Capitalism Is Not What You Think It Is

There’s an unfortunate human tendency to use words we don’t actually understand, which leads us into believing things that aren’t actually true, which leads us to form ideas about people and policy that aren’t actually helpful in any way.

Let’s take a look at the word Liberal.

In the USA this word is thrown around by right-wing folk and means nothing more than “people with ideas I neither understand nor wish to understand but which seem to threaten me so I’m against it.”

It’s an insult.

I doubt more than three people in the USA today have read J.S. Mill’s On Liberty and thus have any clue about the origins of the concept and thus what the word really means. I’ve never met a right-winger in the USA who can even provide the vaguest definition of the word liberal.

Likewise the word Capitalism is most often used in a negative way by those fancying themselves as progressives yet few if any have any idea of what the word means. Just as gluten became synonymous with “bad” so capitalism has likewise become synonymous with “bad.” This is just lazy, because in reality neither gluten nor capitalism can be reduced to one three-letter word.

There are very few people who’ve actually read Adam Smith’s seminal work The Wealth of Nations. Most folk have been influenced by third-hand accounts of Marx’s polemic Das Kapital which (if you make the effort to read it for yourself) is a hilariously inept pseudo-economic rant that’s about as far from a real economic analysis as it’s possible to get outside of a Marvel comic book.

Here’s what capitalism really is: the application of capital (in whatever amount) so as to enable greater productivity.

A simple example is a potter saving up enough to buy a potter’s wheel or a weaver saving up enough to buy a weaving frame. Once the asset has been acquired (by means of capital) the potter can make more pots and the weaver can make more fabric. This means the total cost of the pot or the fabric is lower than it would have been because fewer hours are required to produce these goods. So other people can buy pots and fabric they otherwise wouldn’t have been able to afford and their material lives are made better as a result.

That’s all capitalism is.

It’s not an evil plot to achieve world domination or force people to work for peanuts. It’s merely the means by which we can create greater productivity. This in turn gives the rest of us more choices.

Today we have an extraordinary cornucopia laid out before us. We can choose from among thousands of models of car, each of which provides greater freedom and luxury than even the wealthiest person on Earth could have enjoyed a mere hundred years ago. We can choose among thousands of different types of garment, each of which costs a fraction of our income rather than a huge percentage of our annual wage as was the case a few hundred years ago when most people would wear perhaps no more than four or five different garments throughout the course of their entire lives.

All of these choices are the result of the application of capital to create greater productivity.

There is, however, a caveat. Adam Smith himself noted all those years ago that what we would today call “network effects” would tend to result in a few people or enterprises amassing more and more capital and that at some point these people or enterprises would try to use their scale to take advantage of others, namely consumers and workers. Smith was very clear about the need for government to regulate companies in order to avoid the appearance of exploitative monopolies.

Unfortunately, especially in the USA, companies merely bought the politicians and ensured that these paid-for functionaries would for the most part enable the abuses of scale-derived power rather than constrain them. As Mark Twain observed, “America has the best government money can buy.”

It’s not surprising, therefore, that we see many of the worst abuses of capital concentration in the USA. But this is by no means the fault of capital; it’s the fault of politicians who are permanently on sale. By pursuing their narrow personal interests (re-election at any cost) at the expense of those whom they are supposed to represent, US politicians have consistently favored large corporations over ordinary people with detrimental consequences.

When governments abdicate their responsibilities, people and corporations can act in exploitative ways. They can increase prices, reduce wages, and reduce choice. The USA made atrocious automobiles in the 1970s and 1980s because the US auto companies in Detroit paid US politicians to constrict imports of more adequate cars. This reduced US consumer choice and increased the prices paid for sub-standard products. For public consumption this was dressed up as “protecting American jobs” (sound familiar…?) but of course it actually ensured the destruction of tens of thousands of jobs because US automobiles became less and less able to compete in the world market due to protectionism at home. When you can suck your captive customers dry, why bother to innovate and improve?

Today the US auto industry is weaker and smaller than it would otherwise have been had it been forced to compete. But that’s nothing to do with capitalism. Indeed, if we contrast the state of the US auto industry in the early 1980s (when it was at its nadir) with the state of the Soviet auto industry at the same time what is striking is how very much worse Soviet automobiles were.

The Soviet Union rejected capitalism in favor of a centrally-planned command economy. Bureaucrats in Moscow determined what should be produced and how much should be produced and at what price such things would be sold. The result: chronic shortages of absolutely everything, and absolutely everything of the worst possible quality on those rare occasions it was available.

In a well-regulated capitalist market economy consumers can shun low-quality products and the companies making them must either improve or go out of business. In a command economy there is no penalty for ripping off the consumer and so everything is shoddy, expensive, broken, and often unavailable. In East Germany during the Cold War you had to wait up to twenty years to get your Trabant delivered, and you’d spend all that time collecting every spare part you could find because you knew with absolute certainty that when you finally received your filthy polluting two-stroke disaster on wheels, it would require most of those spare parts just to get it working.

Thus a command economy is not a viable alternative to a capitalist market economy. To date, no one that I am aware of has ever found a third approach that has any likelihood of producing superior outcomes to those engendered by Western-style economic models. And this is despite the many faults with the Western models that we see all around us.

Many people in the USA make a false assumption about capitalism based on US outcomes. They imagine there’s something intrinsic in capitalism that encourages a scramble for money at all costs. In fact this is intrinsic to US culture, not to capitalism. De Tocqueville commented on the avaricious nature of US society more than two hundred years ago and his comments are as pertinent today as they were back then.

Meanwhile in Europe, capitalism and socialism have managed to more or less coexist for decades because social conditions there are more mutually supportive and focused on the common good. In Europe capitalism has not resulted in exploitation as it has in the USA. This is because exploitation is not a fundamental feature of capitalism.

To return to our initial examples, it’s clear the potter and the weaver don’t start to exploit themselves merely because they’ve bought a potter’s wheel and a loom.

Why does any of this matter?

Simply because if we start from the wrong assumptions our proposed “solutions” are unlikely to produce the beneficial results we hope for.

To make a simple analogy, let’s imagine we’re living three thousand years ago. We build a bridge and as the first ox-cart trundles across, the bridge stones begin to crumble and the structure collapses. We believe this is because we failed to make the appropriate sacrifices to the gods. So we rebuild in precisely the same way, but this time our sacrificial rites are more expensive and elaborate. Anyone care to guess how effective this solution will be?

Action based on inadequate analysis is always doomed to fail. Therefore it’s essential, if we want to ameliorate social problems, that we first correctly understand how those problems have arisen.

Shouting “capitalism is evil” is not analysis. It’s merely lazy self-indulgent feel-good posturing. Any policy recommendations arising from such a limited perspective are very unlikely to make anything better, no matter how much we may convince ourselves otherwise.

If we really want to improve society we must begin with a more adequate understanding of what has gone wrong and why it was able to go wrong. And that’s got nothing whatsoever to do with capitalism.

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