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(Topics: The Economy / Private Sector | Back to Home)

There are lots of words that people use incorrectly these days. Capitalism is one of them. One definition of the term is this:

Capitalism is an economic system based on the private ownership of the means of production and their operation for profit.

There's a lot more to be said [1], but this definition is more than enough to show how we often get confused. To break it down:

Economics, Not Politics

Capitalism is a description of an emergent system, and thus it doesn't have goals. Therefore we have to decide, as the people, what those goals should be.

Capitalism is an economic system, not a political one. Governments aren't capitalist, but they can encourage, discourage, or ignore capitalism.

And that second word, “system”, is important too. Systems are collections of parts and pieces that all operate together. Sometimes the system was designed on purpose and has a clear goal, such as the system of parts and pieces that makes up an automobile. Other times systems aren't so much designed, as they emerge. The system that makes up modern sports, for example, wasn't created on purpose by any one individual or even one organization. It has steadily evolved over time.

As an economic system, we should recognize that capitalism does have many parts and pieces that work in concert, but it wasn't designed by anyone and doesn't have a goal. Rather, actors within capitalism—workers and investors—have goals, and those goals are supported and curtailed by capitalism.

Private Ownership

Capitalism features the private ownership of property. But not all property can or should be owned privately, or be able to be owned forever. Deciding what these limits are is an essential question that we, the people, must answer.

An essential property of any economic system is the nature of ownership. That is, what kind of stuff is there, what can be controlled, and what does it mean to “own” something?

This is more complicated than it may seem. Personal property, which is things like a shovel, a book, or a nice sweater, feels straightforward. If you acquired it as a gift or someone traded it to you for money, stuff, or labor, then it's yours. You can do whatever you want with it under most economic systems, including capitalism.

Real property, or land, is a bit more complicated. If you own a huge piece of property, good for you. But that also may make it extremely inconvenient for people who are traveling and have to go around your land. Also, what if there is a river running through your land? If you decide to pollute that river, you're going to impact people around you. So while capitalism does enshrine the idea of private ownership, private ownership of real property is a bit more complex.

Finally, there is the question of intellectual property. That is, the ownership of ideas. If you write a book or a song or a Tony-award winning musical, that creation is your property. The same is the case for a succulent recipe or a clever software application. But at some point, perhaps after decades or after you are gone from this earth, it's not quite as clear that “your” ownership of that idea has much meaning any longer.

Means of Production

Capitalism includes private ownership of the means of production (factories, land, money, trade secrets, contracts. And while this is generally seen as beneficial, people and governments must decide on any limits to the size, power, and rights of firms in the economy.

Here's another term that is surprisingly comprehensive. The “means of production” is everything that is needed to make useful stuff or deliver services. That is often thought of land, labor, and capital, but of course it includes raw materials such as oil and trees as well as trade secrets such as recipes and formulas.

In capitalism, all of this everything-you-need-to-make-things is typically privately owned. If you have an idea for something you want to sell, then you can acquire the necessary components to make or produce that thing. And since you own those components, you can benefit from the sale of whatever you manufacture or deliver based on them.

Furthermore, one of the means of production is contractual agreement. When the restaurant signs up to only carry one kind of soft drink, they are participating in a market process that helps drive capitalism. But the more that the means of production is centralized, the harder it is for anyone else to compete. This is a result of capitalism itself. The best way to leverage the system is to become as big as possible and own as much of a market as possible. That's why there are laws about monopolies, fair trade practices, and so on.

Operation for Profit

Capitalism is supposed to help individuals profit, and therefore help society to become more wealthy. But not everyone can win, and some of the people who lose will suffer horribly.

The primary benefit of capitalism for the individual is profit. That is, getting to charge more money to your customers than it costs you to produce whatever it was you sold. Profit, in turn, gets spent elsewhere in the economy, which leads to the benefit for all of us: increased wealth.

In practice, this doesn't always work out. Lots of businesses fail. Lots of people and institutions can't pay their bills, and end up having to file for bankruptcy. Sometimes people get beat out and the results are devastating. The key question is not “is profit good” but “what levels of loss are socially acceptable?” And this is where we all have to make a decision, together, as people. How much downside risk are we willing to absorb?

What to Do About It

Capitalism has been responsible for virtually all of the wealth we see today. And by “wealth” I mean the fact that it is far better to be alive today for the average person than it was a century or two or more ago [2]. But also, capitalism is responsible for lots of problems as well. When there is an incentive to make a profit, there is an incentive to do things that most people don't think are okay in order to make that profit.

The answer most people come to is regulation. Rules on what we can do. And let's be honest: regulations don't work very well. It's nearly impossible to limit people's behavior, especially on a large scale, and limits tend to create a reason to find a workaround.

But regulations are the best idea we have at the moment. Admitting that the tool we have is a poor tool is a good start to finding better ones. The only answer right now is to regulate capitalism. And because this approach is not especially effective, we need as few rules as possible. At the same time, the lack of rules cannot be an excuse for a failure to do what is right for our fellow human beings.

It's not an easy topic. And telling the truth is always the place to begin.



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