Defining Capitalism -- and what the definitions leave out --

Capitalism and free markets (or, a market economy) are two really basic, critical terms for libertarians, so much so that many consider the two terms synonyms. They aren't.

The purpose of this article is to examine definitions of capitalism, extract the consensus, and suggest that many of the key factors you need to understand the operation of free market capitalism are NOT included in the standard definitions.

This will be the first installment of explaining why neither capitalism nor the State ever really act in the way you have been conditioned to believe they will.

This is going to be long, because if I am going to piss you off to make you think, then I might as well take the time to do it right.

Let's start with definitions of capitalism, initially relying on pretty standard libertarian sources:

A proper beginning is with the man most associated with Austrian economics, Dr. Ludwig von Mises, who defined the terms many times, and (as might be expected) varied the wording slightly, but always returned to this core:

"Capitalism is essentially mass production to fill the needs of the masses." (from Theory and History, but consistent with Human Action, Liberalism, The Anti-Capitalistic Mentality, The Theory of Money & Credit, and many others.) (Note: Mises clearly and repeatedly refers to times from the Enlightenment until the 18th Century as pre-capitalist. It is Mises who can be credited with locating this definition firmly in terms of Industrial Capitalism.)

And others ... ?

Libertarianism.org provides this definition:

"Broadly, capitalism is used to mean an economic system in which the means of production (accumulated assets or capital) are privately owned and in which the use made of those assets in the productive process is determined by the choices made by their owners." (Note: this definition seems a little truncated because it doesn't talk about the free market, competition, supply & demand, etc. It actually does, but that is so interwoven into succeeding paragraphs that I couldn't easily extract it.)

The Mises Institute Wiki advances this definition: 

"Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market. Modern Capitalism is essentially mass production for the needs of the masses." (Note: See where this Wiki has modified many standard definitions by adding "corporate" to "private" ownership of capital goods. Discussion below.)

Reason offers this:

"Capitalism is just an economic system where the provision of goods, services, and labor is determined by individuals negotiating with each other, rather than by a centralized state authority." (Note that this definition does not include ownership of capital assets or production, and looks suspiciously like a definition of a 'free market.' I put it in here because it is an exemplar of some of the confused definitions you see.)

Definitions provided by non-libertarian sources range from pretty much agreements with these to considerable divergence as you move further to the left.

From Investopedia:

Capitalism is an economic system in which private individuals or businesses own capital goods. The production of goods and services is based on supply and demand in the general market—known as a market economy — rather than through central planning—known as a planned economy or command economy. (Note: Investopedia says capital goods are owned by private individuals or businesses, which contrasts with the Mises Institute reference to individuals or corporations.)

The International Monetary Fund has this to say:

"Capitalism is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society. The essential feature of capitalism is the motive to make a profit. ... In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses." (Note: This one is interesting because the examples do wave toward mass production, but also include transportation assets, and it says they "can" be privately controlled, not that they "are" privately controlled. See discussion of that below.)

The Financial Dictionary goes into more depth about the nature of the capital in capitalism, but doesn't really conflict with the others:

"The economic system in which the means of production is privately held. In capitalism, the most important means of production is money rather than land (as in feudalism) or labor (as in socialism). That is, the ability to raise and use money for the production of goods and services is more important that owning the land from which goods come, or the ability to work in order to create a good or service." (Note: This one is interesting for going back to money itself rather than "capital goods,' and in ignoring mass production.)

 Let's look at two of the most highly respected leftist economic historians (both of whom would admit to being influenced by Marx if not necessarily calling themselves "Marxist historians").

The first is by Fernand Braudel, the pre-eminent materialist historian of the mid-20th century, whose trilogy Civilization and Capitalism, 1400-1800 (first published in English in the 1970s) is a flawed masterpiece of historical analysis. Even if you hate Braudel's political and economic perspectives, if you are really interested in the emergence of capitalism in Europe and across the world this is still required reading, because after thirty-five years in archives around Europe he uncovered massive amounts of data and documents no one else had seen in centuries.

It is difficult to find a short definition of capitalism by Braudel (in each of the three books he basically devotes most of a 30-page chapter to it), but this is pretty close:

“…despite what is usually said, capitalism does not overlay the entire economy and all of working society: it never encompasses both of them within one perfect system all its own. The triptych I have described–material life, the market economy, and the capitalist economy–is still an amazingly valid explanation, even though capitalism today has expanded in scope.”

Since this is kind of dissatisfying -- it's not really a definition -- so I have resorted to a more complete explanation of Braudel's views by instead quoting a review that accurately summarizes them:

Here then is the picture. Economic life [by which is meant the "market economy' regular, capitalism unusual. Economic life is a sphere where one knows in advance, capitalism is speculation. Economic life is transparent, capitalism shadowy or opaque. Economic life involves small profits, capitalism exceptional profits. Economic life is liberation, capitalism the jungle. Economic life is the automatic pricing of true supply and demand, capitalism the prices imposed by power and cunning. Economic life involves controlled competition, capitalism involves eliminating both control and competition. Economic life if the domain of ordinary people; capitalism is guaranteed by, incarnated in the hegemonic power.

The next is Immanuel Wallerstein, who has written a five-volume history of his world-system theory of economics, which charts the rise of capitalism from its agricultural roots ("manorial capitalism") through to nearly the present day (ends about the 1960s IIRC). Wallerstein is definitely a critic of capitalism, and he makes clear that he does not buy the salient points of all those other definitions:

"I am not here arguing the classic case of capitalist ideology that capitalism is a system based on the noninterference of the state in economic affairs. Quite the contrary! Capitalism is based on the constant absorption of economic loss by political entities, while economic gain is distributed to "private" hands. What I am arguing rather is that capitalism as an economic mode is based on the fact that the economic factors operate within an arena larger than that which any political entity can totally control. This gives capitalists a freedom of maneuver that is structurally based." (Note: to be clear again, Wallerstein is saying that capitalism's strength is in harvesting profits for private investors while finding a way to make the State absorb the losses -- in modern parlance this is referred to as "privatizing gain and socializing loss.")

Wow, this is kind of all over the map. Mises always followed his definition by extolling the virtues of capitalism in terms of improving people's lives and the state of the world, but for our current consideration, whether capitalism works for everybody or not is quite immaterial to trying to derive a definition.

There are surprisingly a lot common elements, even taking the far left writers into account, although I have to admit you sometimes have to read these sources farther than these quotes to find them (that's why I provided links -- you should get to do that yourself, and to be sure I have not cherry-picked or distorted).

First, they seem to share a common set of historical assumptions 

• Capitalism really means "industrial capitalism" or "mass production." This seems like a legitimate point to make, because even though most of the individual aspects of capitalism existed prior to the 13th or 14th Century, they had never been assembled into a coherent system of either philosophy or operations. So, for sake of argument, when I say "capitalism" think "industrial capitalism" -- factories, mines, railroads, etc.

• Most of these definitions are dealing with capitalism in its most "pure" state, that is, without government influence considered -- in other words, government regulation is considered a "bug" rather than a "feature" in such definitions. So essentially they are talking about what we would call "laissez faire" capitalism.

• Private ownership of capital, production facilities, transportation networks, and the sources of raw materials are generally considered the sine qua non of capitalism. Only a few variations here are noted but they are critical because "private" oversimplifies a lot:

• Many definitions simply say "private" ownership; some add ownership by "business," which could still imply a group of individuals working together;

• The Mises Wiki definition says "private or corporate ownership," which is specifying a specific kind of business organization that is endemic to capitalism: the corporation, which is generally defined as (a) chartered by the State; (b) acting as a legal entity separate from those who own it (limited liability for the owners/stockholders; ability to own property; to sue or be sued; to have preferential tax status; and -- in the US anyway -- to enjoy certain rights such as protected political speech that were once thought only vested in individual citizens).

• The IMF notes that the ownership of resources does not HAVE to be private. They are not talking about socialism here. The IMF is discussing what Murray Rothbard called "state capitalism" to distinguish it from "free market capitalism." Often there are countries in which for-profit companies are either owned by the government (China) or by members of the government elite (any number of banana republics around the world). Because these companies (like COSCO --not the warehouse store but the China Ocean Shipping Company) operate for profit in the international marketplace, the IMF treats them as capitalist entities.

• The IMF aside, "private" really means "not owned by the government." This is an important distinction, because of all the different ways that capital and property can be held "privately."

• Capitalism operates within a system of supply and demand, and therefore prices and availability of products are effectively set through competition in a market economy. This is a critical element following all but the last very left definitions -- supply and demand ... competition in a market economy. (We will be leaving aside the question of government regulation for the moment, and the definitions requiring private ownership and choice don't include that, again, except as a "bug" rather than a feature.)

• Capitalism is distinct from markets or the market economy. Often people are not real clear on this. Markets have existed at least since the time of the Sumerians about 5,500 years ago, and full-blown market economies emerge around 2,600 years ago almost simultaneously in multiple civilizations around the world. It is actually more correct to say that Capitalism operates WITHIN the market economy. (See above.) Almost nobody disputes this distinction, and it is important to note that most agree that the term capitalist cannot actually be used for merchants or traders within the market economy because capitalism is about the ownership (or at least control) of the means of production and distribution. As we will see eventually, there are some serious implications to this, but the reality is that only a very small percentage of the people within what we might call a capitalist free market economy are actually capitalists themselves. The local ice cream parlor owner, the independent bookstore owner, the small food market owner in the city -- these individuals may aspire to being capitalists, but by definition they aren't -- they are entrepreneurs and businesspeople.

So, if I were to sum it all up the more or less standard definition of capitalism would be:

Capitalism is an economic system in which the means of industrial production (capital, raw materials, production facilities, distribution networks) are not owned by the State, and in which products reach consumers through a market economy, where prices and availability are competitively established by the economic forces of supply and demand rather than through any process of centralized planning.

As near as I can make it, this is a distilling down of the "standard" definitions of what capitalism is.

Or at least what we are generally told to believe it is.

Huh?

This definition leaves out a whole bunch of critical factors, without which you are not really defining capitalism at all. (Let me warn you now that many of you are not going to like most of these, which is why each will have its own separate post to argue in detail.) 

To wit:

• Capitalism requires the existence of a stable State entity within which to conduct its primary operations, with that State providing 

• A State charter of incorporation or its equivalent that divests the owners/controllers of each business entity of all but the most strictly limited personal liability while allowing those business entities the privilege of acting as tax farmers for the State;

• Capitalism requires a State court and police system that enforces debts, contracts, labor laws, prohibitions against new competition, intellectual property rights, real property rights, and a bunch of other goodies with the full coercive power of the State.

• Capitalism almost always depends on State subsidization of the cheapest possible labor through direct (slavery, peonage, debt servitude, prison labor) or indirect (welfare systems, usurious interest rates, restrictions on collective bargaining, minimum wage laws) means, again supported by the full coercive power of the State;

• Capitalism needs State subsidization of the cheapest possible access to raw materials and production facilities by means of socializing all environmental impacts of mass agriculture, mining, production, etc. through regulatory actions, waivers, or by the State assuming fiscal responsibility (which means passing the costs on to the taxpayers) for sustainability and clean-up.

• Capitalism needs the State as a major customer in effectively non-competitive, non-market transactions (thereby requiring taxpayers to become unwilling customers of goods produced by the corporations that they did not desire or choose).

• Capitalism relies on the State providing the subsidized use of military force to assist the corporation in keeping foreign labor, raw materials, and transportation costs as low as possible through direct (or at least threatened) violent military action against other nations.

• Capitalism relies on the ability to operate a significant part of its processes OUTSIDE of that State, and therefore at least partially outside of the reach of the laws and regulations of that State (Note: this is not specific to capitalism -- almost all banking, credit, and commercial entities that are NOT strictly local have the same necessity for at least some of their operations to take place outside the home State.)

• Capitalism absolutely needs the existence of a sophisticated international debt and credit system subsidized by the States in and through which it operates;

Now before you go off on me here, let's be clear -- I am NOT bashing capitalism. I am not declaring capitalism to be immoral. I am DESCRIBING the real factors necessary for capitalism to succeed, which have always been there since the very first crude beginnings of industrial capitalism in the 1300s and 1400s.

I am (let's be honest about this) going to make an argument that Laissez faire Capitalism does not mean that the State stays out of the market economy, but that the State actively intervenes on behalf of the capitalists. In fact -- Industrial capitalism came into existence as the handmaiden of the evolving centralized nation-state during the 1300s-1400s and CANNOT operate successfully without the support of centralized nation-states regulating the market in its favor.

I am also saying that, at heart, capitalism is anti-competition and often anti-market, because the ultimate goal of almost any capitalist is to continue expanding until their business entity dominates the market and manages to achieve sufficient monopoly to cease having to pay attention to price competition.

I am also saying that capitalism is not the penultimate economic operating system for the world any more than the nation-state which birthed it, and that -- like all other economic operating systems -- it will have a finite lifespan and be replaced by some other system (though I have zero idea what that system will look like).

I am also saying that, to survive, capitalism requires the society in which it operates to be convinced to link its operations to a moral imperative just as socialism and communism do. In order for capitalism to function at its optimum, the vast majority of the population MUST be conditioned to accept major myths about both its operation and the individual actions of its citizens.

At that, like democracy, capitalism has in its favor that despite all its manifest (and hidden) faults it may be the BEST economic operating system in world history (so far).

Do I expect everybody to agree with this?

Absolutely not. Or at least not yet.

But I will be happy to discuss (either before or after the follow-up posts) and debate. My only request is that you tell me exactly which segment you take issue with in a particular comment.