As background for this discussion of capitalism, I will provide a brief summary of the conclusions of the first presentation of these “Invisible Hand” essays which examined the physical object nature of our money and some of the unfortunate consequences of that nature. I will be concise so if you have already read one or more of the other essays don’t worry, this review won’t take long.
All money in history (and pre-history) has been considered to be or to represent physical objects such as a basket of grain, a cow, a coin, or a paper bill. Today most money is in computer accounts and though it zips around the world from account to account at almost the speed of light, it still is treated as if it were a physical object of some sort. Because we treat money as if it were a physical object, anything which is true of physical objects in general will also be true of money. This obvious point is ignored by economists and others who talk and write about money even though it is the most important truth about money. The importance of the physical object nature of money cannot be overstated. What follows are some of the consequences of that physical object nature.
First, money is like other physical objects in that it can be taken from its owner against that owner’s will; by force, fraud, or stealth and it can also be lost or destroyed. This means that you need to suspect almost everyone of trying to get your money by fair means or foul.
Second, money must be amoral because all inanimate physical objects are amoral. Even animals are amoral, in that they have neither an ethical sense nor morality, especially when they are used as commodity money. You can use your physical object money for anything, good or bad.
Third, the money supply is independent of the supply of goods and services for sale because the supply of one physical object is independent of the supply of other objects.
Fourth, money falsely simulates a zero-sum game in monetary transactions because the money gained by one party must be lost by some other party or parties. Money makes us think that other people can gain money at our expense and that we can only gain money at their expense. It makes us treat others as if they were competitors, rivals, opponents, or even enemies.
Fifth, money is almost impossible for a society or nation to control. In every nation that attempts to limit, regulate, or tax trade a black market comes to exist; and organized crime flourishes in all nations.
Sixth, money transactions are two-party interactions. Two-party interaction is inherently unstable because if one party gets an advantage in power such as having more money, the stronger party can use that power to gain still more advantages. This is particularly true of money. The old saying “them as has, gets” is true. Possession of money does make getting more money quite a lot easier. Naturally, the weaker party in such two-party interaction will eventually want to end the interaction. Thus the relationship is unstable.
Keeping that review in mind, let’s consider capitalism.
Just a glance at the Wikipedia article shows that there are a host of meanings for the word. This indicates that capitalism is not a single concept, but rather, a political word which is used to sway emotions instead of enlightening minds with reason and concepts. You might note in this context that for a Republican in the U.S. the word is a word of praise, of goodness, of progress and a splendid way of life. To a Communist it is a word of condemnation, of evil, of economic retardation and exploitation. Capitalism is also sometimes defined by describing what is considered to be its opposite.
So talking about capitalism without some strict definition is merely talking politics. On the other hand, talking about capitalism with a strict definition will usually be talking about something which does not exist, like a free market. As the Wikipedia article makes clear, there are many kinds and degrees of capitalism. For example: laissez-faire capitalism, welfare capitalism, state capitalism, crony capitalism, anarcho-capitalism, and corporate capitalism. There are many aspects of an economy which can be considered in deciding whether some economic system is capitalist or not. Is property ownership considered to be private or not: If Henry owns land, is that private or not? Does it matter if Henry is a king or not? At one time in Europe the king was considered to own all the land which he ruled. He could give land to his retainers or the Church and he could also take it back. Was the land he ruled private property or not? Did his status as commander of the dominant military force in the area and hence head of state make his ownership public or state ownership, or did the fact that the property passed down from father to son or other family member make it private? It’s hard to tell. As a serf on that land would it make any difference to you?
The case I am making here is that the whole distinction between private property and state ownership is in the eye of the beholder and has very little or nothing to do with how the economy operates. The labels really don’t matter.
I think that most folks would say that the early days of the United States, say around 1800, were a time when capitalism in the U. S. was about as pure as capitalism gets. The government was new and weak. Taxes were low and easy to evade. The national government was far less important to most people than the governments of the states in which those people lived. The means of production, broadly defined, were privately owned and people operated them for profit. So let us consider what life was like for someone of that day and time in the U.S.
If the “someone” we select is a slave, a substantial proportion of the population at the time being slaves, one was considered to be capital goods, to be private property, no better than a beast of the fields or a machine for agricultural production. So could you, the slave, determine whether you lived in a capitalist economy or a socialist economy? You were not allowed to own the tools with which you worked in either system. What clues could you use to ascertain your economic type? Both capitalist and socialist economies use slaves. Both capitalist and socialist economies have allowed people to starve to death. Both capitalist and socialist economies have denied large segments of the population any voice in how the government or the economy is run. Neither capitalist nor socialist treatment of slaves had any mercy. Neither capitalist nor socialist economies would offer the slave any escape from bondage.
So let’s pick some other someone to consider. How about if the “someone” is a woman? Few women were allowed to own property. Women were not allowed to vote. Women were required to bear and rear children as well as work in the home and on the farm without pay. If a woman was employed as a servant, any money she earned could not be invested by her since women did not own property in their own right unless there was no husband or father or brother… to manage that money. It was a man’s world and men ruled that world. How could a woman determine whether the economy in which she functioned was capitalist or socialist? Could she escape from the bondage of being a woman?
We have now eliminated over half the persons living in the U.S. at the time. Who’s left? The largest group that remains consists of poor men. What is their life like in 1800? Most men are farmers. They work on the farm doing manual labor. If they are lucky, they own the farm. Land in the U.S. was inexpensive, but starting a farm requires capital. There are lots of tools, buildings, and farm animals one must possess to operate a farm. So most poor men had to work for others to accumulate capital. The vast majority of poor men had no special skills or education. They knew farm labor and that was about it. They worked to eat and have a place to sleep out of the elements. They were not in chains and did not have a man with a whip threatening physical punishment, in most cases, making them work; but if they did not keep their job they were unlikely to eat. That is a situational coercion most people would recognize as not giving one much choice. Some jobs were little different from slavery. Take the lot of a sailor, for example. They might well be impressed (that is, bodily seized, taken aboard ship, and forced under threat of the lash to work) into what certainly appeared to be slavery, at least until the ship docked again. This is what being shanghaied means, of course. Poor men were not allowed to vote unless they owned property, land. Government was for those who had wealth. Poor men made no political or business decisions, and had no control in the economy. They struggled to survive. They, too, could not distinguish capitalism from socialism.
Moving on up to the higher categories of participants in the economy, we come to the skilled laborer. These men had something more to sell than just a strong back. They would have resided in the towns and larger villages. Some were ministers, some had metal working skills, still others could do bookkeeping and accounting. For these men, if they were not too unlucky, there was a possibility of accumulating some money. By living below their means for a few years, they might get enough money ahead to go into business for themselves as owners. These men could get ahead in life. Some of them could vote and participate in politics. For these men, perhaps capitalism and socialism are distinguishable.
If the state is a socialist state in which all capital goods are owned by the state, the skilled laborer would not be able to own and operate his business for himself. But to operate those capital goods, the skilled laborer would be required. In a socialist economy, he could be promoted to manage other laborers doing that work. So his career path would be from working with capital goods he did not control to controlling those goods while others actually worked that capital. Naturally, there would be an increase in pay. If the supervisor was good at politics within the state bureaucracy, he could move up and gain more and more power and wealth and make decisions for how lots of capital goods would be used.
If the state is a capitalist state in which all the capital goods are owned by private persons, then the skilled laborer could own and operate his business for himself. His career path would be to gain more money to gain more capital goods and hire skilled laborers like himself. If he was good at accumulating more money/capital goods, he would move up and gain more and more power and wealth and make decisions for how lots of capital goods would be used. He would also gain power over government in his part (sector) of the economy.
So for skilled labor, the big difference between capitalism and socialism is that in the former he competes with other skilled labor to gain money which allows him to control other people whereas in socialism, he competes with other skilled labor to gain the approval of his bosses in the bureaucracy. You will also note that as the skilled laborer’s business gets larger, it creates its own bureaucracy; and the path to success in that bureaucracy is to gain the approval of one’s bosses in the bureaucracy.
But in a capitalist economy, for a tiny few of the persons with job skills, it is possible to attain wealth and power outside the bureaucracy. In a socialist economy one must attain success within the bureaucracy. There is no other path. Socialism is the modern equivalent of the rule by kings and emperors. The only path to wealth with kings was in the state bureaucracy.
So we have found a difference for a tiny fraction of one percent of the men. What about the remaining men, those who have wealth and power from inheritance? These men have capital and collect what are called “rents.” That term harkens back to the days when capital was mostly land farmed by attached serfs. The serfs paid rent on the land they worked. These already wealthy men in the United States of 1800 likewise invested their wealth in bonds and land. They therefore gained money because they possessed money. They were the “central planners” of 1800. They included the children of those most successful skilled laborers whose businesses had prospered most.
For the wealthy, was it possible to distinguish between capitalism and socialism? What differences could they see? In both systems, the wealthy have the power to control the economy. In the England of 1500, one might be a wealthy churchman or even a wealthy banker but the majority of the wealthy were nobles who owned land. In 1800 in the U.S. there were no longer nobles but the wealthy owned land and ran the government. The wealthy also ran the economy and did the central planning. There were squabbles over how that planning was to be done, whether to have high tariffs to benefit the wealthy factory owners or low tariffs to benefit the wealthy land owners of the South, for example. But the wealthy few had all the political and economic power.
If the U.S. had been socialist, the wealthy few would all have had places in government rather like the House of Lords in England. The wealthy few would have controlled the land and other capital and would have done the central planning. There would have been rivalries and squabbling over power and control of wealth similar to those over tariffs, just as there are squabbles within our large corporations today over power and control of wealth.
So for the wealthy, too, it would have been difficult to tell whether the economy was capitalist or socialist.
In the previous topics I have dealt with in this series I have not bothered to distinguish between capitalism and socialism in describing the consequences of physical object money or POM as we call it. The reason is that it doesn’t matter whether the government or the capitalists own the means of production. The consequences of POM are the same. That’s why, for most people, it’s really hard to distinguish between living in a capitalist economy and a socialist economy. In both systems most people are poor and exploited. In both systems getting ahead is difficult unless your family is well-off. In both systems the wealthy control the government.
The foregoing should have raised the hackles of many of my readers because political concepts like capitalism are emotional ideas. So I would like to point out that what I have written should offend both the capitalist and the socialist. Neither group likes to be told that there’s little choice between their products, and neither group likes to acknowledge that human misery and exploitation is commonplace in both systems. They delight in pointing out the problems and foolishness of the other guy’s system but they have all sorts of excuses and rationales for the problems and foolishness of their own system: Thus I offend both. The two sides can agree on hating my position. Not that they’ll find that any comfort.
So now that I’ve made you angry, let’s see if I can smooth those ruffled feathers. Let’s see how a non-POM system would be classified on this capitalism/socialism scale.
The question of ownership appears to be of great concern in almost all definitions of capitalism and socialism. With a non-POM system, all ownership is individual and private. There is no joint ownership, corporate ownership, group ownership, or government ownership. If something is property in a non-POM economy, it will be owned by an individual. This makes non-POM unique in the economic systems of the world. There is no POM system which carries private ownership of property to anywhere near this level. All POM systems would be far more socialist than any non-POM system. Therefore, if you define capitalism as lack of government ownership of the means of production then you would have to classify a non-POM economy as definitely and thoroughly capitalist.
Another central characteristic of capitalist economies is capital accumulation. There are at least two ways of looking at capital accumulation. It can be seen as the total of capital goods or money increasing across the economy. If we view it that way, a non-POM system accumulates capital goods far more rapidly than any POM system due to its far greater efficiency. Thus non-POM would be more capitalist than any POM system. It can also be viewed as the accumulation of capital (goods and/or money) in the hands of a few individuals. With this view, POM economies are more capitalist. Non-POM economies have accumulation of money but not of capital goods. In a non-POM economy, no individual owns very much in the way of capital goods even though the production of capital goods in a non-POM economy is far greater than in POM economies. The ownership of capital goods is far more evenly distributed in a non-POM economy. So on capital accumulation it depends on which view of this idea one likes best.
Competition is a central characteristic of capitalistic economies as well. In a non-POM economy the emphasis is upon cooperation rather than competition. All the means of competing in a non-POM economy require cooperation with others. It is not that one is coerced to cooperate, but in order to gain the most rewards one will be most successful if one cooperates. There is no zero-sum game situation with non-POM so there is no true competition. Therefore, a POM economy has far more competition than does any non-POM economy. On competition, POM is far more capitalist.
The next central characteristic of capitalist economies is wage labor. Wikipedia writes that wages are set by a market. Of course in a POM economy there is no such thing as a free market so we know that wages are set by a market constrained either by government controls or by price fixing or other means. Unions have historically come into play here. In a non-POM economy the prices for labor are set in a completely free market operating with pure competition. Note that this pure competition is strictly for wages. It should also be noted that the only way one acquires money in a non-POM economy is through wages. At the same time one should keep in mind that there are no employers in a non-POM economy. No one is hired by anyone else. This means that the term “wages” does not have the same connotations that it has in a POM economy.
Wikipedia says QUOTE “In a capitalist economy, the parties to a transaction typically determine the prices at which assets, goods, and services are exchanged.” UNQUOTE. Now in a non-POM economy all transactions are three-party transactions, unlike the POM economy in which all monetary transactions are two-party. With non-POM the exchanges of assets, goods, and services are taking place within that three-party context. Therefore, with most of the transactions there is no price for the asset, good, or service being provided because it is not being exchanged for money. In those few cases in which a price exists, it is fixed and unchanging because those transactions are not trade or exchange. Those exchanges are merely the choosing of one’s earnings. In a POM economy, prices will exist for all exchanges of money for assets, goods, and services. A variety of prices exists, set by a variety of market forces, but the market is not free, even if the market is an illegal (or “black”) market. Thus, in a POM economy, one of the two parties will usually have far more control over what the price will be. I will leave it up to you to judge whether exchanges of assets, goods, and services which do not involve a price are capitalist and whether prices set in a constrained market are capitalist. This one could go either way.
Government regulation also plays a role in degree of capitalism versus socialism. Presumably, the more regulation there is, the less capitalistic the system – though a POM system with no regulations would fall apart. In a non-POM system there is no government regulation at all. The government is totally powerless to constrain the operation of the economy in any way. With POM, regulations by the government are necessary for functioning. Even organized crime comes to have regulations for how the various organizations will interact. They recognize each other’s “territory” and negotiate compromises and so forth. So a POM economy must have government and regulations in order to function. Therefore, with regards to government regulation, non-POM is far more capitalist than POM systems.
With POM economies one will note that there is a constant movement in degree with more and less government involvement. Typically in a POM economy the government becomes larger and larger and more and more involved through the demands of powerful wealthy interests or through the actions of a powerful political leader. So an economy can be capitalist in 1925 and socialist in 1955 as was the case in East Germany. With a non-POM economy, it is impossible for the system to become in any way socialist since there is no government ownership or control of any of the means of production or productive activities. No regulation is needed or possible. Thus, no matter to what degree you think a non-POM economy to be capitalist, it will never drift or move toward socialism or state control.
In a POM economy the relationship between government and those engaged in economic activities (all those activities that involve money) is a coercive relationship. That is, the government requires some behavior or prohibits some behavior and punishes (in some cases and in some way) those who do not obey the law or regulation. Of course, whether you get punished and how severely will depend on your wealth and power. Thus the relationship between government and people, so far as economic activities are concerned, is top-down and controlling. Naturally, this relationship is not what one thinks of when one considers the properties of a capitalist economy. The reverse is the case with a non-POM economy. That is, those who engage in economic activities, which is almost everyone, are functioning in a reward system rather than a coercive system. With non-POM, rational agents strive to maximize rewards for themselves. There is no punishment or negative sanction to evade, nor is there any external control. Every person is a free agent responsible for the consequences of his or her own actions. One can gain rewards from the non-POM system or fail to gain rewards. Think of wandering through a wilderness and you come upon a berry bush. The number of berries you pick and eat determines your reward for picking berries and those berries you do not choose to pick do not constitute punishment. The non-POM system does not punish. This reward relationship between individuals and the nation or society is far more similar to capitalism than is the coercive, punishment for disobeying the system that all POM economies produce.
Now let us consider the objectives of capitalism, the benefits of a capitalist as opposed to socialist system, and compare those benefits with the actual outcomes which POM and non-POM tend to produce.
Capitalism generates greater production and economic growth than socialism does. This is a very desirable feature and consequence of capitalism. With POM there is the business cycle during some parts of which growth is rapid and production soars but during other parts of the cycle growth slows or even reverses and production falters and is reduced. With POM there is always significant unemployment of at least two or three percent even at the best of times. Socialism seems to have even more severe problems with production. In contrast to the experience with POM, non-POM has no business cycle. Production is full speed at all times. There is never a money reason to stop production. There is never unemployment with non-POM: though one may change what one does to earn money, in non-POM one never needs to be idle. Also with POM there is much economic activity which does more harm than good. My favorite example of this is the tobacco industry which kills over 400,000 U.S. citizens every year and damages many thousands more without killing them… yet. The many thousands of people employed in tobacco, and the resources used in the production of tobacco products, are worse than wasted. Or we might consider the vast resources devoted to military activities to give governments more force to have at their disposal. The production of these harmful items, tobacco products and weapons of war, takes away from production which might provide true benefits. With non-POM, production is strongly oriented toward actions which produce benefits or reduce harms. Therefore we can easily conclude that non-POM not only produces more goods and services with the productivity per capita increasing rapidly but it also produces far more things that benefit people and far fewer things that harm people.
Capitalism is associated with political freedom. In fact, there have been those (such as Freidrich Hayek, Milton Friedman, Ronald Reagan, and Ayn Rand) who have maintained that capitalism is required for political freedom. Any totalitarian system will always attempt to control the economy in many ways. Therefore if the government is socialist the temptation to exert that control to eliminate political freedom is strong. We know that with POM political oppression is possible since every nation in history has used POM and the overwhelming majority of those nations have been oppressive political systems. So POM is associated with coercive control in government since POM provides the power to punish. Compare that with non-POM, in which there is virtually no government at all; and the system provides only rewards, never punishments. With non-POM political freedom is complete and completely safe since there is no mechanism or means by which that freedom can be denied. Thus non-POM attains the desirable objective of political freedom far better than POM.
Capitalism as an economic system can organize itself into a complex system without external guidance or any central planning mechanism. With POM such organization always results in the use of government by business. The very same persons who attain economic wealth in a capitalist system will also extend their organizing and control into the political arena in order to gain further advantage in the economic system through favorable legislation and enforcement. Political corruption does not spontaneously occur from within government. Those who attempt to influence government by use of their wealth are the other part of the equation. POM makes such corruption and control of government possible. With non-POM there is virtually no government to control, and no means of using wealth to exercise control. With non-POM, true free markets exist, which distribute power and control throughout the economy. The marvelous machinery of the free market takes everything people know into account. Thus, resources and their allocation are optimally arranged for the benefit of human beings, the human beings who constitute those free markets. Therefore, non-POM is far better than POM at bringing about this capitalist ideal of self-organization as well.
So we can conclude that if one wants capitalism in order to attain more production, more political freedom, and better mechanisms of self-organization for the participants in the economy then one should also want a non-POM economy. Even if one is determined to maintain that non-POM is not capitalist, that conclusion still stands. Whatever you think a non-POM economy to be, whatever inappropriate label you want to put on it, non-POM does the job better than any POM system whether the POM system is socialist or capitalist or something in between. Personally, I think that non-POM is definitely capitalist but then I am almost certainly biased. If one must place economic systems on a capitalist to socialist dimension then non-POM must be about as far from socialism as possible which puts non-POM at the capitalist end on that spectrum. If one is merely using the word “capitalist” for political purposes to label the good guys or the bad guys then POM or non-POM doesn’t matter at all.