Perhaps the most fundamental principle of capitalism is the idea of private property. This idea, above all others, represents the clearest distinction between capitalism and socialism. In a socialist society, property is not owned by individuals, but by the state or central government. Any and all functions of property performed under the socialist banner are undertaken at the direction of governing authorities. More simply put, the public at large owns all property, and the officers of the state determine how that property will be used. In a capitalist society, private citizens own property, and it’s the individual property owner who decides how best to use that property.
It is a common misconception that property under the capitalist system is used only for the benefit of the property owner. There are many who believe that private property in a capitalist society does not serve the public good. We often hear loud voices shouting for government to regulate, control, and take ownership of private property in order to fulfill the needs of the public. The simple truth is that not only do owners use private property for the benefit of the society at large, but also, they do so more efficiently and effectively than any government could dream.
For example, let’s say an industrious young woman named Harriet decides to purchase a piece of property for the purpose of designing and manufacturing running shoes. In order for her to make the most of her property, she cannot simply make shoes for herself and herself alone. She must make shoes for as many people as are willing to buy them. Furthermore, she cannot simply design shoes that she herself likes. She must design shoes that as many people as possible will like. Therefore, the idea that Harriet will only use her property to meet her own ends is inherently false. In his masterpiece Human Action, Ludwig von Mises, the renowned Austrian economist, wrote,
In the market society the proprietors of capital and land can enjoy their property only by employing it for the satisfaction of other people’s wants. They must serve the consumers in order to have any advantage from what is their own. The very fact that they own means of production forces them to submit to the wishes of the public. Ownership is an asset only for those who know how to employ it in the best possible way for the benefit of the consumers. It is a social function.
In addition to meeting the demands of the public, Harriet must also meet all the demands that go along with owning property for the purposes of commerce. She will be forced, not by government, but by the marketplace, to minimize waste and find equilibrium between quality and quantity. She will have to maintain her equipment, tools, and machines (capital goods) in order to keep producing running shoes. She will also have to ensure that her employees are as happy or happier than they would be working at any other factory, otherwise, they may become dissatisfied and ultimately choose to leave and seek employment elsewhere.
The economic competition that exists under a capitalist system will force Harriet to please the public (consumers) in order to please herself. The use of her property toward these ends is mutually beneficial, but the demands of the public are paramount. Should the public’s desire for running shoes begin to wane, Harriet cannot continue to produce them just because she wants to. She must learn to design and produce another kind of shoe; one that the public demands. If the public decides it wants shoes that are made in a more environmentally friendly manner, she must alter her production practices to make them happy. If the public decides it no longer wants to buy shoes at all, Harriet will have to use her property for another purpose entirely. Private property owners must meet the public’s needs before their own and it’s the desire to meet their own needs that drives them to meet the needs of the public. It is a wheel of economic activity that is beautifully simplistic in its reliance on free will and self-determination, and as it turns it tends to benefit anyone who has a hand on it.
Now, in order to adequately meet her customers’ demands, as well as her own personal desire for more profits, Harriet must not only keep up her property, but she must also save a portion of her profits in order to reinvest in it. She cannot simply splurge on unnecessary luxuries and expect to out-compete the other shoe manufacturers. She must use a sizable portion of her profits to purchase newer and more efficient capital goods. In doing so, Harriet will be able to produce more shoes at a lower cost, resulting in a more affordable running shoe.
In his book The Conquest of Poverty, Henry Hazlitt uses a quotation from George Roberts, a Director of the United States Mint under three Presidents to illustrate how one private property owner served the public better than government could, simply by reinvesting in their property and in capital goods. Roberts wrote a monthly newsletter for the National City Bank of New York from 1914-1940, and in July of 1918 he wrote,
If Henry Ford had exceptional talent for the direction of large productive enterprises the public had no reason to regret that he had an income of $50,000,000 a year with which to enlarge his operations. If that income came to him because he had a genius for industrial management, the results to the public were probably larger than they would have been if the $50,000,000 had been arbitrarily distributed at 50 cents per head to all the [then, 1918] population of the country.
What Roberts is saying, is that Henry Ford’s ability to make $50 million is a testament to his ability to continuously reinvest his profits in order to produce bigger quantities of automobiles, at a better price, and of a better quality than his competitors.
Ford’s accomplishment wasn’t just big profits; it was that he was able to make an automobile that was affordable to the general public. Ever-increasing numbers of citizens could now benefit from the advantages that went along with owning an automobile. The United States didn’t start keeping statistics on automobile ownership until 1960, but if we look just at the period between 1960 and 2011, we can see the kind of effect that saving and reinvestment by private property owners can have on society as a whole. The percent of households with no vehicles in 1960 was 21.5%. By 2011, that number had dropped to 9.3%. Interestingly, in 1960 the percent of households with two vehicles or more was also 21.5%. By 2011, that number had risen to 56.6%.
The ability to reinvest in capital goods is predicated on the notion of private property and without it, a free market cannot exist. When government assumes ownership of the means of production, it also assumes all the responsibilities that go along with it. The problem with this arrangement lies in the fact that politicians are not beholden to individuals as consumers, but as voters. There is no incentive for government officials to reinvest profits into capital goods for business expansion. Rather, their incentive rests in using those profits in whatever way they think will win them the most votes in the next election. It is not market forces that drive politicians; it’s forces relating to power and influence. Therefore, profits used for political purposes are often wasted and create market distortions, like those of a funhouse mirror, that don’t accurately reflect reality.