumptions that will enable it to shed light on the operations of a division-of-labor society, and insofar as by so doing it can place the value of a division-of-labor society in its proper light, by contrasting it with non-division-of-labor societies.

4. In the second century A.D., the Roman Empire extended from Syria in the southeast to the northern border of present-day England in the northwest. It circled the Mediterranean Sea, embracing Egypt and all of North Africa, and included all of Europe west of the Rhine, as well as present-day Romania and Turkey and all of Eastern Europe south of the Danube. Goods produced in the various regions of the Empire were consumed throughout the Empire. For example, pottery made in Syria was consumed as far away as England, and tin mined in England was consumed as far away as Syria.

5. Because of its primary application to government policy, it is understandable why the subject was originally known as political economy, which was its name from the time of Adam Smith to the last quarter of the nineteenth century, when the change to "economics" took place.

6. See below, pp. 473-498, 544-548, 559-580, and pp. 603-668.

7. I am indebted to von Mises for this view of what economics has to offer historians and journalists. Cf. Ludwig von Mises, Epistemological Problems of Economics, trans. George Reisman (Princeton, N. J.: D. Van Nostrand, 1960), pp. 27-30, 99-102.

8. Cf. Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951), p. 402; reprint ed. (Indianapolis: Liberty Classics, 1981). Page references are to the Yale University Press edition; pagination from this edition is retained in the reprint edition.

9. On this subject, see below, pp. 462-498.

10. For elaboration, see below, pp. 42-49 and 542-559. 11. See the writings of Ayn Rand for a consistent elaboration of the "benevolent universe premise" across the entire range of human activity.

12. For a discussion of the ideas of Marx and Engels on "alienation," see below, pp. 129-130.

13. See above, the discussion of mathematical economics on pp. 8-9. See also below, pp. 58-61.

14. See Bernard Siegan, Economic Liberties and the Constitution (Chicago: University of Chicago Press, 1980).

15. This section was inspired by and draws heavily on the content of a lecture delivered by Dr. Leonard Peikoff in Chicago, in May 1980, under the title "The Philosophic Basis of Capitalism," before the Inflation and Gold Seminar of the US Paper Exchange/Tempor Corporation.

16. Ayn Rand, "Man's Rights," in Ayn Rand, The Virtue of Selfishness (New York: New American Library, 1964), pp. 124-125.

17. See below, pp. 27-28.

18. On these points, cf. Ayn Rand, "The Nature of Government," in Ayn Rand, Virtue of Selfishness.

19. Cf. ibid.

20. In a fully consistent capitalist society, taxation itself would be of a voluntary nature. On this subject see Ayn Rand, "Government Financing in a Free Society," in Ayn Rand, Virtue of Selfishness.

21. Again, cf. Ayn Rand, "The Nature of Government," in Virtue of Selfishness.

22. See below, pp. 343-371, 513-514, 542-594 passim, and 938-942.

23. It should be realized that even if much of the savings individuals presently pay into the social security system were invested in housing, as they likely would be, those savings would indirectly still contribute to investment in factories and machinery. This is because savings would then not have to be withdrawn from financing factories and machinery to financing housing, as is presently the case because of the vast siphoning off of personal savings caused by the social security system.

24. The problem of the economic insecurity of prospective social security recipients (and of everyone else) is compounded by the fact that an inevitable accompaniment of the welfare state is fiat money, which makes all contractual obligations stated in fixed sums of money essentially meaningless. On these points, see below, pp. 925-926 and 930-931.

25. It should go without saying that the context taken for granted in the reference to antipornography legislation is one in which all the parties involved are freely consenting adults.

26. The following discussion is essentially an application of principles set forth by Ayn Rand in criticizing the use of the word censorship in reference to the actions of private individuals. Cf. Ayn Rand, "Man's Rights," in Ayn Rand, Virtue of Selfishness, especially pp. 131-134.

27. Cf. ibid., pp. 128-130.

28. Ibid.

29. See below, pp. 375-387 and 238. The contrasting meanings of the right to medical care are discussed on p. 380. Concerning this last subject, see also George Reisman, The Real Right to Medical Care Versus Socialized Medicine, a pamphlet (Laguna Hills, Calif.: The Jefferson School of Philosophy, Economics, and Psychology, 1994).

30. For further discussion of the distortions introduced into the concept of freedom of labor and present in the notion of "wage slavery," see below, pp. 330-332.

31. I am indebted to von Mises for the substance of this discussion. See Ludwig von Mises, Human Action, 3d ed. rev. (Chicago: Henry Regnery Co., 1966), pp. 734-736.

32. Concerning the fact that the division of labor originates on the basis of differences in human abilities and in the conditions of people's natural surroundings, see von Mises, Socialism, pp. 292-293.

33. On the fact that money originates in the self-interested actions of individuals, see Carl Menger, Principles of Economics (Glencoe, Ill.: The Free Press, 1950), pp. 257-262. See also below, pp. 506-517.

34. These factors also operate to create a steadily growing supply of useable, accessible natural resources. See below, pp. 63-67.

35. See below, pp. 123-133.

36. See above, p. 19.

37. See below, pp. 938-941.

38. In most of the world, unfortunately, the history of private property is not so simple. Again and again, owners were forcibly dispossessed by foreign invaders, by civil wars and revolutions, and by other expropriations carried out by governments. Nevertheless, one of the things that later discussion will show is that even where holdings of private property can be traced back to acts of force, the operations of a capitalist society steadily wash away these stains. Once a few generations have gone by, during which private property no longer passes by force, but by purchase, the result is virtually the same as if it had never passed by force. For a discussion of this point and also of the alleged injustices committed specifically against the American Indians in the process of appropriating land in North America, see below, pp. 317-319. See also Ludwig von Mises, Socialism, p. 504.

39. In the last generation, Japan, Taiwan, and South Korea have achieved even more rapid rates of economic progress than the United States did in its era of greatest progress. But the rapidity of their advance is largely the result of being able to take advantage of the enormous heritage of innovations pioneered by and bequeathed to them by the United States.

40. See below, pp. 99-106.

41. The leading manifestation of this worldview is the Marxian exploitation theory and the "liberal" political agenda that rests on it. See below, pp. 603-604.

42. The nature of these fallacies, along with most of their leading manifestations, has been brilliantly dissected by Henry Hazlitt, Economics in One Lesson, new ed. (New Rochelle, N. Y.: Arlington House Publishers, 1979), and by Frederic Bastiat in his Economic Sophisms, trans. Arthur Goddard (New York: D. Van Nostrand, 1964).

43. See below, pp. 618-663, 930-937.

44. On this subject see below, pp. 712-714.

45. See von Mises, Human Action, pp. 258-259. Also, see below, pp. 263-264.

46. Cf. Henry Hazlitt, Economics in One Lesson, pp. 15-19.

47. Among the most important and comprehensive writings on the subject of irrationalism and its destructive influence are those of Ayn Rand, virtually all of whose works shed profound light on it. See, for example, Atlas Shrugged (New York: Random House, 1957) and the title essay in For the New Intellectual (New York: Random House, 1961). See also the book of her leading intellectual disciple Leonard Peikoff, The Ominous Parallels: The End of Freedom in America (New York: Stein and Day, 1982). The works of von Mises also stress the destructive influence of irrationalism in all matters pertaining to economics and capitalism and are extremely valuable in this regard. See in particular, Human Action and Socialism.

48. J. M. Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), p. 129.

49. See below, pp. 99-106.

50. For a philosophic demonstration of the wider union of fact and value, see the excellent essay "Fact and Value" by Leonard Peikoff in The Intellectual Activist 5, no. 1 (May 18,1989).

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