Capitalism. “The economic system in which all or most of the means of production and distribution…are privately owned and operated for profit, originally under fully competitive conditions.”
Perhaps the greatest difficulty in any discussion about capitalism is overcoming the widely divergent concepts of what capitalism means and settling upon an agreed definition. For the political left, the term capitalism is so heavily laden with negative connotations that leftists have employed it as a label of derision, scorn, and condemnation, if not an outright curse, for more than a century-and-a-half. Karl Marx may be long gone, and the grand socialist experiment in central economic planning widely discredited after the collapse of the USSR two decades ago, but many people still loathe capitalism and yearn for a radical alternative to it. Both the anti-globalization protests of the late 1990s and the Occupy Wall Street movement of the current decade have held demonstrations prominently featuring signs proclaiming, “Kill capitalism!”
The dictionary definition given above is correct as far as it goes, but let’s expand on that definition so that we may increase our chances of engaging in intelligent discussions about it. The late economist Hans F. Sennholz, who earned his doctorate in economics (he also earned one in political science) under Ludwig von Mises and later guided me through my doctorate, preferred the phrase private property order to capitalism.
Indeed, private property order is a less problematical term. First, it describes a real-world political-legal system instead of another contentious ideology, another “-ism.” Second, as stated earlier, all human societies require capital as a factor in economic production, regardless of whether capital is privately or publicly owned. Private property order is a more precise, accurate, and illustrative descriptive term than capitalism as a name for a particular order and organization of economic production.
If we were starting from scratch, I would favor adopting Dr. Sennholz’s term. However, given the left’s constant misuse of the term and leftists’ Orwellian attempt to mutilate the term by bastardizing its definition, it is important to rescue the word from their malign distortions.
Free market economy and free enterprise system are two other acceptable alternative terms for the private property order or capitalism. The key distinctions between capitalism and alternative systems involve the role of government and the related question of who is in charge of economic production.
In a truly free market—genuine capitalism—the “means of production and distribution…are privately owned and operated,” and the government does not tell individuals or companies what to produce, how much to produce, how to produce it, what wages it should pay or what prices it should charge, etc. Under capitalism, the government does not redistribute property from some citizens to others, nor does it pick economic winners and losers in the business world by favoring some with subsidies, bailouts, insulation from competition, etc., or weighing down others with discriminatory taxes, regulatory requirements, and other economic hindrances.
Under capitalism, the proper role of the government is to act as a night watchman, impartially defending everyone’s rights—upholding legal contracts, upholding clearly defined property rights, punishing fraud, theft, etc. To use a metaphor from sports, the government in a capitalistic system plays the role of the referee, enforcing the rules of the game, but does not become an active participant in the economic contest that determines who prospers.
In a free market, all transactions are voluntary. No business can compel anyone to purchase its products or services. Every day, providers of goods and services compete with other providers (actual and potential, within their line of business and between different product choices) for customers. Those providers of goods and services who fail to provide what consumers want at a price consumers are willing to pay either amend their business plan or go broke. Only those providers who excel at fulfilling the most highly valued wants of consumers will survive and prosper.
This is the doctrine of consumer sovereignty. Under capitalism, the consumer sits in the position of the crowd watching Rome’s gladiatorial games, rendering the fateful verdict of “thumbs up” or “thumbs down” on the various business enterprises seeking their approval and patronage in the competitive marketplace.
Ludwig von Mises described consumer sovereignty in these clear, succinct passages: The consumers’ “buying and their abstention from buying decides who should own and run the plants and the land. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities.
“The consumers determine ultimately not only the prices of the consumers’ goods, but no less the prices of all factors of production. They determine the income of every member of the market economy.”2
“All production must bend to the consumers’ will. From the moment it fails to conform to the consumers’ demands it becomes unprofitable. Thus free competition compels the obedience of the producer to the consumer’s will and also, in case of need, the transfer of the means of production from the hands of those unwilling or unable to achieve what the consumer demands into the hands of those better able to direct production. The lord of production is the consumer.”3
We can plainly see today that government in the United States often abandons the night watchman, impartial referee role, and instead actively intervenes in economic activity. It frequently overrules the preferences of consumers and usurps a significant portion of the sovereign control that consumers wield in a truly capitalistic system.
Interestingly, the political left and right have been in agreement about the injustice of at least one type of government intervention: federal bailouts of big Wall Street firms during the financial crisis a few years ago. Millions of Tea Party and Occupy Wall Street Americans have denounced those bailouts, condemning them as “crony capitalism” or “corporate capitalism.”
This is where the linguistic waters have been muddied. The use of the adjectives crony and corporate is correct, but to use the noun capitalism in this context is utterly incorrect, because in genuine capitalism, government would not intervene to save private corporations from their mistakes. To describe such a clearly non-free-market practice as a form of capitalism is to mutilate the meaning of the word. Neither crony capitalism nor corporate capitalism is capitalism. Linguistically, they are oxymorons; in practice, both are rejections of capitalism, because they denote the replacement of free markets with politically rigged markets.4
The distortion of words’ meanings can cause great mischief, for by associating capitalism with offensive, non-capitalistic policies, the left believes that capitalism is something pernicious. This can blind them from seeing true capitalism which, when rightly understood and practiced, remedies some of the most serious human problems about which the left professes concern.
Plainly, capitalism in its pure form does not exist today. Government intervenes in economic activity in myriad ways. Perhaps pure capitalism can never be attained, since imperfect human beings are incapable of adhering perfectly to any ideal—although the United States came close to achieving that ideal (at least, for white males) and thus can rightly be said to have been predominantly capitalistic during its first century. Realistically, capitalism may be what Ayn Rand called an “unknown ideal,”5 but it is an ideal worth striving toward, as we shall now see by comparing capitalism with alternative economic systems in the following subsections.
The Moral Liberal Contributing Editor, Mark Hendrickson, is Adjunct Professor of Economics at Grove City College, where he has taught since 2004. He is also a Fellow for Economic and Social Policy with The Center for Vision & Values, for which he writes regular commentaries. He is a contributing editor of The St. Croix Review, sits on the Council of Scholars of the Commonwealth Foundation, and writes the weekly “No Panaceas” column in the Op/Ed section of Forbes.com.
Mark’s published books include: America’s March Toward Communism (1987); The Morality of Capitalism (editor, 1992); Famous But Nameless: Inspiration and Lessons from the Bible’s Anonymous Characters (2011); and God and Man on Wall Street: The Conscience of Capitalism (with Craig Columbus, 2012).
Mark Hendrickson’s Archives at The Moral Liberal.
1. Webster’s, p. 268.
2. Mises, Human Action, pp. 270-1.
3. Ludwig von Mises, Socialism: An Economic and Sociological Analysis, (trans. J. Kahane), Indianapolis: Liberty Fund/Liberty Classics, 1981, p. 400.
4. To distort the meaning of the word “capitalism” by joining it to an incompatible practice like cronyism is a favorite demagogic tactic of anti-capitalist ideologues. It is the same intellectual deception that they employ when the federal government overrules, suppresses, and prevents the operation of free markets—like it did to cause economic downturns in the 1930s, 1970s, or 2000s—and then, when the inevitable economic dislocations appear, anti-market ideologues blame “the free market” rather than the government intervention that stifled free markets.
5. Ayn Rand, Capitalism: The Unknown Ideal, New York: Signet Books, 1967.