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What Exactly is True Capitalism?

Economics / Economic Theory Nov 16, 2016 - 03:38 PM GMT

By: Frank_Holmes

Economics

We’ll begin with this truth: We cannot snap our fingers and have “wants” immediately transformed into “satisfactions.” We are born having to struggle to survive. We must take atomic elements, which are provided gratuitously by nature, and transform them into the goods and services that give us satisfaction. Everything used to build an Italian sports car is provided by nature, but not in a form that can be used directly without modifications. The raw material must be combined by our labor and know-how. Wants require efforts to obtain satisfaction. Man is constantly striving to reduce these painful efforts that consume so much of his energy and time. Unfortunately, the history of mankind has been one of pillage: A plan for less efforts. It is far easier to steal a sack of corn than take the effort to grow it.


One can imagine an infinite number of social systems but one cannot ignore or repeal the reality that wants, which are infinite, need many efforts to overcome obstacles before reaching limited satisfactions. Capitalism is a social system based on a simple principle of justice that the person making the unconstrained effort should receive or decide on satisfactions. Capitalism puts the individual, and his natural rights, including individual freedoms, at the center of the social system.

Private property, a hallmark of capitalism, emanates naturally from this basic principle of justice. Private property is to ensure justice.

Communism, or its cousin, socialism, is a social system designed by man that puts society, or the tribe, ahead of the individual. It also violates this principle of justice with vague notions of ability and needs in the slogan, “from each according to his ability [effort], to each according to his needs [satisfactions]”1 Here, we have efforts without reward, and satisfactions without efforts, with an elastic definition of needs.

Capitalism, on the contrary, is not designed, but a natural evolution of the self -interest inherent in man.

The first people that colonized a continent lived in close proximity because combining labor allowed them to reduce efforts. As efforts were reduced, more and more and different satisfactions (goods and services) were available. Soon, each colony specialized based on comparative advantages and began the voluntarily exchange of goods and service – the beginnings of capitalism. The process was a natural development of the principle of justice. So we see a large part of the social nature of man comes from this individual self-interest to reduce effort.

Yet, self-interest is not capitalism. According to justice, a man could give away the fruits of his efforts. His benevolent act would be valued as greater than his personal consumption of satisfactions. Self-interest is in the nature of man.

Since man is constantly trying to reduce efforts, he will constantly be trying to innovate by creating new ways (inventions) to obtain existing and new satisfactions. Capitalism is simply the best environment for this self-interest to manifest itself.

A very common tendency among economists is to attribute depression under capitalism to a dearth, or “saturation” of investment opportunities. This is Henson’s “stagnation theory” where (here and here) booms and bust are caused by the stop and go of innovations. This can only be considered as naïve if one realizes that man, left unconstrained, is constantly innovative and creative, since the desire to reduce effort is not something that “comes and goes” but is perpetual. Yet, without justice or the critical self-interest link between efforts and satisfactions, creativity and innovations will undoubtedly be reduced.

The price system is also a natural evolution from this principle of justice. With free exchange, supply and demand will establish the exchange values between goods and services. It is a decentralized system that allocates resources where they are deemed most urgent.

What about the injustices of the price system? In an exchange or capitalistic economy there will be natural antagonism between producers and consumers. The producer wants scarcity. The store owner wants to be the only person selling a limited number of product during restricted opening hours. The consumer, on the other hand, prefers abundance, with many stores selling a wide variety of products with long opening hours. Robinson Crusoe hunting for himself will clearly prefer abundance to scarcity. Man produces to consume: We work to live, not live to work.

The principle of justice also implies that others are not constrained in making efforts to obtain satisfactions. What is viewed as the injustice of the price system, or capitalism, is in actuality, government constraints that benefit producers at the expense of consumers, or one group at the expense of another, or what we can call legal plunder, and a violation of this basic principle of justice.

We need a return to real capitalism. Today, too many consider legal plunder acceptable instead of morally reprehensible. The recent presidential elections gave us a choice between two candidates who promised to use the coercive power of government to plunder one group at the expense of another. Yet, few question the morality of such plunder, the fundamental principle of justice underlying capitalism being forgotten.

In reality, the only function of government, in a capitalistic society, is the task of protecting against injustice.

Competition, a characteristic of real capitalism, promotes abundance and equality. Suppose you lived in a village and walked ten miles every day to a local stream to carry water home. In your quest to reduce efforts, you create a well to capture rainwater. This saves time, which means you can divert efforts to obtain more and different satisfactions. Suppose you begin to sell water from a well you originally built only for your own use. Your monopoly position allows you to charge a price just under the opportunity cost of traveling to and from the stream. Soon, your monopoly profits will induce others to build wells with the benefit of fewer resources used to obtain water for all of society. Competition will strip you of your monopoly profits with the benefit of more abundance being dispersed to everyone. Competition has raised and equalized the satisfactions obtained by everyone in society.

Of course, a government grant of monopoly right to build wells will benefit you, the producer, at the expense of the rest of society. It is a constraint on the ability of others to use efforts to gain satisfactions.

Some libertarians (utilitarians) believe people will be less creative if they cannot benefit through Intellectual property rights, of the monetary value of their creation, such as patents and copyright. Of course, this assumes that others factor such as expression, enjoyment, reputation, and autonomy are of secondary importance. Leonardo da Vinci did not need patent protection to be creative. Vincent Van Gogh created over 900 paintings but sold only one.

These libertarians conclude that society is better off with more wealth and utility by granting such monopoly rights. Yet, it is not clear that the benefits (however defined) outweigh the costs. By allowing others to build wells, there will be an incentive for everyone to innovate to reduce the efforts of obtaining water. New and different wells will spring up. Creativity and learning are enhanced by cross fertilization and the synergy coming from synthesis. Competitive industries are more innovative than oligopolistic ones: for example, mobile phones versus fixed operating systems. Also, this new abundance frees up time and resources to be creative elsewhere.

Property rights are created to ensure justice. Since justice has not been violated in our well example, there are no private property rights issues! Producers, with their government cronies, have been quietly erecting mini monopolies everywhere using IP law while libertarians and Austrian economists have been on a fruitless debate about the role of property rights, societal wealth and utility, and scarcity to justify or oppose intellectual property laws (see here and here).

Instead of this bickering, they should have been focused on justice that would naturally lead them to unanimously support a view that intellectual property, as some early laws on copyrights, is lost once it is released to the public.

1 Marx, Karl (1875). “Part I”Critique of the Gotha Program.

Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck's article archives.

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© 2016 Copyright Frank Hollenbeck - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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