Yesterday, Steve Horwitz of Saint-Lawrence University made a small post on facebook. Basically, it was a complaint against enduring myths regarding capital owners. He pointed that “historically, the owners of capital have very often rejected free markets and asked for political privileges” and that free markets should be (solely) judged on their ability to increase the standard of living for consumers.

In essence, I share his complaint. History is a good guide on the issue. In both Canada and the United States (historically), protectionism was advanced by capital-owners who wanted to shield their capital from competition. Since both economies had abundant capital in the form of land relative to labor compared with European economies, European economies should have been the producers of labor-intensive goods such as manufactured goods. However, the “owners of capital” basically did lobby against free trade such as to protect their interests in the production of manufactured. Indeed, these industries did expand in Canada and the US and it was good for profits (my co-author on a project regarding measuring Canadian GDP from 1870 to 1900, Michael Hinton, is coming out with a book showing Canadian productivity to be equal to American productivity in protected sectors like textiles). However, the American industries (at least in textiles) were much less productive than those found in England which had the competitive advantage in that area. Although it is a small example, it shows that the “owners” of capital are rarely about free markets and their benefits may not imply greater living standards.

However, I want to point out something important regarding capital that Horwitz fails to mention. In fact, it is the fact that his argument can be summarized in one simple sentence: the value of this capital is determined by the value of what it produces to consumers. Capital must be transformed into capital goods that are helpful in the production of consumer goods. If capital is not used to increase the production of the goods that consumers value the most, it is wasted. By definition, capital should serve consumers. If it does not, there is an incentive to reallocate capital to other areas of production to maximize profits by maximizing welfare for consumers. For example, capital-owners are very happy to lend money to individuals who invent new technologies to take more pie from an even larger pie. The main way through capital can be kept to uses that are not the most valued by consumers is through legislative coercion.

Take the case of Canada in the 19th century which we mentioned above. Capital-owners in Canada wanted to protect their investments in textiles. To do so, they had to prevent Canadian consumers from buying textiles from countries were capital was being used more efficiently to produce clothing.

Had there been free trade, Canadians would have bought more foreign cloth. Owners of capital in Canada would have had to compete with capital owners from abroad (since an increase in imports of goods means an increase in the exports of Canadian assets to foreigners which means more foreign investment in Canada) or would have had to reallocate their capital to other industries like shipping or agriculture. Canadians would have had more money in their pockets to save more money and thus increase the stock of capital to make everyone richer in the future.

I think that this was the best way to illustrate the point made by Horwitz.