What’s Capitalism

Vocabulary

Capitalism is a simple enough concept but the associated baggage of its myriad connotations makes the word pretty useless in discussions with people with differing ideological stances, and with people who don’t bother with meaning and content. We can do better.

For any productive discussion, we should have a shared definition of the terms we use. If we are uncertain of the shared meaning of a word, it is best not to use it or even enter into a discussion involving the word or concept.[1]

So let’s take a few moments to define the word first and then get on with the discussion. The definition does not have to be definitive or universally acceptable. It just has to serve the purposes of the discussion. If you don’t accept that definition, it’s not the end of the world; it’s just the end of this discussion.

Capitalism is a combination of (1) private property, (2) free markets, (3) voluntary trade, & (4) institutions which legally enforce contracts.

Capital and Stuff

Though to define capitalism you have to first define “capital.”

To start off, there’s “stuff.” What’s stuff? Stuff is everything. Everything can be partitioned into two mutually exclusive and exhaustive categories: useless and useful stuff. Basically into the two sets — shit and shinola.

Some of the useful stuff we consume. Examples, bananas (that grow on trees), bread (which we make out of flour), and of course shoes and ships and sealing wax and cabbages. These are what we call consumer or final goods.

There are some other stuff we don’t consume but are useful. Hammers and screw drivers and all kinds of mechanical, electrical and electronic whatchamacallits. We use these things for producing those final goods that we consume. Machines that produce stuff we consume, or machines that make the machines that we use to makes stuff, …. The stuff we use for producing the final goods we are really interested in is collectively called capital.

So we have {Stuff {Useful {Consumer, Capital}}, Useless}

Capital is everything that we need to produce the stuff that we want to consume. But capital doesn’t just fall out of the sky or grow on trees like bananas; it has to be produced. So capital is “produced goods that are used in production.”

Ownership of Capital

If only private individuals and collectives of private individuals (associations, firms) own the capital, that is the first requirement of what it means for an economic order to be capitalist. The operative word is “private.” If the capital — which we must remember is defined as “produced means of production”– is owned by the entire collective, then by this definition it is not capitalism.

Capitalism is defined  by who owns capital. That is distinguished from other arrangements in which capital is owned by some collective. It’s about ownership. That means we have to pay attention to “private property.” If stuff can be owned privately, as opposed to collectively, then is sets the stage for capitalism.

In contrast with, and in contradistinction to, the private ownership of property (consumer or capital), the collective ownership of property define other forms of economic organization. In socialism, there is no private ownership of capital; it is owned collectively although consumption goods are owned privately. In communism, everything is owned collectively. It means not just the capital goods, but even the consumer goods are owned collectively.

Under capitalism, you own not just the goods you consume (shoes, shirts and other stuff), you also own capital (goods that are used in producing the goods you consume such as factories). Under socialism, you own your own shirts, shoes and other stuff, but you don’t own stuff that is used in production such as factories. Under communism, you don’t own shit. Everything — from your shirt to the factory — is owned by the collective. You are owned, you don’t own. The collective owns you and all the stuff.

So the first distinction of the three primary ways of organizing economic activity relates to ownership of stuff. If you own all the stuff, you are talking capitalism. If you don’t own capital, you are either a socialist or a communist. If you don’t own shit, you are talking communism.

Markets and Free Markets

If you own stuff (consumer or capital), then you can exchange them for stuff that is owned by someone else. What good exchange does for you is a matter for later. But the basic fact is that you can only exchange stuff that you own. I cannot exchange the Eiffel Tower for even $1 with you because I don’t own the bloody Eiffel Tower. If I did own the Eiffel Tower (or the Golden Gate Bridge), I would be free to exchange it with anyone willing to make a deal.

Wherever the deal of exchanging the Eiffel Tower for whatever is called a market. A market is some place (which need not be a physical place such as a store where you pick up a gallon of milk) where rights to the use of some property are exchanged.

A free market is where there are no barriers to entry or exit. You are free to sell the Eiffel Tower (provided of course you own it) to whomever who wants to buy it. That is, you can enter the market if you wish to do so. If you don’t want to sell your Eiffel Tower, you are free too — meaning you can exit the market.

Similarly, if you don’t wish to buy the Eiffel Tower that I wish to sell, you are free to not buy it. You are not compelled to buy the Eiffel Tower from me on the terms that I set. Nor I am forced to sell you my Eiffel Tower on terms that you set.

The thing about free markets is that the seller is free to enter or to exit, and so is the buyer free to enter or exit. This is not rocket science and you don’t have to get a PhD in logic and metaphysics to get it. It is plain common sense. Unfortunately, the world is full of idiots who don’t understand markets and free markets.

For the benefit of the retards, let’s just repeat the aforementioned. If you have property rights, you can freely enter or exit the market. That is all. And that there are markets, but not all markets are free markets. If there are markets where there are barriers to entry or exist, those are not free markets.

Capitalism requires free markets, as much as they require private property.

Voluntary Trade

The next thing about capitalism is voluntary trade. As has been painfully detailed above, if you own stuff and if others are able and willing to exchange stuff with you, then it must mean that they value the stuff you have more than you do, and you value the stuff that they have more than they do.

Again, this is not bloody rocket science. You don’t have to a get a degree in ballistics of rockets to realize the truth of this simple proposition. Why the heck would you buy a sandwich for $5 from someone unless the sandwich was worth more than $5 to you? And why the heck would someone sell you a sandwich for $5 if the $5 was not worth more than the sandwich?

In any voluntary trade — that means no one is forcing anyone to enter into the exchange — it must be logically true that both parties benefit. Only those in diapers or are incorrigible retards don’t get the logic. Readers of this piece don’t fall in either group.

More

The thing that I learned over the last few decades while studying economics is not the content of the subject but the method. What I learned was that one has to proceed systematically, in small steps, carefully, slowly, making sure that the terms are well-defined and the reasoning sound, and then going on to the next small step. It’s similar to the advice on how to eat a dinosaur: one small bite at a time.

Using too many ill-defined words and concepts is a stupid waste of time.  If you cannot define what you mean before you start the discussion, you are probably a moron and you are wasting everyone’s time.

{Continued in What’s Capitalism – Part 2.}

{This piece was motivated by a comment in which terms such as “industrial capitalism” and “financial capitalism” were bandied about. I don’t have the foggiest notion of what they mean. I’d like to know but I am unable to.}

NOTES:

[1] Douglass North (1993 Prize recipient of the Nobel Memorial Prize in economics) said, “I don’t know what the word capitalism means and therefore I have never used the term.” Well, he could afford that luxury because he did not enter into discussions with non-economists. We don’t. (Source.)

Author: Atanu Dey

Economist.

2 thoughts on “What’s Capitalism”

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