The Elves of Capitalism

Editor’s Note: It’s Christmas Eve. So let’s take a step back from the sturm und drang of the markets, to reflect upon some essential facts we should celebrate this Christmas. The perspective below comes courtesy of Jeffrey Tucker. Read on…

We hope you and your family have a safe and Merry Christmas.


One reason that the Brothers Grimm fairy tales have such appeal — more so than the folklore that came before — is that they deal with a world that is familiar to us, a world that was just being invented in the early 19th century, when these stories were first printed and circulated. They deal with people, scenes and events that affect what we call the middle class today, or the bourgeoisie. Yes, the stories feature kings, queens, princes and princesses — this was not yet the age of democracy — but most often our sympathies as readers rest with the plain people and their triumphs, which the stories feature most poignantly.

Both Marx and Mises agree that what we call the middle class was a new creation in the history of the world, and it was brought about by capitalism. The caste chasms that once persisted between the peasants and the lords, those privileged by title and land grants and those fated to serve them, were melted away by the advent of commercial society. Universal possession of property and money replaced servitude and barter, and exchange relationships of people’s own choosing gradually replaced the required lifetime associations of birth and happenstance. The distinguishing mark of this new middle class was the prospect of social advance through rising prosperity. Fluid classes replaced fixed castes.

This was the world that serves as the backdrop to the tales of the Brothers Grimm.

A great example of this is the very short story called “The Elves and the Shoemaker.” A cobbler and his wife worked very hard at their craft, making shoes all day. But leather was expensive, and no matter how hard they worked, they could not put their business in the black. They were selling some shoes, but they couldn’t make enough fast enough. They were getting poorer, rather than richer.

One night, the shoemaker left his cut leather out on a table and went to bed. The next morning, a fantastic pair of shoes made out of that leather awaited him. The craftsmanship was impeccable. They were of the finest style. He was able to charge a very high price to a customer who was very impressed by them. This same series of events repeated themselves again the next day and the next. Some months later, the shoemaker and his wife were financially secure and part of the rising middle class. All their financial worries were gone, and they were comfortable and happy.

At this point, the shoemaker said to his wife: “I should like to sit up and watch tonight, that we may see who it is that comes and does my work for me.” The wife agreed, and they stayed up to watch what was happening in the night.

Now, to be sure, this turn of events strikes me as rather strange. One might think that curiosity would have caused them to examine this long before. Why didn’t they stay up after the second or third time that leather had become shoes? Why did they wait so long to investigate the cause of their prosperity?

In any case, they did stay up and look, and they found two naked elves there working away, turning scraps of leather into fine shoes. The wife thoughtfully decided to return the favor and make them tiny little clothes. When the elves found the clothes, they put them on and ran away with great delight. They never returned, but the story assures us that this was just fine because the shoe business stayed in the black. The shoemaker and his wife lived a long and prosperous life.

We can see in this one story an archetype of what was then a new type of middle-class success story in the framework of a commercial society. The couple went from poverty to wealth in relatively short order. This came about not because of favors from the king or the discovery of gold, much less from stealing or piracy, but purely by virtue of work and commerce, combined with the assistance of some benefactors in the night whose favors they never sought, but nonetheless came to deeply appreciate.

Apply this story in our times: We are all in the position of poor shoemakers with benefactors. In a state of nature, we would be struggling for survival as most all of humanity did from the beginning of recorded history until the late Middle Ages, when the first lights of capitalism as we know it began to appear on the horizon. Over the next several hundred years, and especially during the 19th century, life itself was transformed. The state of nature was vanquished, and the world completely re-made in the service of human well-being.

As William Bernstein summarizes the situation: “Beginning about A.D. 100, there had been improvement in human well-being, but it was so slow and unreliable that it was not noticeable during the average person’s 25-year life span. Then, not long after 1820, prosperity began flowing in an ever-increasing torrent; with each successive generation, the life of the son became observably more comfortable, informed and predictable than that of the father.”

We were born into a world of amazing prosperity that our generation did not create. We have the expectation of living to old age, but this is completely new in the sweep of history, an expectation we can only have had since about 1950. The shift in population reflects that dramatic change, too. There were most probably 250 million people alive 2,000 years ago, and it took until 1800 for the 1 billion mark to be reached. One hundred and twenty years later, that was doubled. Three billion people lived on the planet by 1960, and there are 7 billion today. Charting this out, you gain a picture of a world of stagnation and stasis from the beginning of recorded history until the Industrial Revolution, when life as we know it today was first experienced by humankind.

If we are shoemakers in this story, the prosperous world in which we live — the world that grants us smartphones, health care, gasoline to power our cars and the ability to communicate in real-time video with any living soul on the planet with the click of a button — might be regarded as the elves that came in the night to turn our leather into a marketable product. Most of us never did anything of our own merit to cause us to benefit from this amazing world. At our birth, we woke up in the morning and found a finished and beautiful pair of shoes given unto us.

Earlier, I said that it strikes me as strange that the shoemaker and his wife waited so long to become curious about who or what was nocturnally turning their leather into shoes. How could they have gone for months without wanting to know what was causing their poverty to turn to riches? How could they have treated the magic in their shop as something helpful but rather normal, and only decided to look into the cause as an afterthought?

Yet this is how most everyone behaves in the world today. We are surrounded by bounty in this man-made world, a world completely unlike anything that has existed in 99.9% of the rest of the history of the world. And how very few bother to investigate the causes! We take it all for granted.

We use our technology, eat foods from all over the world available for sale a few blocks from our home, hop on planes that sweep us through the air to any destination on the planet, instantly communicate with anyone anywhere and have the expectation of living to the age of 80 and beyond, yet we are remarkably indifferent and incurious about what forces operate within this world to have turned the cruel state of nature into an earthy paradise.

Actually, the situation is worse than that. Many are openly hostile to the institutions and ideas that have given rise to our age of plenty. We’ve all seen the protests on television in which mobs of iPhone-carrying young people are raising their fists in anger against commercial society, capitalism and capital accumulation and demand just the type of controls, expropriation and regimentation that are guaranteed to drive us back in time to the restoration of castes, poverty and shortened lives. They are plotting to kill the elves.

In the fairy tale, there are only two elves. In the real world, scholars have discerned that there are actually six, and they go by the following names…

First, there is private property, without which there can be no control of the world around us. It would not be necessary if there were a superabundance of all things, but the reality of scarcity means that exclusive ownership is the first condition that permits us to improve the world. Collective ownership is a meaningless phrase as it pertains to scarce resources.

Second, there is exchange. So long as it is voluntary, all exchange takes place with the expectation of mutual benefit. Exchange is a step beyond gift giving because the lives of both parties are made better off by the acquisition of something new. Exchange is what makes possible the formation of exchange ratios and, in a money economy, the development of the balance sheet for calculation profit and loss. The is the foundation of economic rationality.

Third, there is the division of labor that permits us all to benefit from cooperating with one another toward mutual enrichment. This is about more than dividing up productive tasks. It is about integrating everyone into the great project of building civilization. Even the master of all talents and skills can benefit by cooperating with the least skilled among us. The discovery of this reality is the beginning of true enlightenment. It means the replacement of war with trade and the replacement of exploitation with cooperation.

Fourth, there is risk-taking entrepreneurship that bravely pulls back the veil of uncertainty that hides the future from us and takes a step into the future to bring us every manner of material progress. Uncertainty over the future is a reality that binds all of humanity; entrepreneurs are those who do not fear this condition, but rather see this as an opportunity for improving the lives of others at a profit.

Fifth, there is capital accumulation, the amassing of goods that are produced not for consumption, but for the production of other goods. Capital is what makes possible what F.A. Hayek calls the “extended order,” that intertemporal machinery that stabilizes the events of life over time. Capital is what makes planning possible. It makes the hiring of large workforces possible. It allows investors to plan for and build a bright future.

The sixth elf is not an institution, but a state of mind. It is the desire for a better life and the belief that it can happen if we take the right steps. It is the belief in the possibility of progress. If we lose this, we lose everything. Even if all the other conditions are in place, without the intellectual and spiritual commitment to climb higher and higher out of the state of nature, we will slip further and further into the abyss. This state of mind is the essence of what came to define the Western mind, and which has now spread to the entire world.

Together, these elves constitute a team with a name, and that name is capitalism. If you don’t like that name, you can call it something else: the free market, free enterprise, the free society, liberalism or you can make up your own. What matters is not the team name but the constituent parts that make up that team.

The study of economics is much like the decision of the shoemaking couple that stayed up overnight to find out the cause of their good fortune. They discovered these elves and found that they had no clothes. They decided to make clothes for them as a reward for their service. So too should we clothe the institutions that made our world beautiful in order to protect them against the elements and their enemies. And even after they scurry off into the night, we must never lose consciousness of what they have done for us.

Regards,

Jeffrey Tucker
for The Daily Reckoning