Machan's Little Libertarian Encyclopedia
Chapter 3: Capitalism
Capitalism is the political economic system in which the institution of the right to private property, that is, to own anything of value (not, of course, other human beings, who are themselves owners), is fully respected. There is dispute about the label, of course, mostly because its definition is often a precondition of having either a favorable or unfavorable view of the system.
By itself capitalism is an economic arrangement of an organized human community or polity. Often, however, entire societies are called capitalist, mainly to stress their thriving commerce and industry. More rigorously understood, however, capitalism presupposes a type of legal order governed by the rule of law in which the principle of private property rights plays a central role. Such a system of laws is usually grounded on classical liberal ideals in political thinking. These ideals may incorporate positivism, utilitarianism, natural rights theory and/or individualism, as well as notions about the merits of laissez-faire (no government interference in commerce), the "invisible hand" (as a principle of spontaneous social organization), prudence and industriousness (as significant virtues), the price system as distinct from central planning (for registering supply and demand), etc.
Put a bit differently, "capitalism" is the term used to mean that feature of a human community whereby citizens are understood to have the basic right to make their own (more or less wise or prudent) decisions concerning what they will do with their labor and property, whether they will engage in trade with one another involving nearly anything they may value. Thus capitalism includes freedom of trade and contract, the free movement of labor, protection of property rights against both criminal and official intrusiveness.
The concept "freedom" plays a central role in the understanding of capitalism. There are two prominent ways of understanding the nature of freedom as it pertains to human relationships. The one that fits with capitalism is negative freedom, namely, the condition of everyone in society not being ruled by others with respect to the use and disposal of themselves and what belongs to them. Citizens are free, in this sense, when no other adult person has authority over them that they have not granted of their own volition. In short, in capitalism one enjoys negative freedom, which amounts to be free from others' intrusiveness. The other meaning of freedom is that citizens have their goals and purposes supported by others or the government so as to prosper. Under this conception of freedom one is free to progress, advance, develop, or flourish only when one is enabled to do so by the efforts of capable others.
In international political discussions the concept "capitalist" is used very loosely, so that such very diverse types of societies as Italy, New Zealand, the United States of America, Sweden and France are all considered capitalist. Clearly, no country today is completely capitalist. None enjoys a condition of economic laissez-faire in which governments stay out of people commercial transactions except when conflicting claims over various valued items are advanced and the dispute needs to be resolved in line with due process of law. But many Western type societies protect a good deal of free trade, even if they also regulate most of it as well. (The extent of such regulation in the United States of America alone, thus the divergence from pure capitalism, is chronicled in Jonathan R. T. Hughes, /The Governmental Habit,/ 2nd edition [1990].) Still, just as those countries are called "democratic" if there is substantial suffrage — even though many citizens may be prevented from voting — so if there exists substantial free trade and private ownership of the major means of production (labor, capital, intellectual creations, etc.), the country is usually designated as capitalist.
The most common reason among political theorists and economists for supporting capitalism is this system's support of wealth creation. This is not to say that such theorists do not also credit capitalism with other worthwhile traits, such as encouragement of progress, political liberty, innovation, etc.
Those who defend the system for its utilitarian virtues — its propensity to encourage the production of wealth — are distinct from others who champion the system — or the broader framework within which it exists — because they consider it morally just.
The first group of supporters argue that a free market or capitalist economic system is of great public benefit, even though this depends on private or even social vice, such as greed, ambition, exploitation. As Bernard Mandeville, the author of /The Fable of the Bees,/ put it, this system produces "private vice, public benefit." Many moral theorists see nothing virtuous in efforts to improve one's own life. They believe, however, that enhancing the overall wealth of a human community is a worthwhile goal.
Those who stress the moral or normative merits of capitalism say the system rewards hard work, ingenuity, industry, entrepreneurship, and personal or individual responsibility, and this is all to the good. This alone makes the system morally preferable to alternatives. Yet, another reason given why capitalism is not only useful but a morally preferable system is that it makes possible the exercise of personal choice, something that would be obliterated in non capitalist, collectivist systems or economic organization.
The most influential critic of capitalism is the 19th century German thinker and social activist Karl Marx. He did not oppose capitalism but argued that it occupies only a specific period of humanity's development. Capitalism, as Marx saw it, is the adolescent period of humanity, as it were. Socialism is the young adulthood, while communism is full maturity. Marx believed that supporters are wrong to assume that the system has universal relevance and validity. Instead, Marx held, the system must be accepted as a temporary fact of the life of humanity — two or perhaps four hundred years long.
Capitalism's defenders have argued, in response, that the system that is, economic liberty — is best suited to human beings because human nature is reasonably stable over time. Human beings, in turn, tend always to be motivated by self-interest or they will always want to be rewarded for their work and will not likely develop into creatures who are loyal primarily to humanity or society, never mind their self interest.
Others have responded to Marx by claiming that not only is his position untenable but actually morally despicable. The vision of human life Marx champions cuts directly against what is best about human beings, namely, their individuality, uniqueness and resulting multifaceted creativity, that is, their often single minded vision. Capitalism accords more with the idea of human excellence exemplified by the great artists, scientists, industrialists of the world, not the vision exemplified by members of a stagnant commune. Capitalism is feared only by the lethargic or cowardly, who do not prefer the hustle bustle of nature, including human life.
Capitalism is an economic organization based on some very limited rules or principles. People are at liberty to do everything other than intrude on the sovereignty of other human beings and their authority to make peaceful use of what they own. As such it is a system said to be well suited to human nature, whereby one may embark on various tasks and do well or badly at them but avoid intruding on others. This is best done when one's own sphere of authority — one's private property rights — is clearly identifiable.
Although capitalism is commonly understood in economic terms — "capital" refers to a vital category of economic resource, namely, what a person or firm has available to use in some enterprise — in fact it is dependent on certain non-economic elements of community life. The basic rights to life, liberty and property, when established, maintained and protected in a legal system, make capitalism possible, although not necessary. If one has the right to one's life, one may exercise this right by offering to spend this life, at least in part, on other people's projects, provided one's terms are met. If one has the right to liberty, one may exercise this by embarking on economic pursuits. And the right to private property is clearly indispensable for purposes of trade — one cannot do that without owning what might be traded. As Abraham Lincoln observed: "...but even these [the US Constitution and the Union] are not the primary cause of our great prosperity. There is something back of these, entwined itself more closely about the human heart. That something, is the principle of 'Liberty for all' — the principle that clears the path to all — gives hope to all — and, by consequence, enterprise, and industry to all."
Although some would reduce all aspects of life to economics, in fact, however, it has several dimensions of which the economic is just one. Capitalism is the economic order of a free society, free in the sense that such a society respects and protects each individual's rights to life, liberty and property.