Indian Libertarians

What is Capitalism?

admin Saturday March 2, 2013

Normally capitalism is the word in our vocabulary that we use to denote the free-market capitalism. Capitalism, in the present age, has become a dreaded word for the common. For, capitalism is not a new phenomenon.Capitalism had been, in history and, is still blamed for almost every problem of the society. The capitalists continuously have to deal with the anti-capitalist mentality of human society. In the present day with the ongoing economic slowdown, it has become difficult for pro-capitalists to present their views without expecting a stiff gruesome retaliation of taunts and allegation from the anti-capitalists of all sorts. A capitalist's dilemma to voice a support for free-market capitalism is similar to someone's wish of jumping in front of a speeding train without brakes and halt it like a superman. Most capitalists have opted for the classic approach: "silence is golden" except for a few of them.

Capitalism is not a cult or a religion which requires glorification or criticism. Capitalism is an economic system which is a part of human society. Each one of us gives and takes part in making and working of an economic system without ever knowing or realizing it. Each one of us is an actor in an economic system playing a certain role, contributing to it. We can compare an economic system to a social system where each one of us is an actor in the human society playing a certain role without ever realizing it. Each one of us has different opinions about economy just like we hold certain opinions about our society without understanding sociology. Similarly, most of us hold just opinions about capitalism without really investigating the facts in detail.

Capitalism deals with creation of capital or capital goods and employment of capital goods to produce consumer goods. Capital does not reproduce itself. Capital is always created or consumed. The characteristic feature of capitalism that distinguishes it from pre-capitalist methods of production was its new principle of marketing. Capitalism is not simply mass production, but mass production to satisfy the needs of the masses. Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.

The average people’s opinion towards capitalism swings along with the business cycles of booms and bust. Most of us generally do not understand what suddenly made everything go wrong when there were no drastic changes in our actions or in environment. "How could the economy crash when I have not reduced my daily efforts or productive capacity? Surely someone else is responsible for it" is thus the conclusion that every productive man will arrive at. In easy times when most of were enjoying the luxuries of life, capitalism is glorified. The general topic of conversation during the boom period is about the future prospects, how fast the growth rate is, how better our standard of living was getting, etc. Of course, the fruits of capitalism and its benefits didn't die-off all of a sudden but something else happens when the economy goes bust. Tough times are frustrating for all of us. Our natural tendency is to make a very strong opinions about certain views without really understanding what is going on. Its not the case that most people are not rational or reasonable or are stupid but the fact remains that the general public is not expert of economic theories. Even most of the mainstream experts fails to understand certain economic phenomenon. We can easily make out this fact about them from the articles we read in the economic sections of our newspapers. Do we not see that our economic experts own views on the same economic phenomenon that are contrasting and contradicting to each other?

It is the art of the "intellects of stature" to wisely put the blame across to something else. It is not at all surprising that these so-called intellectuals had to simply put the blame on free-market capitalist system, sometimes on consumerism, sometimes on greed, sometimes the rain gods, heavy snowfall, laziness and everything else, but themselves. Now, it should cross your mind that if economics is such a complex science then how can the people ever interpret it? Its a myth that economics is so complex that it lies beyond the understanding or intellectual capacity of an average person. In fact, economics is a science of human actions. There are different schools of economic thought. The methodology of studying and explaining an economic phenomenon differs from one school to another. The present day economic system runs not on free-market capitalism but exactly the opposite. The economic system is under regulations and mostly called a mixed-market economy or a planned economy with the government as its planner.

If there are no free markets then why do we blame free markets? It seems that we failed to shift the common terminology of capitalism from free-market capitalism to mixed-market capitalism. Lets investigate further and try to understand why capitalism is still related to free-market capitalism theories?

Let us see how capitalism is defined by different sources:

Oxford Dictionaries:


an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state: an era of free-market capitalism, private ownership is a key feature of capitalism



An economic system based on a free market, open competition, profit motive and private ownership of the means of production. Capitalism encourages private investment and business, compared to a government-controlled economy. Investors in these private companies (i.e. shareholders) also own the firms and are known as capitalists.

Merriam Webster:


an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decisions, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

It is clear from these definitions that capitalism is attributed by most sources to free-market capitalism and the belief that free-market capitalism exists in practice. Capitalism, in general, is an economic system based on the concepts of private ownerships, free markets, production of goods, and distribution of goods, profit motive and competition. There should be no doubt in a rational man’s mind that these elements are harmless and are resulting phenomenon of human nature. Lets explore these elements a bit one by one.

Private ownership: Without going into the legalities, we can say that "private ownership" of property means the ways of owning or obtaining, having complete authority and control over it, be able to use the property, dispose-off the property by sale or consumption or by destruction, etc.Ownership of any type of property by any person cannot be held inappropriate by any reasonable man. For example: A farmer claiming ownership to the produce of his harvest, A monk claiming ownership of alms he has received, A taxi driver claiming ownership of his taxi and asking the passenger not to dirty it etc. are display of private property ownership rights. Private property can be jointly owned by more than one individual under a contract with the terms and conditions of ownership between the owners clearly stated.

Production, distribution and consumption of goods: Our survival depends on these elements. The early man needed wood to produce fire or to make tools and weapons to hunt and survive. Man also needed distribution of the produce from place of production to their villages or for trading the goods with other villages to procure other goods they needed, in exchange. Invention of wheel and building of carts and boats are proofs enough to show the necessity of distribution of goods. Consumption of produced goods is equally necessary. We cannot survive without consumption of food and water. We need to consume wood, mud to make bricks, stones etc. to build houses and the likes.

Profit Motive: Capitalism and capitalists are blamed for their profit motive. It is absurd to say that a man who seeks betterment of himself by appropriate means is wrong. A capitalist also carries the risk of loss and therefore his survival is always at stake. In fact, all human actions are purposeful and profit seeking. A man will trade apples for bread only when that man feels that it is profitable for him to part with certain amount of apples that he possesses, in exchange for a certain amount of bread. A man will donate if he feels, that parting with his money, in return for the good feeling he gets by his noble action, is profitable.

Competition: Man is competitive by nature. Man had to contest his territory, food and water against other species to rise above, in the food chain and survive the present day. It is the competitive spirit in sports, arts, science or any other aspect of life that yield out the best of us. The competition is not always of one individual against the other but mostly the competition is with the self. Competition always results in betterment of mankind. For example: I want to be a better player than before so that I can win more games, I must make better goods than before so that my goods will be demanded by customer, the X drugs used in cancer cure is expensive and has many dangerous side-effects, therefore, I must make better drug than X, etc.

Free Markets: Markets are basically places where trade takes place between buyers and sellers. But, when we talk about market in terms of economy like free-market economy or market-socialism or laissez faire, etc., we are basically referring to the price and decision-making mechanism which plays an important role in the system. For example, in free market, prices are results that are solely based on supply-and-demand mechanism. In socialist-markets, the prices are fixed by a regulating authority as the government by different means of price-fixing mechanisms like tax, duties, tariffs, subsidies, prohibitions, bans, price barriers, etc . In laissez-faire market, the government cannot interfere with prices in form of price settings, tariffs or duties but is free to impose regulations, to protect the consumer and also as a justice provider to ensure that contracts are honored and enforced.

It is also important that we understand what capital is. The mises wiki explains


Capital are the goods that were produced in previous stages of production, but do not directly satisfy consumer's needs; they are used in production to eventually produce consumer goods;.

Capital goods can be a bar of metal, a piece of land, fish, intellect and physical strength of man, skills, natural god-gifted talents, attractiveness, spiritual wisdom, etc. We use capital goods to produce consumption goods. For example, a piece of land mixed with physical strength of man can be used to build bricks; spiritual wisdom can be converted into books and consumed by those who are seeking spirituality; attractiveness of a person can be used for marketing of products like our fashion models do etc.

Capital has a value. The mises wiki says


All actions employ scarce means to attain the most valued ends. Man has the choice of using the scarce means for various alternative ends, and the ends that he chooses are the ones he values most highly. The less urgent wants are those that remain unsatisfied.  

Value is the importance that acting man attaches to ultimate ends. Only to ultimate ends, is primary and original value assigned. Means are valued derivatively, according to their usefulness to the attainment of ultimate ends. Their evaluation is derived from the evaluation of the respective ends. They are important for man only as far as they make it possible for him to attain some ends.

Capitalism is the only philosophy which allows man to value things independently according to his valuation. For example, a person might hold diamonds to be priceless and for some other person, it might be just pieces of glittering stones. The value, therefore, is subjective to the person and capitalists gracefully accept that it is so.

Hence, we see that there is nothing evil with capitalism in itself. So, what are we really blaming? What is it that is really affecting us in a bad way? Is it free-market capitalism? The term capitalism is attributed to a lot of things like greed, currencies that we use now a days, destruction of environment, exploitation of workers, class warfare, etc. We must examine few of these elements to understand where the problem lies exactly.

The mises wiki says


Greed is the excessive or rapacious desire, especially for wealth or possessions.  

Joseph Sobran writes, "'Need' now means wanting someone else's money. 'Greed' means wanting to keep your own. And 'Compassion' is when a politician arranges the transfer.

Greed is not bad in itself. Its another of our human desires. However, if a person uses fraud or force to fulfill this desire of his, then it becomes immoral. We cannot complain why a person is earning or saving or consuming more than others. It is only their capacity to put honest actions into play to attend their greedy means. Such greedy persons do not violate any of the rights of another person and therefore, their actions cannot be held wrong or immoral.

The reason why greed is considered evil, is due to the fact that certain individuals have used immoral means to acquire wealth. They have generally used aggression of some form or fraudulent methods to violate rights of other men. This is not the philosophy of capitalism and capitalists do not support such methods. In fact, capitalists are highly vociferous and critical of such men and their corrupt practices. Feudalism, slavery, mercantilism, corporatism, wars, monopoly rights, communism, socialism, fascism, fractional reserve banking, etc. are certain means employed by certain people to amass wealth by corrupt means, which, we know has resulted into mass wealth redistribution and disparities in our society. The kingly class, priestly class, bureaucrats, the elite oligarchs, etc. have always acquired and safe guarded their wealth that are not the ways of capitalism or actual economics. Because, they have the wealth to invest in economic activities, most people tend to confuse them as capitalists. In a free-market economy, the only way to earn and safeguard wealth is by serving the consumers with goods. In free-market economy, the capitalist is subjected to the risk of failing to serve the consumers better than their competitors and lose their investments. Therefore, under the pretext of welfare and protection of those, who do not possess capital, a series of regulations and control was devised cleverly by the ruling class to channelize more wealth and safeguard their investments from free market competition. If you see an entrepreneur lobbying with the government or monarch for special privileges, that's the sign that, that entrepreneur is seeking non-capitalist means of safeguarding his wealth by eliminating competition. In time, they have perfected this system of systematic exploitation. The governments have complete control over the economies today. They are powerful enough to suck-off the entire wealth of the population. The introduction of Fiat Currencies which allowed it to keep inflating (to reduce the value, devalue) at will and play around with interest rates has created a cycle of boom and bust. They promote consumption by lowering the interest rates. With easy money flow, people tend to spend higher than they normally would. This results into consumerism and its the capitalist's brainwashing methods via advertisements which is responsible for it. As soon as the easy money flow is reduced, the advertisement fails to drive-up consumption. This is something which most of us fail to see. This is when we start focussing on our spending and the debts that we have incurred by the thrust of easy money. When interest rates and taxes, both rises, its then that we feel the miserable effects of the economic slowdown. The market always tends to keep the return on investment rates above the rate of interest that is paid on savings. These are the reasons that our savings never seem to grow or become a meaningful instrument to serve us as useful capital, as we had planned our savings for. Hence, we are always in the pursuit of earning more and more money. This is why we find the rat's race in our society. These methods have made almost each one of us helpless and totally dependent on the government's wills and whims. The government is not in the control of the people but only of certain individuals in the business of politics. The Corporate-Government partnership via subsidies, tariff controls, duty control, quality regulation standards, imports permits, special zones etc. are not real partnerships but, a mean to facilitate the politicians to milk the wealthy. The continuous devaluation of the currency destroys our savings.

Hence, we can see the culprit is not free-market capitalism, but other factors unrelated to capitalism and its philosophies. We can only interpret and understand when we investigate and acquire the right information. The Austrian School of Economic Thought explains economics phenomenon far consistently than any other school of economic thought. The Austrian School has precisely predicted as well as provided the accurate causes of what is going on with our economic system. As Murray Rothbard says


“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Lets not keep paying huge price for our ignorance of economic system, which all of us are a part of.