Today’s popular call for capitalism to be replaced with another economic system is driven by a common misunderstanding of what capitalism essentially is. Long confusingly defined as a political and economic system, the activity that capitalism expresses is, in fact, simply a single economic practice, rather than a combined political and economic system.
And it is a remarkably fruitful economic practice that has been used by humanity at least since it facilitated the development of agriculture about 12,000 years ago. The Babylonians and Sumerians practiced capitalism, as did the Ancient Greeks, the Chinese, and effectively, every human society, in varying degree. It certainly did not start only in the 19th century with the industrial revolution.
Capitalism is essentially just the neutral and highly productive economic practice of deferring immediate consumption, and subsequently investing the saved capital. It was discovered early by humanity. The neolithic farmer who saved some of his seed rather than eating it in order to increase his crop the following season was an early capitalist. There is absolutely nothing more to capitalism itself than this. By focusing human intelligence, energy, imagination, and scarce resources on areas of high economic potential, it enabled an enormous increase in production, such as drove the agricultural revolution. Without capitalism, there would possibly never have been complex human civilisation.
Contrary to the popular use of the term, which confusingly mixes the economic practice of capitalism together with the political system of liberal democracy, capitalism is not itself in any way ideological. Historically, as well as today, however, capitalism has always had to function in tandem with whatever political system prevailed in each society at the time, and political systems themselves are always ideological.
Before the 18th century advent of liberal democracy, the various political systems in the West were always authoritarian. They were also specifically organised to benefit the dominant social minority that ruled each society at the cost of the majority, and the rulers manipulated the economy, including the capitalist element, to their financial advantage. Feudalism, aristocracy, theocracy, mercantilism, dictatorship, and slavery were historical examples of different such minority-controlled political systems and practices that preceded liberal democracy.
It was only with the personal freedom, granted each individual in 18th century Europe and the United States by the new liberal democratic political system, that the full economic potential of capitalism was finally realised. This occurred essentially because liberal democracy was not dedicated to serving the interests of any dominant minority group in society, at least not initially, but of everybody. Nor was it authoritarian. The individual political freedom, generated for the first time in history for the masses, released their full, latent economic creativity for the benefit of all of society, as well as for each individual.
While liberal democracy gave everybody the political freedom to pursue their own interests, it was the practice of capitalism within it that gave the masses the opportunity to raise themselves economically from the inferior material position that they had historically always occupied, and to more than double their lifespans.
Again, contrary to the current popular misconception, it is in fact capitalism, but only in conjunction with liberal democracy, that has actually freed the majority of the population from the bondage in which they had historically been kept by whichever minority controlled and dominated society. In this regard, capitalism has done more for the masses relatively than it has for the wealthy.
Capitalism on its own cannot, however, make a significant portion of a population wealthy. In order to have this happen, the political system within which capitalism is practised must be one, like that of liberal democracy, in which exist individual political freedom, the ownership of private property, and the rule of law, so enabling each individual to practise capitalism. These factors together facilitate the existence of the economic free market which capitalism requires around it in order to prosper.
Capitalism is commonly said today to be failing, particularly in respect of the disproportionate distribution of personal wealth that is indeed becoming increasingly manifest in the West, together with the financial undermining of the middle class.
However, it is not capitalism that is failing here, but the political system within which it has to operate. Capitalism as a neutral economic practice can no more logically be said to be failing than the rules of the road can be said to be failing because some drivers sometimes speed.
Once again, the political system within which capitalism has to function is being manipulated by a dominant minority. As their agents, politicians are increasingly able to manipulate the laws that regulate the economy, of which capitalism is only part. Empowering a Central Bank to set the financial interest rate, instead of letting the market do so, is an example of this self-enriching tendency, as is the lobbying of self-interest groups. Until the political failures that are causing capitalism to be blamed are adequately addressed, the benefits that unhindered capitalism naturally brings to all of society will only continue to diminish.
Most of the objections to capitalism are motivated by egalitarianism – the belief that all humans should, for some reason or other, be equal in every important respect, including materially. Egalitarianism opposes capitalism on the grounds that the latter creates a wealthy class that enjoys benefits not enjoyed by the workers.
Capitalism as practised in communist societies (distinguished as State Capitalism), does not directly benefit individual citizens, as it is the state that owns all significant property and defers spending in order to invest the savings. This is because communism, as a political ideology, does not permit the private ownership of property. The individual citizens then cannot follow the productive capitalist practice themselves, and so remain relatively impoverished. Bizarrely, communist states thus effectively achieve their moral goal of egalitarianism, not by enriching the society, but by generating relative poverty.
People calling for the replacement of ‘capitalism’, as the term is commonly understood, are also inadvertently advocating for the end of liberal democracy, even though they do not realise it.
[Photo: by Geoff Livingston/ Flickr | CC BY-NC-ND 2.0]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
If you like what you have just read, support the Daily Friend.