Tuesday, April 21, 2015

Free Enterprise, Capitalism and The Panic of 1819

There is an enormous difference between free enterprise and capitalism. In today's culture, those two systems are conflated, and this causes misunderstandings between and among people who might otherwise have found that they have common ground.

Image from the Wikipediahttps://upload.wikimedia.org/wikipedia/commons/thumb/6/6a/Pedal-driven-weaving-machine.jpg/640px-Pedal-driven-weaving-machine.jpg

Free enterprise is an economic system where  people are allowed to come to agreements and reach bargains amongst themselves without government interference. Free enterprise says nothing about whether businesses are small or large or whether capital is concentrated or diffuse.

Capitalism is an economic system where large amounts of capital are concentrated in the hands of a few controlling interests. Those who control the capital might be corporations or the government. They are usually not individuals. But either way, capitalism says nothing about whether people are free to arrive at their own bargains under terms agreeable to themselves.

It is theoretically possible to have both free enterprise and capitalism at the same time. It is also theoretically possible to have capitalism without free enterprise or free enterprise without capitalism.

However, in practice, capitalism tends to move a country away from free enterprise, as when only a very few control the means of production, they are able, in a democracy,  to pass laws that favor themselves and hurt the competition. In practice, in order for free enterprise to remain stable, a more diffuse dispersal of capital is optimal.

For independent people even of very modest means, it is important to be able to make business decisions unfettered, so what they really want is free enterprise. For others, industrialization implies capitalization, and industrialization creates more goods and feeds the masses, so they favor special legal breaks for corporations. However, when they see what inequality is brought about by this system of capitalization, they start crying out for redistribution.

In the 19th century, the United States moved from being a country characterized by free enterprise to becoming an industrialized nation whose economic system involved allowing a few interests to control more capital. The means whereby this happened was the spread of corporations.

Corporations are legal entities whose investors enjoy limited liability. This means that the corporation can cause harm to others, but the stockholders cannot be held accountable for more than their individual investment. Due to this lack of accountability, investors cede control of their funds to a few individuals who run the day to day business of a corporation without  owning the capital that they control. When things go smoothly, everybody is happy. But when things go badly, you get massive economic downturns, like the Panic of 1819.

In Theodosia and the Pirates: The War Against Spain, Edward Livingston explains the change from free enterprise to capitalism to Jean Laffite.

Protectionism at home for certain businesses against others breeds protectionism from abroad through tariffs and embargoes, and what started out as free enterprise becomes capitalism, and the government is recruited to help protect unviable businesses from bankruptcy.

Today, the people who cry out to expropriate the rich are really targeting individuals who own their businesses: the small family farm or ranch, the mom and pop store, the home seamstress or tailor. When they speak up in favor of the estate tax, they forget that corporations never die, and that if families lose their property every time a father or a mother passes away, then very soon all businesses will be run by large corporations, and nobody will have any choice but to be employed by corporate conglomerates who lobby the government for protection. Then  prices and wages will be fixed by government fiat, and goodbye free enterprise.

Jean Laffite did not want that result. He was against wage slavery. How about you?

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  1. You bring up a good point about how corporations will eventually run all businesses if we do not look out for small businesses that own land, such as family farmers. It is sad how hard it is for a small farmer to get FDA approval for growing fruits and vegetables organically, because many do, but some cannot afford to get the qualification. That is why one farmer said sometimes it is better to buy locally sourced produce at a farmer's market that does not have that designation, but you can always ask the farmer if they spray their crops or not. Some do not, and they cannot afford the USDA organic seal. I do buy conventional produce because I cannot always afford organic, and not all the so called organic produce is truly organic anyway. Sometimes local farmers use more natural methods for growing crops.

    1. Thanks, Julia. I don't think that anybody should have to get FDA approval in order to sell food or to tell people how the food was grown. I tend to disbelieve any health claims made by the FDA, as they have steered the public wrong so many times. Real organic produce does not have any labels on it.