First, the obvious that hardly anyone talks about: If you have not taken at least two good courses in economics, it’s not likely that you understand even the basics of capitalism. If you have, when you were 19 and suffering from severe testosterone poisoning (male or female) it’s still likely that you don’t understand much. There are exceptions: It’s possible to teach oneself through assiduous reading of a good newspaper such as the Wall Street Journal. I don’t know how many people do this although I did, to a large extent. It took me about ten years.
Don’t blame yourself at all. Capitalism is a topic that should be taught every year throughout junior and senior high school. It never is. Also teachers of introductory economics often do a very bad job of it for reasons we need not go into here. A few do more harm than good out of their own ideological blindness. We all know such cases, even outside of the People’s Green Socialist Republic of Santa Cruz where I live. So, below is a handy intro to the subject. If you wish for a more scholarly but still basic approach, please go to my entry “Capitalism” in the 2006 Edition of the Blackwell Encyclopedia of Sociology. Make sure you consult the hard copy edition. The paperback entry that followed is pure trash done by a simplistic 1930s-style pseudo-Marxist.
Capital is money that’s put to work. The $500 in banknotes under your mattress is not capital although it’s potential capital. The valuable tract of wilderness you inherited from your grandfather and that you preserve carefully is not normally considered capital. It’s also potential capital. The millions of dollars worth of gold dangling from the ears of Indian women today are not capital. In all these example, something of value is sleeping, not producing except by happenstance.
Capital has no size. The $200 I put into my brother- in- law’s restaurant truck in return for a small share of ownership in his business is capital. The $100,000 currently in your savings account (2014) is not really capital, at least, it’s not your capital.
Capital does not belong to “capitalists.” Curiously, the word “capitalist” has no fixed meaning today. I believe we have capitalism of some sort but no capitalists. More on the actual actors of capitalism in Part Two of this essay.
Every economic system is also a social system. The way a society or a group makes its living has many implications for how it lives. (Manufacturing Germany is sociologically different from oil-mining Saudi Arabia in several important ways.) One implication, but not the only one, is the degree of poverty of that group. Where capitalism of some sort does not flourish, the poor remain poor.
The Unites States is currently a capitalist society but only in a severely limited sense. We must distinguish between theoretical market capitalism and the real capitalism prevailing in this country, the US, which I will describe presently.
In a theoretical free market (that exists nowhere today) sellers and buyers complete their transactions and that’s it. unless strong bonds of trust exists between the ones and the others. Such a bond of trust allows for the planning of future exchanges. This trust is difficult to achieve with large numbers who know little or nothing about one another. It may be increasingly easy to achieve such bonds, however, because of the Internet. When trust exists buyers and sellers can agree on some future transaction. The purchase of a crop still in the ground is a classical example.
To compensate for the shortage of such trust conditions, the contract came about. A contract is a promise to deliver something in the future at an agreed upon price. The value of a contract is multiplied if it’s enforceable in courts of law. A court is an institution that forces people to do what they don’t want to do at the moment. A classical example is the delivery for an agreed-upon in December price of $19 a bushel for a crop that’s worth $20/bushel in the open market in August.
Courts thus limit the free play of the market; they are a constraint on free market capitalism, but a virtuous one if you ask me.
Next, as hard as it may be to believe, some products in this country are subsidized directly by governments. Every year, Congress gives wheat, corn, soybeans and rice growers billions of dollars in direct payments. There are also thousands of indirect subsidies. Two come to mind: The American sugar industry is allowed to practice higher prices than otherwise would be the case because of a more than century-old custom barrier on sugar imports. Foreign sugar, has to pay customs duties, a fine really, to be allowed into the US. The American consumer pays more for his sugar than he would otherwise
The second form of indirect subsidies, of course, is tax exemptions for government favorites- of-the-moment projects, most notably today so-called renewable energy endeavors (but not nuclear energy for some reason although there are infinite reserves of nuclear material available).
All subsidies distort the allocation of resources, the main moral justification for market freedom. Thus, I may put my money into windmills I think little of because of the clear unearned head start the windmill industry enjoys entirely through tax advantages. Note that I am not speaking here of recent scandals where renewable industry ventures received government support they squandered or stole. I am talking only about ventures that actually proved viable. The corruption frequently following government subsidies is a separate topic.
Beyond courts and government subsidies, taxation itself, limits the free play of the market. All monies take by the government are withdrawn from the free choice of citizens and other economic actors. Historically, it used to be a small thing. Today, at any given time, in developed countries, around 50% of all the income (Gross Domestic Product is a good enough approximation) available is in the hands of government. It’s a low of about 40% in the US, a high of 57% in France. It’s as if developed countries had two economies a capitalist, market-based economy and a state socialist economy, of more or less equal size. Within each country, the latter always has low productivity. Thus, calling such countries “capitalist” is a significant abuse of language. In addition, the costs of simply complying with tax laws is deemed no negligible by various reasonable estimates.
If I wanted to stem the rise of health costs and that of health insurance premiums while lowering the number of uninsured, the first thing I would do would be to spur competition sharply within the health insurance industry. I would accomplish this miracle by doing my very best to void all regulations limiting insurance companies’ activity to one state. You got that right, there are such regulations. If an insurance company in Maine offered me, a private person, better terms than does my current insurer today, I would not be allowed to accept its offer.
Many government regulations act, in particular, as barriers to entry in addition to fulfilling (or not) whatever their other roles (such as promoting safety) might be. This explains why industry associations often ask to be regulated. Business decision makers like competition but mostly for the other guy. ( In a related mode, see Peter Thiel’s Op-Ed, “Competition is for Losers” in the Review section of the Sept. 13-14th Wall Street Journal.)
The biggest, most significant way in which modern capitalism in most countries differs from market capitalism is that the supply of money, of currency available in the economy is tightly managed by a government entity. In democracies, that entity is independent from the executive branch of government. That is the case in the US, with the Federal Reserve Board, in the UK, in France and in addition, in the European Union, for example. Yet the enormous power to release and restrict money – the main medium of exchange – is taken away from the market. The results often differ sharply from what we think the market would do of its own accord.
In the US, the Federal Reserve Bank, ( “the Fed”) only has the formal power to change the rates at which to federal government lends and borrows money. Its formal mission is narrowly defined to fighting both inflation and unemployment through these instruments. In practice, however, at any one time, so much of the potential capital is in the hands of the federal government that the Federal Reserve Bank pretty much determines under what conditions other economic actors operate. A current example: If interest rates are high, investors flock to government bonds and to other bonds because their interests rate follow those of the Fed. (A bond is a loan to a government entity or to a private entity.) If interest rates are low – as they are now, by design – (2014) many investors will move their money to stocks or “equity.” More on this in Part Two of this essay
It would not be far from the truth to state that the US has four rather than three branches of government: legislative, executive, judicial , and financial.
Note that I am mostly only describing until now. Now, I will opine: It seems to me that this constitutionally flawed system has served us fairly well in practice. I don’t know what an alternative would look like. Many people of libertarian bent seem to say that if the US would only return to the gold standard there would be no need for the Fed. This means that a US dollar would be exchangeable at all times from the federal government for a fixed quantity of gold. I don’t think their argument is credible. It’s possible I don’t understand it well.
If any of this is not clear, just ask in a Comment. There are no dumb questions, just dumb answers, and dumb silence.
You might be interested in a historical digression about one of the most popular false beliefs about capitalism, its alleged relationship to Protestantism. If you are, read on-line my co-authored article:
Delacroix, Jacques and François Nielsen. “The beloved myth: Protestantism and the rise of industrial capitalism in 19th century Europe.” Social Forces 80-2:509-553. 2001.