The True History of American Capitalism

0:00Okay, I've been given the modest title of the Real History of American Capitalism in 20 minutes, and so, basically, I'm going to get it hooked up here, it's going to be an ad for my new book, How Capitalism Saved America, basically what this is going to be in 20 minutes. I'd like to start with a, the book is about the myths versus realities of American capitalism in history, Since the early origins of the state, its rulers have always turned, as a necessary bolster to their rule, to an alliance with society's class of intellectuals.

0:45The masses do not create their own abstract ideas or think through these ideas independently. They follow passively the ideas adopted and promulgated by the body of intellectuals who become the effective opinion molders in society, and since it is precisely a molding of opinion on behalf of the rulers that the state almost desperately needs, this forms a basis for the age-old alliance of the intellectuals and the ruling classes of the state. The Alliance is based on a quid pro quo. On the one hand, the intellectuals spread among the masses the idea that the state and its rulers are wise, good, sometimes divine, and at the very least inevitable and better than any conceivable alternatives.

1:30In return for this panoply of ideology, the state incorporates the intellectuals as part of the ruling elite, granting them power, status, prestige and material security. Furthermore, intellectuals are needed to staff the bureaucracy and to, quote, plan the economy and society, so there's always been this quid pro quo. And in America, of course, the deification of the state began with the deification of Abraham Lincoln, and that led to the deification of the presidency in general, and to the state in general. And ever since then, have you noticed, American foreign policy and domestic policy is always a moral crusade. I was just talking with someone this morning about how, like in the war on drugs in parts of Europe, it's a practical problem to be dealt with.

2:17Here it's a moral crusade. Everything is. The war in the Middle East is a moral crusade. It's never practical. So I blame the war in the Middle East on Abraham Lincoln. And the war on drugs. So in addition to the deification of the state, and I'm not being totally a joke, I have magazine articles at home of magazines that were written in the 1860s and 1870s with pictures. These were from New England magazines with pictures of Abraham Lincoln with angel's wings being resurrected from his grave. and the article associated with a picture calling him Father Abraham noting that he died on Good Friday and saying that he died for the country's sins just as Jesus Christ died for the world's sins.

3:05So that's how the deification of Lincoln took place after his death and the New England mercantilist class very happily joined in with the clergy for political purposes to create this aura of a sainted presidency. Presidency, not just Lincoln but all the presidents. In addition to that, the flip side of that is the demonization of capitalism because capitalism, free enterprise, private property, freedom of association has to be attacked. You have to idolize the states while at the same time demonizing capitalism and the whole history of the intellectual, the intellectual history of capitalism has been a history of demonization of capitalism by the court of historians The Public Purse Must Supply the Deficiency of Private Resource The famous free rider problem, claiming that there would never be enough private capital to build private roads in America.

4:17But there's an economist named Daniel Klein, who was an undergraduate student of mine at George Mason about 15,000 years ago, and he did a study of private road building in the early days of America, and here's one quote from him really quickly. The private road building movement build new roads at rates previously unheard of in America. He's talking about the early 1800s. Over $11 million was invested in turnpikes in New York. They were called turnpikes at the time. Some $6.5 million in New England and over $4.5 million in Pennsylvania. Between 1794 and 1840, 238 private New England turnpike companies built and operated about 3750 miles of road. New York led all other states in turnpike mileage with over 4,000 as of 1821.

5:05Pennsylvania was second, reaching a peak of about 2,400 miles. New Jersey companies operated 500 miles. Between 1810 and 1845, over 400 private turnpikes were chartered and built in America. So there was a booming privately funded, privately financed, privately built road system in America, contrary to everything Hamilton and all his followers said was necessary to be done. And how did this happen? The investors earned about a 3% return, which is not very good. But they also realized, the people of these communities, that there was more than just the rate of return on that particular investment. If they built roads, there would be more business in the community. The community itself would survive as opposed to dwindling away.

5:54And so they ostracized about ads in newspapers, urging people to buy stock in these turnpike companies. And it worked. And so that was one of the very early anti-capitalist myths that there was an insurmountable free rider problem. The government did get involved in transportation in the early days of the American Republic by building roads and canals and so forth. But it was such a financial debacle wherever government got involved in road building that by 1860, Missouri and Massachusetts were the only two states to have not amended their constitutions to outlaw the use of tax dollars for road building. They had laws against it, but they had not yet gotten around to actually making a constitutional amendment to do it.

6:39It was such a disaster. So that was myth number one from the very beginning. Myth number two I'll mention is capitalism harmed the working class and were it not for For labor unions and government regulations, the working class would still be harmed by capitalism. That's basically what most college students are taught if they don't take economics classes anyway. And even if they do take economics classes at a lot of places, they're still taught that. But you know, the migration from farm to factory took place because the factories offer higher wages than the farms and better working conditions. So the very fact that Capital investment increases the productivity of labor, and makes labor more valuable to employers, and employers have to compete for that labor, and how do they compete? Paying them more.

7:37During what economists call the first industrial revolution in America, from 1820 to 1860, wages went up 75%. During what's called the second industrial revolution by economic historians, 1860 to 1890, wages went up by another 50%. At the same time, mass production was producing cheaper and cheaper and cheaper goods, and so capitalism gave the working class a one-two punch on one, higher wages, two, lower prices for everything they bought. Capitalism is why we have more leisure. How else could workers have more leisure time and higher standard living materially if it weren't for the increased productivity generated by capitalism?

8:33It's not labor unions, it's not OSHA that has done this, or the Department of Labor, which didn't come around for decades later. It's only the higher productivity caused primarily by capital investment. So in a sense, the working class is one big free rider class who free ride off the capital investment of the investors to a very large extent. Child labor was eliminated by capitalism too, long before laws were passed about it, Because, you know, capitalism by increasing wealth and increasing wages and improving working conditions, eventually people were able to take their kids out of the factories. They no longer had to work to feed the family, and they could, for the first time, afford to send the kids to school and not have them come and go to work also.

9:22And it was purely the wealth created by capitalism that led to that. The labor laws came later, and they, of course, were always motivated by desire and a part of labor unions to kick young people out of work, not to help them. We still have labor unions advocating such things in the third world today, where the alternative to a lot of the young people in the third world to working in a nice, clean, air-conditioned Nike factory is prostitution, crime or starvation. And that's the crusade the labor unions are on. Let's give them that. Let's get Nike out of Indonesia because we care for these children in Indonesia. And that was what the labor unions were all about in the early days of America and their proposals for anti-child labor laws.

10:07Workplace safety also improved because of capitalism long before OSHA came around. In fact, it's pretty well established that when OSHO was established in 1972, most of the progress in terms of improved job safety came to a halt at about that time. And there's simple economics explains why capitalism and competition improved job safety because an unsafe workplace forces employers to pay a compensated difference in wages. You have to hire, you have to pay people more to get them to come to work and take a risk to their health and their safety, and so that puts you at a competitive disadvantage if you have to pay them more. So that gives you an incentive to do what? To improve the safety of your workplace. Because why? It's profitable to do that.

10:54And so the more competitive capitalism became, the more incentive businesses had to improve workplace safety, not because they were convinced by labor unions or OSHA forced them to do it. OSHA has created a lot of problems, as a matter of fact, I think all of you have probably heard of some of these problems. I have an older brother who's an iron worker, the guys who connect iron on bridges, and OSHA requires them to wear steel-toed boots. And every iron worker knows that it's very, very dangerous to crawl around on the steel in Pennsylvania, where my brother lives, in the wintertime, with steel-toed boots where you can't feel the steel with your toes. and so there have been some serious accidents and deaths because of this sort of OSHO regulation. The next myth I'd like to talk about very briefly in my short time here is the myth of the robber barons and I'd recommend a book by Burton Folsom, it's the best book that's been written about this, the myth of the robber barons.

11:51He has two different titles, there was an earlier edition, a later edition, but F-O-L-S-O-M is how he spells his last name, Burton Folsom. It's a short little book, it's a great little synopsis of some of the famous robber barons And he has the right way of looking at the whole issue of the so-called robber barons, the capitalists of the late 19th century for the most part. He separates them into what he calls market entrepreneurs, real entrepreneurs who make money by pleasing consumers with better products, cheaper products or both, versus what he calls political entrepreneurs or business people who make money through their political connections by having laws or regulations passed to keep the competition out. That's sort of being an entrepreneur, but it's being a plunderer more than a real capitalist.

12:40And to give you some of the stark differences between these two types of entrepreneurs that Folsom looks at, a quick explanation or description of James J. Hill, who built a privately funded transcontinental railroad in the United States without a dime of government subsidy, and he proudly boasted that he did not even get any land grants, The government subsidized railroads, on the other hand, called General Sherman in to come in and mass murder the Indians, as opposed, in my Lincoln book, I quote Sherman as saying, we are not going to let a few lousy, thieving Indians stand in the way of the railroad, and then he and his buddy Sheridan were known for the slogan, The only good Indian is a dead Indian.

13:38That's how the government funded railroads dealt with the Indians. James J. Hill just paid them, went into business with them. But here's how Folsom describes Hill. Hill's quest for short routes, low grades, and a few curvatures was an obsession. In 1889, Hill conquered the Rocky Mountains by finding the legendary Marias Pass. Lewis and Clark had described a low pass through the Rockies back in 1805, But later no one seemed to know whether it really existed or if it did where it was. Hill was one of the best gradient so that much of what he hired a man to spend months searching Western Montana for this legendary pass. He did in fact find it and the ecstatic Hill shortened his route by almost 100 miles.

14:23And if you read biographies of Hill, you'll learn that he was just obsessed with efficiency, he used the best materials, he hired people to find the shortest routes, and he just built the best railroad by far. Contrast that to the government-run railroads. The chief engineer was Grenville Dodge, the bosom buddy of Abraham Lincoln, who was one of Lincoln's generals during the war, despite the fact that he had no military experience, The Transcontinental Railroad Bill was passed in 1862. It gave the President of the United States the ability to discern, to determine, to determine what is going to happen in the Transcontinental Railroad Bill.

15:19Cedar Bluffs, Iowa, and the actual spot is known as Lincoln's Hill to this day. Here's what Folsom writes about Grenville Dodge in building the government's subsidized Transcontinental

16:44in the West to the Northwest, for the most part. And so, of course, at one point, the government transcontinental railroads went bankrupt. So that's a good example of the difference. The myths of the robber barons, there were robber barons. Grenville Dodge and Thomas Durant and the people associated with the government subsidized railroads who were robbers and plunderers. But you had genuine capitalists like James J. Hill who were not, and they're all lumped into the same bandwagon Leland Stanford was a senator and a governor of California and he used his political connections to have laws passed making it illegal for anybody to compete in the railroad business within the state of California. Even I could make money in the railroad business with a law like that I would think. Outlawing competition once and for all.

17:32John D. Rockefeller has gone down in history as a great demon. But if you just look at what he did, and don't pay attention to all those books and the stories about his personality, he was stingy, you know. If you've ever read anything about Rockefeller, he was very stingy. So therefore, he was one nice guy. He was very stingy. But if you just look at the bottom line of what he did with his business, In the early days, in 1869, the price of a refined petroleum, which is his basic product, was 30 cents a gallon. And he dropped it all the way down to 8 cents a gallon by 1885. And I picked 1885 because that's when he had about 80% of the market in that product. Pat is saying time, but she's lying because I have a few more minutes left.

18:21One more minute. One other myth that I have is the myth of antitrust based on some work. The basic myth of antitrust is that there was rampant market failure in the late 19th century and government came to the rescue to save us all from these monopolies. But again if you just look at some facts about what was happening, which I have done, the decade before the Sherman Antitrust Act, who by the way was the brother of General Sherman, Senator John Sherman, the decade before the Sherman Act of 1890, real GDP increased by 24%. The output of the trusts who were being accused of being monopolies, and every economist, every economics book apart from the Austrians will tell you, What do monopolies do? They restrict output. They restrict output and they raise prices.

19:15The trust increased their output by 175% during the same period, as opposed to 24% for the rest of the economy. The consumer price index fell by 7% the decade before the Sherman Act. It was a period of deflation, as all the books say. The trust dropped prices even faster than that. So what the trusts were, were dynamic businesses that were taking advantage of the newly invented economics of large-scale production that caused prices to go down, down, and down, and costs to go down, down, and down. And for that, they had to be stopped for doing that. That's what the antitrust laws do. And the final thing I'll say is, in my research on this whole issue of the trust issue, it's interesting that the tariff issue was connected here, because Sherman, Senator John Sherman, his name is on the Sherman Aid and Trust Act, July of 1890, October of 1890, the McKinley Tariff passed, and the sponsor of the McKinley Tariff was Senator John Sherman, who was chairman of the Senate Finance Committee. And so you had an obviously blatant anti-consumer law

20:25Law, the McKinley Tariff, which was one of the biggest tariff increases in history up to that point. Just three months after what the man who was called the father of free enterprise, John Sherman, and by some textbooks that I've looked at, passed this anti-trust law that was there. And I quote the New York Times as saying, essentially, that opposed the Ant Sherman Act. What was going on here was the Republican Party was responsible for a real monopoly, The New York Times actually used the phrase fig leaf, and the fig leaf was the Sherman Antitrust Act. So when prices started going up because of Republican Party protectionism, they needed a scapegoat. Who was that big business? It was the corporations, the trusts.

21:13So we needed an anti-trust law. That's why they called it an anti-trust law. So my time is up. I'll pay attention to Christy before she starts throwing darts at me. That's all. Thank you very much.