Capitalism: Second to none

By Robert Murphy
Monday, May 7, 2007

The last week of April was one for the record books, as they say. The Treasury Department announced that April 24th was the single-day record for collection of personal income taxes, at $48.7 billion. On top of that, on both Wednesday and Thursday the Dow Industrials closed at back-to-back record highs. It seems that the Bush tax cuts might not have been so reckless after all.

Even though we now have an entire industry of professional doomsayers—whether it’s the ozone hole, carbon emissions, subprime loans, or outsourcing—the simple fact is that the current U.S. economy is the wealthiest and most productive that has ever existed in the history of mankind. People one hundred years ago weren’t worried about rolling over in an SUV, they were worried about getting stomped by a horse.

Looking at human progress over the last few centuries, many people attribute the steady increase in standards of living to new inventions. But that simply begs the question: What type of economic system needs to be in place in order for those inventions to do any good? After all, there were plenty of clever tinkerers in ancient Greece and China, yet they didn’t spearhead the Industrial Revolution. And even in our own times, there are places on the globe that are poorer now than they were a decade ago.

The reason “the West” grew rich at precisely the historical time that it did is that these countries respected the private property rights of their citizens. They weren’t (and aren’t) perfect, of course, but the idea that a man’s home was his castle, and that even the king couldn’t trespass on it, was peculiar to Western Europe.

Nowadays we call this system capitalism. Ironically, the term was originally a Marxist smear, meant to convey that capitalism only served the interests of the few capitalists. (In contrast, socialism supposedly served all of society.) Even so, the term is a good one, for under the capitalist system individuals have the freedom and incentive to save and invest (i.e. accumulate capital), providing a growing stock of tools and machinery for each succeeding generation. Today the average worker’s labor is far more physically productive than was the case 100 years ago, and it’s not simply that today we rely on advances in physics in chemistry, but also because we have far more sophisticated equipment and infrastructure put in place by our forefathers.

To repeat, this steady improvement is not automatic. People will only save and invest when the government allows them to keep a portion of the returns. The stock market’s success—not only this past week, but over the past few years—is largely due to President Bush’s tax cuts. It is a simple matter of accounting that when the after-tax flow of income to an asset increases, its present market value will increase. As the stock market is the arena to buy and sell ownership in some of America’s largest companies, it is an excellent indicator of the financial condition of the country. Corporate profits have been at record highs lately, and thus it’s not surprising that the stock market has been doing so well.

Of course, the cynic could retort that this is just what the Marxists were talking about—the system is rigged for the wealthy few, while the little guy gets the shaft. But it helps everyone, not just Donald Trump, when the stock market rallies. If you’ve got a pension, chances are a large chunk of it is invested in the market. The endowments of universities and other recipients of donations are also tied to the market.

And finally, I’d ask those who lament our “horrible” economy: Do you really want to go back to the 1970s before the Reagan Revolution, when (in real terms) the stock market had been sliding for years, and unemployment and inflation were both in the double digits?