Posted: April 28, 2005
ithin a century of its founding, America outstripped the nations of Europe to boast the world's highest per capita gross domestic product. In the 1990s, the U.S. economy grew at twice the rate of Europe's and three times that of Japan's. Generations of scholars have pondered the genesis of this American exceptionalism. A century ago, Frederick Jackson Turner argued that America's uniqueness evolved from the Westward Movement of the American frontier and its individualistic, egalitarian tradition. Others point to the United States as a nation of immigrants, arguing that the "melting pot" has defined American resourcefulness, ingenuity, and material success.
In How Capitalism Saved America, Thomas DiLorenzo makes a compelling case for capitalism and free markets as the headspring of our peerless economic growth. Writing with a lucidity rare for an economist, DiLorenzo insists that government interference in the market process has harmed the nation, and that the expansion of unfettered capitalism has brought prosperity.
DiLorenzo's goal is to debunk views of what he calls "anticapitalists" or "mercantilists" about the source of success and failure in the American economy. He shows, for instance, how the traditional interpretation of "robber barons" like John D. Rockefeller is flat-out wrong. Rather than a "monopolist" who exploited customers with high prices, Rockefeller (and, more recently, Bill Gates) was a highly efficient competitor and innovator who lowered costs and prices for oil (or, in Gates's case, computer software). Government anti-trust actions were prompted mainly by jealous competitors, and had the effect of stifling innovation and cost reduction.
DiLorenzo argues deftly that there are two types of successful entrepreneurs in American history: the "good" capitalist entrepreneurs who got ahead by offering better products at lower prices, and the political entrepreneurs, who milked the mercantilist dimensions of the political system. James J. Hill and Cornelius Vanderbilt were entrepreneurs who competed within the market system, while the promoters of, say, the transcontinental railroad of the 1860s were what economists call rent-seekers, spending a lot of time in Washington getting bigger subsidies and land grants from Congress rather than building better railways.
The parallels that DiLorenzo draws between Rockefeller and Gates are particularly intriguing. Both men made their money by building the equivalent of a better mousetrap. Both were responsible for a dramatic change in human spending habits, by cutting the price of their service. And both were harassed by the anti-trust police at the behest of competitors. In addition, both have given away vast bounties to serve the public good.
DiLorenzo picks examples demonstrating the virtues of capitalism and the vices of interventionist solutions to problems. For example, he marvelously shows how both the Jamestown and Plymouth colonies were literally starving to death until they abandoned a collectivist approach to production, in which all output was shared by the entire community. By defining individual property rights, pioneers like Sir Thomas Dale and William Bradford provided incentives for farmers to work hard and produce more, helping initiate the American capitalist tradition. DiLorenzo argues, correctly in my judgment, that the Revolutionary War was essentially a revolt against attempts to tax and regulate the gains from capitalistic endeavors.
DiLorenzo's account of the American experience is short and not comprehensive. Large parts of the American economic experience are not discussed, such as the Westward Movement, the rise of commercial banking and the expansion of agriculture, or the American industrial revolution. But despite its highly selective account, it incorporates some highlights of our historical experience. On the Great Depression and the New Deal, DiLorenzo points out the pitfalls of such government actions as the National Industrial Recovery Act, the Smoot-Hawley Tariff, the Hoover-Roosevelt High Wage Policy, and numerous tax increases; America remained mired in depression for years. Whenever market forces led the nation to see the light at the end of the tunnel, the government added more tunnel.
This book has several things going for it, but objectivity and balance are not among them. DiLorenzo makes no pretense of trying to present evidence on both sides of historical debates, a failure that some scholars argued marred his previous book, The Real Lincoln (See Thomas Krannawitter, "Dishonest About Abe, Spring 2002), an all-out condemnation of the 16th president. Much of the scholarly literature is ignored. He does little or no original research, but superbly describes the work of a select number of other scholars.
While errors are inevitable in a book-length treatise, the number in this volume is high, ammunition for detractors who will argue that this is nothing but a polemic. For example, DiLorenzo implies that Ohio tried to tax the First Bank of the United States out of existence in 1819, when in fact that bank's charter had expired years earlier and had been replaced in 1816 by the Second Bank of the United States. He claims the Sugar Act (1764) "levied higher taxes on sugar imports." Actually, the Sugar Act lowered taxes, but provided for rigid enforcement, heretofore lacking. DiLorenzo speaks about "economic historians Robert Gray and James Peterson," when really talking about Ralph Gray and John Peterson, neither of whom was an economic historian (although they wrote a textbook in the 1960s).
Sometimes DiLorenzo stretches the truth to make a point. He says that "progress against poverty in American stopped and reversed itself at precisely the moment when the federal government declared 'war' on it." Strictly speaking, this is incorrect. The poverty rate fell significantly in the first nine years after the War on Poverty was declared (from 19% in 1964 to 11.1% in 1973). It would have been correct to say, "Poverty rates had fallen sharply before the War on Poverty was declared, but stopped falling within a decade of the war's declaration— and even today are higher than three decades ago." DiLorenzo's point is valid that the War on Poverty was a failure in the long run, but the factual misstatements expose the entire argument to discredit.
One more example should suffice. Speaking of occupational injuries, DiLorenzo asserts that "they have not gone down since the creation of OSHA." That is dubious, to say the least. Statistics are distorted by changing notions of what an injury is, but my reading of the data is that decline has continued since OSHA's creation. Occupational fatalities (on which there are no definitional difficulties) are clearly down sharply over the last three decades. Still, DiLorenzo is more right than wrong. While occupational safety has improved, most of the improvement reflects changes in the nature of work (e.g., reductions in dangerous mining and factory employment), and is merely a continuation of improvements observed before OSHA was created. There is little evidence that OSHA has accelerated the downward trend. Yet, by denying the existence of such a trend, DiLorenzo reduces his credibility.
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Despite its flaws, this is a useful book, showing that government interferences in market processes are almost always counterproductive. Yet the book raises as many questions as it answers. First, if governmental intervention is so harmful, why has it persisted and even grown over time? Second, are there constitutional ways we can curb the anti-capitalistic mentality? Third, why has the United States been more successful in curbing anti-market impulses than other nations, say, the major countries of Western Europe? DiLorenzo talks some about the first question, but not exhaustively. How can special interests use government for their own good, in the process distorting market processes and crowding out private economic behavior? I see three major factors at work: rational ignorance, the "ratchet effect," and public subsidization of the chattering classes.
The concept of rational ignorance, in particular, is significant. Often government interventions benefit the few at the expense of the many. Assume 100 nursing home operators in a state seek benefits, e.g., above-market level Medicaid disbursements. The nursing home owners—seeing huge gains in their wealth—mount a massive lobbying effort, persuading and bribing legislators via votes and campaign contributions to get their favored law. The ordinary taxpayers lose a bit, but given the costs of keeping up with all the legislative proposals and the low probability than any one voter can effect change, they do not act. In doing so they are both rational and ignorant, in that they are essentially unaware of how the legislation is hurting them.
The term "ratchet effect" was coined by Robert Higgs (Crisis and Leviathan, 1988) to refer to the fact that once government expands in an emergency situation, it is rare for it to revert to its pre-emergency size. Thus the first income tax had a maximum rate of 7% in 1915, but was raised to well over 60% during World War I. After the war, the rate was cut under Treasury Secretary Andrew Mellon—but only to 25%, far higher than the original top rate.
Finally, with the passage of time, we have enormously increased public subsidies to support a class of people, namely intellectuals and academics, many of whom seem insistent on spreading the myth that markets are bad and government is good. When incomes become dependent on government largesse, professors and other intellectuals risk developing an inbuilt bias against the capitalist system, devoting publicly funded time to finding non-existent or small imperfections in markets, and discovering benefits to government activities that are more theoretical than real.
On the second question, one wonders if DiLorenzo believes that at least some progress against an inefficient, welfare-destroying growth in government could come through constitutional means— limits on spending growth, supermajority legislative votes (or perhaps popular votes?) for tax increases, line-item veto powers for the president, and so forth. My guess is that he is a pessimist on this score. The special interests will block constitutional change, and, as long as the judiciary remains unconstrained, the power to limit government will stay minimal. Yet some states (e.g., Colorado) have had real success in restraining growth of government for a decade or more. Thus it is puzzling that only a few devotees of smaller government are trying to modify the rules governing political behavior.
Why has America succeeded where others have not (although parts of Asia seem destined to follow the American experience)? Is it that "distributional coalitions" (to borrow from the late Mancur Olson) became more entrenched, earlier, in the older civilizations of Europe? Is it because the frontier fostered individualism and a distrust of collectivist solutions to social problems? Has the American federal system and the Constitution's separation of powers worked to put brakes on the growth of Leviathan in a way unseen in major European nations? Perhaps DiLorenzo can explore these and other questions in a sequel to this engaging, provocative volume.