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Someone’s take on defining “Capitalism”; and how it is practiced

October 28, 2011

An excellent point someone made on a board:

These are quite senseless discussions because of the lack of shared definitions between the participants. If we want to say something about ‘capitalism’ we’ll first have to define it. What exactly is meant by ‘capitalism’? Do we mean state capitalism, state-backed capitalism or laissez-faire capitalism? Or do we merely want to describe a group of people and economic systems that try to justify and work with the premise of wage slavery? If I look at the discussions in this [topic] it seems to me that the latter is the case, so I’ll try to address that (very broad!) interpretation of ‘capitalism’.

So, what (I think) is usually meant when people speak of capitalism is not so much an ideology or an economic system in the technical sense of the word, but simply a practice of unequally distributing means of production (in particular: monetary wealth) within a seemingly unregulated economic environment. This leads us to, what many view as, the core problem of this practice: the apparent randomness and injustice of capitalism. This problem reveals itself in the fact that it is considered regular practice for some people to work demanding jobs and very long hours for under $2.500,- a month, while some other people easily make well over $50.000,- a month without having to do that much work. This is a real and undeniable problem. However, people tend to disagree on the solution of the problem; this tendency is at the heart of the moral discussion regarding capitalism.

The most obvious solution is to try to justify it by saying it’s necessary, which is usually quite impossible. After all, there is no reasonable person who would argue that it is necessary for some people to be that rich while some others are barely able to survive because of poverty; this can even be disproved by pointing out that, although one might argue that some minimal inequality in income might provide people with the incentive to be innovative, it can never be argued that human beings actually need this kind of extreme income inequality that we have gotten used to in our current economic setting. Most capitalists tend to defend, or at least accept, this status quo nonetheless.

A common argument that keeps popping up in their defences is that these inequalities that I have been talking about can be traced back to and justified by the dynamic between supply and demand that is at the heart of (free) market thinking. They tell us that some people deserve more money because their work is being more highly appreciated by the market. They sometimes even try to moralize these core mechanics of markets by using vague concepts such as ‘responsibility’, ‘usefulness’ and ‘effectiveness’. A common formulation of such a moral argument might go something like this:

Well, these multi-millionaires deserve their money because they are being appreciated and rewarded for running an effective/useful company. These people took risks and bear more responsibilities than the other people who work for their respective companies. So, they deserve it.

I think this kind of reasoning is defective for several reasons. First of all, these kind of arguments tend to presume the unspoken axiom that the market indeed does reward the most useful and effective of companies, while this is not true. Markets are not, contrary to popular believe, some kind of deus ex machina mechanisms that help the best and most innovative companies to survive; this is mostly so because markets are governed by human desires and big market players. This often leads to errors in judgement, ’tilted tables’ and ineffective markets. In other words: the market isn’t a good or pure system of rewarding; it can be manipulated very easily. So, it seems to me that this kind of argument revolving around market mechanisms is a weak excuse for those who benefit the most from these market mechanisms. These people are simply trying to justify their position of power and wealth by claiming that they are actually being rewarded for their self-proclaimed ‘indispensability’. It is unfortunate that so many people believe such obvious fallacies.

These are actually the kind of people that Adam Smith criticized in his Wealth of Nations, which is somewhat sad since these people usually believe that Adam Smith actually promoted their way of living. And while it is true that Smith remarked that it is by virtue of the baker’s self-interest that we usually have enough bread, he has never said that a life dedicated to self-interest and greed was a good life. Actually, he is quite distrusting of, what he calls, the third order: a group of people who solely live for and through profit. It is actually quite interesting that so many self-proclaimed capitalists choose Smith as their champion, since he is quite nuanced and critical when it comes to markets and regulation; he definitely would not approve of, what most present-day Westerners call, capitalism.

Also, it is very contra-intuitive to think of wealthy corporate owners and wealthy businessmen as being more responsible than their employees. Just because they own the company doesn’t mean they are the ones who are at risk. I think that an employee who is a single parent, and who is dependent of their salary, but who can be fired very easily, has far more responsibilities than any of the big wheels, who’s primary responsibility is to stay rich (because that is basically the task of a profit-based company’s CEO). This is of course a matter of personal values. And if you don’t agree with this take on responsibility and risks, then you are definitely free to disregard this opinion, but I believe that it is a reasonable assessment. Concordantly, I think it is fairly unrealistic to believe the opposite.

Basically, I think it is not so much the question whether capitalism (in this very broad sense) is a failure, but in what way it is a failure. I personally believe that capitalism is a failure because it is immoral, inefficient when it comes to allocating the means of production, not able to regulate itself properly and somewhat unnecessary. A regulated form of capitalism could be seen as a necessary evil, depending on one’s perspective, but laissez-faire capitalism and other forms of extreme ‘free market’ systems (such as neoliberalism) are all unnecessary, inefficient or plutocratic in nature. Such economic systems are only beneficial for the ultra-rich and definitely don’t provide the greatest good for the greatest number of people (I deliberately say ‘greatest good’ instead of ‘greatest happiness’). And this is an important observation, since economics’ primary moral applications are best understood within a utilitarian framework.

All the stuff I’ve been trying to say!

And so interesting that not only did the Founders not really support this system (as we saw), but they cannot even completely fall back on Adam Smith, as they always obviously assume!

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