What Is capitalism, anyway?

Capitalism is a system based on peace and trade. Photo: Federal Reserve Bank of San Francisco (Thomas Hawk, Flickr)

ARKANSAS, July 22, 2012 — People complain about capitalism almost anytime something socially undesirable occurs. Kim Kardashian’s marriage lasted 15 seconds? That’s capitalism, for you. People are eating unhealthy food because it’s “cheap”? That’s capitalism’s fault. The poor are getting poorer while the banks are getting bailed out? You can blame capitalism for that, too. 

Capitalism isn’t the cause of our social problems; those same problems exist anywhere there’s a society. Most negative characteristics of “capitalism” have nothing to do with capitalism at all. In fact, many of the problems we associate with capitalism are direct violations of it.

Most of the social ills in America are caused by violating and rejecting capitalism. They can be attributed to the feel-gooders who think they can fix the world by hiring politicians to just write a few populist laws. Unfortunately, what ails society is rarely a question of simple legislation.

What is capitalism, anyway?

We can’t diagnose the problems of capitalism if we don’t know what it is. People who hate capitalism often use vague definitions that are contradictory, because undermining the use of the word undermines the ability of people to understand the concept at all.

If you want to distort the truth, you just need to use really vague words, and the negative aspects of human nature will take care of the rest.

Capitalism is a social system in which the only legitimate use of coercion is to protect the rights of life, liberty, and property. This means polluting a common resource, like a stream, isn’t allowed; neither are murder, rape, theft of any sort, or fraud. 

It’s a simple philosophy. No one can violate your rights. No one can force you to do anything with your body or property, except to stop you from using coercion against others. That’s what capitalism is.

Most people focus on the economics of capitalism, and often seem to miss that the notion of people using money, and businessmen setting up businesses with more freedom is simply a consquence — it’s not what capitalism is itself. It’s something that is simply easier to do and far more likely to happen once capitalism as a system is created.

Some people are horrified at such a definition, and try to limit it to another system entirely — a system that uses money, for example. This is absurd, because by this standard, Mao’s China and communist Cuba would be “capitalist” economies. Are they? Of course not.

They are anti-capitalist in every sense of the word, because capitalism is about not using violence on people — it is a system where property rights are a bulwark against coercion, and no one is allowed to use coercion against other people or their property.

Does capitalism mean corporatism?

Perhaps one of the greatest ideological conflicts in the last couple of years has been between those who support the free market and those who support intervening. And it’s not just leftists who support violating the free market. Many Republicans, for example, support market interventions.

Subsidies for some industries, special regulations that support corporations, bailouts for the big banks — these were all exercises of coercion and even theft. They violate capitalism. Getting people to understand the difference between the two systems is important.

If we went to a straight-up, fully capitalist system from our current system, the impacts would be breath taking. Almost instantly the larger banks would dissolve, with the smaller, safer, more stable community banks buying them up. The Federal Reserve wouldn’t exist, nor would most of the US federal budget.

Inflation wouldn’t exist, meaning the poor wouldn’t have to pay higher prices every time they try to buy food. Housing prices would likely fall substantially, which actually means housing would be cheaper for the poor. People with mortgages probably would hate this, but everyone hates it when their government “cash cow” disappears. It’s the nature of bubbles.

But in the end, while the impacts of capitalism would greatly enrich the poor and the middle class with fewer “bubbles”, this isn’t the real reason to be a capitalist. That reason is far simpler.

The inherent restrictions of capitalism

Capitalism isn’t a system without rules or codes of laws. In fact, capitalism demands a rigorous application of rules — far more restrictive rules than even currently exist.

The only difference is the nature of those rules. In a capitalist system, coercion cannot be used to force people to do anything contradictory to their desires in the use of their own property.

Richard Maybury, an important author and thinker, adequately summed up the two most basic rules of a capitalist system. He calls them the “Two Laws”: Do all you have agreed to do, and do not encroach on other persons or their property.” 

An implication of these two laws is that big corporations cannot trample others under foot. True capitalism would immediately end all corporate welfare, all government monopolies, and all “sweetheart deals” between businesses and regulatory agencies.

Here are a few examples of how bigger businesses under capitalism will still be constrained, and moreso than today:

  • Pollution. No one has a right to pollute the air and water to kill others. Corporations which pollute would be heavily sued in a capitalist system, so long as someone else’s health or property is actually at risk. This is likely even more restrictive under capitalism than under our current corporatist system.
  • Bailouts. No tax-payer funded bailouts exist in capitalism. If your business goes under, someone else will pick up the pieces. This goes for the big banks. If you hate the big banks, just remember — they would have disappeared and community banks would have gained substantially in 2008 if we had a capitalist economy. Instead, the big banks are bigger. That’s just wrong.
  • “Deals.” The absurdly cozy relationship between business and the government can’t exist under capitalism. Instead, corporations can only woo their customers, not have them delivered by government. This means huge lobbying firms essentially dry up. And in this context, that’s a great thing.

In the end, capitalism means that no one can violate the rights of others. That goes for everyone, including CEOs and corporate boards. This is a stark contrast to the bailout-fueled, corrupt economic system we currently have.

Until people who think they hate “capitalism” understand that they’re fighting the wrong enemy, our economic problems won’t go away. Instead, they’ll get worse. 


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Shaun Connell

Shaun Connell is an investor, writer, and entrepreneur passionate about economics, finance, and politics.

Shaun is the editor of Capitalism Institute, where he writes about economic principles and political theory. He’s also the author of Live Gold Prices, where he reviews important economic and market news.

Passionate about economics and liberty, Shaun was naturally drawn to the Austrian approach to human behavior, and tries to write all of his content from such an angle.

Shaun also enjoys nice cigars, good bourbon, and grilling as often as he can.

 

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