What is Capitalism?

I recently had an exchange that got me questioning the nature of Capitalism. What I’ve come to understand in my exploration of the topic is that it is not particularly well defined. I honestly think that’s by design; many of the behaviors that we attribute to natural cooperative exchange between entities is often claimed as Capitalist.

In my discourse, I was confronted with this definition of Capitalism. To paraphrase:

Capitalism = the natural right of ownership of that which is produced by a person by that person as well as the natural right to engage in the free exchange with others of those things which each party owns.

If this is what many libertarians and conservatives believe, then I see why Capitalism is so attractive. This is a quaint definition and, as I’m going to illustrate, basically incorrect.

Let’s start with the idea of that which is produced by a person actually belonging to that person. I really can’t challenge that premise. What a person produces should indeed belong to that person, at least in my estimation.

However, this isn’t a practical concept in a world of seven billion people. How does one protect what they own with so much competition? The ability of a single person to protect what they produce in today’s world simply isn’t realistic. The odds that someone (or, more likely, some group) will come along and just take it, at least in a world without the rule of law, are pretty high.

But, rather than directly address that, let me present this example:

Let’s examine the idea of building a home. Assume that someone builds a dwelling with their own two hands without assistance of any kind; under those circumstances, it’s reasonable to argue that that person should indeed “own” their home, that it is their property, and that no one else should have a claim on it.

Now what if I give that person a hammer with which to build their home?

Most people wouldn’t accept that I can claim any ownership of the home by simply lending a hammer. Their likely position would be that the builder used that tool to do all of the productive work, so the home still rightfully belongs to them.

Now what if I also provide hammers, nails, wood, plumbing, etc. to build that home?

Now it gets a bit murkier. It’s likely that many people would think that, because I provided all of the raw materials, a claim of ownership on my part is somewhat easier to justify.

Now what if, on top of all of the raw materials, I also paid the builder to build the home?

In this circumstance, I still have contributed no productive effort to the building of the home. Yet, in our current economic system, most people would acknowledge that I can make a pretty strong claim for ownership.

So how is this Capitalism?

If I’ve contributed no productive effort to build the home though I’ve contributed all of the materials and paid for it to be built, that fact, at least according to the definition used by many conservatives and libertarians, should mean that I can make no claim of ownership on that home.

But why is that generally not the case?

Why is it possible for people to claim ownership for things that they do not directly produce?

Because, in the example of the home, though I haven’t directly produced anything, what I have arguably done is assumed “risk.”

By providing the materials and payment, I am making an economic commitment to an uncertain outcome: the ability of the builder to actually produce the home. This is the nature of risk from a financial and economic perspective: the commitment of capital to a productive endeavor that may either succeed or fail.

That is Capitalism.

Modern Capitalism is characterized by two factors: production and, more significantly, risk. It is distinguished by the use of financial instruments involving an element of risk to facilitate the means of the production of value. Its structure is the legal and societal apparatus that has been created to codify that risk (in the form of contracts) and enforce agreements (with coercive force if necessary). To put it another way, Capitalism is the legal, financial, and monetary system created to commodify the production of value. The lynchpin of that system is the apparatus created for the production, control, allocation, and distribution of money.

Productive effort is the value creation of society, the mechanism with which wealth is created. But, as my previous example illustrates, very little can now actually be produced by any single individual relative to the whole. So a sophisticated system of “risk” has been created both to facilitate and commodify production. This system has allowed a class of so-called “risk takers,” such as traders, investors, and venture capitalists, to reap disproportionate rewards relative to their own ability to actually produce. In more colloquial terms, Capitalism is a system of middle-men who allocate capital, usually in the form of money, to fund productive efforts. Those efforts can be funded at the individual or small enterprise level (with loans), at the high-risk enterprise level (with venture capital), at the government level (with bonds), and a myriad of other ways.

In exchange for their investment, what do these “risk takers” gain? In some cases, they receive the fruits of production in the form of real assets, such as housing or commercial property, which, by nature, they are unable to produce on their own. However, in most cases, they receive “returns on capital,” which is another way of saying they get back more money from their investments than they commit. In other words, by harnessing the productive capacity of others, they are able to accumulate vast sums of money for themselves. The advantage to them is that money, which is a completely artificial and mostly worthless commodity, can be used to procure things of real value. Accumulate enough of it and you can live a quality of life, at least in terms the ability to acquire possessions and experiences, that is far greater than the overwhelming majority of the people on Earth ever can. The entire Capitalist system, by its nature, promotes hierarchy and stratification. Throughout history, it has manifested as extreme economic inequality which has often motivated war and revolution.

Now here’s the tricky part: if “risk” is funded with a worthless commodity (money), then why is money perceived to have value and why are “risk-takers” able to commodify production with it to their (relatively) exclusive benefit? That question is difficult to conclusively answer. Some of it may simply be expedience. People believe that the money has worth because of its convenience; it is a very efficient method of value transfer and exchange. However, efficient doesn’t mean “accurate.” Indeed, Capitalism’s natural paradoxes and distortions make determining value in terms of money a relatively arbitrary exercise.

However, the main reason production can be commodified with money is government. As time goes on, almost every government on the planet is coming to accept that its true main responsibility is not necessarily the well-being of those whom they govern but the protection of the Capitalist apparatus by any means necessary. Using their monopolies of force, governments have growingly come to understand their roles in protecting a system that allows those who control it to reap massive rewards for its maintenance, in the forms of wealth and power. The so-called “risk takers” operate hand-in-hand with governments to perpetuate the system in which both benefit.

While this may sound nefarious, there is actually a pretty practical reason why such cooperation would take place: it’s much easier than war. Capitalism allows governments to compete with one another through cooperation rather than violence. It’s said that, in war, there are no winners. However, in Capitalism, even poor countries have a privileged class which reaps the overwhelming majority of the country’s wealth as generated by production. Hell, it beats being strung up by a violent mob or standing in front of a war tribunal by a long shot.

So no, my libertarian friends, Capitalism isn’t about what an individual owns as a result of their own production. Capitalism is the vast societal apparatus involving governments, laws, armies, and police to protect the system of using money to commodify the productive capacity of a large amount of people for the disproportionate benefit of a very few. In the past, conditions such as slavery, colonialism, and imperialism were prevalent aspects of Capitalism. Though they have mostly become obsolete, the system of commodification of human production still produces profound negative results; structural violence related to Capitalism results in the death of tens of millions every year. Though, to be fair, in the last 300 years, substantial benefit has also been produced.

Regarding “risk”… let’s examine this concept more closely. It is not simply a matter of the potential for risk-takers to lose their investments. Capitalism commodifies human production by systemizing risk allocation at many different levels. For instance, the risks of a large percentage of producers can be minimized in exchange for their productive output through a process called “employment.” A producer who chooses not to assume risk can become an “employee,” which is essentially a producer with a minimized risk profile. Hence, pensions, unionization, employer-provided healthcare, and other features of the modern Labor system. Through the employment process, their personal risks are assumed either by public or private legal entities, such as governments and corporations.

However, “risk takers” are now systematically shifting the risk they assumed from those producers back to them. A stark example of this is represented by the so-called “gig economy.” Many consider the assumption of risk at the individual level by entities which benefit greatly from the legal and coercive power of governments the proper exchange for their productive capacity. In other words, the unspoken agreement has been that, in exchange for being allowed to commodify human production in aggregate, the “risk-takers” tacitly agree to minimize the risks of those who freely offer their productive capacity which greatly enriches the risk-takers and, far more modestly, the producers. Many think that the “gig economy,” as well as wages that provide below-subsistence level living conditions, are violations of the implied contract between those who control capital and the productive labor which enriches them.

Capitalism may reward risk-taking, but is far more often highly punitive to both those who do not wish to take such risks as well as those who do. Those who choose to take on the risks directly associated with productive effort are generally referred to as “entrepreneurs.” Entrepreneurship is extremely risky and failure rates are ridiculously high. It’s rare for an entrepreneur to create significant productive value, particularly without the assistance of “risk-takers.” Even then, success is statistically very low. The effect of failed ventures are often terminal and many would-be entrepreneurs spend much of their economic lives repairing the damage.

The producers such as entrepreneurs shoulder the greatest personal risks because failure is potentially devastating. A fortunate few go on to become successful and even extremely successful. To justify the system, “risk-takers” often elevate the most successful entrepreneurs as “front men” for a narrative that champions Capitalism while reaping outsized gains in the background. Keep in mind that, in almost all instances, a “risk-taker” is also enriched by the entrepreneur’s success. For the system to be perpetuated, it’s necessary for “risk-takers” to idealize risk taking. The result drives the system which creates the opportunities for the “risk-takers.”

The “risk-takers” have essentially made a game of gambling on the producers and claiming disproportionate rewards when they succeed and relatively modest losses when they fail. They’ve constructed a financial system that protects them from the worst of their excesses (”too-big-to-fail banks,” etc.) The “risk-takers” themselves have also become idealized and idolized. The ones who take the risks credit themselves with Capitalism’s progress at the expense of those who actually produce.

Here’s the funny thing about “risk”… at scale, in aggregate, over the long-term, it’s an illusion. Progress, as the fruits of production, is inevitable. While any individual “risk taker” could potentially lose their shirt, those at the highest levels benefit from a system designed specifically to shift the damage of failure onto those lower on the chain. It’s no coincidence that criminal prosecution is exceedingly rare for those at the highest economic levels, especially in regards to economic crimes. The system is self-justifying and self-validating. Those at the top are insulated from its most devastating effects which is why they are its most vocal champions.

It’s said that Capitalism makes everyone richer. I’d say that it makes a few people much richer and everyone else somewhat less poor. I can’t deny that, at least statistically, many aspects of the world have improved as a result of Capitalism. But millions also die as a direct result as well as suffer other negative outcomes, such as crime and the destruction of human dignity. As the global economy begins to stagnate, there are also signs that the same system that allows risk to drive productive growth may be reaching its limit.

My proposition is that each of us is born with our own wealth, as our time and effort. Because we own our own efforts, we should also own our own money. In my estimation, it is unjust that effort be artificially deprecated by markets or otherwise commodified. For the modern world, that time/effort can and should, by default, be fungible.

Is risk a necessary element for progress? This is a debatable question and a great argument can be made in the affirmative. However, in my estimation, economic risk as it exists today is an artificial burden that serves only to keep the vestiges of the past world around to justify the existence of power and control institutions which Man has outgrown. Risk was an original element of the hunter/gatherer society. As man has grown and evolved, we’ve systematically both faced risk and conquered it. In a social, collaborative world, should we be motivated by fear or a desire for personal excellence?

I personally think we’ve outgrown Capitalism. If I’m correct and we have, then what do we risk by holding on to it?

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2 thoughts on “What is Capitalism?

  1. Pingback: In Response to Deirdre McCloskey | The Currency Paradox

  2. Pingback: When Capitalism Mattered | The Currency Paradox

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