December 2, 2004, 11:14 pm

Last week, there were several comments in Carnival of the Capitalists that people would like to see more articles highlighting the benefits of capitalism. This got me thinking about a conversation I had years ago at the beach:

Hanging out at the beach one day with a distant family member, we got into a discussion about capitalism and socialism. In particular, we were arguing about whether brute labor, as socialism teaches, is the source of all wealth (which, socialism further argues, is in turn stolen by the capitalist masters). The young woman, as were most people her age, was taught mainly by the socialists who dominate college academia nowadays. I was trying to find a way to connect with her, to get her to question her assumptions, but was struggling because she really had not been taught many of the fundamental building blocks of either philosophy or economics, but rather a mish-mash of politically correct points of view that seem to substitute nowadays for both.

One of the reasons I took up writing a blog is that I have never been as snappy or witty in real-time discussions as I would like to be, and I generally think of the perfect comeback or argument minutes or hours too late. I have always done better with writing, where I have time to think. However, on this day, I had inspiration from a half-remembered story I had heard before. I am sure I stole the following argument from someone, but to this day I still can't remember from whom.

I picked up a handful of sand, and said "this is almost pure silicon, virtually identical to what powers a computer. Take as much labor as you want, and build me a computer with it -- the only limitation is you can only have true manual laborers - no engineers or managers or other capitalist lackeys".

Yeah, I know what you're thinking - beach sand is not pure silicon - it is actually silicon dioxide, SiO2, but if she didn't take any economics she certainly didn't take any chemistry or geology.

She replied that my request was BS, that it took a lot of money to build an electronics plant, and her group of laborers didn't have any and bankers would never lend them any.

All too many defenders of capitalism would have stopped here, and said aha! So you admit you need more than labor - you need capital too. But Marx would not have disagreed - he would have said it was the separation of labor and capital that was bad - only when laborers owned the capital, rather than being slaves to the ruling class that now controls the capital, would the world reach nirvana. So I offered her just that:

I told her - assume for our discussion that I have tons of money, and I will give you and your laborers as much as you need. The only restriction I put on it is that you may only buy raw materials - steel, land, silicon - in their crudest forms. It is up to you to assemble these raw materials, with your laborers, to build the factory and make me my computer. She thought for a few seconds, and responded "but I can't - I don't know how. I need someone to tell me how to do it"

And that is the heart of socialism's failure. For the true source of wealth is not brute labor, or even what you might call brute capital, but the mind. The mind creates new technologies, new products, new business models, new productivity enhancements, in short, everything that creates wealth. Labor or capital without a mind behind it is useless.

From the year 1000 to the year 1700, the world's wealth, measured as GDP per capita, was virtually unchanged. Since 1700, the GDP per capita in places like the US has risen, in real terms, over 40 fold. This is a real increase in total wealth - it is not money stolen or looted or exploited. Wealthy nations like the US didn't "take" the wealth from somewhere else - it never even existed before. It was created by the minds of human beings.

How? What changed? Historians who really study this stuff would probably point to a jillion things, but in my mind two are important:

There was a philosophical and intellectual change where questioning established beliefs and social patterns went from being heresy and unthinkable to being acceptable, and even in vogue. In other words, men, at first just the elite but soon everyone, were urged to use their mind rather than just relying on established beliefs There were social and political changes that greatly increased the number of people capable of entrepreneurship. Before this time, the vast vast majority of people were locked into social positions that allowed them no flexibility to act on a good idea, even if they had one. By starting to create a large and free middle class, first in the Netherlands and England and then in the US, more people had the ability to use their mind to create new wealth. Whereas before, perhaps 1% or less of any population really had the freedom to truly act on their ideas, after 1700 many more people began to have this freedom.

So today's wealth, and everything that goes with it (from shorter work hours to longer life spans) is the result of more people using their minds more freely.

Look around the world - for any country, ask yourself if the average person in that country has the open intellectual climate that encourages people to think for themselves, and the open political and economic climate that allows people to act on the insights their minds provide and to keep the fruits of their effort. Where you can answer yes to both, you will find wealth and growth. Where you answer no to both, you will find poverty and misery.

UPDATE

While it is not exactly a direct follow-on to this article, see my post Progressives are too Conservative to Like Capitalism for an analysis of some of capitalism's detractors. For yet another way to explain capitalism, at least libertarian philosophy, here is a new-agy approach that is actually pretty good. Finally, Spontaneous Order has an interesting post comparing religious creationism in the physical world with progressives' statism in the economic/social realms.

Update #2: Here is my more recent statement covering similar ground, focusing on the mistaken assumption that economics are all zero-sum.