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Capitalism and the Free Market, Part 2

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The taint of government intervention into economic activity carried over to the British North American colonies. The radical nature of the American Revolution has masked the class struggle within American colonial society between what historian Merrill Jensen called “radicals” and “conservatives” in his book The Articles of Confederation: An Interpretation of the Social-Constitutional History of the American Revolution, 1774–1781. (Class analysis was not originated by Marx, but by the earlier laissez-faire radicals Charles Comte and Charles Dunoyer.) A privileged politically connected elite came to dominate each colony, living off big land grants and taxes. Power and land were handed out as royal favors, and the wealthy recipients became entrenched. In the North, the ruling class consisted of merchants, in the South of the big planters. Jensen notes that in Pennsylvania, for example, “the merchants had tried by various means to overthrow the system of markets and auctions in order to get a monopoly of the retail trade.” Then as now, established business preferred cartels to free and unpredictable competition. The elites came to think of themselves as the wise aristocracy destined to govern, and they were not eager to give up power when the radicals first started to push for independence from Britain. Staying in the empire was seen as the key to holding local political power.

The radicals and the conservatives thus had different economic and political interests and different views about independence from Great Britain. When British usurpations made continued association with the empire intolerable even for many conservatives, those groups then disagreed over how the new nation should be governed. The mercantile interests tended to favor nationalist centralization, which was seen as the best way to maintain their power and restrict the radical democrats. They hoped to emulate the British mercantilist system. In contrast, the mass of people, who felt themselves imposed on by those interests, tended to favor decentralization because they believed they had a better chance for justice and property with local self-government. Thus what Jensen calls the “internal revolution” — the effort to break the hold of the elites in the colonies — was at least as important as the external one against the British.

The Constitution

Given this pre-independence picture, it should come as no surprise that independent America was no bastion of laissez-faire libertarianism. Indeed, the effort to overthrow the Articles of Confederation — with its weak central quasi government that lacked the power to tax the people directly or regulate trade — and establish a far stronger central government under the U.S. Constitution was a continuation of the internal struggle that had occurred before the Revolution. To give just one indication here, it is erroneously believed that the driving force behind the Constitution was the determination to create a free-trade zone among the states. Thus, according to the standard account, the Commerce Clause was the response to widespread trade barriers between the states. But several problems present themselves. First, the United States were already a free-trade zone (with the exception of rare restrictions on European goods passing from one state to another).

Second, in arguing for ratification of the Constitution in The Federalist Papers, Alexander Hamilton complained that tariffs were too low, not too high:

It is therefore, evident, that one national government would be able, at much less expence, to extend the duties on imports, beyond comparison further, than would be practicable to the States separately, or to any partial confederacies: Hitherto I believe it may safely be asserted, that these duties have not upon an average exceeded in any State three per cent…. There seems to be nothing to hinder their being increased in this country, to at least treble their present amount…. [Federalist 12; emphasis added].

In other words, competition among the states was keeping tariffs down, while uniting the states under a strong central government would curb that competition, cartel-style, and permit higher tariffs. (Indeed, the first economic act of the new Congress in 1789 — on July 4! — was a comprehensive protective tariff ranging from 5 to 10 percent. It was called “the second Declaration of Independence.”)

Third, historian Calvin Johnson notes,

In the original debates over adoption of the Constitution, “regulation of commerce” was used, almost exclusively, as a cover of words for specific mercantilist proposals related to deep-water shipping and foreign trade. The Constitution was written before Adam Smith, laissez faire, and free trade came to dominate economic thinking and the Commerce Clause draws its original meaning from the preceding mercantilist tradition….

… Barriers on interstate commerce, however, were not a notable issue in the original debates. [Emphasis added.]

Thomas Jefferson’s philosophy of decentralization might have been the philosophy of the people, but powerful elites throughout the new states were in Hamilton’s camp. As a result, government intervention in critical parts of the economy (internal improvements and, later, subsidies to railroads) was prominent. When Jefferson and later Jeffersonians gained power, they were able to reverse some of the damage, but the nationalism and statism of Alexander Hamilton and Henry Clay were always in the wings waiting for a Lincoln to be elected.

Distributing land

A revealing story is to be found in the disposition of federal lands. As noted, political favoritism and land speculation, yielding fortunes, were scandalous in the colonial period. Things changed little after the Revolution. Despite the impression given by the Homestead Act of 1862, most land — and certainly the best land — was given or sold on sweetheart terms to influential economic interests, most prominently but not exclusively the railroad interests. Needless to say, the landless and powerless were not among the buyers.

As historian Paul Wallace Gates wrote in 1935,

[The] Homestead Law did not completely change our land system…. [Its] adoption merely superimposed upon the old land system a principle out of harmony with it…. [It] will appear that the Homestead Law did not end the auction system or cash sales, as is generally assumed, that speculation and land monopolization continued after its adoption as widely perhaps as before, and within as well as without the law, that actual homesteading was generally confined to the less desirable lands distant from railroad lines, and that farm tenancy developed in frontier communities in many instances as a result of the monopolization of the land.

The large land holdings produced by this policy, parts of which were kept idle, limited the opportunities of those without power and influence, increasing their dependence on employers and landlords. The situation thus bears some resemblance to that in England.

Aside from the land issue, we know from the work of Jonathan R.T. Hughes and others that from the beginning, government entwinement in the economies of the colonies and states was common. Hughes wrote in The Governmental Habit Redux,

Most studies of modern nonmarket controls consider that the relevant history extends back to the New Deal. A few go back further, into the late nineteenth century. But in fact the powerful and continuous habit of nonmarket control in our economy reaches back for centuries….

Thus, during the colonial period virtually every aspect of economic life was subject to nonmarket controls. Some of this tradition would not survive, some would become even more powerful, while some would ascend to the level of federal control. The colonial background was like an institutional gene pool. Most of the colonial institutions and practices live on today in some form, and there is very little in the way of nonmarket control that does not have a colonial or English forerunner. American history did not begin in 1776.

The expansion of capitalism

Reviewing a couple of dozen studies of state and local economic intervention in the 19th century, historian Robert Lively concluded in 1955,

King Laissez Faire, then, was according to these reports not only dead; the hallowed report of his reign had all been a mistake. The error was one of monumental proportions, a mixture of overlooked data, interested distortion, and persistent preconception…. The substantial energies of government … were employed more often for help than for hindrance to enterprise. The broad and well-documented theme reviewed here is that of public support for business development.

In the second half of the 19th century, America moved further from, not closer to, laissez faire, thanks to Lincoln’s adoption of Henry Clay’s statist American System, which included a national bank, internal improvements, tariffs, and, for a while, an income tax. As Joseph Stromberg writes, “In truth, the Gilded Age witnessed a ‘great barbecue,’ to use Vernon Louis Parrington’s phrase, rooted in the rampant statism of the war years, whose participants defended themselves with Spencerian rhetoric while grasping with both hands.”

The 20th century only accelerated this process by shifting it further to the national level. Big business’s complicity in the Progressive Era “reforms” is well documented, thanks to Gabriel Kolko and others. If you count favors for major businesses as government intervention, then there was no laissez faire in the 20th century, even during the Harding-Coolidge years. Herbert Hoover’s interventionist record is well known. And it ought to be understood that big business supported Franklin Roosevelt’s election in 1932 and his administration during its initial period. The corporatist National Recovery Administration was much to its liking and for some didn’t go far enough. If one believes that in the throes of the Depression, America might have embraced explicit nationalization of the means of production, then one can conclude that Roosevelt did indeed “save capitalism,” but not in the sense of the free market, which had already been compromised virtually beyond recognition.

The upshot is that historical capitalism was not the free market. Rather it was an anti-competitive, pro-business system of controls and subsidies in which government and mercantile interests worked together in a misguided attempt to produce economic growth and to promote the fortunes of specific well-connected interests. As in any period, there are rent-seekers and obliging rulers, with a revolving door between the two groups. But it is important to note that there was no attempt at comprehensive economic planning. Thus, there was scope for entrepreneurship, which needs little encouragement to flourish. By historical standards the burden of government was light. Grass sprouts through the cracks in the sidewalk. A little economic freedom goes a long way.

This historical account is relevant to understanding the basis from which the U.S. economy evolved and to realizing that the trajectory of development has been different from what it would have been had a real free market existed. Privilege has had long-lasting effects, which we still feel today owing to what Kevin Carson calls the “subsidy of history.”

Thus those who call today’s system “capitalism” cannot be said to be misusing the term. Advocates of the real free market therefore would be well advised to avoid using it to describe their preferred social system.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.