What is Capitalism?

Wall Street in New York City

Capital is wealth. Using capital to generate more wealth is capitalism. There are a lot of details that economists may argue about, but in a nutshell capitalism is using money to make more money.

The first prerequisite of capitalism is private property. Capitalism motivates people with rewards that one can keep for one’s own private purposes. If you can’t keep what you earn, or a substantive part of it, why bother?

The second prerequisite of capitalism is capital. You have to have some to participate; either your own, or some you have borrowed from someone else. The first rung on the ladder of success for many successful capitalists is work and savings. The savings become the initial investment to start a business. Contrary to Karl Marx social classes are not rigid. A worker can become a capitalist, and a failed capitalist may need to become a worker.

A street vendor running his own hot dog stand is a capitalist

You will never be a capitalist if you keep blowing your whole paycheck every payday without thinking of the future. But as American history has shown over and over again, people with some vision and foresight can rise from poverty to abundance and sometimes even great wealth.

Capitalism is an economic system, not a philosophical or moral system ( although some will argue that it implies both – see Ayn Rand). There have been capitalists who used their wealth to buy luxuries and build mansions and others who gave away much of their wealth to help others (see Andrew Carnegie).

But in the end capitalism makes no judgment about what you do with your wealth once you earn it. A lot of people seem to be angry at rich people spending money on luxuries that most of us could never own, whether it is a huge mansion, an expensive automobile, airplane, or yacht. But the fact is no matter how the rich spend or invest their money, the end result is almost always the creation of jobs and opportunities for others.

Some will argue that creating jobs is the ultimate form of charity.

 Another often under appreciated aspect of capitalism is risk and foresight. The spectacularly successful capitalists in American history almost always had a vision of what could be but was not yet, and were willing to take substantial risks to create their visions.

The late Steve Jobs, one of the founders of Apple Computers, was such a person. Along with Steve Wozniak he conceived the original Apple computer that became the Apple II. Later came the Macintosh computer, but probably his most consequential idea was the iPhone.

Steve Jobs and the iPhone

The iPhone, and all the other phones inspired by it, have drastically changed how people all over the world work, play, and communicate.

Not everyone wants to invest the time and energy it takes to be a successful capitalist. Not everyone has that vision and drive. But the good news is that those who do will often create the jobs for those who are happy in their niche. Many have perfectly good and honorable goals that are not all about profit and loss (but they should show some gratitude for those who do).

There is nothing in capitalism about equality of outcome. It is all about equality of opportunity. A very important point about that “equality” is that it is totally about equality under the law. The law is not supposed to give anyone an advantage due to their birth. There are not supposed to be aristocrats who have more “rights” under the law than anyone else (as for example in feudal societies).

That equality is not about everyone starting off in life with the same circumstances either. Some are born in poor families and others in well to do families. But all should have the same opportunity under law to flourish if they are up to the task.

In a world with diverse talents, enthusiasm, intelligence, and drive there is going to be a lot of diversity in outcomes. Advocates of capitalism will point out that with all of the wealth created by capitalism it is inevitable that everyone will better off than they would be without it.  

It should be obvious that capitalism coupled with the Industrial Revolution has created a tremendous amount of wealth. That wealth has allowed millions of human beings to survive and thrive that would have been condemned to disease and starvation in previous centuries. The living standards of people today in countries that practice some degree of capitalism would be unimaginable to people a few centuries ago.

There are many critics of capitalism despite the obvious benefits. We will look at some of the classical criticisms next.