Capitalism: What is it?

Last week the World Council of Churches met and made some statements about capitalism. I responded to those statements with a post on Saturday. I have received a variety of responses. I have also begun a series on theology and economics. I intended to discuss the specifics of capitalism later in the series and I still intend to do so. However, response to my recent post has illustrated for me once again the considerable confusion that exists over what capitalism is. Too often the term “capitalism” is used as a proxy for an American socio-political-economic ethos that has been weighed and found wanting. When I use the term capitalism I am talking about a specific economic system with specific attributes. One of the best definitions I have come across is in a recent book by Rodney Stark.

Capitalism is an economic system wherein privately owned, relatively well organized, and stable firms pursue complex commercial activities within a relatively free (unregulated) market, taking a systematic, long-term approach to investing and reinvesting wealth (directly or indirectly) in productive activities involving a hired workforce, and guided by anticipated and actual returns. (1)

Vibrant capitalist economies are accompanied by a relatively strong emphasis on democracy, civil rights and protection of property rights. These are technically traits of the legal/political institutions of a society, as opposed to the economic, but they tend to reinforce one another.

Charles Wheelan writes the following in his book Naked Economics: Undressing the Dismal Science:

I will argue that a market economy [capitalism] is to economics what democracy is to government: a decent, if flawed, choice among many bad alternatives. Markets are consistent with our views of individual liberty. (2)

The typical critique leveled against capitalism is the oppression of some by people or nations who practice capitalism. It is argued that it is the economic system itself that generates the oppression. I take issue with this assumption. Let me illustrate by way of analogy.

Wheelan’s comparison to democracy is a good place to start. One of the central issues of the US civil rights movement in the 1950s and 1960s was voting rights. African Americans were systematically blocked from voting, even though on paper they had the right to vote. When Dr. King and other leaders confronted this issue there conceivably were two options available. One was to declare democracy evil and unjust. A new form of government could have been demanded. The second was to decide that democracy was a good thing that should be extended to all. That would mean confronting and reforming those institutions that were blocking the extension of that democracy. Of course, civil rights leaders opted for the second perspective. Now extend this logic to capitalism.

The United States has been entangled in inexcusable economic abuse of others over the years, especially since the US became a world power toward the end of the Nineteenth Century. One example is the relationship of the US to much of Latin America throughout the Twentieth Century. Many of these countries were formed under the oppressive Spanish hacienda system that concentrated obscene amounts of wealth in the hands of a few families, and placed the rest of the population in perpetual peasantry. There was tremendous oppression and injustice in these countries before the United States arrived on the scene. Instead of introducing free markets to these nations, the US propped up and reinforced the oppressive régimes. US military forces were used to suppress freedom movements. American corporations like United Fruit Company were allowed to maintain their own private military to prevent disruptions of their plantations by freedom movements. Working hand in hand, multi-national corporations, the US government and oppressive régimes cooperated to enhance each other’s vested interests. Key to keeping their control was the suppression of any move toward free market capitalism and the institutions that support it. Oppression was not caused by the imposition of capitalism. It was caused by the suppression of capitalism!

In Mid-Twentieth Century America, powerful interests were at work blocking the extension of democracy to African-Americans. The answer was to confront the powers that were blocking the extension of democracy. Powerful forces have long been blocking the extension of capitalism to those who have been denied the greatest engine of prosperity ever devised. The United States and Europe have been, and in some ways still are, part of the blockage. For instance, a great many quality food products could be grown in, and exported from, some of the most impoverished areas of Africa, but the US and Europe have subsidized their own food producers and erected tariffs to prevent free and open trade with these African nations. If true capitalism were allowed to function there were would be a temporary disruption in US and European markets while many Africans would quickly began to see increasing prosperity enabling them buy other goods made in places like the US and Europe. All nations would benefit in relatively short order. The problem is that powerful food production interests have the ability to use political power to block the functioning of markets. The answer is more capitalism not less.

Another fallacy is that capitalism is based on greed. Following the political analogy, this is like saying democracy is based on lust for power. We expect people who go into politics to work for the public good and not for their own aggrandizement. Do most politicians enter the political arena because of a vision to implement an agenda that they believe is for the public good? I think so. Are there often elements of ego and desire for power involved? You bet. Are there some for whom this is the primary motivation? Absolutely. However, overreaching with political power may work for a time but our democratic institutions have a way of snapping such excesses back into line eventually. Generally speaking, if you want to exercise power for an extended time you must advance the public good with your power.

Similarly, do most people in business desire to create quality goods and services, make profits, and then reinvest those profits to improve and expand production. I think so. Is an element of greed or selfishness present at times? Yes. Are there some people who are motivated primarily by greed? Absolutely. However, if the greedy do not make a quality product that consumers will buy, they may succeed in the short run but the market has a way of snapping them back.

Neither our republican democracy nor capitalism provides justice for all, all the time. Both aim to strike a balance between maximizing individual freedom and advancement of the common good. Both assume corrupt and corruptible human beings. The most desirable state of affairs is a society of people choosing of their own volition to engage in virtuous political and economic activity. When virtuous behavior is compulsory it ceases to be virtue. It merely becomes obedience.

If you create the freedom for people to behave virtuously, you also create the opportunity for immoral behavior and must be willing to acknowledge its inevitability. The best we can hope for in a free political or economic system are institutions that reward virtuous behavior and entice the less virtuous to at least contribute to the common good. The occasional failure of these arrangements to render a perfectly just outcome is the price of freedom. The great temptation when injustice does emerge is to grasp for utopian cures that will eradicate a specific injustice, yet these utopian “solutions” always have the effect of elevating either individual freedom and or the common good above the other, thus creating an even worse tyranny. Democracy and capitalism, as imperfect as they are, are by far the greatest freedom and prosperity enhancing tools known to humanity.

(1) Rodney Stark, The Victory of Reason: How Capitalism Led to Freedom, Capitalism and Western Success. New York: Random House, 2005, p. 56)

(2) Charles Wheelan, Naked Economics: Undressing the Dismal Science. New York: W. W. Norton and Company, 2002, p. 21)

(Note: I thought I would recommend a very good economics primer by a professor of mine at Eastern University, John Stapleford. The title of the book is Bulls, Bears and Golden Calves: Applying Christian Ethics in Economics. It is written to be a supplement to the major college economics textbooks. However, it reads just as well as a stand alone volume. I think it does a wonderful job of introducing basic economics and integrating Christian thought. I highly recommend it.)

Comments

[David Stanley]

I love this post Mike. In a society that seems to constantly berate our government, politicians, and economic systems, it's nice to have your voice in these kind of issues speaking a bit of level-headed wisdom into the mix.

[Michael Kruse]

Thanks Dave. I think there are plenty of things that need work in our culture. Where I often seem to differ is that many critics charge that we need to abandon certain institutions because of the problems we face. I argue that the political and economic institutions are reasonably sound ideas. It is the values of people (all of us) who feed into these institutions that need to change. That is not to deny that some systemic changes might be needed. I just don't think these are the fundamental problems.

[will spotts]

This is a good summary. (You address my concern -- primarily the confusion in the use of the word "capitalism" -- whether it includes government regulation to benefit specific, private entities. (This is often lauded and labeled capitalist, but I do not consider it good -- and I see that your definition excludes this.)

I absolutely that the utopian cures are not desirable. I think the attempt is to micro-manage results in the name of fairness -- but that necessarily creates instability in the system -- so that productive and unproductive (notice -- not the same thing as virtuous) things are equally rewarded.

[Michael Kruse]

"This is often lauded and labeled capitalist, but I do not consider it good.."

Bingo. Just as there is a potential by the state to abuse economic interests so is there a potential for powerful economic interests to abuse the state.

"I think the attempt is to micro-manage results in the name of fairness -- but that necessarily creates instability in the system -- so that productive and unproductive (notice -- not the same thing as virtuous) things are equally rewarded."

Right. A disproportionate interest individual "fairness" creates instability and disincentives that damage the total economy and ultimately the individuals. Disproportionate interest in aggregate economic grow without compassion and concern for individuals brings rebellion which ultimately damages the ability of the economy to grow. A polarity once again.