Hypothesis #2—The Means: The superior economic system is democratic capitalism based on economic freedom, private property, competition, neutral money, and protection from speculators. Democratic capitalism maximizes wealth because workers are motivated to produce and innovate in a trusting, cooperative environment in which they share in the surplus of improved performance. Worldwide economic growth becomes stronger because of the workers’ motivation, and steadier as a result of the broader distribution of wealth.
By the later part of the nineteenth century, economic freedom had been experimentally verified through improvement in the lives of millions of people, particularly in America . The great wealth that was produced by this system was then distributed to those whose purchases kept the economy growing and spreading through free trade. This was the free market system summarized by Adam Smith in these words:
Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.1
The dynamic that Adam Smith proposed is an economic perpetual-motion machine. Leave it free and it will steadily reduce costs, add volume, and spread wealth around the world through free trade (see chapter 6). Economic freedom will not only eliminate material scarcity, the source of the traditional struggle, but also it will foster the harmony and trust that has been thwarted throughout human history.
Adam Smith was not an apologist for greed, as he has been frequently translated to be; he was, rather, a champion of the workers. He was an enemy of mercantilism and the concentration of wealth, and he qualified the success of his system in terms of the availability of non-volatile, patient money, and the control of speculators. Smith warned that the “prodigals and projectors,” as he called them, would deflect money from the job-growth economy and waste it on speculation. In Smith’s vision, strong and steady economic growth would spread wealth broadly if the wild and destructive swings in the economy were purged by directing currency and credit to the job-growth economy.
Karl Marx and John Stuart Mill were inspired by Adam Smith’s description of a system that could actually eliminate material scarcity. The message that Marx and Mill got from Smith was of economic freedom that combines the productivity and innovation of involved workers, the technology of the Industrial Revolution, the motivation of private property, the monitoring influence of competition, and a government that secures ample, low-cost, non-volatile, patient money. Mill integrated all of these vital components, but Marx failed to assimilate the importance of private property and competition.
Mill studied socialism carefully and concluded that the Socialists had taken a wrong turn when they took competition and private property out of the economic equation. Subsequent history proved Mill correct, for central planning not only is inefficient but also it destroys motivation at all levels. The prospect of honest competition is the fuel that energizes Smith’s economic perpetual-motion machine, for competitors constantly raised the levels of productivity and excellence in product design, reduced the cost to produce, and improve their marketing skills.
This economic system that offers to improve the quality of life in a moral environment can be rationalized in several ways. Mechanical engineers could explain the superiority of democratic capitalism on the principle of friction and force: More friction results in less force; less friction results in more force. The parallel in human relations is this: More alienation results in poorer performance; less alienation results in better performance.
Social scientists could explain the superiority of democratic capitalism because it appeals to both sides of the human duality: individual ambition and the instinct for social cooperation. Democratic capitalism rejects the motivation of “greed is good” morality and the theory of Social Darwinism as one-dimensional and overly individualistic. The self-centered approach ignores, and in fact contradicts, the more powerful benefits resulting from combining individual ambitions with cooperative efforts.
Statisticians could verify the superiority of democratic capitalism by referring to the large database of democratic capitalist companies that have demonstrated superior long-term performance in competition with those who treat workers as a cost commodity (see chapter 4). This comparative record would be even more impressive if Business Schools presented democratic capitalism for student examination, thereby adding substantially to the pool of young managers inspired by the philosophy and trained in the protocols.
Instead, democratic capitalism has had to be reinvented through trial and error by successive generations of democratic managers.
Democratic capitalism is superior to other economic systems because it is freedom based and enhances the natural characteristics of humans. The human urge is to bond together in order to be free of want, fear, and oppression. Nevertheless, humans throughout history have been forced to settle only for freedom from want in a commercial world that was run on the basis of fear and oppression. Democratic capitalism, by contrast, is based on the natural human state in that it allows everyone to be free of want, but it accomplishes this in a working culture that frees people from both fear and oppression.
The superiority of democratic capitalism can be tested and verified in many ways, but how universal can it become? Is it a “Western” phenomenon only? What political structures are required for its success? In hypothesis #3, I propose that it can be a universal system.