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Objective: America is not a capitalistic country. We are roughly half-capitalists and half-socialists. This article explains America's vacillation between capitalism and socialism from the founding of our country till today. In this article you will learn...- The Pilgrims first organized their colony as a socialist economy, but quickly realized the importance of private property.
- More recently, China followed a similar story.
- The Progressive Movement sought to append socialist government programs to American capitalism, and was motivated from a desire by the lower and middle classes to constrain the accumulation of power by the wealthy and to acquire some of their wealth—partly because the wealthy were developing into an aristocracy.
- These expensive government programs began in nineteenth century Germany. Today, both America and Western Europe employ a political system that has elements of capitalism and socialism. These programs are popular, even with many anti-government protestors.
- Although there will never be agreement on the popular size of government, not even among economists, there are certain policy changes supported by most economists. However, they require taking "free stuff" from people, and thus are unlikely to be implemented.
America's Socialist Roots
Believe it or not, the first government established by the Pilgrims was a socialist government. Sounds outlandish, I know, but it it true. They were probably inspired by the New Testament gospels and a sixteenth century book by Thomas More called Utopia (discussed in this article). Fortunately, the Pilgrims soon recognized the incentive problems inherent in a socialist economy, and embraced an economic system which allowed for private property. The video below tells this story of the American colonies' founding fathers.
Video 1—America's Socialist Pilgrims
The Pilgrims initially liked the idea of no private property. In England, property resided solely in the hands of the rich and politically powerful—the same people the Pilgrims wanted to leave behind. The deficiencies of a socialist system soon became apparent when the Pilgrims realized they did not like to work all day for other people, nor to depend on other people for their substance. They wanted to acquire their own food from their own sweat, and to provide voluntary charity to others, instead of being forced to work for others.
A similar story took place in China, where a system of shared property discouraged people from working, thereby casting everyone into poverty. One village, whose bravery is hard for us to appreciate, decided it had to bestow its families with private property if they were to survive, and when they did, the farm soon became the most productive farm in China. When officials from the Communist Party saw the farms remarkable yields they were impressed, and thus began a series of changes leading to modern-day China, where even the Communist Party encourages private property and the pursuit of profits. The Planet Money podcast team tells this story best. I encourage you to listen to it here or download the podcast here.
Colonists in America learned from their Pilgrim experience, and grew a strong fondness for property. So strong, in fact, that when Great Britain sought to confiscate its property by onerous taxation, Americans decided to risk their lives in a bolt for independence. You know how that turned out (USA! USA! ...).
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Almost every American knows the traditional story of July Fourth—the soaring idealism of the Declaration of Independence, the Continental Congress's grim pledge to defy the world's most powerful nation with their lives, their fortunes and their sacred honor. But what else about revolutionary America might help us feel closer to those founders in their tricornered hats, fancy waistcoats and tight knee-breeches?
Those Americans, it turns out, had the highest per capita income in the civilized world of their time. They also paid the lowest taxes—and they were determined to keep it that way. ... By 1776, the Atlantic Ocean had become what one historian has called "an information highway" across which poured books, magazines, newspapers and copies of the debates in Parliament. The latter were read by John Adams, George Washington, Robert Morris and other politically minded men. They concluded that the British were planning to tax the Americans into the kind of humiliation that Great Britain had inflicted on Ireland. As eight years of war engulfed the continent, not a few of the rebels saw that the Revolution was a spiritual enterprise that would never really end. Dr. Benjamin Rush, a Pennsylvanian who signed the Declaration of Independence, wrote that the war was only the first step in the Revolution's destiny to transform America and the world. History confirmed his intuition. In the next hundred years, other nations and peoples would issue 200 similar declarations. —Thomas Fleming. July 3, 2012. "What Life Was Like in 1776." The Wall Street Journal. A15. |
When independence was attained, Americans designed a Republic where private property was protected by the government and all men were equal before the law (of course, you know what they meant by "all men") with specified individual rights. Even though America has evolved since then, we have preserved our political brew of democracy and individual rights. Such a brew is not easy to preserve, for democracy and individual rights are often opposed to one another, as democracy allows a majority to persecute a minority, a fact which brought down the Greek's first experiment with democracy. There is no doubt that America has transitioned towards a bigger, more active government, and has thus made slight movements back towards socialism, where a substantial portion of people's earnings are confiscated (another word for "taxed") and given to the elderly, the poor, and the unemployed—let's not forget the politically corrected, who also get some of the money. This change towards greater government began during the Progressive Movement, in the first half of the twentieth century. Before the Progressive Movement, aid for the unfortunate stemmed almost exclusively from voluntary charity. Examples include hospitals, schools, and poor houses funded by churches and philanthropists. The Progressive Movement sought to replace this voluntary charity with forced charity, where the government forces people to pay through taxes, and then decides who should receive it. That's not necessarily bad. In fact, it's obvious that most Americans support such a system.
Big government, European style
Beginning in the latter half of the nineteenth century, all the world was heading towards a system of democracy and "big government", often referred to as social democracy. Perhaps surprisingly, the welfare state began with war-loving Prussians of the nineteenth century, who were ruled by a Kaiser and his Prime Minister, Otto von Bismarck. Even a Kaiser needed the support of his people, and Bismarck concluded the best way to win the people's loyalty was to give them money. Thus began a system of providing direct government payments to the poor, the elderly, and the unemployed. Bismarck had foresight, as he recognized the growing power of unions and socialists. He figured the unions and socialists were becoming popular due to their promises to give people money, so he elected to take their power by fulfilling those promises himself. The Russian Tsars made no such efforts to help their people, and the Communists repaid the Tsars in 1917 by murdering Tsar Nicholas II and his family, thereby ending the Romanov dynasty that had lasted over 300 years.
Video 2—Bismarck Creates the Welfare State in 19th Century Germany
(as depicted by 1974 mini-series Fall of Eagles)
As World War I ended, many nations ended their monarchy (or made the monarch irrelevant, as in the UK) and replaced it with a mixture of democracy, capitalism, and socialism. It did not go well in some places (e.g., Germany) and did not always bring stability, but after the worldwide depression of the 1930's modern democracies developed a system where most of the help for the poor and unemployed was handled by the government.
Figure 1—Humorous Excerpt from Stephen Colbert's Book America Again
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Why do modern societies prefer a charity based on coercion, rather than voluntary compassion? There is no single answer to this question, but my reading of history has given me an impression I will now share. Before the big welfare state, when the destitute relied on the charity of the wealthy, the charity was rather small, and the wealthy began to think of the the lower class as a truly inferior class. They were treated harshly, they were personally blamed for their misfortune, and the rich influenced policy in a way to preserve their wealth at the expense of the poor. The rich started to be treated differently. Their money allowed them to play by different rules. Some wealthy bankers didn't even have to stop for red lights!
Video 3—Jesse Lauriston Livermore Didn't Have to Stop for Red Lights!(C1)
(must use Internet Explorer)
This is America, though, and we believe everyone should be equal before the law. The middle and lower classes sought to take away wealthy people's power by taking away their wealth. It is not surprising, then, that in a Republic where politicians can win elections by promising to tax the rich, many of the politicians who do win will do just that. The poor were being told their poverty was their own fault, but in the 1930's the number of people who were poor was large—large enough to elect politicians. These politicians told the poor it was not their fault they couldn't make ends meet. It was the rich people who rigged the game against them. When the voters fought for their dignity at the voting booth, the result was larger taxes on the rich, taxes which were used to pay for programs like social security. That, at least, is the story as I see it, from my reading of history.
Yet the belief persisted among many Americans that the needy, new poor and
old poor alike, were personally culpable for their plight, sinners against the
social order, reprobates and ne'er-do-wells, spongers, and bums with no
legitimate claim on the public's sympathy.
—David M. Kenneddy. 1999. Freedom From Fear. Oxford University Press: NY,
NY. Page 172.
You can see hints of this in modern America; for instance, in the fact that the rich give a smaller percent of their income to charity than the middle class, and the rich people who live surrounded by rich people are less charitable than equally rich people who live amongst the middle and lower classes.(N1) Wealth has a way of creating different classes of people—a "two Americas", as former Senator John Edwards once described it—and when this happens one of the Americas uses the tools of democracy to bring the other America back down to their status.
The result, I believe, is a system of government with weaker individual rights, but with a mechanism where the frustrations of the lower and middle classes can be manifested in high taxes and expensive social programs.
America: a European nation?
America may pride itself on its distinct form of limited government, but in reality, we differ little from the welfare states of Europe. Both governments are willing and able to intrude on individual rights, and both confiscate large amounts private wealth to be spent on social programs. On the one hand, the idea of a large government is scary. On the other hand, the nations of America and Europe are Republics, and at no point in history have a people experienced more prosperity and felicity. This doesn't mean that our large government caused our high living standards, but it is a fact that critics of large governments must confront.
I'm often asked if I think America is trending toward becoming a European-style social democracy. My answer is: "No, because we already are a European-style social democracy." From the progressivity of our tax code, to the percentage of GDP devoted to government, to the extent of the regulatory burden on business, most of Europe's got nothing on us.
In 1938—the year my organization, the American Enterprise Institute, was founded—total government spending at all levels was about 15% of GDP. By 2010 it was 36%. The political right can crow all it wants about how America is a "conservative country," unlike, say, Spain—a country governed by the Spanish Socialist Workers Party for most of the past 30 years. But at 36%, U.S. government spending relative to GDP is very close to Spain's. And our debt-to-GDP ratio is 103%; Spain's is 68%.
—Arthur C. Brooks. July 9, 2012.
The Wall Street Journal. A15.
Economists of all political flavors agree that...
Economists do not all agree on political issues. Some economists vote Democrat and some vote Republican. Some economists want smaller governments and some want larger governments. Yet there is also wide agreement among economists on certain issues, and what is interesting is that while economists may unanimously agree on certain policies, voters would never support it. The reason is that each policy involves taking away some of the "free stuff" politicians hand out, and voters have a hard time remembering that all government spending is paid for by taxes. People tend to think of the government's budget as falling like manna from the sky, and the only decision is whom the government will give the money to. Even the loudest critics of government spending tends to resist any cuts to the programs that affect them.
Video 4—Anti-Government Republicans Ironically Love Food Stamps
(must use Internet Explorer)
In this Planet Money podcast, also available here, a group of economists from all political flavors discuss why they support the following policies.
- Eliminate ALL loopholes in the tax code, including the mortgage interest deduction (your income that goes to paying interest on your home mortgage currently isn't taxed) and the deduction on health care benefits (the profits/ncome that you/your employer pay for your health insurance is not taxed).
- The corporate tax rate should be set to 0%.
- Don't tax "good things" like the earning of income, instead, tax "bad things" like pollution.
- Legalize drugs.
So anytime someone refers to America as a capitalistic country, correct them, for we are as socialist as we are capitalist, and while many do not like hearing this, they will oppose any politician who seeks eliminate the socialist component of our government.
cReferences(C1) Director and Producer: Muffie Meyer & Ellen Hovde. Writer: Ronald H. Blumer. 2009. The American Experience: The Crash of 1929. Middlemarch Films.
(N1) Berg, Nate. August 20, 2012. “Isolated and Under-Exposed: Why the Rich Don’t Give.” The Atlantic. Accessed August 22, 2012 at http://www.theatlanticcities.com/neighborhoods/2012/08/isolated-and-under-exposed-why-rich-dont-give/3002/. This article cites the following study: Gose, Ben and Emily Gipple. August 19, 2012. “Rich Enclaves Are Not as Generous as the Wealthy Living Elsewhere.” The Chronicle of Philanthropy. Accessed August 22, 2012 at http://philanthropy.com/article/Rich-Enclaves-Are-Not-as/133595/.
