On Defending the Indefensible, Part One

C. Bradley Thompson

April 1, 1994

Since On Principle published my first essay “Socialism v. Capitalism: Which is the Moral System?” I have received a short stack of mail either praising or condemning my ruminations. More notably, I have received a number of letters from conservatives and socialists alike, denouncing my piece for essentially the same reason: Capitalism, they say, is indefensible.

In this essay and in another to follow in our next issue, I propose to take up some of the more serious charges and to dispel what I believe are some of the most common fallacies about capitalism.

One of the least understood and most widely misrepresented aspects of the history of capitalism is the charge that during capitalism’s supposed heyday–the period from roughly 1875-1925–the condition of the laboring classes were progressively deteriorating, that greedy, heartless businessmen exploited their workers, paying them abysmally low wages and forcing them to work in unsafe conditions in order to eke out ever greater profits.

This view of capitalism’s history is unquestioned today. One cannot pick up an American history textbook without reading of the inhumanity and cruelty done to the laboring classes by the so-called “Robber Barons” of the late nineteenth century. America was saved, we are told, by the heroic efforts of reformers to improve the work-place and living conditions of the laboring classes.

Any discussion of laissez-faire capitalism, the Industrial Revolution and the factory system cannot begin until a certain context is kept in mind. It is inappropriate for late twentieth century Americans to look at pictures of nineteenth century working or living conditions from the perspective of the present. In societies governed by free economies, material conditions are revolutionized with the passing of almost every generation, thereby raising each generation’s standards and lowering their toleration about what are and are not acceptable social conditions.

It is also important to judge the social conditions of the late nineteenth century New York City, for instance, relative to where many of the workers had come from. For many Irishmen, Italians, or east-European Jews, social conditions in America’s industrialized urban areas were a great improvement relative to where they had come from. Tens of thousands if not millions of people escaped the disease, famine, discrimination, persecution and death that were regular features of life in the old country. Poverty in America meant something very different from the poverty of rural Ireland, Italy, or Poland.

Conditions may have been squalid for some, but then only for a short time. For most, however, America’s system of unregulated capitalism offered a new hope and new opportunity that brought millions of immigrants to this country who were illiterate, who knew little or no English, and who had little capital or worldly possessions.

The existence of slum tenements, poor houses and overcrowding in late nineteenth-century America is easily explained. In the years following the end of the Civil War tens of millions of immigrants, many of whom were unskilled, illiterate, and who did not speak English, were pouring into the country. The population of the United States increased by an extraordinary 140 percent between 1860 and 1900. The population of New York City alone increased from one million in 1860 to just over three million in 1900.

The extraordinary population pressure put on America’s urban centers was often more than some cities could bear. But what is truly remarkable about this population explosion is that American business was able to absorb these newly arrived immigrants as easily as it did. No other civilization could have done it. Employment in manufacturing in the forty years between 1869 and 1909 rose astoundingly from 1.8 million to 6.3 million. What is truly remarkable is not how bad the conditions were for most. It is to the credit of America’s capitalist system that it was able to absorb so many of the world’s hungry, poor and tired.

What historians never tell you is that in almost all cases, these kinds of living conditions were temporary situations. The millions of people who came into this country with little or no possessions, not knowing English, and without a pre-established network of family or friends, found America’s system of unregulated capitalism to be one where they could quickly prosper and achieve an extraordinary degree of upward social mobility.

A second barrier to a just understanding of the period known as “The Guilded Age” is the charge that the rising inequalities of wealth during this period resulted in declining standards of living for the working poor. The facts simply do not bear out the charge that businessmen got rich on the backs of the working poor.

In the years between the end of the Civil War and the beginning of the First World War, the United States became the wealthiest nation in the world and had the highest per capita standard of living in history. The national wealth in 1860 was $16 billion and grew at an amazing rate to $88 billion in 1900. This kind of growth rate is nothing short of revolutionary.

The standard and quality of life for laborers also rose precipitously during this period: wages rose, prices declined, and the work day became shorter.

Per capita income in these days was doubling almost every thirty years. Between 1860 and 1900 per capita income rose from $500 to $1,100. Wages likewise, rose precipitously. In manufacturing, for instance, real wages rose 50 per cent in the years between 1860 and 1890 and by 40 per cent in the years between 1890 and 1914. All of this occurred in America before labor unions acquired any significant size or economic and political power.

As wages went up prices went down. In the years between 1866 and 1890 the wholesale price index fell from a high of 174 to a low of 82. Under the guidance of Andrew Carnegie’s United States Steel Corporation, the price of tons of steel plummeted from $65 a ton in 1872 to $20 in 1897. Likewise, John D. Rockefeller’s Standard Oil lowered the price of kerosene from 26 to 8 cents per gallon between 1870 and 1885, and in the same time period the price of refined oil dropped from 3 cents to 0.452 cents a barrel. The retail price of refined sugar in 1880 was 9 cents per pound but had dropped to 5.3 cents by 1895.

And as material conditions improved, workers also had more time to enjoy the fruits of their labors. The average work day in 1850 was 11.5 hours, in 1900 9.8 hours, and in 1920 8.5 hours. Increasing wages and the shortened work week were the result not of union demands or of labor legislation, but came about because self-interested employers found ever more effective ways to increase the productivity of their workforce through efficient cost-cutting measures and through technological innovations.

Given these revolutionary improvements in production and the quality of life, we might well ask: What was the cause of the improving workspace and living conditions and the rising standard of life for working people in this country? Was it regulation and redistribution? Or was it something else?

It is a common fallacy these days to say that labor unions and government legislation are responsible for the improved living conditions of the working class over the course of the last hundred years. This claim is false and dishonest. The sole cause of the ever-improving working and living conditions of the laboring classes in this century is due to the industrial and technological advances in the means of production that are the consequence of freedom, voluntary exchange and the entrepreneurial spirit.

The advances in work productivity have very little, if anything, to do with physical labor. In and of itself, the productive value of physical labor is extremely low. If physical labor were the standard of value and cause of ever increasing amounts of wealth and well being, one would expect India, China, or the nations of Africa to have the highest standards of living in the world. But such is not the case. None of these countries have politico-economic systems that protect the rights and freedoms of individuals, nor do they place high value on reason. A very simple question will demonstrate our point. Would the standard of living in India or Nigeria be increased by sending them a contingent of our best inventors and entrepreneurs?

Once you admit the necessity of regulations to control the safety of working conditions, there is simply no means by which to prevent more and more regulations. Any person who advocates the regulation of one area of the workplace has knowingly or unknowingly opened a Pandora’s box of regulations that can logically know no limits. There is simply no way to provide a set of criteria by which to regulate and not regulate.

The result is and has been throughout American history that administrative codes proliferate, with the general result that employers now have less capital and less incentive to improve working conditions. A further result is that such regulations create new production costs that force into bankruptcy marginal companies (those companies that have been barely able to compete), they force some companies to lay off workers, and they provide a disincentive to potential new companies, thereby conferring monopolistic privileges on existing firms.

What, then, are the causes and conditions necessary for the creation of wealth? In the next issue of On Principle, I will conclude this essay by examining the new and improved moral relations that accompanied the rise of unregulated capitalism.

C. Bradley Thompson is Assistant Professor of Political Science at Ashland University and Coordinator of Publications and Special Programs at the John M. Ashbrook Center for Public Affairs.