A Brief Explanation of Capitalism

            I wrote this informative speech for my communications class last semester. Thanks to this blog, it was relatively easy to put together: I had already done most of the background research and expressed most of my views on this topic in my Classical Student posts. (That brilliant butcher analogy of mine might sound familiar.) Simplifying Capitalism But I thought a more comprehensive post that summarizes my personal definition might be interesting to read as well.

Nobel-prize winning economist Milton Friedman said, “What kind of society isn’t structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.” So much for capitalism’s purpose. But what is capitalism exactly?

       Today you are going to come away from my speech with a full grasp of the definition “capitalism”. I will demonstrate, first of all, the literal definition of the term capitalism, along with a real-life example of what this system would look like on a practical level. I will also relate a brief history of capitalism, and finally contrast and compare capitalism to its opposing economic system, communism.    
      Capitalism has always been an interest of mine since my dad read George Orwell’s Animal Farm to us when we were young, and I’ve been studying the contrasting economic systems of Animal Farm’s socialism and its opposing system capitalism every since. I’ve also explored the topic through my writings on my blog and in my personal reading. I’m fascinated by its basic principles of free choice, non-intervention, and individual initiative.
      One way to understand a concept is through its definition. We will look at a definition of capitalism by Milton Friedman, a real-life example, and an alternative explanation.
      Nobel Prize-winning economist Milton Friedman defined capitalism and its role in society when he said: “The role of competitive capitalism is the organization of the bulk of economic activity through private enterprise operating in a free market – it is a system of economic freedom and a necessary condition for political freedom” (Friedman, 1962, p. 4). Wow... these words are all very grand and imposing, but what does this definition look like on a day-to-day basis? What is the practical picture behind this fine-sounding economic jargon?
      Well, picture me as the owner of a butcher shop. You need meat, so you come into my butcher shop. I provide you with the resources, (meat,) and skills, (preparing and packaging the meat,) that you cannot provide for yourself, because you don't have the resources, skill, or time. In return, you give me money, which I can then use to provide for myself the things I need. I go to the bakery and buy bread with that money, because I don't have the resources (flour, ovens, bakers, etc.,) or the time, or the skills, to bake bread myself. Thus you have provided me with something I don't have, and I have provided you with something you don't have. That is a mutual exchange. This is capitalism in its purest and most basic form. 
      Maybe another butcher opens a similar shop down the street. Maybe he has a larger variety, or cheaper prices, or better quality of meats - so you go to him to buy meat instead. That's free choice. You can decide which butcher you like better. I want more money so I can buy bread for my family, so I lower my prices to bring in more business. That's competition. Does this competition hurt you, the customer? On the contrary, it lowers prices and improves quality/quantity for you, which is very beneficial for you. These laws - the laws of mutual exchange, free choice, and competition - are the basic tenets of capitalism. Adam Smith called these natural laws "the invisible hand" of the market.    
      Now that you have a clearer picture of what capitalism looks like on a daily basis, let’s look at an alternative definition from Robert P. Murphy, Ph. D. and author of The Politically Incorrect Guide to Capitalism. He summarized capitalism this way: it is a system where people can use their property however they want – it’s also known as the free enterprise system because people have the freedom to choose their own jobs, the products they want to buy, and the products they want to sell (Murphy, 2007, p. 1).   
      But we can’t fully understand the definition without understanding where it came from – entire economic systems do not come out of a vacuum. Capitalism had a definite history, beginning with the end of the feudal system and the rise of the middle class, and continuing into the pages of today’s modern economic story. To better understand capitalism we will take a look at its brief history.
      The basic tenets of capitalism go all the way back to the Torah, where hard work, individual initiative, and private property were valued components of God’s economic system. God commands us in both Exodus 20:9 and Deuteronomy 5:13, “Six days you shall labor and do all your work” and as Rabbi Spero pointed out in his Wall Street Journal article, with work a person becomes comes to understand that he has to be productive, and that success is not just an entitlement (Spero, What the Bible Teaches About Capitalism, 30 Jan 2012: A.15). (I recommend you read the full article, as it's excellent - here.) This is a fundamental principle of capitalism as well. Of course, as Spero says, the Bible “has nothing to say about financial instruments and models such as private equity, hedge funds or other forms of monetary capitalization.” But it does demand “honesty, fair weights and measures, respect for a borrower's collateral, timely payments of wages, resisting usury, and empathy” for those less fortunate than ourselves (Spero, What the Bible Teaches About Capitalism, 30 Jan 2012: A.15) 
      So capitalism’s principles were laid down in ancient times through the Torah – but modern capitalism was introduced into the world by Adam Smith. The popular economic system of the day was mercantilism, which he challenged in his revolutionary book The Wealth of Nations, published in 1776. “It was Adam Smith who noticed that mercantilism was not a force of development and change, but a regressive system that was keeping the world from advancing. His ideas for a free market opened the world to capitalism” (Beattie, The History of Capitalism: From Feudalism to Wall Street, October 14^th, 2011). After Adam Smith popularized “laissez-faire” (“do what you want”) economics now known as capitalism, the era of the industrial revolution dawned. As Beattie stated, this new industrial capitalism was the first system that carried benefits for all societal levels instead of just for the nobles. The standards of living were raised which led to the formation of a middle class that grew larger and larger as more people from the lower classes rose to prosperity (Beattie, The History of Capitalism: From Feudalism to Wall Street, October 14^th, 2011). 
      Today’s version of capitalism is quite different from the Biblical models of Moshe and also quite different from Adam Smith’s “laissez faire” economic system. But the basic principles are the same. Modern capitalism still emphasizes the ideas of individual initiative, working hard to receive rewards, and getting to keep those rewards – Americans believe that these are inherent rights and American capitalism is a reflection of those basic beliefs.
      Yet another way to understand a concept is to contrast and compare it with something else (Foreman, 2013, p. 10). Let’s take a look at capitalism’s nemesis, communism.  
      A basic definition is that communism is a form of society in which the means of production and sustenance belong to the community (O’Leary, Communism, 2007) Communism, which puts the power into the hands of the state, stands in stark contrast to capitalism, which generally gives the state the role of referee, rather than player. Communism votes for working for the common good of the whole community sharing both labor and profit – capitalism relies on individual initiative and personal rewards for an economy to run smoothly. (On a side note, it is obvious form the examples of Russia and China that communism often leads to totalitarianism while capitalism generally promotes free trade, free enterprise, and political freedom in general – but that’s a topic for another speech.) As economist Milton Friedman said, “There are only two ways or coordinating the economic activities of millions. One is central direction involving the use of coercion… the other is voluntary co-operation of individuals – the technique of the market place” (Friedman, 1962, p. 13). Communism vs. capitalism.

       Through the literal definition of the term “capitalism”, a look at a simple form of capitalism in practice, the history of capitalism, and a contrast/comparison of another economic system besides capitalism, you now have a basic understanding of this very important and influential economic system.

      Capitalism’s literal definition is an economic system that promotes individual initiative, free trade, free choice, minimal governmental interference, (except to enforce rules), mutual exchanges, competition, personal profits, and personal property. To borrow, yet again, Friedman’s way of expressing capitalism; its central feature is that it prevents one person from interfering too much with another – the consumer’s protected from coercion by the seller because there are other sellers with whom he can deal – the seller is protected from the consumer because of other consumers with whom he can deal. Moreover, the employee is protected from the employer because of other employers for whom he can work (Friedman, 1962, pp.14-15). This is how capitalism is supposed to work on a practical level in our daily, economic lives.

References

Beattie, Andrew: “The History of Capitalism: From Feudalism to Wall Street”, October 14^th, 2011, Investopedia, http://www.investopedia.com/articles/economics/08/capitalism-history.asp#axzz2CDmqGLvC.

Brearton, Steve: “A Brief History of Capitalism”, June, 2008, “Report On Busines Magazine”, The Globe & Mail division of Bell Globemedia Publishing Inc., Canada.

Foreman, Mark: Prelude to Philosophy: Thinking Critically About Foundational Beliefs, 2012, InterVarsity Press, Downers Grove, IL.

Friedman, Milton; Friedman, Rose D.: Free to Choose, 1980, 1979, Harcourt Brace Jovanovich, New York and London.

Friedman, Milton: Capitalism and Freedom, 1962, The University of Chicago

Press, Chicago Ltd, London.

Murphy, Robert P., The Politically Incorrect Guide to Capitalism, 2007, Regnery Publishing, Inc.: Washington D.C.

O’Leary, Zina. Communism. (2007). In The Social Science Jargon-Buster. Retrieved fromhttp://www.liberty.edu:2048/login?url=http://www.credoreference.com/entry/sageukssjb/communism

Orwell, George. Animal Farm. 1945. Secker and Warburg, London.

Smith, Adam: Wealth of Nations. 1776 W. Strahan and T. Cadell, London.

Spero, Aryeh. What the Bible Teaches About Capitalism. Wall Street Journal. 30 Jan 2012: A.15; New York, N.Y.
 

Simplifying Capitalism - Part/Chapter Two

        From my two previous posts on capitalism, my readers might logically and reasonably assume that capitalists think that, indeed, all government is evil and must be destroyed. After all, Friedman says that government, specifically American government, has done a lot of things wrong. He says government should not interfere with buying and selling, he says that government should not use coercion to manage the people's economic activities, and he says that government interferes in American society in many areas where it should not be present. Thus we can conclude that capitalism proposes government should be done away with.
So to Washington D.C., conservative Americans! We must wave our banners and proclaim that the White House should be burned and the office of President abolished! ... Right, Friedman??
         Unfortunately, no. In the second chapter of "Capitalism and Freedom," titled "The Role of Government in a Free Society," we find that this is not Friedman's conclusion at all. On the contrary, our government has an extremely important role to play in the workings of this nation. After all, where would we be without leaders, without authority, without referees? And this is, in fact, government's primary job - that of referee. As a rule, the people should be left to their freedoms of speech, religion, thought, and open marketing. But this does not mean there shouldn't be laws, and this does not mean there shouldn't be individuals to enforce these laws. Therefore, our government's job is double-sided; it must know where to step in and where to stay out.
        Firstly, there are many important ways it must step in. In this chapter Friedman has defined eight specific areas of government intervention...
1.) Maintain order and uphold the laws,
2.) Define and uphold property rights,
3.) Arbitrate disputes,
4.) Enforce contracts,
5.) Promote competition,
6.) Counter technical monopolies, (monopolies on lighting, transportation, electricity, etc.)
7.) Counter neighborhood effects, (by-products of private agreements that harm a third, uninvolved party,) and
8.) Support private charities and support families to govern the irresponsible (children and lunatics.)
        These are extremely important functions, ones that, if adequately performed, would have an enormous impact on our society's law and order. We can trust humans to be able to manage their own affairs, but we need higher authority when these affairs threaten to harm other human beings. This also goes along with the Founding Fathers' idea of three separate branches of government - one branch, the legislative, makes the laws. The next branch, the administrative, puts the laws into action. The third branch, the judicial, tries and punishes those accused of breaking the laws. Without government we would be a lost and immoral country indeed. A few important lines from one of my favorite plays, "A Man for All Seasons" by Robert Bolt, serve to express this concept; 

Will Roper: So, now you give the Devil the benefit of law!
Sir Thomas More: Yes! What would you do? Cut a great road through the law to get after the Devil? Will: Yes, I'd cut down every law in England to do that!
Sir Thomas: Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast... And if you cut them down, (and you're just the man to do it,) do you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake!

           In other words, so many people's lives would be threatened and ruined if there were no standards by which to judge their actions. America devoid of laws and authority is a frightening thought. 
           Government's role however, is not only very vital to the preservation of law and justice in our country, but is, (or should be,) a very defined role. There are many areas of society in which it can and should, in fact, be an active participant; there are also areas where it should mind its own business. This is where some of the lines become fuzzy. Many recent presidents, beginning, I believe, with Teddy Roosevelt and the "Progressive" Age, have taken it upon themselves to broaden, expand, and re-define government's parameters in society so much so, that these parameters hardly exist anymore. That is to say, fewer and fewer boundaries restrict government from intruding upon every area of our lives. This is also a frightening thought, one that has given rise to much concern from conservative Americans like Friedman. In this chapter he also lists 12 roles government has taken it upon itself that should instead be played by the American citizen...
1.) Sets agriculture prices,
2.) Sets tariffs on imports and exports,
3.) Controls output,
4.) Uses rent, price, and wage controls,
5.) Regulates many industries,
6.) Regulates and censors free speech,
7.) Forces people to use social security programs,
8.) Public housing,
9.) Conscription into military service, (employed several times throughout our history, such as during the later stages of the Vietnam War,)
10.) National parks,
11.) Government post offices, and
12.) Government toll booths.
         And these are not its only spheres of influence - think of public high schools, public colleges, income taxes, public service projects, licenses on occupations, the alphabet soup of wasteful government programs, its interference in health care. You are probably familiar with and accustomed to the government being a part of all these things in your life. I, for one, have become very used to giving my Social Security number to anyone in the public sector who asks for it, though I don't really or fully understand Social Security's purpose. All I know is that I had to have that 10-digit number memorized by the time I was 16 and can only do certain things if I write it down on certain forms. There are three very important things that define American individuals - our health, our education, and our jobs; Washington has stuck its finger, its entire hand rather, deeply into all three.
      I could continue in this line of argument for many pages, using 1984 or Animal Farm by George Orwell, or excerpts from works of Hayek, Reagan, and De Tocqueville as support. However an anti-government theme is not my focus. I merely wish to point out, as Friedman did, that government should and does have certain duties, and one of those duties is leaving the market alone. The more recent presidents have found this difficult to do - they have found it impossible to do. And te consequences for our economy have been disastrous. More importantly, the consequences for our much-cherished liberty have been disastrous. 
     This is a summation of Friedman's "The Role of Government In a Free Society," along with my own commentary and thoughts on the subject. There is much, much more I want to say, but I'll stick with this expression of the main points for now. Any comments or questions below would be much appreciated. 

Simplifying Capitalism - Part/Chapter One

Relating Economic Freedom & Political Freedom

Assuming all my readers are conservative Americans, such as myself, I'm pretty sure you all agree with me on several basic political principles...that Americans should be free to buy/sell what they want, that freedom of speech and opinion are fundamental natural rights, that we should not oppress one another, and that we should abide by the laws of our country. These are principles that are found, not only in the ideas and writings of the Founding Fathers, but in the Torah as well. In the Communistic governments of China and Russia we have seen examples of political systems which flout these principles of human rights and individual freedom.
        How does the economy relate to these? How can our system of buying and selling affect our political freedoms of speech and thought? And vice versa - how do politics affect the economy? Do labor unions, wage standards, and the price of laundry detergent have anything at all to do with voting, the Constitution, or America's laws? In Milton Friedman's first chapter of Capitalism and Freedom, he demonstrates that political freedom and economical freedom are intimately related, and explores the relationship between the two entities. Also in this chapter Friedman discusses the market as a direct part of freedom, the relation between market arrangements and political freedom as well as briefly tracing the development of free trade concepts and outlining the ideal economy promoting a free society.       
        First of all, Friedman states that only certain arrangements between these two freedoms are possible - more specifically, that only a competitive capitalistic economy ensures political freedom. (Big surprise.) In other words, a country where people are free to start their own private businesses, compete with other businesses, buy what they want, and sell what they want, all without restrictions of the federal government or anything else, is the only kind that also ensures political freedom. We will be free to live securely in liberty if a capitalistic infrastructure is in place.
        In the early 1800s, the trend was laissez-faire economics, ("LAH zay fair", French for basically "do what you want,") which seemed to work very well and greatly improved the conditions of the masses. But then the trend changed, and government began to interfere in the economy more and more - "Welfare rather than freedom became the dominant note in democratic countries." And after World War Two, this collectivist trend was briefly interrupted by a reversal in economic policies and an increased emphasis on private markets. Now we are back to more government and less individualism once more. During these twists and turns in the economy, political freedom has fallen suit - strangely enough, whenever the market was left alone and individuals were free to compete in trade, the nation's population did very well and enjoyed greater freedoms. Whenever welfare prevailed and government stepped into private business affairs, the people suffered, politically and economically. 
       Next Friedman states that there are two ways to manage the economic activities of the masses - either military/totalitarian coercion, or voluntary individual cooperation; "the technique of the market place." He is saying the government can force people to buy and sell what the government wants them to, or they can allow the natural laws of supply and demand to determine the market. Obviously the latter is the most appealing mode of management...
     What does a "free private enterprise exchange economy" look like, and why is it so desirable? These are questions that Milton Friedman will spend the rest of his book answering in detail, but he also briefly and simply answers them in a few paragraphs in the first chapter. Essentially, capitalism in action is - a business that uses the resources it controls to produce goods and services, which, in turn, it exchanges for goods and services produced by other businesses, on terms mutually acceptable to both. Money is the exchangeable commodity that makes this transaction that much easier.
      On a very simple level, let's take a very simple example of a free-enterprise market. Let's say I run a butcher shop. You need meat, so you come into my butcher shop and I provide you with the resources, (meat,) and skills, (preparing and packaging the meat,) that you cannot provide for yourself, because you don't have the resources, skill, or time. In return, you give me money, which I can then use to provide for myself the things I need. I go to the bakery and buy bread with that money, because I don't have the resources (flour, ovens, bakers, etc.,) or the time, or the skills, to bake bread myself. Thus you have provided me with something I don't have, and I have provided you with something you don't have. That is a mutual exchange. This is capitalism in its purest and most basic form.
       Maybe another butcher opens a similar shop down the street. Maybe he has a larger variety, or cheaper prices, or better quality of meats - so you go to him to buy meat instead. That's free choice. You can decide which butcher you like better. I want more money so I can buy bread for my family, so I lower my prices, or I expand my variety, or I better my quality of meat to bring in more business. That's competition. Does this competition hurt you, the customer? On the contrary, it lowers prices and improves quality/quantity for you, which is very beneficial for you. These laws - the laws of mutual exchange, free choice, and competition - are the basic tenets of capitalism. It is obvious how letting these laws alone to freely balance and improve the market in turn lead to greater freedom of choice and a more prosperous economy. Adam Smith called these natural laws "the invisible hand" of the market.
      What does this have to do with politics? History may prove that people are more free when they can buy/sell what they want, but why is this so? Well, for once thing, minorities are more free under a free market because the market is impartial. When you buy bread at a bakery you don't know if the flour was grown by a black person or white person, and you probably don't care. Thus minorities are less likely to be discriminated against in a free-enterprise society. Also, the market naturally "gives people what they want instead of what a particular group thinks they ought to want... each man can vote, as it were, for the color of tie he wants, and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit."
        For another thing, the economy has long been a powerful source of coercion by despotic governments - Communist governments make their people their political slaves by determining what they can or can't buy, what occupations they can or cannot hold, what they can sell or not sell. They take away their political freedoms by taking away their economical freedoms. In a society where the government doesn't interfere with the economy, this source of force is gone.
       In conclusion, the principles and ideas outlined in this chapter are extremely important to our understanding of what a capitalistic economy should look like. It is vital for Americans to grasp the basics. Friedman covered numerous extremely significant points about economics and politics, and I hope that my interpretation of his thought is accurate and made good sense. Questions/criticisms/praises are encouraged below! :)

Simplifying Capitalism - Introduction

If I stopped the average American on the street and asked them what they thought of Communism, nine times out of ten the reaction towards this institution would be negative.

Most Americans are afraid of Communism for many reasons, the main one being that they have very recently been eyewitnesses to its oppressive and destructive effects on the peoples/economies of China, Russia, and others in the forms of censorship of the press, violent authoritarianism, harsh quenching of liberties such as liberty of speech and thought, savage anti-religion campaigns, etc. McCarthyism in the 1950s was one example of how Americans feel about Communism - so was the largely unsuccessful and embarrassing Vietnam War of the 60's and 70's - and so was the Cold War of the 80's. Fear of 'Commies' pervades this nation.

Yet how many of us really understand the philosophies of Karl Marx in all of their complexity? What element(s) of Communism make it so repressive of mankind's natural rights and liberties? Americans understand from the examples of China and Russia that Communism is wrong, but do they ultimately recognize why? Something vital to understand is that Communist theories are fundamentally unsound, which has in turn led to phenomena like censorship of the press in Russia and 70 million deaths under Chinese Communist leader Mao Zedong (1893-1976.) These cases of massacre and oppression are not radical, rogue events perpetrated by insane leaders - they are the results of an economic philosophy, one that blatantly contradicts the guiding premises of the Jewish Torah.

In summary, to understand why "Communism is bad" one must first understand what Communism essentially is. However that is a study for another post. At present, I'm going to take the opposite side and discuss what Communism is not.

Communism's nemesis, as you probably know, is capitalism. There are many definitions of this word, and for the time, I'm going to put those aside and look at capitalism how the Nobel prize-winning economist Milton Friedman understands it in his book Capitalism and Freedom. I'm reading this book for my literature class at the moment, and to better understand it (not exactly Dr.Seuss level stuff, just sayin'!) I'm planning on blogging my notes. You may not be a politician or Barack Obama's economic adviser, yet I think it's still important that everyone understand what a free market should look like and why Communist economic thought is fundamentally wrong. In any case it will be interesting to learn more about what one of the greatest thinkers of the century has to say about Communistic fallacies and how our government could be doing it better.