What’s Capitalism – Part Two

In the previous post, What’s Capitalism, I had noted that capitalism is a combination of (1) private property, (2) free markets, (3) voluntary trade, & (4) institutions which legally enforce contracts. I briefly touched upon the first three already; here I discuss the matter of “institutions which legally enforce contracts.”


“A contract is a legally binding agreement which recognizes and governs the rights and duties of the parties to the agreement. … An agreement typically involves the exchange of goods, services, money, or promises of any of those.” The wiki’s definition serves our purpose. The two parties agree to do, or refrain from doing, some specific act. An example: the agreement that homeowner Alex reaches with Bob for remodeling the kitchen.

Why a contract though? Because remodeling the kitchen is not like buying a sandwich. You fork over the posted price of $5, you get handed the sandwich, and you are done. But kitchen remodeling takes a few weeks, and costs thousands of dollars. Alex cannot simply hand over $1ok to Bob and expect to have a remodeled kitchen the next instant. That’s why they need a contract which lays out the terms such as specifications of the finished kitchen, the cost, the time it will take, etc.

Legally Enforceable

For the contract to be of any use, the contract has to be legally enforceable. Suppose Alex does hand over the $10k to Bob, and instead of doing the job, Bob simply disappears. Then Alex can go to the appropriate government agency to recover his money. Or suppose Bob does the job and Alex refuses to pay up, then Bob can get the authorities to force Alex to pay.

Voluntary trade is always beneficial to both parties, as noted in the previous piece (linked above.) Alex and Bob both stand to gain if the kitchen job is done. Without the ability to enter into a legally binding contract, both Alex and Bob will be reluctant to enter into the trade: Alex will not get a new kitchen, and Bob will not get to earn money for the job.

Among the various institutions necessary for the efficient functioning of an economy is the institution that legally enforces contracts. The word “legally” is important. There can be contracts that are enforced illegally. The mafia enforce their contracts by promising to break your knee caps, or to send you to sleep with the fishes.

Therefore institutions that legally enforce contracts are important in a capitalist economy. In general you need courts that settle commercial disputes, and for the decision of the courts to be effective there has to be some policing authority to enforce the judgement. And equally important i that the courts have to be efficient. If the court is going to take 40 years to decide the case, the whole idea of contracts falls flat and that leads to social losses.

Government Ineptitude

Indian courts are phenomenally inefficient and have a reputation for corruption. The backlog of cases run into tens of millions, and it takes decades to settle disputes. The legal system’s inefficiency has lots to do with India’s economic woes — too many potential trades don’t happen.

Firms have a hard enough time with bureaucratic red tape. It makes matters worse when they cannot get commercial disputes settled quickly.

I think the constitution must mandate that the courts must decide all cases within some reasonable time — which to my untrained mind appears to be a matter of months, not decades.

Which reminds me. Once I was talking to a hot-shot lawyer and I asked him why it took the Indian court something like 40 years to decide on a particular terrorist case. His justification was a most amazing display of irrationality and illogic.


Back to capitalism. I like capitalism. I like capitalists. And I am not alone in this. Everyone likes capitalism. Actually everybody likes the benefits of capitalism, even those who are constantly bitching and bellyaching about it. How can I tell? Certainly not by their talk but by their walk. Given a chance, they would go to a capitalist society. Sure they love socialism but only in the abstract; in the concrete they don’t.

Capitalism produces stuff. I like stuff. But I am not a consequentialist. Even if capitalism did not produce amazing stuff, I would still support capitalism because it is more moral than socialism and communism. The morality of capitalism is based on self-ownership, which entails private property and trade.

Why should workers love capitalism and capitalists? Feel free to answer that question in the comments.


Author: Atanu Dey


2 thoughts on “What’s Capitalism – Part Two”

  1. If workers work for a company striving to make sustainable profits, meritocracy will be established. There will be work-satisfaction for the honest worker and people will be paid according to their contribution.


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