What is Capitalism?

Capitalism is a social and economic system based on individual rights, freedom, and responsibilities. Ayn Rand describes it as the best way to achieve the “common good,” and the “only system consonant with man’s rational nature.” Capitalism is a market system in that markets rather than government control the economy.
A review of the lecture notes of the Common Sense Economist reveals seven characteristics necessary to capitalism.
The first, and perhaps the most important, is private property. Individuals have the right to own things. They own homes, cars, recreational vehicles, boats, barbeque grills and other personal items, and use them as they see fit. Businesses have the right to obtain, use, and dispose of property resources as they see fit. Both businesses and individuals have the right to bequeath (leave) their property to whom they desire, sustaining the right to private property.
The second is freedom of enterprise and choice. Private businesses are free to produce what they want to produce and sell their products in the markets of their choice. Of course, there are social and legal limitations of freedom of enterprise. Meth labs and selling illegal drugs on the street is frowned on and is also illegal. It is illegal in certain professions, such as hairdressing, pulling teeth, or providing medical services, to provide service without a license. These limitations are to prevent crime, prevent unqualified people from providing services, or to protect those already in the businesses. They also protect union members. The later often belies common sense.
Third is the role of self-interest. Entrepreneurs do whatever is in their best interest, and that is usually to make a profit. The profit motive is the driving force behind the “invisible hand” of Adam Smith. Businesses benefit society by producing what people want at a price they can afford. If nobody wants the products or cannot afford them, businesses won’t make a profit.
Competition is necessary in a capitalist economy. No one producer is able to dictate the price of any product, giving rise to the term “competitive pricing,” and generally keeping prices low. Health care is a current example. The lack of competition has kept prices high in the United States by not allowing health insurance across state lines and limiting the number of health insurance companies. The Affordable Care Act was supposed to take are of these problems and promised that families would save $2,500 annually in health care costs. The opposite has happened in many cases by further decreasing the number of insurance providers and requiring unnecessary treatments. The ultimate goal according to President Obama is a single-payer system with the government the sole provider, eliminating competition completely. I should point out that this is the desire of many who believe the government can do a better job than the private sector. The common sense economist does not agree.
Capitalists have high reliance on capital goods and technology to lower production costs. A side effect is technological advance to further decrease production costs. Technological advance has also occurred because of government investment in the market. An excellent example is miniaturization required in the space program that led to hand-held calculators and this MacBook Air that I am using on this cruise to write this newsletter. The government encouraged technological advance in going to the Moon by granting contracts to the lowest bidder. We now have no-bid agreements with Russia, second to the United States in space travel, to send our astronauts into space at $72 million per astronaut. Go figure. We are supposed to be the capitalists.
Specialization, called division of labor by Adam Smith in his pin factory example, saves time in production and results in better products. He described how one person drawing, cutting, and sharpening the steel, and then attaching the heads and putting the pins into those sheets of paper would take one person nearly all day. With one person drawing, another cutting, another sharpening, another attaching the heads, and another sticking the pins into those annoying papers, thousands of pins could be produced each day. Imagine how long it would take one person to build a car. Using specialization, the Honda plant in Alabama can produce a car in 16 hours, from start of welding to drive-out.
Finally, capitalism requires limited government interference in the market. Some interference is required, of course. Illegal activities must be prevented and private property must be protected. People who cannot take care of themselves must be taken care of. Necessary public goods that cannot be provided through the market must be produced. Adam Smith (and this common sense economist) believe that government should tax for these, and only these, reasons. Government interference should be limited because politicians in government are not very good at participating in the market place. All we have to do is witness the recent Affordable Care Act rollout. No further comment is needed.
Jonah Goldberg had an excellent newsletter (January 13, 2012 and republished on March 21, 2014) about those who like or don’t like capitalism in theory, but like it or don’t like it in practice. Those who don’t like it in theory but like it in practice are rather obvious. Think of the minions in Hollywood who despise all the above characteristics of capitalism but take advantage of the motion picture industry to the tune of a million bucks for a little acting. Another example is George Soros, who became a billionaire in a capitalist economy but now doing his best to kill it.
There are a few who like capitalism in theory but not in practice. Perhaps professors who believe in and teach capitalism, but have not seen the return they would like on investment in their doctoral studies.
The common sense economist likes capitalism in both theory and practice.

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Posted by at April 10, 2014
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