Capitalism and Western Civilization - The Founding

William H. Young

Fortunately for our heritage, Adam Smith published The Wealth of Nations in 1776 and destroyed the theoretical underpinnings of British mercantilism, which the American Revolution was fought to overcome. Our Founders adopted Smith’s ideas while creating a unique economic system for a new nation.

Sir James Steuart, a contemporary of Smith, actually wrote the first systematic treatise on economics in English, Inquiry into the Principles of Political Economy (1767). Steuart was an exponent of mercantilism (or corporatism), the existing system of Great Britain and France. He accorded government a key role in the economic development of society, particularly in the perfectibility of man and employment. He advocated export subsidies, price supports for agriculture, and government job-creation programs. The Encyclopedia Britannica adds:
He understood that all such programs would require higher taxes but felt this to be a fair trade-off, given his assumption that tax revenues would come mainly from the wealthy. He believed that these programs would benefit politicians by keeping their “subjects in awe.”
Ironically, our current economic debate could be seen as noted economist and occasional baseball player Yogi Berra would put it, déjà vu all over again.
Steuart’s treatise was Smith’s chief target for refutation. In Book 4 of Wealth of Nations, he indicted the failures of mercantilism and control of the economy by the state, politicians, and monopolies (crony capitalism, as we would say). He also disagreed with the theories of the French Physiocrats—which Tocqueville would call “democratic despotism”—except for their concept of laissez faire, or free trade. Smith believed that free markets could better the world, and that progress required “little else…but peace, easy taxes, and a tolerable administration of justice.” He wanted “the establishment of a government which afforded to industry the only encouragement which it requires, some tolerable security that it shall enjoy the fruits of its own labor.”
Smith’s notion of the general interest was simply the sum of the interests of all the members of the society, including the working classes. This was perhaps the most novel aspect of Wealth of Nations. The title referred not to the nation as the mercantilist understood it—the nation-state whose wealth was the measure of its strength vis-à-vis other states—but to the people comprising the nation. It was their interests, their wealth that would be promoted by a political economy that would bring about a “universal opulence which extends itself to the lowest ranks of the people.”
Almost all of the Founders read and praised Smith’s Wealth of Nations, and absorbed the thrust of his concepts. Hamilton worked arguments derived from it into his public papers. Madison quoted from it unconsciously, without attribution, in his speeches.
We have seen that man’s universal instincts include a deep-seated capacity for envy. Man has a need for recognition or esteem from others. Human nature was forged in competition; the drive for human dominance is universal. Human nature countenances hierarchy; humans form hierarchies of dominance. The Founders took account of those innate features of human nature and sought to transcend the history of failures of past Western republics due to envy, class warfare, and economic conflict over scarcity among factions.
In a historic first, America was founded from the beginning as a commercial republic—with few rewards provided by government—to provide for private pursuit by individuals of self-interest and prosperity through a market system utilizing private property and entrepreneurial initiative. Past republics had viewed man’s insatiable appetite for material comforts and commerce as a sign of decadence and impending social instability. Our Founders saw that man’s appetites could be satisfied in a commercial economy in which economic progress, based on freedom, could lift the burdens of life from the shoulders of the common man. They realized that the pursuit of material well-being through individual work and performance based on reciprocity in the private sector contributes to the welfare of society—both in the sense of creating personal fulfillment and wealth and the social unity engendered by commerce. Stability was achieved because individuals pursued their economic self-interest rather than warring over frivolous religious and political disputes.
The Founders turned to private property and multiple productive hierarchies within the private sector as the primary way for citizens to fulfill their different and unequal faculties of human nature, satisfy their inherent human ambitions for dominance and hierarchical status, and achieve recognition and esteem from others. They uniquely recognized that “different and unequal faculties” are part of human nature. James Madison expresses this in The Federalist, Number 10, when he argues:
The diversity of the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results
“Madison has in mind such ‘faculties’ as ambition, intelligence, experience, energy, and strength,” explains Thomas West in Vindicating the Founders (1997):
These lead people into different jobs and professions (leading to different ‘kinds of property’), and the same differences lead to different levels of income (different ‘degrees’ of property)….The right to acquire property was understood by the Founders, and by Americans long afterward, as a protection to rich and poor alike. It was a means by which the poor could ascend from poverty to wealth and not, as is so often asserted today, a device to keep them down.
To Madison, government had been instituted not to protect any particular property, but to protect the human faculties of acquiring it now and in the future.
Alexander Hamilton sought to establish a government system that would both channel the individual pursuit of self-interest into developing the American economy and protect that economy from the follies that untrammeled self-interest always leads to. One of the greatest problems facing the American economy was the lack of liquid capital available for investment. Hamilton wanted to use the national debt to create a larger and more flexible money supply. Government bonds held by banks could serve as collateral for bank loans, multiplying the available capital. By 1794, the United States had the highest credit rating in Europe, one more lesson our postmodern politicians could learn from the founding.
“The most forceful architect of the political economy expressed in the Constitution was Hamilton, a Lockean who also viewed his teaching as tempered by an older notion of moral order,” explain Robert N. Bellah and the other authors of The Good Society (1991): 

For Hamilton, progress was a highly charged moral idea. But progress had to be institutionalized, to be given public standing and recognition in order to be an effective force in human affairs. For Hamilton, progress was a spirit human society had to learn...The institutions of Hamilton's model of political economy—from the money supply and national bank to publicly chartered organizations for the promotion of enterprise to the laws of contract and obligation—were pedagogical devices. Their aim was the moral transformation and improvement of human beings. 

Hamilton conceived political economy as making possible a spiral of human progress, not just in commerce and technique but in morals as well, through popular opinion and associations.
For more than two centuries, America has had the world’s foremost record of economic growth through entrepreneurial capitalism and its own Industrial Revolution, producing a much improved standard of living for all of its people. The story of the founding of our commercial republic and the economic system that produced that record should be included in college liberal education. Tragically, most students today encounter our founding, if they do at all, exclusively through the lens of multiculturalist critics.
Next week’s article will address the emergence of economic growth in Western and American history.
This is one of a series of occasional articles applying the lessons of Western civilization to contemporary issues relevant to the academy.
The Honorable William H. Young was appointed by President George H. W. Bush to be Assistant Secretary for Nuclear Energy and served in that position from November 1989 to January 1993. He is the author of Ordering America: Fulfilling the Ideals of Western Civilization (2010) and Centering America: Resurrecting the Local Progressive Ideal (2002).
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