These days, many Americans who regard themselves as part of the intelligentsia are talking about socialism. Among the professoriate and the college-educated, socialism is looked upon favorably while capitalism is held in disdain. These people have rarely heard any criticism of the former, nor a defense of the latter. Crucially, they don’t know how capitalism works: how it harnesses human energy and creativity for the production of goods and services most in demand, and thus raises the standard of living for everyone.

If you could get those who think they want socialism and believe that capitalism is horrible to read Capitalism in America by Alan Greenspan and Adrian Wooldridge, you’d put a considerable dent in those beliefs. The authors—Greenspan, of course, is the former Federal Reserve board chairman and Wooldridge is the political editor of The Economist—have written a mostly excellent, illuminating history of the consequences of America’s embrace of capitalism rather than a government-controlled economy. The authors give a historical account of the roots of capitalism in America, its success in enabling people to advance economically, and the reasons why it has been so vilified by statists.

Most importantly, Greenspan and Wooldridge get absolutely right the fact that the original American system—secure property rights, the rule of law (particularly the sanctity of contract), and people’s freedom to try producing and exchanging goods with little if any government interference—made it possible for virtually everyone to succeed, although often after some failures. Unlike most of Europe, where traditional privileges restricted opportunity to a few, in America, they write, “it was possible for people born in obscurity to rise to the top of society and for ordinary people to enjoy goods and services that were once confined to the elites.” Fortunately, the Founders understood that the people would thrive if government refrained from undermining their natural urge to produce and invent. They also knew it was essential that people not be deprived of the fruits of their labor. That didn’t change until the imposition of the income tax in 1914.

Freedom and creative destruction / Under capitalism, Americans produced goods and services at a pace unknown in history. U.S. economic expansion in the late 18th and 19th centuries was stupendous. Within a century of the Founding, Americans enjoyed higher incomes than did people in Britain, Germany, France, and Italy.

Alexis de Tocqueville saw clearly why prosperity was rising in America. The authors quote his observation that “the entire society is a factory.” He and many others noticed how extraordinarily busy Americans were—the energy that they put into their farms and trades. Under capitalism, free Americans used their brains and brawn much more effectively than did the taxed and regulated peasants of the Old World. It’s that freedom to try without having to get permission from authorities that makes the world of difference between capitalism and socialism.

One of the key concepts of capitalism is what the Austrian economist Joseph Schumpeter called “creative destruction”: the inevitability that free people will come up with new methods and products that displace older, inferior ones. Such progress necessarily wipes out some investments and jobs. The crucial thing about American capitalism is that (at least until fairly recently) we let creative destruction run its course. The authors write:

America has been much better than almost every other country at resisting the temptation to interfere with the logic of creative destruction. In most of the world, politicians have made a successful business out of promising the benefits of creative destruction without the costs.

To say, however, that the United States experienced rapid economic growth because of capitalism in its early decades is to overlook the vast difference between the North, with its free market for labor, and the South, where much of the labor force consisted of slaves. Greenspan and Wooldridge devote a chapter to the gap between the two regions. Slavery acted as a drag on innovation and the development of industry in the South. One telling point the authors mention is that 93% of all U.S. patents issued up until 1860 went to inventors in the North. The economic gap between the regions kept widening as, they write, “the North invested in more machinery and the South invested in more slaves.” Millions of industrious immigrants went to the free Northern states, but relatively few to the hidebound South. Given the huge disparity in resources, the outcome of the Civil War was almost inevitable.

I only wish that Greenspan and Wooldridge had clearly stated that slavery is incompatible with capitalism, which calls for mutual consent on all contracts. Stealing your workers is just as uncapitalistic as stealing your raw materials or threatening customers to compel them to buy. The South was economically backward because it relied so heavily on a coercive, pre-capitalist mode of production.

After the prodigious human and material costs of the Civil War, America began to grow and build again. The postwar decades were marked by strong economic development. Business leaders kept finding ways to produce more with less. Bessemer steel plants, for example, could turn out more steel of better quality with substantially less usage of coke than older hearths could. As a result, the authors write, “Steel put cheap tools in everybody’s hands and cheap utensils on everybody’s tables.” The price of kerosene fell sharply over many years as oil refiners like John D. Rockefeller improved their efficiency. (Cheap, universally available kerosene for lighting, by the way, destroyed the whaling industry; that’s another point I wish Greenspan and Wooldridge had made.) Capitalism’s creative destruction was working wonders.

Standards of life for ordinary people increased steadily. Because of improvements in farming, food processing, and transportation, Americans could enjoy far better, more varied diets than ever before. New kinds of merchandizing, such as the Sears mail-order catalogue, made it possible for people to obtain goods they could have barely imagined in the recent past. Massive waves of immigrants poured into a country where they had boundless opportunity to succeed, unlike in their homelands.

Progressive push-back / However, some dark clouds were forming. One of them was the way a few capitalists—railroad magnates initially—began turning to the government to enhance and protect their profits. This gave state capitalism a foothold, and it has grown into what the authors describe as a grave and debilitating problem today. Business success depends more and more on good lobbying than on good products.

The other dark cloud was Progressivism. The Progressives were mostly university-educated intellectuals who were certain that society could be improved by abandoning “chaotic” capitalism in favor of a “scientifically managed” economy. In their vision, enlightened government officials would set “fair” wages and prices, break up businesses that got “too big,” and have government provide for the needy. A leading Progressive, economics professor Richard Ely, declared in 1885 that laissez-faire was “unsafe in politics and unsound in morals.”

Progressive tracts and speeches had a big effect. Greenspan and Wooldridge put it this way:

The Progressives’ greatest achievement was to encourage a change in the American attitude to government. Before they got to work, Americans were optimistic about business and cynical about government. A couple of decades later, Progressives had persuaded a significant number of people that the opposite was the case.

With that change in attitude came a clamor for all sorts of government mandates: minimum-wage laws, maximum-hour laws, price controls for businesses “affected with a public interest,” antitrust laws, and more. Progressivism ushered in the pernicious notion that the people secure prosperity and safety through government power rather than through freedom under the rule of law.

At first, Progressivism did little damage. Most Progressive legislation was defeated and that which passed was frequently declared unconstitutional by the courts. But that would change.

One of Greenspan’s favorite topics in his early days as an Ayn Rand follower was gold, and he still gives a strong defense for the gold standard as the foundation for capitalism. He and Wooldridge write:

The fact that the supply of gold was limited meant that gold was one of the most solid defenses of liberal society against the temptation to debauch the currency, the monetary equivalent of property rights. The universal acceptance of gold as a means of exchange made it easier to trade goods across borders.

Unfortunately, governments could not resist the urge to meddle with the gold standard when it suited their supposed needs. In 1890, for instance, the U.S. government enacted the Sherman Silver Purchase Act, a blatant piece of special interest legislation. (See “Silber on Silver,” p. 57.) Because of a huge silver find in Nevada, the price of silver fell dramatically. Politicians who wanted to raise the price of silver and spark inflation that would benefit debtors passed a bill requiring the federal government to purchase nearly all the silver the mines were producing and turn it into coins.

This law undermined confidence that the United States would continue to adhere to the gold standard, eventually provoking the severe economic contraction known as the Panic of 1893. The Silver Purchase Act was later repealed and the nation returned unequivocally to gold after the election of 1896, despite Democratic candidate William Jennings Bryan’s “Cross of Gold” speech advocating bimetallism and the free coinage of silver. The book’s point is clear: capitalism works best when government protects sound money.

Progressive efforts at undermining capitalism were given a tremendous boost by World War I. President Woodrow Wilson, an outspoken opponent of laissez-faire and limited government, entered the war in Europe in 1917 even though he had campaigned for re-election in 1916 on a peace platform. War gave the government the excuse to vastly increase its powers over the economy and even trample upon the First Amendment. Greenspan and Wooldridge sum up the unhappy situation thus:

The America of 1918 was a very different country from the America of the late nineteenth century. It had most of the accoutrements of a modern state-dominated society: an income tax, a central bank, and a swelling bureaucracy. And it had a significant group of people who thought that the major problem was that this hadn’t gone far enough.

The Depression and WWII / The 1920 election brought to Washington a traditional pro-business administration in Republicans Warren Harding and, upon Harding’s death in 1923, Calvin Coolidge. They cut taxes, did away with much of Wilson’s bureaucracy, and made the right decision to do nothing when the economy went into a sharp recession in 1921. (The economy recovered and resumed growth in 1922.)

But, the authors note, not all was well. The Republicans returned to their traditional support of high tariffs and instituted the nation’s first law to restrict immigration. (See “The War against Chinese Restaurants,” Summer 2017.) Even its putative defenders couldn’t resist throwing sand in the gears of capitalism.

When the stock market crashed in late 1929, the White House was occupied by Herbert Hoover, a Republican with strong interventionist instincts. Instead of following Harding’s laissez-faire approach from earlier in the decade, Hoover wanted the federal government to play an active role in restoring prosperity. Among his actions was signing the Smoot–Hawley Tariff of 1930, against the advice of most leading economists of the day. Hoover believed that keeping out imports would raise domestic prices and revive the economy. Instead, the result was an international trade war that saw American trade fall by two-thirds from 1929 to 1933, adding drag to the floundering economy. He also pushed for a huge tax increase to cover the rising cost of federal programs—another drag.

Hoover was crushed in the 1932 election by Franklin D. Roosevelt. With unemployment at unprecedented levels, most of the people were willing to hand power over to a jaunty, upbeat politician who promised to revive the economy. FDR was even more of an interventionist than Hoover and surrounded himself with a “Brain Trust” of intellectuals who admired the greater interventionism of Europe, including fascist and communist regimes. Congress rubber-stamped FDR’s waves of New Deal legislation, which tried to end the Depression through heavy government management of business activity and labor. Greenspan and Wooldridge criticize many of these initiatives; perhaps the most awful was the plan to raise the price of pork by ordering the slaughter of millions of baby pigs at a time when many people were going hungry.

Although the Depression dragged on and on, including the “Recession within the Depression” of 1937–1938, Progressives were delighted with Roosevelt’s New Deal. It had, the authors write, “put the federal government at the heart of American society.” Capitalism was not gone, but the economic liberty it needs had been permanently reduced.

Yet, the New Deal policies failed to provide the stimulus their creators envisioned. Instead, according the Greenspan and Wooldridge, World War II “finally pulled the United States out of the slough of despond.” That’s one of the book’s errors. The United States had basically returned to long-term economic trend before Pearl Harbor, as FDR’s gold policies unwittingly rectified the Federal Reserve’s tight-money policies that had produced the Depression. The war did create enormous employment as millions of men were drafted and huge factories opened to produce war materiel. By 1944 the nation’s GDP was twice what it had been in 1939, but it consisted in large part of military hardware rather than more goods and services for the citizenry. That’s not a healthy economy. It’s disappointing to read Greenspan and Wooldridge fumble this.

Further, the authors declare that the war “forced companies to devise new techniques to boost output.” But under capitalism, as they show throughout the book, people are constantly trying their utmost to improve efficiency.

The last chapters of the book cover the economic slowdown over the last several decades: historically sluggish growth and falling numbers of new business startups. Has capitalism run out of steam, as some commentators (who favor still more government control and redistribution) maintain?

Greenspan and Wooldridge don’t think so. Capitalism, they argue, remains the optimal economic system. Unfortunately, we have undermined it with a host of bad government policies. As the authors write, America “is trapped in an iron cage of its own making: out of control entitlements and ill-considered regulations are forcing it to perform well below its potential.”

What’s the solution? The authors want to open the cage so that capitalism can again work. They’re right. Our future will be much brighter if we can return to the days when people were free and Washington, DC was not the nation’s heart.