What Is "Capitalism" Anyway?

One of the leading ideological punching bags for well over one hundred years has been the ideas, institutions, and impact of “capitalism” on society. Think of something someone does not like in the world and the guilty party causing it is almost always the same – “capitalism.” But what is capitalism, and what is it not?

The words “capitalism” and “capitalist” were used in a variety of ways going back several centuries, but it is primarily a Nineteenth-Century creation by the critics of the market society that was taking on many of its “modern” forms in the early and middle decades of the 1800s. Its use and connotation were meant to convey the idea of a social order under which “a few” owned the physical means of production (the “capital” of a society), which enabled them to exploit and abuse the much larger majority for their own material and financial advantage.

Capitalism as the Enemy of Human Betterment

Its most popularized use, no doubt, arose from the writings of Karl Marx and other socialists who were certain that if not for private property in the physical means of production, all of the evils and hardships of humanity could be lifted from mankind’s shoulders. Common or “collective” ownership and use of the means of production would soon eliminate poverty, abolish disparities in income and wealth, and bring about a near-post-scarcity world in which “social class” conflicts over possessing things would become a thing of the past.  

In the second half of the Twentieth Century, however, the existing socialist “experiments” with collective ownership and government central planning increasingly showed that all they created were political tyrannies, new “status” societies of privilege based on “Party” membership or position within the bureaucracy, and general economic stagnation with standards of living far behind those in “capitalist” countries.

So what does “capitalism” mean to a friend of freedom? And what is “capitalism” not? So especially in “the West,” those who had been advocates or apologists for, first, the Soviet regime in Russia and then other communist governments around the world, changed their tune. Private property did not have to be abolished outright and in every corner of society. Private enterprise could continue to “deliver the goods,” but it needed to be constrained and controlled by a spider’s web of regulations and restrictions to see that “capitalism” produced what and where it would best serve the “common good,” rather than the directions into which private businessmen would take it guided only by the “profit motive.”

The interventionist state had to be accompanied, at the same time, by the welfare state to assure a less “exploitive” and more egalitarian redistribution of wealth through the use of the tax system to take from the “unfairly” richer “Peters” to give to lower income and more deserving “Pauls” in society. (See my article, “Barack Obama and the Meaning of Socialism”.)

In criticizing the market economy, a common tendency has been to reify “capitalism” as if it were a living, breathing entity acting on and against society. Hence, “Capitalism” exploits the workers. “Capitalism” creates poverty. “Capitalism” destroys the environment. “Capitalism” is “racist.” “Capitalism” discriminates against women.

The word has so many negative connotations in so many people’s minds that some friends of freedom have suggested to stop using the word at all in designating the economic system that proponents of free enterprise defend; or to add a softer descriptive word to its use. For example, “Compassionate Capitalism,” or “Conscious Capitalism,” or “Democratic Capitalism,” or “People’s Capitalism,” or “Liberal Capitalism,” or . . .

For better or worse, in my view, the word “capitalism” is not going to go away, and its opponents will keep hitting over the head all those they define as its defenders. So what does “capitalism” mean to a friend of freedom? And what is “capitalism” not?

Private Property, Personal Liberty, and the Polite Society

The bedrock concept behind an explanation of “capitalism” is private property. That is, the idea that an individual has a right of ownership and exclusive use of something. For the classical liberal, the most fundamental property right possessed by an individual is his own person. In other words, an individual owns himself. He may not legally or informally be treated as the slave of another person. The individual has ownership over his mind and his body. Neither may be controlled or commanded by another through the use of force or its threat.

The benefits of peaceful and mutually accepted relationships offer greater pay-offs in the long-run than permitting free rein to one’s prejudices. This implies that if every human being has such a right of private ownership over himself, then all associations and relationships between individual human beings must be based upon voluntary consent and mutual agreement. No person may be forced or defrauded into an exchange, trade, or associative relationship.

The classical liberal also believes that if this principle is followed by the community, it tends to create a social setting in which respect and tolerance of others and their choices is more likely to be fostered. Thus, it generates, in various ways, a more humane society. People have the need for each other’s assistance and companionship in sundry ways. If force may not be used and only free consent can serve as the basis of those connections among human beings, then it behooves individuals to act with courtesy, deference, and implied dignity toward others.

This does not mean that rude, disrespectful, and even cruel words and deeds may not happen among people. But it does mean that there are costs to doing so since those treated in this manner are less likely to willingly enter into exchanges or other types of relationships with those who treat them in these negative ways. Some might not care and proceed to act in these disrespectful and intolerant ways, anyway. But for most people, the benefits of peaceful and mutually accepted relationships willingly entered into offer greater pay-offs in the long-run than permitting free rein to one’s prejudices.

Furthermore, in a society of voluntary association, courtesy, respect, deference, and politeness become the social norms over time, and those who fail to act in such ways toward others (no matter how some of them might feel “inside”) are faced with possible social ostracism or criticism for their “bad behavior.” This reduces those individuals’ chances for attaining their own goals and purposes for which they need the cooperation of their fellow human beings. (See my article, “Free Markets Refine Good Manners”.)

The Origin of Rightful Property and Its Justness

But a classical liberal philosophy of freedom and capitalism does not end with the self-ownership of each individual. It also argues for the right of individuals to establish a property right over “real property” in the form of resources, raw materials, land, produced means of production (machines, tools, equipment), and the finished goods manufactured from them.

It is based, primarily, on the idea of “first appropriation” or acquisition through voluntary exchange with others in society. “Natural rights” theory has long been controversial among political philosophers in general and even among classical liberal thinkers of various stripes. It remains, nonetheless, a core conception derived from John Locke that if a man settles down on land previously unoccupied or not owned by any others, that individual makes a legitimate claim to it as his rightful possession by in some way working and changing the land, such as clearing the field, planting the crop, tending it to maturity, and bringing in the harvest. (See my article, “John Locke is Needed Now More than Ever”.)

The harvested crop is this individual’s justly produced and owned property that may not be taken by others without his consent. This idea follows from the intuitive sense that virtually all reasoning people share in common that there would be an inherent injustice or “wrong” if a band of thieves fell upon our land-settling and working farmer, and proceeded to plunder the efforts of his mental and physical labor. After all, our individual used his mind to conceive of transforming the undeveloped land into a farm. And he then set about producing the harvested crop through his own labor efforts.

If it is not his private property, then who can make a just claim to the fruits of his labor? The threatening band of thieves who now confront him? Some others over some neighboring hill who have done nothing to do the work to bring the crop into existence, but who say they “need” it for their own survival or pleasure?

If such a claim is made by either the thieves or by those others who just want his crop, what if he does not willingly part with this harvest? May they use force to seize it from him? May they threaten his life if he puts up resistance? May they kill him if he acts to retain possession of what his labor has produced? And if the latter, is taking his life if he defends his crop an unjustified killing?

If our unfortunate farmer does not resist the thieves because he fears more for his life if he attempts such resistance, imagine that he decides that this thievery is likely to happen again if he undertakes the planting and harvesting of a crop during the next season. He, therefore, decides not to do so, and simply tries to “live off the land” from what nature itself provides without any transformative labor effort on his part, so as to keep a low profile from the plundering eyes of these thieves.

If the band of thieves return and find nothing to plunder, may they physically take control of our luckless individual and, again under the threat of force, make him work the land to plant, grow, and harvest a crop for the thieves to claim as their own? If they do so, has not our individual been transformed into a slave, a person who does not own his mind and body but is forced to use them by the threatening command of others?

I have chosen to present this scenario in the form of a series of rhetorical questions rather than positive declarative statements. The reason being that in their form as questions, it more directly asks the reader to state to himself what the answers are as he reads them. I suspect that few who have done so have come to any conclusion other than one: the harvested crop is this individual’s justly produced and owned property that may not be taken by others without his consent. And that it would be equally unjust if he were to be denied the right to his liberty by making him work at the commands of others under the threat or use of force.

Private Property as the Source of Wealth and Civilization

Now if the individual has a right to his life and his liberty, and to the fruits of his own labor – the harvested crop – then it logically follows that this individual has an equally just private property right in the tools, implements, and equipment that he has produced through his mental and physical labor to assist him in his productive efforts.

Thus, he has a rightful title to the plow with which he has laid out the furrows in the field, which he has made. These produced means of production – the plow and all other tools and implements – are the individual’s rightfully owned physical “capital” that assists his productive efforts.

Having the personal liberty and the rightful property ownership in both the settled land and the physical “capital” to produce a desired product, he has increased his own capacity to survive and better his own life. Indeed, it has been argued that the right to and recognition of private property has been the basis of all that we call civilization and human material betterment.

As the noted Nineteenth-Century British political economist, John R. McCulloch (1789-1864), explained in his widely read Principles of Political Economy (1864):



Capitalism, therefore, is an economic system based on the principle of every individual’s right to his own life, his own liberty, and his own honestly acquired property. This private property includes his own mind and body, and the physical products that his mental and physical efforts have produced.

The capitalist system also is based on the principle that the recognition of every individual’s right to his own life and liberty requires that all human relationships and associations be established through voluntary consent and mutual agreement. Violence and fraud are incompatible with the logic of a capitalist system of production and human association.

Division of Labor and the Other’s Labor Placed Before Us

It may be reasonably asked, but what about a world, like ours, in which unclaimed and unsettled, and, therefore, unowned land and resources to produce the necessities and amenities of everyday life, are not available for every individual or family to appropriate for themselves? We enter the world, and others already own almost everything in that world. Thus, the Lockean notion of just property right titles seems to have little relevance in “modern times.” A limitless “frontier” open and available for settlement and acquisition is long gone.

But it is not necessary for everyone to own land, resources, and produced means of production to be able to have access to all the desired finished goods. It is sufficient if those who do own them are placed in a position in which to further their own interests and betterment. They must apply and direct their use in ways that serve the wants of others in society, as well.

The Austrian economist Ludwig von Mises described this in his famous work on Socialism: An Economic and Sociological Analysis (1951):

To have production goods in the economic sense, i.e. to make them serve one’s own economic purposes, it is not necessary to have them physically in the way that one must have consumption goods if one is to use them up or to use them lastingly. To drink coffee I do not need to own a coffee plantation in Brazil, an ocean liner, and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table.

Sufficient that others own these means of production and employ them for me. In the society that divides labor no one is exclusive owner of the means of production, either of the material things or of the personal element, capacity to work. All means of production render services to everyone who buys and sells on the market.

In a system of market- or capitalist-based division of labor, individuals find their niche in the social system of division of labor in various capacities. The individual who owns nothing but the labor of his own mind and body is able to sell his talents and abilities for what others may consider them to be worth, either by directly satisfying some others’ consumer demands or by assisting an employer in producing a product to be sold to consumers in the marketplace.

With the wages earned for services rendered, this individual who owns nothing but himself now has the outputs of the world placed before him by all the other private owners of various means of production who can only earn revenues by finding interested and willing buyers for the goods and services they offer. In their own self-interests, so they also may demand the outputs of others in the arena of market exchange, the owners of the physical means of production must apply themselves in their producer roles to successfully fulfill the consumer wants of everyone else in the society.

I make my living as a professor of economics. Other than lecturing and writing, I’m really not good for much of anything else (just ask my wife when it comes to simple everyday repairs around the house!).  I have my mind and my body. I have filled my mind with a lot of ideas about economics, history, political philosophy, sociology, and a smattering of classical literature. And I have my body to go into the classroom and talk about those ideas in front of a group of students, and to sit in front of a laptop computer to write about my sitting in front of this laptop and being not good for much else.

Yet, with the income that my university employer pays me for classroom and related services rendered, I am able to go out into the market in my consumer role and demand the products of everyone else in the global marketplace. Their wares are offered to me in a courteous and pleasant manner since every salesperson with whom I interact knows that I don’t have to buy their product. I can walk away willingly, empty handed because I did not like the product or thought it wasn’t quite what I was looking for or did not find the price attractive. The salesperson knows that in this voluntary system of market-based division of labor I can purchase some alternative version of the product he is selling from one of his competitors, who also is keen on gaining my business.

Income Inequality and Market Evaluation of Our Worth

But don’t some in this capitalist system of division of labor and market exchange have more dollars to spend than I do? Can’t they buy more and afford to pay higher prices than me and thus outbid me for some of the things I’d like to buy? Yes, this is true. But why do they have more dollars to spend in the marketplace than I have in my pocket? Because everyone else in society who has earned dollars to spend has spent more of them on the rich person’s product or services than on mine. My fellow market participants have, in a sense, “voted” with their dollars and said they consider what that other fellow is offering to sell to be of greater importance and value to them than what I’m bringing to market.

Where, then, is the “exploitation” of the workers or the consumers in such a “capitalist” society? All of our individual relative income and wealth positions in society represent what our fellow market participants think each of us is worth in satisfying their demands for things. Each of us helps in determining everyone else’s relative income position when we spend portions of our own earned income on various goods we desire and for which we are willing to pay.

The capitalist system generates the institutional framework and incentive structure that leaves everyone free as an individual to live his own life, enjoy his personal liberty, and use his private property as his peacefully. But that very institutional framework and incentive structure of voluntary association and exchange in an emergent network of interdependent divisions of labor creates the setting in which it becomes in everyone’s self-interest to primarily focus their knowledge, skills, and abilities in their production activities to satisfy the self-interested wants of others as the means to advance their own goals and purposes in society.

Where, then, is the “exploitation” of the workers or the consumers in such a “capitalist” society? Where are the incentives or capacities for “raping the environment” or hurtfully discriminating against people on the basis, say, of gender or race? What avenues are open and available for the less well-off due to birth or circumstances to better themselves and raise their relative income and social position in the community of humanity?

We will turn to these questions and problems in part two of this article.