Lecture by Sheldon Richman given as part of The Future of Freedom Foundation’s “Economic Liberty Lecture Series” on March 1, 2010. http://www.fff.org
Sheldon Richman is editor of The Freeman, published by The Foundation for Economic Education in Irvington, New York, and serves as senior fellow at The Future of Freedom Foundation. He is the author of FFF’s award-winning book Separating School & State: How to Liberate America’s Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State.
Here’s a great short piece on the differences between capitalism and free enterprise from Rick Martin:
“When I tell people that capitalism and free enterprise are not the same thing, I typically get a deer-in-the-headlights look, followed by a clearly articulated “Huh?” But they are not the same thing, and that is the subject of this piece.
Capitalism requires growth. Free enterprise does not. Capitalism can only be satisfied by “more.” Free enterprise can be satisfied by “enough.” Free enterprise can go on forever. Capitalism cannot.
Free enterprise means that I am free to set up my own enterprise, say a general store, and the Federal Agents will not come knocking at midnight. As long as my expenses do not exceed my revenues, my enterprise can continue indefinitely without the need to increase my net worth.
Free enterprise requires freedom, but it does not require accumulation, or growth.
Capitalism, on the other hand, requires a return on investment (ROI). It requires me to accumulate ever more capital. If I invest $100, by the end of the year, I had better realize a minimum of $106. If I don’t, then my investment became negative, as the very roots of capitalism are planted in inflation.
If I reinvest my $106, I must receive $113 the next year. This must continue forever, or else the capitalist system will fail. This is closely related to the concept of compound interest. This also requires an exponential increase in the money supply, which eventually becomes impossible to balance with the physical system of available resources.
The real difference then, is this; capitalism requires accumulation while free enterprise does not. Capitalism also requires external inputs, often coming from Peter where Paul is the capitalist. “Those who rob Peter to pay Paul, can always count on Paul for support” ─ George Bernard Shaw
“Growth” must come from an expansion of the money supply, resulting in the dilution of the value of the currency (inflation). Capitalism and free enterprise are not mutually exclusive. In fact, capitalism usually rides on the back of free enterprise making them appear as one.
Capitalism thus requires infinite growth. Since we live on a finite planet, this is clearly impossible. Eventually something has to give. It is not a matter of if, but only a matter of when. To believe otherwise is to believe in magic. When I was a child, compound interest seemed like magic to me. Yet any professional magician will tell you that magic is not really magic, but merely an illusion. Similar to capitalism.
The characteristics of capitalism are the characteristics of the weed: overshoot and die-off. Before the weed dies it shoots out consumerism, imperialism, and planned obsolescence. These are meant to delay the demise of the weed but in the end, when it has exhausted its resources, the weed dies anyway. Capitalism must, in the end, consume its own host society. The result of practicing unchecked capitalism in the U.S. is currently consuming our Middle Class.
We have all seen those movies where the crew of a steamship, when the coal is gone, rips up the decks to feed the boilers. It is clear to everyone that this can only go on for so long as there are decks to rip up. A steadily increasing return on investment, which is the very essence of capitalism, can only have a similar result. The poor people on the steamship may be hopeful of rescue by another ship. On Spaceship Earth, I do not think we can count on being rescued by, or making landfall on another planet.
So it comes back to my initial comparison of capitalism and free enterprise. Free enterprise means, quite literally, freedom. Freedom to try, freedom to succeed, and freedom to fail.
Capitalism (sorry, Dr. Friedman) does not mean freedom. It means slavery to the demands of return on investment; of never ending growth. Carried to its logical conclusion, in our present time it probably means turning into a society that might be characterized as high-tech feudalism.
Free enterprise is a shopkeeper, capitalism is a banker. With free enterprise, we can own our wealth. With capitalism, our wealth will wind up owning us. That is the real difference. And that is our choice.