How do you define the word "capitalism?"

Miscellaneous General
1

Hello, Mises community. My name is Mark and I am a physics grad student from Florida.

I do not mean to impose (and if I have posted this thread in the wrong forum, please feel free to delete/move it) but lately I have become more interested in Austrian School thought, in particular what Austrians mean when they refer to the subject of “capitalism.” This is such an important and controversial word nowadays that I feel the need to better understand what Austrians and their related thinkers mean when they talk about it. That is what I wish to inquire about in this thread, if that is alright.

When you refer to or hear the word “capitalism,” what does it mean to you, personally?

  1. Is “capitalism” purely a means of describing a mode of economic organization, i.e. a way to describe how humans carry out economic activity in societies?
  2. In your opinion does “capitalism” influence or descend from any particular institutions/mores in the societies which practice it?
  3. Does “capitalism” in the Austrian sense have an impact upon the social makeup of society, e.g. what sociologists might call “stratification” or “class?”
  4. What are the conditions that allow for “capitalism” to operate most effectively, and how do we determine what “effectively” means in this context?

These questions are obviously very broad but I am looking for the broadest range of responses possible. Please feel free to post your views with reference to as many or as few of these questions as you would like, post resources for reading, etc.

Thank you, everyone. I look forward to your responses.

2

Hi Mark. Good questions.

For me, capitalism simply means a respect for property rights and the non-aggression principle. When people freely trade with one another, are able to keep the fruits of their labor, and do with their property whatever they wish, provided that they do not aggress upon others, they are being “capitalists”.

If a mugger gets wealthy by threatening violence against innocent people, it would be incorrect to call him a capitalist in the sense that I refer to.

  1. Yes, at least if I take your question to mean what I think it does. It is important to recognize that, at least in my view, capitalism describes a mode of action (free trade) but not so much organization (there is no organizer or central planner). If this is what you meant, then yes.

  2. In my opinion, the mores that lead to capitalism are, again, a recognition that each individual is a sovereign being and therefore owns himself, and that it is morally abhorrent and unacceptable for any individual to initiate violence or the threat of violence against any other individual. To the extent that these mores are part of the social fabric, the “structure” or “system” of society may be called capitalism.

  3. If there is a respect for property rights (including the inalienable and exclusive self-ownership that each individual enjoys) coupled with the non-aggression principle, then there are no “classes” in the common sense of the word. Certainly some will be wealthier than others, just as some are taller, more athletic, more attractive, more intelligent, more charismatic, blessed with a better metabolism, etc. than others. But it is the productivity and ingenuity that is unleashed by capitalism that has done the most for the most people - ordinary, “lower-class” people to boot - throughout history. Those societies that have attempted to equalize wealth distribution have only ever succeeded in creating the very stratification they attempted to eliminate. The common description of society, with its lower class, upper class, and (somehow always shrinking) middle class is, I believe, a legacy of collectivistic Marxism, which gives the false idea that those who belong to a certain class are destined to stay a part of that class, when of course the opposite is true. Obviously it is possible and often useful to break down the aggregate of income earners into different levels, but the word “class” conveys a permanence that just isn’t realistic.

Under capitalism (freedom), on the other hand, each individual is a class unto himself. He is a unique being, attempting to survive by attending to his various needs. Some of these needs will be met individualistically, but many will require the help of other individuals. Some (such as family members or friends) will grant this help freely, or in exchange for non-material benefits such as love, affection, loyalty, etc. Most, however, will have their own material needs to look after and will desire to trade physical goods in order to meet their own needs. Capitalism, in my view, encompasses this latter category: the voluntary interaction of individuals who seek to trade goods and services with one another in order to improve their respecitve situations.

Each individual is free to associate (and, obviously, dissociate) himself with any other individual or group, provided again that this association is voluntary. Capitalism, therefore, is not “individualistic” simply because it sees the individual as the relevant unit in society; nor are any of the various flavors of collectivism (fascism, socialism, democracy, communism) any less ‘individualistic’. Rather, these require the forcible association of individuals into a particular collective, generally based on geography. This involuntary, de facto collectivization is antithetical to the non-aggression principle, and is therefore not to be considered a part of capitalism.

  1. The conditions that allow for capitalism to operate effectively are, again, the NAP and property rights. Capitalism is whatever comes out of an adherence to these two related principles. To answer the second part of your question, “effective” is a subjective term, and can only be analyzed on an individual basis. I don’t consider myself to be a consequentialist, and therefore it isn’t because capitalism seems to be the best system at increasing wealth that I am a proponent of capitalism. It is rather because I find the initiation of violence -aggression - to be abhorrent, and that I don’t consider myself to be sovereign over any other individual, nor that there is any individual who is sovereign over me, that I am in favor of capitalism. Therefore, the effectiveness of capitalism is a question of the effectiveness of each individual’s life, as analyzed by his ability to successfully reach his own ends. If I aim to accumulate as much wealth as possible, yet I remain poor, the failure is not on the part of capitalism, but on me. Somebody else may have a goal to have a very large family, and material wealth is not as important to him. This is still capitalism. A third person might be devoutly religious and wish to remain totally penniless her whole life. A fourth may wish to accumulate knowledge. Capitalism describes it all. The point is, if people are free to strive to enjoy whatever end they have set before them, Capitalism is being effective, irrespective of the success of a given individual in reaching his special goal.

Broadly speaking, the way an economy grows is by the accumulation of capital. As this capital grows, more productive, efficient processes are able to be undertaken, and the result of these new processes is an increased standard of living for everybody (scarcity, the enemy of life, is lessened by the degree to which productivity increases). In this way, the name “capitalism” has taken an ironic twist. The word was actually coined by Karl Marx, attempting to denigrate the system he saw around him by saying that wealth would primarly accrue to the capitali**sts (the owners of the means of production). This system, therefore, should be called “capitalism”. However, what Marx didn’t realize is that he aptly named the system, since it is the accumulation of capital that best differentiates capitalism from any other system.

3

A point of clarification:

When people freely trade with one another, are able to keep the fruits of their labor, and do with their property whatever they wish, provided that they do not aggress upon others, they are being “capitalists”.

The above is not accurate. I meant to say that “…they are participating in the system of capitalism.” The term “capitalist” has a more rigorous definition, namely one who restricts present consumption (saves money) which he then supplies to owners of the factors of production (land and labor) who are producing only future goods. This point is a little technical but it is important. For more on this, reference Murray Rothbard’s Man, Economy, and State (p 374).

4

Thank you for the detailed and eloquent responses, Stephen. I greatly appreciate the time you took to respond to me.

I do want to raise one question about rights and the NAP as they apply to a libertarian capitalist society, however. Put most simply, this question relates to an employer’s privilege in bargaining power in determining the terms of an employment contract with an employee. Some non-Austrians that I know raise this question by means of the following thought experiment (if you would be so kind as to indulge me):

Suppose, in a free capitalist society in which property rights and the NAP are enforced, an employee is laid off from his previous job. As weeks go by without an income he becomes desperate for work as the danger of hunger and poverty loom. He loses his home and soon is out on the street, on the brink of starvation.

Say that a local shop owner notices his plight and offers the starving man a basic subsistence wage to work at his shop. The starving man, wanting to live, accepts the shop owner’s offer. According to the NAP this contract agreement is legitimate as coercion by force was never incurred, and it is also ultimately beneficial in a Rothbardian sense since both parties immediately benefit from this arrangement, i.e. the employer gains labor and the employee gains a chance to live.

But what if the employer, in forming the contract, had taken advantage of the employee’s relative disparity in bargaining power (given that he was on the brink of death) by dictating much harsher terms (in wage, duration, etc.) than he might have with someone who was not starving? Is it not possible to argue that the starving employee was effectively (forgive me, I know you are skeptical of that word) compelled by the prospect of imminent death to accept the employer’s offer, despite the fact that the threat of force was not used against him?

This is a scenario that non-Austirans have brought up to me to demonstrate the results of possible power disparities in a free capitalist economy.

What do Austrian theorists of capitalism have to say about a situation like this? Can they be avoided in a free capitalist system, or are they ultimately inevitable?

5

Putting aside more philosophical arguments, on a strictly economic analysis, this ‘problem’ does not hold water in a real economy, where entrepreneurs bid competitevely for labour services from a scarce labour pool. Entrepreneurs have a profit incentive to bid up a labourers wages towards the Diminished Marginal Value Product of the labourer. Or in plain language. When entrepreneurs are free to bid on labourers services, there is a competetive force which militates against workers being systematically undervalued.

6

there wouldnt be a duration requirement on employment, that slavery. If the man wants to quit after he worked enough to get water and food he can quit.

how is the employer taking advantage of someone who wants to and agrees to do business with each other?

there will be private charity to take care of the poor and hungry.

the only way something like that could happen is if the person refuses to work. If a man is willing to work then he will get paid in accordance to what he produces. Yes there will be poor people in capitalism (compared to the average persons wealth), but it will be from their own choosing (work ethic) or mental capabilities (intelligence or knowledge acquired from school/work). In a free market people would get hired and fired much more easily. If someone is unproductive they will get fired without having to worry about lawsuits, but they will also get hired much quicker because they know they can fire them 5 minutes into employment.

Just imagine if you were a business owner and you saw some bum walking down the street. What do you have to lose in hiring him? Lets just say the cheapest wage for an hour of work is worth a $5 meal. So you hire him for an hour and if he cant produce $5 worth of work you fire him. All the business owner risks is $5. If HE DOES produce $5 you keep him. If he starts producing more then $5 then you give him a raise or he will look for employment elsewhere.

***edit - just to be clear, in our economy right now a man can have a roof over his head and food in his belly on $5 an hour for 40 hours a week. I worked almost a year like that while waiting to join the Marine Corps. Paid for an apartment, plenty of food, bought plenty of clothes, bought a flat screen TV during that time, new cell phone during that time, when out drinking to the bars once a week, bought any ps3 game i wanted, all on 5$ hour 40 hours a week average wage. Our idea of poverty is perverse if anyone is going to suggest that i was poor. I had everything i needed and then some.

7

how can you say this. almost half my check is taken in taxes, i get paid minimum wage and there’s NO WAY i could afford an apartment by myself

8

@nirgrahamUK

This is an argument with which I am familiar- essentially that, in a free capitalistic economy, there will be a race to the bottom for prices and a race to the top for product quality and wages among competing firms. I understand that this is also the reason why monopolies/cartels could never durate for long in such an economy sans government intervention, as there will always be short-term profit incentive for one member of the cartel to drop out thus starting all of these “races” over again.

Am I correct in understanding that in this fashion a free capitalist economy would be in a constant flux between monopoly formation and collapse?

Is it not possible, however, that once a monopoly breaks up naturally in this fashion that it could form once again and stay that way because all of its “members” remember what happened the previous time that one of them decided to defect (i.e. all of them were reduced to a fraction of their previous market power and profit levels)?

Anyone may feel free to answer. I’ve already learned quite a lot and am looking forward to hearing more.

9

People who are interested in justifying state intervention into people’s lives often invoke the threat of “economic power.” Rather than attempting to recreate Rothbard’s argument on the matter, I will quote him at length from Power and Market.

"A well-known type of “private coercion” is the vague but ominous-sounding “economic power.” A favorite illustration of the wielding of such “power” is the case of a worker fired from his job, especially by a large corporation. Is this not “as bad as” violent coercion against the property of the worker? Is this not another, subtler form of robbery of the worker, since he is being deprived of money that he would have received if the employer had not wielded his “economic power”?

"Let us look at this situation closely. What exactly has the employer done? He has refused to continue to make a certain exchange, which the worker preferred to continue making. Specifically, A, the employer, refuses to sell a certain sum of money in exchange for the purchase of B’s labor services. B would like to make a certain exchange; A would not. The same principle may apply to all the exchanges throughout the length and breadth of the economy. A worker exchanges labor for money with an employer; a retailer exchanges eggs for money with a customer; a patient exchanges money with a doctor for his services; and so forth…

“"Economic power,” then, is simply the right under freedom to refuse to make an exchange. Every man has this power. Every man has the same right to refuse to make a proffered exchange.

"Now, it should become evident that the “middle-of-the-road” statist, who concedes the evil of violence but adds that the violence of government is sometimes necessary to counteract the “private coercion of economic power,” is caught in an impossible contradiction. A refuses to make an exchange with B. What are we to say, or what is the government to do, if B brandishes a gun and orders A to make the exchange? This is the crucial question. There are only two positions we may take on the matter: either that B is committing violence and should be stopped at once, or that B is perfectly justified in taking this step because he is simply “counteracting the subtle coercion” of economic power wielded by A. Either the defense agency must rush to the defense of A, or it deliberately refuses to do so, perhaps aiding B (or doing B’s work for him). There is no middle ground!

"B is committing violence; there is no question about that. In the terms of both doctrines, this violence is either invasive and therefore unjust, or defensive and therefore just. If we adopt the “economic-power” argument, we must choose the latter position; if we reject it, we must adopt the former. If we choose the “economic-power” concept, we must employ violence to combat any refusalof exchange; if we reject it, we employ violence to prevent any violent imposition of exchange. There is no way to escape this either-or choice. The “middle-of-the-road” statist cannot logically say that there are “many forms” of unjustified coercion. He must choose one or the other and take his stand accordingly. Either he must say that there is only one form of illegal coercion—overt physical violence—or he must say that there is only one form of illegal coercion—refusal to exchange.

“We have already fully described the sort of society built on libertarian foundations—a society marked by peace, harmony, liberty, maximum utility for all, and progressive improvement in living standards. What would be the consequence of adopting the “economic-power” premise? It would be a society of slavery: for what else is prohibiting the refusal to work? It would also be a society where the overt initiators of violence would be treated with kindness, while their victims would be upbraided as being “really” responsible for their own plight. Such a society would be truly a war of all against all, a world in which conquest and exploitation would rage unchecked.”

This, to me, is persuasive enough on moral grounds to be decisive, but I can see that some will be unconvinced. To them I would ask certain questions:

  • Why is it so difficult for the unemployed man to find a job? If he could support himself (or his family) with the income from his previous job, he must have at least some marketable skills. Why is it that nobody is interested in what he has to offer, when before they were? The answer should take into account that persistent unemployment is a problem created by the state, with its minimum wage laws and mountainous, cost inflating regulations that introduce much uncertainty and increase the risk of hiring people.
  • Why is it that the man has no savings built up? No plan? Why does he not take out a loan? If he cannot take out a loan due to poor credit, little collateral etc, then…
  • Why has he found no charity? No friends, family, or organizations that would be willing to help him out?

While it is possible to imagine a person like this (with no skills, cash reserves, credit, heavy debt, no friends, no charity willing to help him and his family), one would begin to question the choices this man seems to have made leading up to his unemployment. Capitalism (freedom) doesn’t save us from the consequences of our bad decisions. If he has reneged on his previous deals, been an ahole to his friends and family, left debts unpaid, skipped out on his meals, and been an all around unreliable guy, then sure, “capitalism” will fail him. The world will seem to be a cruel and lonely place. But of course this would be no indictment on freedom or capitalism. This isn’t the outflow of a free market, “Austrian” system, any more than dying of thirst out of a refusal to drink would be.

10

I would say that the race to the bottom is more like a race to the “discounted marginal value product,” whereby each owner of a factor of production (land, labor, and/or capital) competes with other owners by bidding resources toward himself. This bidding process will tend toward each factor’s marginal value product, or, the aliquot part of the utility of the final good that can be attributed to that particular factor. WIthout getting into too much detail, the point is that each factor of production (including labor) earns what it contributes. This is an extremely important and somewhat complex process, so if you wish to learn more about how factors are priced (about the various competing “races”) I recommend reading Man, Economy, and State, chapter 7

As far as your hypothetical concerning monopolies goes, strictly speaking, yes that is possible. It is highly improbable, but given the right group of people, sure why not? But the more fundamental question, I think, is ‘so what?’ Remember that if the market is aligned a certain way based on voluntary interactions and no government coercion, then who are we to analyze it and determine that a single seller, or a small group of sellers is detrimental to the market? Why do we, or the government in our stead, get to override the preferences of the people who are proving the ‘effectiveness’ of capitalism by actually engaging in the exchanges. Perhaps in a given scenario, economy of scale will lead to one single seller. Or perhaps a certain market is so small, or a good so unique, that there is literally only one seller available (the boxing services of Manny Pacquiao, or the singing services of Carrie Underwood).

But regarding your hypothetical cartel, while it is possible, the overwhelming probability is that it will always break up, and it has nothing to do with the cartel members’ failure to understand economics or the nature of cartels. It is a classic case of ‘the prisoner’s dilemma’, whereby if each member of the cartel knew for sure that nobody else would break the agreement, then it would make sense to to stick to it. But of course nobody knows that for sure. The incentive is always there to undercut the other members, and the incentive is greatest for the first one to do it. Again, though, even if there is some cartel with members so disciplined, so loyal, and so attuned to one another that it continues perpetually, so what?

Thank you, by the way, for the good questions and the polite attitude.

11

weedface - i didnt have a car for one (which i can i DEFINATELY would not of been able to afford on those pay checks), i had a studio apartment for 400 all bills included, leaving me 400$ a month to play with. I was actually getting paid $10 an hour at best buy, but they only allowed me to work 20 hours a week making it a $5 an hour 40 hour a week job. My only bill was $30 for a phone. So thats $370. Pregame bar nights with a few $2 40s, goto bars with drink specials ($15 cover all you can drink, $10 cover penny pitchers/byob strip clubs/$1 wells/50cent bottle night ect) shop at goodwill, buy food on sale/lots of eggs. Food is the hardest thing to figure out how to do cheaply, but my food bill was under $40 a month. I have literally over $15,000 suit collection that ive paid under 150$ total for at good will. Seriously its easy to find $2000 brioni, oxxford, zegna suits in there for $15. Bought used games ect. I’m not some crazy coupon shopper i just know what i can afford.

12

Capitalism = when multiple entities make voluntary agreements upon things which they trade (money/labor/goods/services/machinery/etc), and also property rights.

13

Capitalism - The system of production which proceeds from a general societal respect for property rights.

14

^^ i like that one better than mine

15

By that definition, whatever we have now would be Capitalism and whatever Rothbard proposed would be Capitalism, thus necessitating qualifiers or the usage of a new word. Free Market Anti-Capitalism isn’t so much useless as it is obnoxious pandering to the cool kids club of the Socialism. Imo the Anti-Capitalism part isn’t necessary.