Capitalism vs. Free Enterprise
October 10th, 2011 // 11:18 am @ Oliver DeMille
The New Culture War
During the Cold War, people came to equate the three ideas of democracy, capitalism and free enterprise.
This made sense at some level, since the whole world seemed inescapably divided into authoritarian, totalitarian, socialist and communist nations on the one hand and democratic, capitalistic and free enterprise nations on the other.
In the decades since the Berlin Wall fell, as CNN’s Fareed Zakaria has pointed out, there has been a growing divide between the nations emphasizing democracy and those focused on capitalism.
The differences between these two groups are both interesting and significant to world events.
But an even more nuanced and impactful division is the difference between capitalism and free enterprise.
I wrote about this in my book FreedomShift, but it is a point of great magnitude in our current society and bears repeating.
Unfortunately, very few people have considered the differences.
Most still equate capitalism and free enterprise, even in the post-Cold War era.
This is a weighty mistake with a high potential for negative ramifications in the 21st Century.
A simple defining of terms points out the crucial importance of the distinction between these two brands of economics.
To summarize: capitalism gives special government-supported benefits to capital and those with capital (wealthy individuals, families and business entities).
This is the opposite of socialism, which promotes special government-supported benefits to those without capital—the proletariat, as Karl Marx put it.
In contrast to both capitalism and socialism, free enterprise establishes good laws and government policies that treat the rich, middle and poor the same.
Some people may believe that this is the system we live under in the United States today—that the law treats all the same.
Such an assumption is incorrect.
The U.S. commercial code has numerous laws which are written specifically to treat people differently based on their wealth.
For example, it is illegal for those with less than a certain amount of wealth to be offered many of the best investment opportunities.
Only those with a high net worth (the levels and amounts are set by law) are able to invest in such offerings.
This naturally benefits the wealthy to the detriment of wage earners.
This system is called capitalism, and it is a bad system—better than socialism or communism, to be sure, but not nearly as good as free enterprise.
In a free enterprise system, the law would allow all people to take part in any investments.
The law would be the same for all.
If this seems abstract, try starting a business in your local area.
In fact, start two.
Let the local zoning commissions, city council and other regulating agencies know that you are starting a business, that it will employ you and nine employees, and then keep track of what fees you must pay and how many hoops you must jump through.
Have your agent announce to the same agencies that a separate company, a big corporation, is bringing in a large enterprise that will employ 4,000 people (or, in a more urban setting, 24,000 people)—all of whom will pay taxes to the local area and bring growth and prestige.
Then simply sit back and watch how the two businesses are treated.
In most places in the United States, one will face an amazing amount of red tape, meetings, filings and obstacles—the other will likely be courted and given waivers, tax breaks, benefits and publicity.
Add up the cost to government of each, and two things will likely surprise you: 1) how much you will have to spend to set up a small business, and 2) how much the government will be willing to spend to court the large business.
Of course, I don’t really suggest that anyone announce such a fake business.
But imagine, theoretically, what would happen if you did.
Our current mentality in government is to treat big business better than small business.
This is the natural model in a capitalist system.
Capital gets special benefits.
In free enterprise, in contrast, the costs and obstacles would be identical for the two businesses.
In free enterprise, the operative words are “free” and “enterprise.”
Note that American business and ownership stayed mostly small—with most people owning family farms or small businesses—until the 1960s.
It was debt (often promoted by government) which wiped out the farming culture that dominated the South and Midwest, and the rise of big corporations over family-owned businesses came after the U.S. commercial code was changed by law to a capitalist rather than a free enterprise model.
If we altered today’s laws at all levels so that government entities treated all businesses and citizens the same, regardless of their level of capital, the natural result would be the spread of more small businesses.
Note that nearly all major growth in America’s economy since 1985 has come from small business.
Today, small businesses are struggling under a veritable “mountain” of regulatory red tape—the result is economic downturn.
And, while some in government hold an anti-business attitude, even many of those ostensibly promoting pro-business policies are more aligned with Wall Street corporations than the needs of small business.
Capitalism, sometimes called “Corporatism”, is not the same thing as free enterprise.
Both are certainly preferable to socialism or communism, but free enterprise is considerably more conducive to freedom and widespread prosperity than capitalism.
History has proven the following: 1) Under capitalism, the divide between rich and poor naturally increases; 2) In a free enterprise system, the prosperity, freedom and dignity of nearly everyone in the society inevitably rises.
Alexander Solzhenitsyn pointed out that while modern American capitalism was clearly better than Russia’s twentieth-century communism or Europe’s contemporary attempts at socialism, the U.S. implementation of capitalism left much to be desired.
For example, he noted, under American capitalism the question of, “is it right?” became less important to many people and companies than, “is it legal?”
Likewise, the culture of capitalism frequently asks, “is it profitable?” before (or instead of) asking, “is it good?”
American capitalism, Solzhenitsyn said, created a nation more materialistic than spiritual, more interested in superficial success than genuine human progress.
Note that Solzhenitsyn was adamantly anti-communist and anti-socialist.
But he also found capitalism lacking.
In every particular, however, Solzhenitsyn’s criticisms of capitalism don’t apply to the free enterprise model of economics. When the law treats all people and businesses the same—regardless of their size, connections, power or wealth—an interesting consequence occurs.
Put succinctly:
- In socialism the government ignores, downplays and literally abuses prosperity and freedom to the point that both are lost for nearly everyone.
- Under capitalism, the laws promote the wealth and license of a few above the freedom and prosperity of all, with the cultural result of valuing attainment of wealth above almost everything—including virtue, compassion, and the liberty of all.
- In free enterprise, the laws treat everyone the same, thereby incentivizing freedom, prosperity and enterprise (as long as such enterprise doesn’t violate the inalienable rights of others). The application of this model is rare in human history, but the results when it has been applied are nothing less than spectacular (see Ancient Israel, Athens, the vales period of Switzerland, the Saracens, the Anglo-Saxons, and the United States—which by 1944 had 6% of the world’s population and produced over half of its goods and services).
The lesson?
Freedom works.
Enterprise works.
And the outcome when the two are combined is breathtaking.
We are capable of so much more than we’ve accomplished so far, and free enterprise is the most powerful economic system yet to be tried by mankind.
Isn’t it time for an end to the outdated debate about socialism versus capitalism and a national return to the free enterprise system which made America great?
During its first century-and-a-half of application, free enterprise brought us major wealth, a standard of living for most citizens that rivals or surpasses the lifestyles of history’s royals, world power, major technological and medical advancements, and the end of slavery.
It also brought the repudiation of racism, male dominance, religious persecution and a host of other ills that have existed for millennia.
With all these areas of progress, imagine what we could do if we re-adopted the free enterprise values and culture in our time.
Laws that give special benefits to wealth and capital while withholding such opportunities from the rest can never bring the progress, advances, freedom and prosperity that free enterprise will.
It’s time for a change, and the first step is for all of us to start using the phrase “free enterprise” a lot more.
We need to study it, think about it, discuss and debate its various applications, and make it a household topic rather than an obscure economic reference.
The future of America is inextricably linked with the future of free enterprise.
We will sink or swim exactly as it does, whether we realize it or not.
Isn’t it time to admit this reality and make it the leading topic in our national dialogue?
***********************************
Oliver DeMille is the co-founder of the Center for Social Leadership, and a co-creator of Thomas Jefferson Education.
He is the co-author of New York Times, Wall Street Journal and USA Today bestseller LeaderShift, and author of A Thomas Jefferson Education: Teaching a Generation of Leaders for the 21st Century, and The Coming Aristocracy: Education & the Future of Freedom.
Oliver is dedicated to promoting freedom through leadership education. He and his wife Rachel are raising their eight children in Cedar City, Utah.
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Keith
13 years ago
There is one more glaring issue. The placement of competition. Capitalism is the competition between individuals, free enterprise is the competition between people. Take a beehive. When it gets too big, it naturally splits and creates two autonomous hives and both compete against each other for natures pollen. The same for pods of whales, packs of wolves, and schools of fish. Capitalism does not naturally split up as free enterprise does. Plus one more thing. Free enterprise does not tax labor; it taxes possessions. Capitalism taxes income from labor. And if I dare say something on the edge that is certain to offend, capitalism in religion teaches to pay one tenth of your income annually to the church, thus grinding the faces of the poor, while free enterprise in religion teaches people to pay one-tenth of all that they possess annually. Run the numbers on both and you will see that freedom in free enterprise has a long battle ahead because so few see the equity that is missing. Here is a link for a must read article on the matter: http://zionmormons.com/2011/06/29/holy-abomination-of-heaven/.
Blake Elliott
13 years ago
You’ve talked about the difference between Capitalism and Free Enterprise in the past. Which specific books offer the best in depth understanding of Free Enterprise? I know authors of like Adam Smith, Milton Freidman, or Ludwig Von Mises, but they and those like them have written a great deal of books! What should we read?
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Carl
12 years ago
How fortuitous for me that I needed to google a reference (nobody trusts their own common sense) on the subject of “capitalism not being the same as free enterprise” and found this. A lot less belligerent than my arguments and a tremendous help….
Thanks for the assist.
“Free market capitalism” is an oxymoron.
Ayn Rand spent most of her life attempting to redefine capitalism into something it is not and never was.
Capitalism is not about free markets, it’s about the capture and subjugation of markets. The only freedom that can be associated with capitalism is the freedom to capture and subjugate.
Capitalism does not build free markets; it destroys them along with the independent, free enterprise, economies that capitalism endevors to dominate.
Capitalism could give a care less about the types of government a country has, as long as the government allows it access to it markets and it will partner with any government that allows that access.
Capitalism is government. It is expressed as dictatorial control over the conquered economies and associated lives and livelihoods of the many by the few.
Capitalism is passive, compulsive slavery.
Free enterprise and capitalism are not the same thing.
Free enterprise is economic equilibrium. In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. For example, in the standard text-book model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal. Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes.
Capitalism is the external force. It is aggressive over-production for the purposes of disrupting and capturing local markets, and it usually partners with governments to achieve its goals of market domination.
Capitalism is economic warfare against free enterprise economic systems, it destroys them.
Todd
11 years ago
Thank you for this essay. I completely agree coming from a family of big corporations and being a small farmer myself. The more corporate America becomes, the worse off we are. People definitely need to understand the difference.
Ian Agni
11 years ago
Love your comments, but you are conflating Communism with Socialism. The top 5 most prosperous Nations on Earth are Socialist, yet have more “wealthy” people, per capita, than the U.S. No, they aren’t billionaires (except in rare cases) like in the U.S., Mexico, and Russia – but they are way deep into the “no worries for generations” category. Socialism fulfills the Government responsibility for education, healthcare, guaranteed employment or a stipend (unless you are unwilling to work, in which case you lose benefits) as a matter of National security and National pride. Compared to Denmark, Sweden, Germany, Austria, Canada and Holland the United States has become a third-world country by any measure like educational performance, infant mortality, percentage of people living in poverty, those without access to real, meaningful healthcare services, and the ability to have the dignity of a decent job. A decent job, compassionate healthcare, and quality education are rights – not privileges doled out to the good wage slaves. In the Nations I cited wages are high, people are healthy and happy, and far more free personally than Americans.
Keith
11 years ago
Ian, when you say they are “far more free personally than Americans,” I think you assume to mean less personal responsibility means more freedom. When you have health care, education, a decent job and so on, this you conclude to equate to freedom. However, when they are state run and when the education core is designed by the state, and when you do not have freedom to dissent and the freedom to consent with real teeth, there is no way you can claim any personal responsibility, and thus with less personal responsibility you have no freedom. Personal responsibility is directly associated with the free agency to dissent with your own disagreements and consent with your own voice. Remove these and you have a prison.
Oliver DeMille
11 years ago
Right on! What Keith said.
Techzilla
10 years ago
@Keith: I understand your perspective, but you must acknowledge, pulling the safety net in this corporatist oligarchy would be horrific. This action alone would never produce your desired outcome. On the contrary, when people are hungry and angry, they would view the system as their enemy. The result would be a social revolution, and we have many historical examples of this situation.
A much better strategy would focus on improving the free-enterprise, by destroying the least personally beneficial aspects first. You could get cross party support, and the benefits of a less corrupt society would promote free-enterprise. Once you have those tangible improvements, as you’ve mentioned, the oligarchically induced inequality would subside. Pulling the safety nets would become less horrible, and then you would also prevent revolution. The people wouldn’t view the government as solely propping up corporate profit.
Keith
10 years ago
Pulling the safety net. Hmmm. Why not compete with it? You say, “when people are hungry and angry, they would view the system as their enemy.” And this is not a bad thing. Within three years of the 1929 crash, we had over 2,000 local currencies nationwide. Bartering skyrocketed, and necessity become our mother again to increasing innovation. You talk of focusing on free enterprise, so let me ask you some tough questions. In the town of Beaver Utah, you have over 50 billboards along the freeway. Each billboard produces on average $500 a month in revenue. That is $25,000 a month conservatively. Why didn’t the county school district run after that opportunity? Why not make that work for the city in helping sustain a doctor’s clinic for those in need? So much revenue is leaving our communities these days that it is a sickening thing. Right now Washington County is looking to promote a 180+ million dollar bond for the school district. This just produces speculation at a distances while tax payers carry the debt on their backs. Why not buy the Red Cliffs Mall for less and get sustainable revenue for new construction projects? You talk of destroying the “least personally beneficial aspects first.” Why not destroy the most hideous examples of capitalism first? Let the federal and state safety nets continue, but let communities compete against them by using capitalism against itself. Sorry I could not help myself.
Mac
10 years ago
Good thoughts and commentary, There has always been confusion swirling around the label
Capitalism. I hold that it is a process where money makes money on money, compounding and leveraging. Free Enterprise is making money (profit) on producing tangible products or services. Will Durant the great historian observed that Freedom and Equality are forever sworn enemies, Where there is the greatest freedom, there is soon the greatest inequality. The greater the freedom, the greater opportunity, for the astute or connected to out run the moderate, the sluggish or the moral, then close the gates to future competition creating Aristocracy that is eventually over turned by the tyrant.
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Ray
8 years ago
In an early post, four years ago, Blake asked what books to read. I suggest you never read just one book, but pair them for competing perspectives. You can read, for example, Milton Friedman’s Capitalism and Freedom but also read Leopold Kohr’s Overdeveloped Nations: the Diseconomies of Scale. Many years ago I wrote a side-by-side comparison of the two, which appeared in Challenge Magazine (Vol 29, Issue 5, November/December 1986, pp.59-63. Kohr would agree with Keith’s early post regarding bee hives, whales pods, wolf packs and schools of fish.
Ray
8 years ago
Another thought, after having just seen Mac’s post from a year ago. Mac wrote that capitalism is a process where money makes money on money, compounding and leveraging. Free Enterprise, on the other hand, is making money on producing tangible products or services.
My own preference to express this is to begin with this:
Money – Commodity – Money – Commodity – Money – Commodity ………
Capitalists begin with money, turn it into a commodity for the purpose of turning it into more money. It is the expansion of capital that is paramount. That is why it troubles nobody to speak of State Capitalism.
Those engaged in free enterprise begin with a commodity, turn it into money for the purpose of turning it back into a commodity. Producing usable goods and services is what is paramount. Does it make sense to speak of State Free Enterprise?