What is Capitalism?
Written by Elliot Temple, on July 29, 2011

Capitalism is the application of freedom to economics. It is an independent issue from whether there is a State or not.

Capitalism ownership is not granted by the State. At most it is protected by the State. Property rights are deemed to be *granted* by reason, liberalism, natural rights, utilitarianism, religion, morality, or various other things, but not by the State.

The idea of capitalism as requiring State backing is a Marxist idea (no doubt also held by many other people who take the State for granted without questioning it):

http://en.wikipedia.org/wiki/Capitalism

Marx's notion of the capitalist mode of production is characterised as a system of primarily private ownership of the means of production in a mainly market economy, with a legal framework on commerce and a physical infrastructure provided by the state.

"Capitalism" is Marxist terminology (used by a few socialists before Das Kapital, and then made well known by Marx). It was not chosen by liberals or advocates of capitalism. I am pointing this out because the root word, "capital", is misleading. This is not surprising since the word was chosen by an opponent, to emphasize what he saw as a main characteristic of a bad system, rather than being chosen by a proponent to emphasize what he saw as being good about it.

Capitalism only has to do with capital indirectly: it allows (and causes, without requiring or forcing) accumulation of capital, and it is favored by some economists who understand the value of accumulation of capital and how capital can help create more wealth more efficiently. Economists also speak of issues such as repurposing capital as the needs of society change (e.g. retrofitting an obsolete factory to produce something else).

Capitalism refers to an economic system of free trade and individual property in which the market is left alone and individual economic actors freely make decisions about their own property and actions, rather than (for example) a central authority running or regulating commerce or individual behavior (e.g. imposing tariffs).

Capitalist societies, by the way, can have a central authority or not have one. Capitalism itself is compatible with either approach. Having a central authority is the historical norm and it's not simple to avoid but, for example, anarcho-capitalism does not involve one.

The key concepts of "capitalism", as seen by its advocates, are *free trade* and *individual property*, not capital.

Trade means people swap goods or services. People choose to trade when they believe they will benefit. Trade thus operates by *unanimous consent*. If they wouldn't benefit (in their opinion), and they had the free choice, then they would choose not to trade. Free trade therefore refers to mutually beneficial trades (beneficial as judged by each party to the trade).

Restricting free trade is bad because it means that in some cases where two people want to trade, and believe they would both benefit, they are forcibly prevented and denied that benefit. Therefore restrictions on free trade always make people worse off.

Alternatively, free trade can be violated by *forced trade*, in which at least one party considers themselves worse off but is forced to trade anyway. Force trade is trade without unanimous consent and it can only be imposed by violence or threat of violence (normally by a State).

Individual property is a system of resolving disputes. Disputes are dangerous because they can leading to fighting, force, and violence. The system of individual property says that when two people disagree about the use of a piece of property, the owner gets to decide. As long as people respect this system, disputes get settled without violence.

People who have ideas about property they do not own are required to use persuasion and argument to convince the owners to use the property differently. If they are unconvincing then they have to trade for the property in order to gain control over it.

In this way -- by successfully resolving many conflicts -- capitalism facilitates cooperation and avoids violence.

What about "voluntary socialism"? That is a special case of capitalism. It is allowed under capitalism. Property owners may share or give away any property they want. What makes it a type of "capitalism" is that no violations of free trade or individual property ever take place. That's because of the voluntary nature of the arrangement and the ability for anyone to stop if they change their mind and not be forced to do anything they do not wish to go along with.

Voluntary socialism looks similar to socialism as long as no conflicts come up. When everyone agrees, any system allowing freedom will look about the same -- people will happily do whatever they want and nothing bad will happen. But what's crucial is what happens when people disagree, and how conflicts can be resolved without violence.

Voluntary socialism uses the capitalist system of individual property as its fallback conflict resolution mechanism when persuasion and verbal discussion fail. What that means is if someone disagrees with something he can leave and take his property with him. His participation is purely voluntary and isn't forced on him. (Of course, and again this is how capitalism works, anything he had ceded ownership of he won't be able to take with him if he leaves.)

Previously this question came up (here phrased in my words):

How is the competition of capitalism compatible with cooperation and social harmony? Does capitalism cause conflict and fighting?

I've begun to answering this by explaining how capitalism provides a dispute resolution mechanism. Further, it provides freedom and *lack of freedom* always means conflict (people being forced to do things they do not consent to). I'd now like to address the issue of competition.

The sense of competition involved in capitalism works as follows:

People try to do or make what they think is best. They offer to trade what they think is valuable. If they want a lot of good or services from others, then they strive to do what is most valuable that they can trade, so that they can get the most in return.

People aim for *objective value*. High quality is rewarded. They are competing primarily against failure and mistakes.

An example of a mistake would be if someone judged a particular product would be useful, produced it, and then it was discovered it is not useful so no one bought it. (Note: buying is a form of trading for it, for mutual benefit, where money is the thing traded by one party.)

There is a special category of mistake which is confused with competition between people. But it does not fundamentally put people at odds with each other. It goes something like this:

If I am going to produce a product and sell it, I have to judge what people will want to buy. If I am mistaken then I will benefit less than I hoped, or even lose resources.

Many products take time to create. Sometimes they take years of research and planning. So entrepreneurs often have to make predictions in advance.

Sometimes the following thing happens: I predict people will want to buy my product in two years time. I produce it. And I would have been correct except that something unforeseen (to me) happened. So, I made a mistake.

And that unforeseen thing is: someone else started selling a different product which was (in the eyes of the people I hoped would buy my product) better than mine.

That this happened is good for my potential customers. They believe themselves to be better off this way. But it's bad for me because I made a mistake in my predictions about who would wish to buy my product. And that mistake indirectly involves another person. So it's easy to blame that other person as a scapegoat. But he has done nothing wrong.

This is not a zero sum game. Everyone can win. No one else's success ever makes me lose out. Only my own mistakes end badly for me. My competitors are not my enemies. And bear in mind that being an entrepreneur is a risky and optional occupation. One doesn't have to do that.

(Read more of Elliot Temple's writing at  http://fallibleideas.com/ )