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.
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 14th, 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 14th, 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.
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 14th, 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 14th, 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 14th, 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.
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