Most politicians and economists do not recognize capitalism's crucial characteristic.  Given the state of the world today, it's easy to see why.

In his widely acclaimed speech on September 20, 2001, President Bush said, "Terrorists attacked a symbol of American prosperity; they did not touch its source.  America is successful because of the hard work and creativity and enterprise of our people.  These were the true strengths of our economy before September 11, and they are our strengths today." [1]

Are not other people hardworking, creative, and enterprising?  Are Americans simply that much better in these respects than the rest of the world?

Among the many things Bill Gates' company has given us is access to their on-line encyclopedia, Encarta.com.  One might think the earth's most successful entrepreneur could ante up a scholarly article on the economic system in which he has flourished.  But such is not the case.  Encarta's article on capitalism offers the standard statist account of its history, suggesting why Microsoft has spent a lot of time in court in recent years, and why Mr. Bush missed the mark in his speech.

The article's two authors, who teach economics at American universities, tell us that modern capitalism came about on the basis of two major developments in the 18th century: (1) the emergence of the Physiocrats in France after 1750, and (2) Adam Smith's "Wealth of Nations" and its devastating attack on mercantilism.

Both the Physiocrats and Smith thought the economies of nations would function best if their governments "played a highly limited role."  Their ideas "provided the ideological and intellectual background for the Industrial Revolution--the material side of the sweeping transformations in society and the world that characterized the 19th century.  No precise date can be given for this 'revolution'; it is generally conceded to have begun in the late 18th century." [2]

Also conceded to have begun in the late 18th century was the United States and its declaration of inalienable rights.  Somehow, this fact didn't make it into the final cut of the Encarta article.  Did men carry out these "sweeping transformations" by choice or decree?  Smith writes of the power of the division of labor and expansion of markets.  If this power didn't come from the state, where did it come from?

Encarta says that one of the fundamental characteristics of the Industrial Revolution was the development of machines to replace work previously done by hand.  Why hadn't machines been introduced sooner, in pre-capitalist societies?  What characteristic of capitalism made this possible?  No answer.

In discussing the early stages of capitalist society, the authors show us, in effect, a glass with an inch of water and suggest it was once nearly full.  Factory working conditions were appalling, they note, and child labor was abusive.  Were factory owners simply mean-spirited?

In England, where factory conditions were worst, the pre-capitalist era was marked by paternalism and government tutelage of business that kept large numbers of people from earning a living.  Those that didn't perish survived mostly by begging, stealing, or prostitution.  Against great opposition the factories succeeded, in part because economists showed that labor-saving devices benefited workers.  As Ludwig von Mises explains, the factories "emptied the poorhouses, the workhouses, and the prisons.  They converted starving beggars into self-supporting breadwinners." [3]

Encarta does not trouble itself to reveal the conditions capitalism found at its doorstep.  "It is deplorable that such [poverty] existed," Mises writes.  "But if one wants to blame those responsible, one must not blame the factory owners who--driven by selfishness, of course, and not by 'altruism'--did all they could to eradicate the evils.  What had caused these evils was the economic order of the pre-capitalistic era, the order of [what many historians call] the 'good old days.'" [4]

The factory system not only revolutionized the methods of production, but it radically altered the market for whom the goods were produced.  Prior to the factories, artisans and laborers catered mainly to the rich--who else had any money?  But factories created a new class of consumers by producing "cheap things for the many."  Cotton mills, for instance, made cotton clothing for the masses.  Quoting Mises: "The much talked-about sweatshops did not produce clothes for the rich, but for people in modest circumstances." [5]  Under capitalism, the common man became the sovereign consumer.

None of this is recognized in the Encarta article.  Instead, it tells us how Karl Marx declared himself the savior of the working class with his theory of communism.  In essence, Marx proposed seizing the material factors of production then dispensing goods among the politically connected.  ("Marx believed that land and capital should be owned collectively," as Encarta gently puts it.)  Altruism would replace selfishness.  Private property would be abolished.  The state would rule everything.

Encarta then discusses the formation of trusts in the late 19th century and their alleged threat to competition.  Though not perfect, the "antitrust laws . . . [impeded] the worst tendencies toward creating monopolies and restraining trade," it explains.

In a fully free market, if a dominant firm sets prices too high it will attract lower-selling competition.  Only if government restricts entry into a field is it possible for monopolies to operate in defiance of supply and demand.  Monopolies unaided by government guns survive only while they can supply consumers better than potential competitors.

Antitrust laws penalize success and discourage risk-taking.  Are these the "tendencies" Encarta wants government to impede?

In the 20th century, capitalism was "buffeted by wars, revolution, and depression," Encarta asserts.  Following World War II, it says, communist economic systems "took hold" in the USSR and China.  They took hold, all right.  Their dictatorial governments took complete hold of their citizens' lives.  The ones they didn't slaughter they enslaved.  By contrast, in the early years of capitalism, people formerly doomed could now survive and prosper unhampered by the state.  But this is a contrast Encarta fails to make.

Capitalism's big crisis, Encarta's scholars tell us, came in the 1930s during the Great Depression.  Fortunately, President Roosevelt "restructured the financial system so as to prevent a repeat of the speculative excesses that had led to financial collapse in 1929."  They cite the Employment Act of 1946 as representing "the formal abandonment of laissez-faire as national policy."

If laissez-faire means the complete absence of government interference with business, have we ever had laissez-faire in this country?  If not, what could be the motive behind the government's claim to be abandoning it?

Is it possible the government, with its passage of the Federal Reserve Act of 1913 in particular and other intrusions in general, mismanaged the money supply during the 1920s?  Is it possible that politicians found it more expedient to blame the market for a failure which in fact government caused?  Are politicians in the business of fixing problems--or expanding their power?

The Great Depression was the result of government meddling.

The Encarta article continues with much the same approach--smearing capitalism and extolling the state.  I shudder to think of the students who might look to this sorry piece for enlightenment.

The source of American prosperity, which terrorists attacked on 9-11, was not our hardworking, creative, or enterprising capacities as such, but our freedom to act that way.  It is freedom that drives capitalism and is the source of our prosperity--and is the enemy of people everywhere who envy material success, including some Americans.

No doubt the Encarta article would receive high marks from Mr. Gates' antitrust tormentor, Judge Thomas Penfield Jackson.  But if the founder of the Redmond giant wants to present capitalism without the standard falsehoods and omissions, he should consider hiring someone who understands the subject.

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References

1.  President Bush's speech of 9-20-2001, http://www.cnn.com/2001/US/09/20/gen.bush.transcript/

2.  "Capitalism," Microsoft® Encarta® Online Encyclopedia 2001
http://encarta.msn.com © 1997-2000 Microsoft Corporation. All Rights Reserved.

3.  Human Action, Ludwig von Mises, Yale University Press, 1963, p. 620.  See also:
http://www.mises.org/humanaction.asp

4.  Human Action, p. 620

5.  Human Action, p. 621.

April 3, 2002