Time to get this out of the way: What is Capitalism?

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There are an alarming number of posts and threads on this site questioning the merits of and often damning the supposed results of Capitalism.

 

I write this in the hope of explaining what Capitalism is and what it is not, and extinguishing the notion that capitalism is a) somehow mutually exclusive with a resource-scarce or resource-barren world, b) that capitalism has failed, c) that we need a “new” system to replace capitalism and d) that capitalism has anything to do with inflation or fiat money.

 

Let’s start with a few things that Capitalism is not:  First of all, Capitalism is not the blueprint for the US constitution.  The word doesn’t even appear once in the U.S. Constitution, its Bill of Rights, or the Declaration of Independence. 

 

That is because Capitalism is a by-product of a more important system, a system based on the notion that individuals hold freedom necessary to decide how to direct their energies to exploit natural resources and trade goods derived from the exploitation of natural resources.  The energies they direct are either their own labor, or the energy saved from previously expended excess labor – i.e., capital.   

 

Now before any environmentalists lambast this with counter-arguments contending that we do not have to “exploit natural resources”, let’s get this out of the way:  any human decision that results in survival rests on the exploitation of natural resources.  If you do not believe that, then you must have taken your own life already or will soon do so, because the only way it is possible for you to survive from this moment and on into next week is for you to breathe some air, drink some water, and eat some food, preferably within some sort of structure called “shelter”.  Those are all natural resources or their by-products, and anytime man utilizes them to advance his needs, he is, by definition, exploiting them.

 

OK, back to work:  capitalism requires individual freedom.  Individual freedom allows individuals to decide how, when, and whether to expend their efforts (labor) in exchange for results leading to the fulfillment of happiness (from basics such as food and shelter, all the way to luxurious leisurely endeavors such as books, theater, sports, TV, and vacations).  Note that this labor does not necessarily need to be expended on behalf of someone else, as is the case in a job.  Labor could be used in one’s own farm or garden, producing crops and livestock that allow one to eat and survive.  Labor in this sense is only defined as the expense of human energy directed towards modifying natural resources (land, water, seeds, other) for their use as a means of survival and or enjoyment.  It is important to note that property rights would be a necessary part of this system, but more on that in another post (or refer to the system capitalism is contingent upon, i.e., US Constitution and Declaration of Independence).

 

Freedom to exploit natural resources is one requirement for capitalism, but it is not enough.  The other requirement is for individuals to use not today’s labor, but previously expended labor, in exchange for goods and services (another term for exploited natural resources).  Previously expended labor is excess labor or put another way, excess production.  That is, it is labor that produced more than was necessary at the time.  It is the savings that result from production – consumption > 0.  If it were not possible to store excess production in some way, there would never be any reason to produce anymore than was absolutely necessary to produce one’s daily bread.  Excess production, stored in some way or other, is termed “capital”.  It could be stored as excess grain in a silo; as a machine purchased in exchange for labor that has the ability to produce work; or as anything else that has value. 

 

While many things have been used throughout history to store the value resulting from excess production, the method used today is “money”. 

 

The reason I went through all this to come up with a concept that I know everyone on this site already understands, is because while some people know what the purpose of money is, they do not understand why.  I’ve seen people lauding inflation or not understanding why it’s bad, and I’ve seen people lambasting capitalism because of inflation when the two concepts couldn’t be further apart.

 

If money is used to store excess production, which is the result of our own labor, which we expend thinking we may use it later, money must be able to store that excess production faithfully, i.e., without losing value.

 

The very essence of capitalism is the ability for individuals to store capital (excess work). Storing capital faithfully cannot be accomplished if the medium used to store it loses value every day (fiat money).  Therefore, any complaints against fiat money, which are 100% well-grounded in my opinion, are just that – complaints against fiat money.  Fiat money has nothing to do with capitalism.  In fact, it’s capitalisms mortal enemy.  Blame the Fed, blame ignorant politicians for not recognizing fiat money’s ills, but don’t blame capitalism.  The very concept of capitalism is dependent on the ability to store excess production in a medium.  Fiat money is anything but that medium.

 

The opposite of capitalism is a society whereby individuals do not hold the freedom to decide how to direct their energies.  These decisions are made by a central government.  In this system, individuals can only expend labor, as all capital is owned by the state, even any capital they produce as a by-product of their labor.

 

In the capitalistic system, it is entirely possible for an individual who spends less than he produces, to accumulate capital.  Eventually, he or she can deploy (invest) this capital in a productive venture.  If successful, the venture will produce revenue for the individual, and possibly eventually free him/her from ever having to expend labor in exchange for goods and services again.

 

In any system absent of capitalism, such a concept is inconceivable.  Therefore, even though in a capitalistic system there are two options for expending energy: labor or capital, it is the formation of capital that makes capitalism unique and that’s why, I think, “capital” is the root word for the system, and not “laborism” (which I think would make a much better term for socialism or communism).

 

Unfortunately, our politicians, influenced by special interests, have imbued themselves with the power to spend more than the government takes in through taxes.  To fix this little problem, they made a cozy arrangement with bankers to devise a system that produces money that was never worked for.  The government wins by funding projects and services demanded of them by special interests but beyond the means of tax revenues, and the bankers win by participating in a system that lends fake money to real workers that pay real interest on it.  The producers (all workers and tax payers) lose by having previously produced wealth (capital) devalued, and by having their children make up for the difference.  All of this is a perversion of the concept of capitalism and it is this that should be the target and subject of much of the recrimination I see on this site mistakenly directed against capitalism.

 

Capitalism and Scarce Resources

 

Several people have purported that capitalism is incompatible with a world that has scarce natural resources, as if natural resources were ever anything but scarce.

 

Let’s define “scarcity”.  In my book, a “scarce” resource is anything that is not ever-present and cannot be enjoyed without exerting energy to acquire and/or use it.   Under present circumstances, the only non-scarce resource I can think of is air.  If we lived in less populated times, or in the US shortly after the Louisiana Purchase, land would be a close second, but even with land so cheap (it was free for a brief period to anyone that could claim it, hence the term, “stake your claim”), considerable energy and sacrifice had to be expended to claim it and survive on it. 

 

In my book, capitalism is precisely the best, most efficient system available for the prodigious use of resources, especially the most scarce ones!  

 

This is because freedom-based societies upon which capitalism is based on, hold that individuals are in the best possible position to make decisions regarding their own well being.  Since they are “closest to the action” of their own circumstances, it is difficult to argue against that concept.  Since the cumulative societal consumption of resources is nothing but the sum of each one of the society’s individual members’ decisions, the most efficient way for a society to harness its natural resources is to let each one of its individuals decide what is most efficient for their own particular set of circumstances. 

 

Capitalism does not need oil, coal, nuclear energy, or any other natural resource to exist.  Capitalism is simply a system whereby individuals make their own decisions about how to exert their own energies towards the adaption of whatever natural resources there are, for the purpose of furthering their own well-being.

 

If you have an island-based society whereby the only resources are fish, coconuts, palm tree leaves, and volcanic rocks, those circumstances do not preclude capitalism.  They only preclude the production of goods based on resources that don’t exist on the island.  If that island exists in a world with other societies that have other resources, so be it.  They won’t be able to trade much in exchange for other goods, but it does not mean they cannot exercise capitalism or survive.  Would any other system make this island anymore successful?  I think not.

 

Has Capitalism Failed?

 

Capitalism, as defined above, requires a medium that allows for the storage of excess production.  Excess production that is saved for a future date is capital.  A medium used to store capital that is unfaithful (devalues) is almost as opposite to capitalism as communism is.  This is because in communist societies, the only choice individuals have is whether to exert labor or not to exert labor.  The choice to produce excess labor that can be saved as capital is not an option, because the State owns all the capital.  Therefore, the choice to someday deploy capital as a means of producing revenues is not an option, and labor is the only choice, for the lifetime of the individual.  A so-called capitalistic system that does not employ sound money is in effect the same as a communist system to the extent that the medium of money devalues over time, and to the extent that the individual is not allowed to save excess production for future deployment due to the devaluing nature of the medium used as money.

 

So, before you blame capitalism, look at how one of the two basic requirements of capitalism has been perverted into an unrecognizable version of itself.

 

What new system should replace Capitalism?

 

Go back and read everything else in this post.  Capitalism hasn’t failed, it’s been abandoned.  The new system we need is Capitalism that is protected from the profligacy of government; that is held as sacred as the right to life and liberty, for that is what capital is:  it is excess production by individuals.  Excess production comes from the decision of an individual, the rightful owner of his/her own body and mind, to produce more than daily necessities and store excess production for future use.  Capital produced is capital owned as rightfully as one’s own body and mind and therefore should be protected equally and not subject to rights or policies of government that devalue it at the stroke of a pen.  Imagine if the government could devalue your life with the stroke of a pen, either by decreasing your life expectancy or by enslaving you for a period of time each day – that’s the SAME thing as DEVALUING CAPITAL because capital is a natural extension of your body and mind produced only by a decision of your mind and the exertion of your body!

 

Fiat Money and Inflation

 

It should be crystal clear by now that capital will only be produced if there is a means to store it and later deploy it.  Otherwise, why should any of us produce more than we absolutely need every day?  From this, it should be easy to conclude that whatever we use as money, be something that cannot be produced without an exertion of energy – either labor or capital itself.  Therefore, all fiat money systems are the mortal enemy of capitalism. In fact, they are communism in sheep’s clothing, for they rob from us the sweat of our brow. 

 

So, if you want to attack fiat money, the Fed, the US Treasury, laws that allow for the creation of non-worked-for money, please by all means do so.  But please do not confuse such foolish, perverted concepts with Capitalism or I will not be able to sleep at night.

 

Thank you and sorry for the long post.