What is Capitalism?

I did an article a while back on “What is Money?” (TL;DR is “Money is a commodity and an acceptable medium for universal exchange of value.) I am writing this in the wake of the passing of Walter E. Williams, one of the greatest economic minds of our time.

Now comes the answer to “What is Capitalism.” We have to start with capital, which is defined as:

“a stock of accumulated goods especially at a specified time and in contrast to income received during a specified period. also: the value of these accumulated goods.”

Before I get any farther, Capitalism, like any other –ism designed by man, is neither “good” nor “bad.” What people use it for is where terms like “good” and “bad” might come in, but even then you have to define that those terms mean. What is good for one person in a Capitalistic exchange might be bad for the other person.

Capitalism is like a hammer. It is a tool to be used. In the hands of a workman, it is used to build things. In the hands of a person with ill intent, a tool used to build can be used to destroy or even kill. It is the heart of the wielder that makes the choice.

Back to Capitalism. I contend that there is more than just physical materials that fall under the term of “capital.” We must also include aspects like knowledge, effort and to a lesser but related extent, time in there as well. Raw materials are worth less than finished goods, because time, effort and other capital must be expended to convert raw products to finished goods. Wood is used in the frames of most houses. But trees can’t be used for the job. They must be planted, cultivated, then harvested and cut into standard-sized boards before they can be used to construct a house.

So, that’s the “Capital”, now let’s talk about the “-ism.”

Capitalism is the free (uncoerced) exchange of things of value (capital, labor, etc.) between two parties, be they individuals, companies or governments. Capitalism exists in any country and under any political system where people trade their own excess capital for the capital another has and wants the other person’s capital. It is the quintessential “win-win” exchange.

I have several skill sets of knowledge. I am willing to use those skill sets, combined with spending my time and effort to produce a good or service someone is willing to give me money in return for my work product. I then take that money and exchange it with my local grocery store for food, and rent to live in a house. I could have exchanged my work product for a finished good (say, a vehicle) and that would be okay as well, as long as it is a free and equitable exchange of value to each of us.

To illustrate this point, in 2006, Kyle Macdonald started with a single red paperclip and traded it to another person for a pen. With a total of fourteen trades over the course of a year, this guy turned a paperclip into a house, all by bartering. He even wrote a book about the whole thing. For each trade, Kyle had capital, and he found someone who was willing to take his capital and give Kyle their capital in exchange. Both parties agreed to the trade and everyone walked away satisfied.

The critical part is the particulars of the contract/relationship/transaction must be agreeable to both parties. My idea of what my knowledge and effort and what a potential employer is willing to pay for my skills, time and work product is probably going to be very different. The good news is we can “meet in the middle” to reach an agreement we both profit from. If we can’t agree, the employer goes without the work product he needs and I don’t get paid for my time.

Here’s some debating points when dealing with a Socialist/Democratic Socialist:

If your opponent uses the term “wage slave,” ask them to define it, then tell them most people are wage slaves under any system on the planet, past, present or future. Because to live and function in any society, you must generate a work product in order to generate value for the society. In a system where your basic needs are met, but your work product (if any) doesn’t generate enough value to pay for what you consume, then you’re forcing other people to work harder to make up for your laziness.

If the other person brings up slavery, stop them right there and clearly explain that slavery is not, never has been and never will be a part of Capitalism. I can see their point about the slaves being considered capital and all that, but here’s the part they missed: The transaction between master and slave is not a voluntary one. Remember I said “…the free exchange of things of value between two entities...” The slave did not have the opportunity to negotiate a mutually beneficial and agreed-upon contract, trading his work product for the benefits provided by the master. The slave also lacks the option to withdraw from the transaction if he believes the conditions he works under or the compensation is unacceptable.

Case in point: I was working at a job I enjoyed at the beginning of 2020. I had been there for several years, was very happy and had no intention of leaving. In early 2019 a derp head of a manager was hired to supervise the group of technicians I was part of. In this company, the average tenure time of a technician of 15 years and several techs had been with the company 40 years. This is company which treats its techs with a level of respect and compensation to stay that long is a rarity these days. Derphead lost about 25% of his technicians, (he supervised 42 technicians) including myself over a ten-month period, which is an unheard of level of turnover at this company. The fact that I could leave any time I wanted (and eventually did) shows I was not a slave.

As Walter E. Williams (and Gordon Gecko) said, “Greed is good.” Not the “cheat, lie and screw over others, I-win-you-lose” kind of greed, rather the “maximize my prosperity without hurting others win-win” kind of greed. We all act to better our own self-interest. That concept is hardwired into all of us. We fulfill our own self-interest by serving others. Capitalism in its purist form is a physical manifestation of Altruism. By creating what we are able to and equitably exchanging it with others, we all contribute to the whole and receive what we want.

Steve Jobs, Bill Gates and Mark Zuckerberg all started with very little and made billions because they designed, built and sold products (Macintosh/iPhone/iPad, Windows and Facebook respectively) that people liked, and it was sold at a price point where the company made a profit and the customers profited from what they got out of the deal.

And to make my final point, Capitalism brings people together. Looking at the lesson of the Pencil, the places where the different materials are produced (wood, graphite, brass, rubber, etc.) might actively hate each other, but they have to work together in their own self-interest to produce those materials (capital) to be paid for their effort. If one of them decides they don’t want to cooperate, they can walk away and the pencil manufacturer will have to find another source to keep producing the pencils.

Capitalism in one form or another exists in every sociopolitical group in history. What makes the difference is how much or how little governmental oversight oversees the exchange between the participants, and the general control of the system by the government. Some government oversight is always needed, such as governmental enforcement of contract law. However, onerous taxes or excessive regulatory compliance only forces such transactions underground and makes the people unnecessary criminals.

Related Articles

The Gender Pay Gap

Getting paid for your work

Basic Economics

Free Joomla! templates by Engine Templates