Capitalism for dummies

How a high school dropout left an estate of around $28 million in today’s dollars seems profoundly unfair to anti-capitalists everywhere.

In 1958, George Billings left Point Loma High School in the 11th grade and subsequently worked for two contractors, learning how to build homes. He bought a used 50 mpg Isetta automobile to save money, and after saving $5,000, he bought a La Mesa lot on his own and built a spec house, and then another and another.

He accumulated enough profits to buy a North Park lot through me as his broker and build nine apartments. After selling them, he bought additional lots and built several more apartment buildings and small condo projects, gaining enough capital to build at least three apartment projects of 100 to 164 units in El Cajon, Escondido and Carlsbad. By the time he died in 1985, he had built nearly 2,000 apartment units.

Profits come out of savings in businesses and are the source of the capital in capitalism. Many evenings Billings would call his sub-contractors, roofers, tile men, glazers, framers, carpenters and appliance suppliers and tell them they had to do better. In the trade they call it “beating down your subs.” I was amazed at how the subs kept coming back and bidding on subsequent projects.

The more money Billings saved in construction costs, the greater his profits and hence the greater his capital to build more, better and larger apartment projects (creating a lot of jobs). Making his subs cut their costs was also a gain for renters — Adam Smith’s “invisible hand” at work. Every apartment that Billings built, no matter how much he profited, benefitted not only his renters, but also renters in other buildings — buildings that had to compete with Billings' lower construction costs, lower rents and higher quality.

Billings and another builder of the same era — Ray Huffman — built thousands of apartments that 95 percent of San Diego renters could afford. In contrast, the government today develops, sponsors or provides apartments that less than 5 percent of renters can afford. They are so expensive ($400,000-$500,000 each) that they must be subsidized by the government and only the poor can afford to live in them.

Private profits come from the savings derived from building better apartments than the government can at half the costs. This is the significant difference between free enterprise (capitalism) and government planning (socialism). Consumers compel builders to build better and cheaper, while politicians believe the more expensive their undertakings, the more money they are redistributing. All too many in government honestly believe that every dollar the government spends results in a Keynesian multiplier of $2.50 to $10 in economic growth. This causes politicians of every stripe to become positively orgiastic, especially Democrats.

Agriculture Secretary Tom Vilsack last year said food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." House Minority Leader Nancy Pelosi contends that "unemployment benefits create jobs faster than almost any other initiative you can name." Rep. James Clyburn said, "We're not going to save our way out of this recession; we've got to spend our way out of this recession.”

This is how we got a national debt of $16 trillion. This is why waste in government is ubiquitous. All government spending is someone’s income, noted Sen. Edward Kennedy.

Capitalism means free enterprise, and free enterprise means freedom — freedom to sow, freedom to reap, freedom to enjoy the benefits of your own labor and dexterity. The more government coerces people beyond its legitimate functions of protecting people and property, the worse off people become. Third World nations are Third World nations because they have not developed a system of property rights and free enterprise. If this were not the case, the USSR and Red China — where profits were illegal and immoral — would have become the wealthiest nations in history. “People before profits” was their dumbest slogan.

Economists Ludwig von Mises, Friedrich Hayek, Milton Friedman and Murray Rothbard have demonstrated that profits are the only way to know how to allocate resources and the only way to tell what consumers want — the more urgently consumers want things, the higher the profits. Without the profit system, our politicians would be lining train tunnels with silver instead of cement, because silver lasts longer, Rothbard noted.

Nearly all Nobel laureate economists advocate a zero capital gains tax. They agree with Mises that the only way to raise the general standard of living is to increase capital and capital investment at a faster rate than the increase in population. This enables workers with better computers, machines and equipment to produce more for each hour worked and thereby earn higher salaries. Hence the justification for lower capital gains tax rates.

Last week I drove alongside a semi-tractor pulling two gasoline tankers. By pulling two tankers instead of one, the driver was twice as efficient and undoubtedly earns more money than drivers pulling just one tanker trailer. It works the same for lumberjacks who use chain saws instead of axes like my grandfather used. Chain saws enable them to down more trees per hour worked, which enables higher wages.

The free market is under attack, debated and mischaracterized constantly. Polls indicate 40 percent of Americans lacking an understanding are losing faith in free enterprise. But capitalism is that system of social cooperation and division of labor that is based on private ownership of the means of production. You can freely choose for whom to work, to whom to sell, what to produce, and what to buy and from whom through voluntary exchanges. It’s the antithesis of government coercion.

Free enterprise is the fountainhead of capitalism, and the objective of every enterpriser is to make profits. He can only make profits by serving consumers and as consumers wish to be served. Free enterprise, aka capitalism, is the most moral and efficient economic system to have ever evolved for creating jobs and lifting more people out of poverty than all other systems combined. It’s proven by hundreds of George Billings entering the market every day.

Schnaubelt, president of Citizens for Private Property Rights, has been a commercial real estate broker for 35 years and was a San Diego city councilman from 1977 to 1981.