Everything that is considered unsatisfactory in present-day conditions is charged to capitalism. The atheists make capitalism responsible for the survival of Christianity. But the papal encyclicals blame capitalism for the spread of irreligion and the sins of our contemporaries, and the Protestant churches and sects are no less vigorous in their indictment of capitalist greed. Friends of peace consider our wars as an offshoot of capitalist imperialism. But the adamant nationalist warmongers of Germany and Italy indicted capitalism for its “bourgeois” pacifism, contrary to human nature and to the inescapable laws of history. Sermonizers accuse capitalism of disrupting the family and fostering licentiousness [immoral sexual activity]. But the “progressives” blame capitalism for the preservation of allegedly outdated rules of sexual restraint. Almost all men agree that poverty is an outcome of capitalism. On the other hand many deplore the fact that capitalism, in catering lavishly to the wishes of people intent upon getting more amenities and a better living, promotes a crass materialism. These contradictory accusations of capitalism cancel one another.
--Ludwig von Mises, From the Epilogue of Socialism: An Economic and Sociological Analysis, p. 481 (Liberty Fund page numbering). Originally published in 1947 as Planned Chaos.
Capitalism is probably one of the worst terms to use in any political or economic discussion because it has too many divergent and contradictory meanings. Dr. Mises’s quote certainly captures this problem. Capitalism is simultaneously pro-religion and anti-religion, pro-poverty and anti-poverty, pro-war and anti-war, and pro-sex and anti-sex. Of course, this is completely illogical—these arguments are at the logical level of me saying that I am dead and I am alive right now as I write this blog. What are we to make of this? I suppose that “capitalism” has become one of those terms that the author of a paper gets to define as he or she sees fit. Maybe I can get around this problem by citing a “textbook definition.” In Liberalism: The Classical Tradition, p. xxv, Mises defines capitalism as: “A society in which liberal principles are put into effect is usually called a capitalist society, and the condition of that society, capitalism.” Unfortunately, he used the term ‘liberal’ and that is such a misunderstood term as well. He took 160 pages plus and introduction to define what the term ‘liberal’ means in a classical sense. The term ‘liberal’ in modern usage is very different from its classical usage and so another source of confusion exists. Today’s usage implies that liberal means progressive or moderate socialism; in a classical sense liberal means literally “philosophy of freedom.” Moreover, if memory serves me correctly, the term “capitalism” was a Marxian invention intended to serve a political purpose by implying that capitalism is meant for the interests of the ‘class of capitalists’ only.
For this blog, my definition will be as follows: capitalism is a social philosophy that explains why social cooperation can exist without the need for government coercion or compulsion. Consequently, it is inherently anti-violence, anti-war, and anti-concentration of political power. Logically, this implies that it is a philosophy based on individual choice. Individuals specialize in different areas of production because nobody is alike; we are all different and being different is a good thing. No attempts are made in a capitalist system to try to make everyone equal. Specialization in production, or the division of labor, ensures that more output will be produced in total than could be produced if everyone tried to go it alone and be self-sufficient. The division of labor ensures that the standard of living tends to rise over time. Capitalism is the refutation of class warfare and other antagonistic social philosophies because everyone—factory owners, laborers, and consumers—benefits materially when voluntary exchange occurs. To earn profit, the factory owner must produce the goods that the consumers or the masses want and so the interests of the masses and the producers are aligned. In order to defend his or her profitable position, the factory owner must continually innovate, must continually upgrade his or her machines, and must continually find better ways to produce because if he or she fails to do so then someone else will. The factory owner is forced to invest in capital goods—and it is this process of capital accumulation that leads to higher real wages and so is in the interests of the workers.
I think that today many people despise capitalism because they think that capitalism means a rigged system meant to benefit the special interests of Wall Street bankers and the power elites. The idea that capitalism will lead to business monopolies that will then abuse and control the people is actually and old socialist argument that usually goes under the rubric of the ‘inevitability of socialism’ or ‘dialectical materialism.’
The argument seems to be that specialization and the division of labor, as anti-self-sufficiency ideas, lead to the creation of larger and larger firms producing a specific good. These larger firms have ‘concentrated’ an industry and represent a threat to the masses because now the firm can do all sorts of nasty things to the consumers and the consumers have no way of protecting themselves. The firm might price gouge, might sell the product to only preferred customers, might charge different prices to different groups of customers, might deny access of a product totally to a certain market and so on. By this chain of reasoning, capitalist production is going to lead to its own demise—concentration will transition from a system of social cooperation into a system of exploitation.
Let us suppose that for some reason General Motors becomes the monopoly car company in the world. I am not sure how that could possibly happen, but just play along and let me not have to write something stupid such as “company X” sells product to “customer Y.” In this scenario, the only producer of cars and trucks is General Motors—absolutely no alternative supplier of cars and trucks exists anywhere on Earth. And just to take this to the extreme, I will also assume no inter-planet trade with little green aliens from outer space. One objection is that “transportation services” can be provided by train, airplane, buses, walking etc. and General Motors does not hold a monopoly on these alternative modes of transportation. Customers, ticked off by all the evil price gouging and price discrimination of General Motors will switch to alternative modes of transportation. General Motors will suffer losses and be forced to liquidate, that is, to sell machines, equipment, etc., to the producers of trains, airplanes, and buses. General Motors will be punished for its anti-consumer policies by suffering losses and might even go out of business, assuming government bailouts are prohibited in our little model. Consequently, the threat of losses forces General Motors to adopt pro-consumer policies.
But what if General Motors were to somehow monopolize all forms of transportation—buses, cars, trucks, trains, even walking (by buying up all the sidewalks), boats, and so on. Now, we have more concentration in this model than before and I have taken out all substitute products. I am also assuming that transportation is an essential service—people will still want to get around and will not renounce transportation and stay in bed 24/7. Is the General Motors global monopoly of all transportation sources now able to abuse the masses of consumers and force them to pay ridiculously high prices? My suspicion is that the people can still break this monopoly and force General Motors to adopt a pro-consumer policy. General Motors can only I assume produce all the world’s transportation services by using both capital goods and labor. I am not going to assume some sort of Terminator world where cyborgs are running around. In other words, General Motors will have to buy both capital goods (machines, tools, equipment), and labor services in order to run this global monopoly. At the end of each time period (weekly, monthly, whatever) General Motors will have to pay out income to workers (wages) and dividends to shareholders. Now, our workers and shareholders are also consumers—they also buy lots of different goods and services, including of course transportation services. In the short run, our workers/dividend receivers are being mistreated by the price gouging and price discrimination policies of General Motors. Normally, at this point, we would be hearing cries for anti-trust laws and government interventions to stop General Motors’ evil behavior. But, it is important to remember that certain forces are working behind the scenes against our global monopolist. I see two major enemies working against General Motors: 1. all the consumers now have an interest to work against General Motors’s anti-consumer policies, and 2. depreciation of capital assets. I think that ultimately, these two sources, WITHOUT any government intervention, will break our global monopolist. Let me explain.
Depreciation of capital assets simply means that machines, tools, equipment and so on, used by the General Motors factories slowly wears out, breaks down, seizes up and needs to be replaced. Machines do not last forever; they are not immune to damage and destruction. How will our General Motors monopoly pay for these replacement machines, tools, and equipment? Now remember, General Motors is paying out most of its income as either dividends to shareholders or as labor income wages to its workers. This means that General Motors will have to go hat-in-hand to its workers and shareholders—the same people being discriminated against—and ask to borrow funds. To use more of the economic terms here, the workers and dividend receivers have been given ‘income.’ They can take this ‘income’ and either consume it (buy pens, milk, cars etc.) or SAVE it. The workers and shareholders become the SUPPLIERS of SAVED FUNDS. This is logical—Bob has a job; he gets a paycheck (income); and every week he puts $200 away for his retirement—he is SAVING funds every week. (The rest of his paycheck is spent on food, clothing etc. or simply ‘consumption.’) Our General Motors global monopoly is STILL DEPENDENT UPON SAVERS. General Motors still has to borrow these saved funds so that General Motors can go out and pay for all these capital investment projects—i.e., to buy new replacement machines, equipment and so on. Our angry consumers/dividend receivers/workers can pool all of their saved funds and not give them to General Motors but instead give them to new capitalists who promise to build new sidewalks, cars, buses, etc. at a non-price gouging price. In other words, General Motors, even as a global monopoly is still dependent upon savers to provide funds that it needs to buy new capital goods.
Now, how might General Motors get around this problem? I suppose that it could try to find a new source of saved funds. Remember, General Motors has insulted the world’s suppliers of saved funds—the workers who are saving funds for retirement will not lend these funds over to General Motors. There is, however, a source of artificial savings—a central bank. So, General Motors might run to a central bank to create these artificial savings through credit expansion. This is exactly what central banks do, by creating new money through credit expansion, they artificially supply new ‘savings’ to the loanable funds market. But, once again, as long as people are free to use whatever they want as money, (gold, silver, beaver pelts, whatever they want), these central bank run-arounds will not work. No one will accept these central bank notes (think inflation problem here) and so General Motors cannot use them to go out and buy new machines or labor. If General Motors wants to stay in business, it will have to buy new machines and equipment. To do so, it needs funds that are supplied by savers. But the savers are also the consumers (and workers, and receivers of dividends). Therefore, our global monopoly firm must comply with the needs of the consumers. Without a central bank providing artificial savings, General Motors, even as a global monopoly, must comply with the needs of the masses—the needs of the consumers.