I was recently walking through a construction site near my house, where a new townhouse project is being built. The townhouses are four stories high. The basic construction of all four levels has been finished. A man was using a gigantic piece of equipment that lifted an entire bedroom section, which must have weighed around 1000 pounds. He then elongated the equipment to enable him to place the section onto the fourth level of the townhouse. It was an incredible feat.
As I was standing there watching this, I couldn’t help but think about the critical importance of capital in a society. Imagine an extremely poor nation, one on the verge of starvation. It wouldn’t have that piece of equipment, which has to be enormously expensive, because no one in that society could afford it.
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So, what would poor nations do to construct a townhouse project of that nature? The probability is that they wouldn’t be constructing such a project, either because it would be too expensive or because they would lack the necessary equipment to do so. Alternatively, if they were to construct the townhouse project, they would have to break down that huge bedroom section and manually carry the pieces up to the fourth floor and then reconstruct it.
Thus, the question arises: Why are some nations able to afford that piece of equipment and others like it when other nations are unable to do so? Or to put the question another way, what causes some nations to become wealthy while other nations remain poor? Or as the Scottish philosopher Adam Smith put it in the title of his famous book, what are The Nature and Causes of the Wealth of Nations?
Among the greatest contributions that America has made to mankind is to discover the key to ending poverty through continuous increases in people’s standard of living. Consider, for example, the years 1890 – 1910 here in the United States. No income tax, Social Security, Medicare, Medicaid, welfare state, national-security state, foreign wars, immigration controls, drug war, minimum-wage laws and other economic regulations, gun control, paper money, or Federal Reserve.
Needless to say, this unusual way of life shocked the world. Even more shocking was the result of this unusual society — the greatest increase in people’s standard of living in history. People were going from rags to riches in one, two, or three generations. That includes the fact that millions of penniless immigrants, many of whom could not speak English, were flooding American shores. By the way, when people were free to accumulate unlimited amounts of wealth, there was also the greatest outburst of voluntary charity that mankind had ever seen.
Americans had discovered the solution to poverty, a solution that involved preventing government from waging war on poverty. That’s what people around the world found so shocking. Throughout history, it was just assumed that government was needed to combat poverty. Hardly anyone had figured out that government efforts to combat poverty were the principal cause of poverty.
Here is how the American system worked. People were free to accumulate unlimited amounts of wealth and decide for themselves what to do with it. That’s because there was no income taxation.
When people were free to accumulate unlimited amounts of wealth, they saved a portion of it. They placed those savings into banks. Banks would lend that money to employers who would use it to purchase tools and equipment, which would make their workers more productive. Higher productivity meant increased revenues for the firm. Increased revenues meant that the firms had more money with which to pay higher wages. If they didn’t pay higher wages, they ran the risk of losing their workers to competing firms who were offering higher wages with their increase in revenues.
The cycle would then build on itself — more income, more savings, more capital, more productivity, more revenues, more wage increases.
It boggles the mind what the standard of living of the American people would be today had that process not been interrupted. Unfortunately, however, it was interrupted by the adoption of the income tax, Social Security, Medicare, Medicaid, the welfare state, the national-security state, foreign wars, the drug war, immigration controls, gun control, minimum-wage laws and other economic regulations, paper money, and the Federal Reserve System, all of which necessarily entailed, decade after decade, a massive confiscation of income and, therefore, an enormous diminution of productive capital.
Of course, that abandonment of the sound founding principles of our nation is water under the bridge. There is nothing anyone can do about that. But there is something we can do about the future. We can restore those sound founding principles to our nation. We can show the world, once again, the importance of capital. We can, once again, show the world the way out of poverty. We can, once again, lead the world to economic liberty and to ever-increasing standards of living.