When was this written? 1941? 1981? or 2021?

MODERN democracies are confronted with a fundamental problem which may be defined as follows : How to curtail the freedom of the individual in economic enterprise sufficiently to effect that measure of equality of possessions and of opportunity without which democracy is no more than an empty form, and at the same time to preserve that measure of freedom of the individual in intellectual and political life without which it cannot exist? The problem may be otherwise stated: Can the flagrant inequality of possessions and of opportunity now existing in democratic societies be corrected by the democratic method? If it cannot be corrected by the democratic method, the resulting discontent and confusion will be certain, sooner or later, to issue in some form of revolutionary or military dictatorship. This then is the dilemma which confronts democratic societies: to solve their economic problems by the democratic method or to cease to be democratic societies.

Part 1

It is obvious that the problem is intrinsically an economic one. At the present moment it takes the spectacular form of unemployment. For ten years, in virtually every democratic society, from ten to twenty per cent of the working population, for the most part willing but unable to find work, have been kept alive by public or private charity or by jobs created for that purpose by the government. Unemployment is no new thing, but never before in modern democratic societies has it reached the proportions of a major social catastrophe.

The catastrophe cannot be explained as an act of God, cannot be attributed to destructive natural forces beyond human control. The people are famished, but there is no famine. On the contrary, there is wealth in abundance, or should be. Given our natural resources, our man power, and our technical equipment, there could be produced, in this country at least, sufficient wealth to provide all the people with the necessities of life and many of the desired comforts and luxuries. Yet in spite of widespread and insistent human need, the technical equipment is used only in part, the man power is not fully employed. In a land of potential plenty, millions are destitute. Obviously the situation is one which arises not from a lack of potential wealth, but from some defect in the method of producing and distributing wealth. That the defect is a serious one is sufficiently indicated by a simple ironic fact: in a world in which millions are destitute, it is thought necessary, and under the prevailing system of production and distribution apparently is so, to limit the production of the necessities of life in order to keep people from starving.

The prevailing system for the production and distribution of wealth is variously denoted by the phrases capitalist system, competitive system, price system, system of free economic enterprise, system of laissez faire. The theoretical justification of it derives from the liberal-democratic ideology —the assumption that social welfare can best be achieved by reducing governmental interference with the freedom of the individual to a minimum. The assumption was never better formulated than in John Stuart Mill’s famous essay, “On Liberty.” Governmental interference in the activities of the individual, he maintained, was never justified except when manifestly necessary to prevent the activities of some individuals from injuring others.

In the economic realm this meant the maximum freedom of the individual to choose his occupation or business, and to enter freely into contracts for the acquisition and disposal of private property and for the purchase or sale of personal service. It was assumed that the free play of individual initiative, stimulated by the acquisitive instinct, would result in the maximum production of wealth, and that the competitive instinct, operating through the law of supply and demand and the resulting price system, would effect the best possible distribution of it. The function of the government in this system would be reduced to defining and guaranteeing the rights of private property, enforcing the rules of contract, and preserving social order. Having defined the rules of the game, the government should see that they were observed, but should not otherwise interfere with the players. Let the game go on and the best man win! Laissez faire, laissez passer!

Contrary to a widespread belief, laissez faire was never more than a theory imperfectly applied. That imagined happy time when government did not interfere with the freedom of the individual by meddling in business never in fact existed. The institution of private property itself is a most drastic regulation of business enterprise, the law of contract a fundamental interference with the liberty of the individual. But assuming private property and the law of contract as part of the system, there never was a time when government did not find it manifestly necessary, according to Mill’s famous definition, to interfere with the activities of some individuals in order to prevent injury to others.

In England, the trend towards laissez faire was halted before it was completed. A decade before the doctrine was officially adopted by the repeal of the Corn Laws in 1846, the government had found it necessary to restrict free business enterprise by passing the first Factory Acts for the protection of women and children. And from that day to this, in England and in every industrialized country, including the United States, the governmental regulation of private property, of free competition and free contract, of the price of commodities and of labor, of the inheritance of property and of the disposal of income from it, has steadily increased. This increase of governmental regulation, this mass of what is called social legislation, has been brought about by the pressure of labor unions supported by the humane sentiment of the community, and underlying it is the assumption, avowed or unavowed, that the system of laissez faire, of free business enterprise, so eminently successful in stimulating the production of wealth, is incapable, without governmental regulation, of bringing about an equitable or even a tolerable distribution of it. It is far too late in the day to ask whether government should interfere in business enterprise. It always has interfered in business enterprise. The only relevant question is precisely to what extent and in what ways it should interfere.

Nevertheless, although the governmental regulation of business enterprise steadily increased, the theory of laissez faire was not abandoned. The prevailing assumption was, and still is in democratic societies, that governmental regulation should be kept to a minimum, however high the minimum might in the event prove to be. It was for the most part taken for granted that the basic right and the assured foundation of the economic structure of society was private property in the means of production, free enterprise, and the competitive system. Social legislation was regarded as no more than a limited, if necessary, concession to adverse circumstances, an exception that proved the rule, a series of minor adjustments that would leave the system intact while enhancing its efficiency. In the decade before the Great War it was indeed widely regarded as in some sense a part of the system of free enterprise, a kind of insurance against the subversive doctrines of socialism, a preordained and peaceful method of transforming that anomaly of progress and poverty which Henry George had so graphically described, into that progress and prosperity which the prophets of democracy had so confidently predicted.

Since the Great War, faith in social legislation as a method of validating the system of free enterprise has been much impaired. If we survey the history of a century of governmental regulation of business enterprise, it is obvious that while it has done much to correct minor evils it has done little or nothing to solve the fundamental problem of an equitable distribution of wealth. On the contrary, the problem of the distribution of wealth is more serious and more insistent than it was in the time of Henry George. If the anomaly of progress and poverty is less glaring than it was, the only reason is that while the poverty is more patent the progress is less assured.

Inevitably, therefore, the question, long since raised, becomes every day more relevant: Can the problem of the production and distribution of wealth be solved, within the framework of the existing system of free enterprise, by any amount of governmental regulation? In short, are the defects of the capitalist system incidental or inherent?

Part 2 and Part 3 are published in the Comments below.