Capitalism

Education is the foundation upon which we build our future.
-Christine Gregoire

Thomas Sowell, a prominent American economist is quoted with saying: “Despite a voluminous and often fervent literature on ‘income distribution,’ the cold fact is that most income is not distributed: It is earned.” Essentially what Mr. Sowell is trying to say is that, income (money we make) cannot be distributed, but has to be earned. In a sense this embodies all that is Capitalism.

You may have heard the words Capitalism and Socialism thrown around together quite a bit. (We will go over Socialism in a later post.) The two, as I’m sure you have experienced, are not one in the same. In fact we can think of the two as opposites. Today however, we will look solely at capitalism.

What is Capitalism?

Capitalism is an economic system in which the means of production are privately owned and operated for profit.

That my friends, is one of the shortest definitions you will see on here. That is because Capitalism in itself is a very broad term and hard to define. There are many types of capitalism, and many ways governments choose to pursue it. However, there is one key reference that all capitalists can agree on, and that is private ownership.

Since everyone can agree on private ownership, let’s work on that. When a capitalist speaks of private ownership in an economic system they mean that all production, creation of goods, prices, profits and wages are held by the individuals involved with them. We’ll get back to that word “all” in a moment. For now, let’s have an example.

In Greenopolis (our made-up capitalist country), Farmer Joe is a green bean farmer. Joe buys all his tools and seeds to grow his green beans. He also spends all the money to take care of his farm. When the green beans are ready to be harvested, he sells them at the market (for a price he determines). When people buy his beans, assuming they do, Joe gets to keep all his profit. This is capitalism plain and simple.

Now that we have that down, let’s get back to that word “all.” In order for capitalism to be present not all of the above listed things need to be private, a mixture is completely acceptable. In fact, the majority of the time a mixture is what we see. For instance, in the United States, it is not uncommon for the government to set price floors on certain goods. A price floor is a price at which a good is not allowed to sell under. This helps people (like farmer Joe) stay profitable and keep producing goods.

Most capitalists will agree that property is a very important thing to remain private (when we say property we don’t just mean land, we mean things people own in general). Private ownership in capitalism implies the right to control property. This includes how it is used, who uses it, and getting the money that the property produces.

What you’ve heard.

Sometimes in the news you will hear of a new law that affects companies or has to do with the economy. Sometimes you hear it said, “Well, that’s just one step closer to socialism.” For now we can think of socialism as the opposite of capitalism, in that the government plays a very large role in the economy.

For instance, let’s go back to our Greenopolis example. Farmer Joe has grown his green bean crop. However, farmer Joe isn’t the only one. In fact many people grow green beans in Greenopolis. Lately people haven’t been too fond of them and have gone on to eat other things. Since less people want them, prices have dropped very low, and way too low for any of the growers to cover expenses. The green bean growers risk losing their farms if they can’t make any money! The Greenopolis government decides to step in. They put a price floor on the green beans higher than what people want to pay for them.

In the above example we see how government policies can affect people. Who’s likely to benefit in the above scenario? Well, the green bean farmers are now able to sell their product and remain in business. Staying in business is always good news. However, there is another side to this coin. People who buy green beans now have to pay a price that is above the “fair” market price (the price that people were paying at the market before the government stepped in. This is sometimes called the free-market equilibrium price). The people who are paying more for these green beans are probably not very happy.

(Extra Credit: Law of Supply and Demand dictates that setting a price below the equilibrium price is probably not a good idea. In all actuality, moving the price up would not guarantee that the farmers would make more money. They could risk people stop buying green beans all together, in fact.)

Now what exactly isn’t very capitalist about this? Well, the Greenopolis government is taking away something very important from the buyers. That’s their property (that’s right, money is their property too!). How exactly is the government doing this? By making it mandatory that the green beans sell at or above a certain price, they are adjusting the way the way the economy works. Essentially, Greenopolis is giving extra money to the green bean growers, that the economy said wasn’t theirs.

(Extra Credit: The term Laissez Faire (Lah-zees Fair), French for “let it be” or “leave it alone,” is used to describe a theory in which markets are allowed to behave automatically without price fixing or interference from outside sources, as our scenario showed. Some argue that this is a big component of capitalism. Some argue that a true laissez faire economy cannot exist.)

As you can see Capitalism is a very broad subject with plenty of it up for debate. Today we’ve scratched the very tip top of the surface. I hope you’ve enjoyed your time here and look forward to reading your comments.

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If you’d like to learn more about capitalism here are a few sites:

http://www.bbc.co.uk/programmes/p00545kv

This is a short radio blurb on the history of capitalism from the BBC.

http://capitalism.columbia.edu/theory-capitalism

Here is a short article on the theory of capitalism.