Saturday, August 19, 2006

What is Capitalism?

A proper discussion of any topic cannot begin without a definition of its most fundamental terms. Most of the controversy over Capitalism stems from disagreements and ignorance of just what Capitalism actually is. My definition will not settle the arguments, of course, as it will provoke again as much controversy as it resolves. Nevertheless, it is based upon this definition that I make the Shocking, Outrageous Assertions, and it will be shown that with this definition established (if not agreed upon), the common arguments against Capitalism lose their power and frequently turn on their wielders.


At the heart of Capitalism is Liberty; the freedom of the individual to do as (s)he pleases with what is his/hers, unbounded by forcible coercion or fear of agression against his life; only constrained by the equal liberty of every other individual human being.

Liberty is freedom, with the responsibility to respect the freedom of others. It is the freedom of innocents from aggressive force, and the restraint from using aggressive force against innocents.

Liberty thus is not license to do anything you want and/or can get away with, including robbery, rape, murder and mayhem. To paraphrase Walter Williams, ‘the freedom of your fist ends at the tip of my nose’[i].

Without Liberty, there is no Capitalism and no civilization.

Already I can hear the anti-capitalist critics screaming. “Liberty! What Liberty? Capitalism is the expoitation of the powerless workers by the ruling class of owners of the means of production! It’s the Liberty of the Rich to enslave the Proletariat! Long Live the Comm---”

Patience, please. We’ll get to that…

Security of Life, Person and Property

In order to be free in the civilized sense, an individual must know that his right to live, and to live free of fear of physical threat or theft of what it his, is respected and defended. Since one individual is no match for the agression of multitudes, society must construct institutions which constrain, prevent, and as a last resort, punish violations of individual liberty. This conclusion is easily deductible from secular, dispassionate observation of human society. Remarkably enough, it is also freely available in the form of one of the oldest religious codes in the world, to wit, the Ten Commandments.

I am not a religious scholar. Nevetheless, permit me to go out on a limb for a moment to give my interpretation of this ancient text as it is relevant to our current discussion. The first 4 commandments instruct human beings in how they should relate to God; to believe (exclusively), to not profane the name or image of God, not to engage in idolatry, and to honor Him with the weekly Sabbath. The last 5, which I call the 5 Secular Commandments, or the ‘Secular 5’, deal with how human beings are to treat one another, specifically prohibiting fundamental forms of agression against innocents:

  • Thou shalt not murder
  • Thou shalt not commit adultery
  • Thou shalt not steal
  • Thou shalt not bear false witness against your neighbor
  • Thou shalt not covet thy neighbor’s wife, …house, his field, or his manservant, or his maidservant, his ox, or his donkey, or anything that is your neighbor's.

The fifth commandment, ‘Honor thy Father and thy Mother’, seems to serve as a bridge between the spiritual commandments and the more worldly ones.

My next 2 sets of critics are screaming: the fundamentalist religious and the militant anti-religious atheists. The first are ready to fry me over my superficial and sophomoric analysis, which doesn’t agree perfectly with theirs, and the second are furious at my corrupting a ‘sacred’ secular topic with fairy tale mush. Hasn’t Howard heard of Separation of Church and…Separation of Church and…Economics? Uh,…

None shall murder, rape, rob, steal, defraud, or falsely prosecute.

I haven’t set out to write anything necessarily claiming that God endorses Capitalism. Nevertheless, I find it very interesting that I can find nothing in the most fundamental, religion-given law to contradict the most fundamental principles of Capitalism. For if all people followed the 10 Commandments (or at least the Secular 5), then Liberty, Capitalism and the most optimum prosperity possible on an imperfect earth would follow. This I deduct not from religious faith but independently from secular, logical deduction.

The commandment against murder validates the primacy of the individual human life. Capitalism takes this principle as its first axiom; by definition, capitalism cannot exist unless innocent individuals have an inviolable right to theif lives. About adultery there may be less of a connection with Capitalism (I cannot say that Capitalism per se requires abstinence from extramarital sexual relations), but both this commandment and Capitalism would be in agreement as proscribing rape. Religion teaches that rape is morally wrong; Capitalism is undermined by and therefore incompatible with violent coercion and violation of life, liberty, property and/or body of the individual.

‘Thou shalt not steal’ is a validation of private property rights, fundamental to Capitalism. For if there were no such thing as private property, there could be no such thing as theft. If what’s mine is yours is his is theirs is hers belongs to all and any, then if I take what is yours, it is the same as if they took what was hers or you took what was mine, or if you took what was your own. So what’s the problem?

The problem is that without security of possessions, there is no Liberty and no Capitalism. If none will defend my (or your or his or her or their) right to keep what I have acquired through my own labor and/or voluntary exchange with others, then Capitalism can not develop (we will deal with whether or not this is a good thing later). Capitalism requires defined boundaries of who may do what with what, and deduces that if a person owns himself, his life and his body, than anything which he acquires without violence upon others must also be his and his exclusively. In the case of possesions such as clothing, tools and foodstuffs, this is easily managed. With respect to land and other nature-given resources, the issues become more complex and subtle. As resources are defined with increasing subtlety, including side effects, externalities and aspects not thought of before (like water rights, pollution, airspace, mining, noise, aesthetic effects, property values etc.) the difficulty increases. Nevertheless, the most satisfactory solutions have been ingeniously devised by free people cooperating under the system of private property, validating this principle so fundamental to Capitalism.

False prosecution of innocent people is morally and socially destructive and is therefore proscribed by spiritual authority and incompatible with Capitalism. It is not enough to say, none shall murder, rob or rape; neither shall anyone acuse anyone else of the same, knowing the charge to be untrue.

The final commandment as enumerated in the Bible deals with ‘coveting’, or envy. Believers (and non-believers alike) are exhorted not to look upon the possessions of others as objects of provocation, inspiring feelings of inadequacy, jealousy, and the temptation to appropriate those thing from others by force or stealth. Envy is a poisonous emotion, causing destruction among the envious and the envied alike. In the political arena, some have elevated it to a high art, seeking to satisfy constituents through the punishment, plunder and restraint of other people for no better reason than that such others are perceived to be more prosperous than the supposed beneficiaries of the policy. ‘Soak the rich’ for the benefit of the poor, or the ‘Robin Hood’ political syndrome, are examples of this.

As it applies to Capitalism, for individuals to commit murder, robbery, rape etc. is just as much not permitted when done out of envy or jealousy as for any other reason. Moreover, the ambitions and plans which arise from envy --- conspiracy to commit murder, theft, fraud --- are worthy of the attention of the institutions which defend Capitalism. In order for Capitalism to exist, it is not sufficient only to punish violations after the fact; it must strive to prevent them (protect innocents) proactively. Thus Capitalism is consistent and in agreement with the tenth commandment, implementing it with prevention of violence and enforcement against criminal plots.

Again, I don’t expect to settle long religion-based and/or moral arguments. Nevertheless, I observe that Capitalism is a system of private property and voluntary cooperation holding individual human life and liberty to be sacrosanct, a position with which the religious commandments seem perfectly compatible.

The Ten Commandments are imperative, value-laden judgements. Capitalism takes most of the same statements as definitional, without passing moral judgement per se. Capitalism does not require or endorse government enforcement of the first four ‘spiritual’ commandments. It does require institutions of society to enforce the last five as they pertain to the limits of agression against other people.

Ownership of property is documented, standardized, and leverageable.

Under Capitalism, not only are individuals free to own possessions (foodstuffs, clothing, tools etc.) and property (homes, land, businesses and other long-term assets), but that ownership is documented, recognized and respected by the society as a whole. A title deed from Wyoming is as valid, comprehensible and enforceable in Florida (or France or Japan) as it is in Wyoming. No court in Florida would judge an owner in Wyoming as invalid and therefore worthy of forfeiting his land to a Floridian on the basis of the title deed not being written in Florida, on the Floridian forms[ii].

The first consequence of this documentation and standardization is that, unlike primitive tribes, third-world countries or citizens of states struggling to emerge from communism, capitalist owners are secure in the knowledge that their property cannot be capriciously taken away or otherwise violated. The second, and most powerful consequence, it that assets thus secured are able therefore to become living, leverageable Capital. A documented and recognized owner may take out a mortgage (incur debt in exchange for cash), sell all or part of a property, sell equity shares in an enterprise, or derive other financial instruments from his otherwise ‘merely’ physical assets. This is the truly powerful nature of capital, and the key element missing in so-called ‘third-world’ and post-communist countries. Hernando de Soto has written authoritatively about this in his seminal book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails everywhere else. The world’s so-called poor have collectively accumulated literally trillions of dollars worth of assets (many times the total foreign investment and charitable aid donated to the same people and countries); however, lacking a proper, universally recognized documentation and enforcement system, they are unable to leverage these assets. They are ‘dead’ capital. If ever there were a key to solving world poverty, this is it.

Rule of, and Equality before, the Law

Capitalism is defined as a social system in which all individuals are governed impartially, without privilege or prejudice, by laws consistent with the preservation of individual life, liberty and property. ‘Rule of Law’ differs from ‘Rule of Men’ in that the latter are capricious, favoring themselves and their cronies, unbounded by fundamental principles. A ruling dictator may makes laws or arrive at judgements binding on others because he feels like it or because they favor himself or his friends, without reference to any transcendent priniciple beside his own pleasure. This is the antithesis of the rule of law.

Rule of law differs from ‘Rule of Lawyers’ as a system in which well-connected power brokers jockey for advantage. Neither is it necessarily synonymous with democracy, which for all its merits is still corruptible, allowing for tyrannical majorities or caucusses to vote for themselves the expropriation of the property of others, competing caucusses.

Rule of Law means not just any law, but natural law which respects and defends the most fundamental rights of individuals and does not seek to engineer social outcomes per se. The founders of the United States of America and their precursors such as John Locke and Thomas Hobbes, considered that law was not something to be invented or made up for the caprice of the moment, but rather something innate in the nature of the world, God and human beings, to be discovered and understood. When we say that Capitalism requires rule of law, we mean law that is in harmony with transcendent, immutable principles.

Minimal, Democratic Government

Under Capitalism, government has only one job; the defense of Liberty. Government’s role is to interdict and punish murderers, rapists, theives, robbers, defrauders and all other violators of Liberty as outlined above, so that the Liberty-respecting citizens are free from fear and free to act in their own best interests.

In an imperfect world, governments formed on the principle of equal right of participation in the governing process by all adult citizens --- democratic governments --- have the best track record of respecting individual liberty and promoting Capitalism. Thomas Jefferson’s statement that ‘government is best which governs least’ is consistent with Capitalist definition and principle.

While still clinging to a fragile lead, the West in general and the United States which Jefferson contributed so much to found in particular, have strayed far from the original principles of minimalist, democratic government. The US since its founding has extended the franchise to the lower classes of society, to non-landowners, to black former slaves and to women. Yet the minimalist creed has been eroded beyond recognition via a series of significant expansions: the conduct of the Civil War under Abraham Lincoln, the 16th Ammendment to the Constitution permitting the Income Tax, the New Deal policies of Franklin Delano Roosevelt, ostensibly instituted to save us from the Great Depression, and the Great Society programs of Lyndon Baines Johnson and their progeny[iii]. Today government in the United States of America consumes 40% of GDP while placing or permitting substantial burdens on individuals, families and businesses, and eroding private property rights and equality before the law.

America may yet be the most capitalist nation in the world, but it is a far cry from the definition of Capitalism.

Freedom of contract and of exchange

The next part of the definition of Capitalism flows freely from the prior. If individuals are free in relation to other adult human beings to own themselves, their bodies, their possessions and their property, then it follows irrefutably that they have the right to do with these things as they, not others, judge best, including exchanging them with others.

Under Capitalism, individuals are free from coercion or compulsion in deciding whether to hold onto something they own (including their own labor), or to exchange it for something else with another individual. Third parties do not interfere in the free exchange of goods or services by others unless (s)he can demonstrate that the exchange violates his/her own liberty in some way.

Individuals are free to trade with friends, family, neighbors, strangers, foreigners or aliens (intra- or extra-terrestrial). They may voluntarily form groups or organizations for purposes of mutual aid, spritual fellowship, commercial enterprise, charitable works, artistic patronage or any other desirable human activity. Individuals may choose to join such organizations as paid employees, unpaid volunteers, leaders, advisors and/or contingent stakeholders. And they may choose to leave. Individuals may contract their labor with other individuals freely willing to employ them. Individuals acting alone or in concert (i.e. as a corporation or labor union) may agree to perform services or provide goods to one another over short or long periods of time, with agreement on consequences should one party be unwilling or unable to fulfill the bargain. Capitalism requires that contracts freely entered into be enforced according to their original terms, not capriciously discarded at the whim of one party to the detriment of the other or to be reinterpreted and/or rejected by third parties; to permit otherwise is to permit and commit fraud and theft.

I can hear the yawning. So what, you say?

The critical element in all of this is that absent a demonstrable violation of the liberty of one or more individuals, no interference, compulsion or regulation by third parties is required or permissible under Capitalism.

Capitalism is, by definition, freedom of contract and of exchange.

Freedom of Competition

Under Capitalism, individuals are free to offer their goods and services on the market as they judge best, at prices and/or terms of their choosing. No individual or corporate party is prevented from entering into any business, industry or profession except by the limits of their own abilities, skills, knowledge, competence and experience. No privilege is reserved for parties already in a certain industry or market against newcomers. Anyone is free to compete with anyone else, to offer their own (presumably better, cheaper, higher-quality, better-tasting-less filling) product or service to consumers or clients, who are free to make new purchases and contracts which differ from the ones they had made in the past. ‘Stealing’ market share from competitors is not theft punishable under capitalist law (unless achieved through coercion or threat of force), but represents customers freely choosing to do business with different entities in the present and future than they had in the past.

Parties on the losing end of any market competition have five alternatives:

  1. Improve their market offering; lower prices, higher quality products, better service etc.
  2. Go to work for the leader; for the individual, this may mean seeking employment with the leading competitor in a subordinate position; for a company, this may mean being bought out by the leader (with mixed prospects as to what the buyer will actually do with the acquired assets).
  3. Leave the market segment, industry, trade or profession and find one in which one’s abilities, products, services, etc. can be more competitive.
  4. Appeal to his/her fellows for aid or charity to avert bankruptcy and starvation.
  5. Fail in the business or occupation, consume remaining assets, and in the extreme case, starve to death.

It is this fifth, extreme condition that most critics of Capitalism latch onto to claim that Capitalism is a cruel and vicious system where compassion and caring for the less fortunate are absent and only the ‘law of the jungle’ prevails. We will defer the discussion of this criticism to a later chapter. For the moment note that without denying the reality of this case, we have with reason placed it at the end.

The sixth alternative, appealing to the government for aid, that is, having the government intervene by virtue of its ability to coerce and force appropriations in the marketplace, to take resources from one set of citizens (including the winning competitor) in order to subsidize or ‘bail out’ the failed individual or business, is not a capitalist concept. This is an interventionist action inconsistent with laissez-faire capitalism, practiced to some degree by all governments on Earth, from the most liberal to the most tyranical.

What Capitalism is NOT

I will defer discussion of the claim that Capitalism is the exploitation of the poor by the rich. For now I want to make clear some frequently misunderstood notions about Capitalism.

First, Capitalism by definition is NOT a system in which government is ‘pro-business’ in the sense of providing subsidies, protectionist tarrifs, special tax breaks and privileges for corporations. Capitalism is freedom from interference, and equality before the law. Under Capitalism, businesses are free to succeed without punishment, and to fail without privilege (we will talk about the very very VERY important role of failure in detail in a later chapter).

Capitalism does not sanction slavery, or the forcible coercion of workers to stay in jobs that pay ‘starvation wages’. It only permits anyone willing, to offer or deny employment, or to accept or forgo the same. It may happen under Capitalism that workers are not paid as much as they (or third parties) feel that they are worth (and this can and does happen at any level from non-skilled manual labor to high-level professional work). But this is not the same as ‘forcing’ people to accept inadequate compensation.

Finally, no activity of government qualifies as Capitalist. If a government runs a factory and sells the goods in a store ‘for profit’, this is still not Capitalism, because the government has the ability (which a private company does not) to tax and regulate the market, in other words to forcibly coerce individuals and groups to its own advantage. This is inconsistent with Liberty, private property, and freedom of contract and exchange, and therefor does not qualify under the defnition of Capitalism.

Government acting in defense of liberty in preventing and punishing murder, robbery, rape and fraud, acts in support of Capitalism. But Capitalism is the thing being defended, separate from the agency defending it.

With this definition of Capitalism in hand, then, let us elaborate upon how Capitalism solves so many of the challenges of human existence.

[i] I heard this in the mid-1990’s when Walter Williams, professor of Economics at George Mason University, was subbing for Rush Limbaugh on his nationally syndicated radio talk show. Forgive me for not recalling the exact date.

[ii] We’ll deal with Eminent Domain and its abuse another time.

[iii] Some might argue that Jefferson himself was the first significant violator of his own principles, with the massive land purchases and the government financing of the Lewis and Clark expedition, which in its day was equivalent to our NASA Apollo program to go to the moon.

Copyright © 2006 by Howard Hyde. All rights reserved.