What Is Capitalism?

By Norm Robins

An old joke has two Soviet citizens, a communist and a non-communist, walking in Red Square and chatting. The non-communist asks the communist what is the difference between capitalism and communism? The communist says, “Capitalism is man’s inhumanity to man; communism is the other way around.” Funny as it is, the joke explains nothing. We need to dig deeper.

Economists teach that the means of production include land, labor, and capital. One can’t produce without a place to do it. That’s the land component. People produce, so labor is needed. If we are not to scratch a living out of the soil with our fingernails, we need capital to help us do it. Capital makes labor more productive. A shovel is capital. A backhoe is more capital. A huge dragline excavator is a very large amount of capital.

Where does capital come from? When we produce something, there are two and only two things we can do with it. We can consume it or save it. Some saving, like gold bars stashed under a mattress, is not productive. However, much saving finds its way into capital, which is productive by definition. Thus, capital comes from saving.

That’s capital, but what is capitalism? One dictionary says capitalism is an economic system in which the means of production and distribution are privately owned, and development occurs through the accumulation and reinvestment of profits gained in a free market. The same dictionary defines communism as an economic system characterized by the collective ownership of property and by the organization of labor for the common advantage of all members. Notice, one definition tells us where the capital comes from, but the other does not. Under capitalism, capital mostly comes from reinvested profits. How is capital accumulated when property is collectively owned?

Joseph Stalin knew where capital comes from. In any economic system, capital comes from foregoing consumption. To pursue his industrialization goals, Stalin forced Soviet citizens to forego food consumption. One consequence was the Holodomor, a word combining the words “starvation” and “to cause death.” At least 4 million Ukrainians starved to death in the early 1930s, in part because the collectivized farms produced less, but also because Stalin confiscated much of what produced to support other purposes. New York Times correspondent Walter Duranty called Ukrainian wheat “Stalin’s gold” because it was exported, even while people were starving, to obtain funds for Stalin’s industrialization goals.

A case can be made that the capitalist versus communist distinction is a distraction. If we distinguish capitalism by the accumulation of capital, Stalin was as much a capitalist as J.P. Morgan. His policies that restricted consumption nationally were extremely costly, but they were effective at accumulating industrial capital. The additional industrial capacity modernized the Soviet Union and made it a world power that soon would effectively battle Hitler’s Germany.

A distinction that is not a distraction is whether capital accumulates through coercion or not.
Most would not describe Stalin as a capitalist because he accumulated capital through coercion, indeed by confiscating much of it. In a capitalist economy, businesses cannot coerce people who save to provide them with capital. Rather, businesses must compete for capital, and savers deploy their capital voluntarily, as they choose.

There are two basic economy types, market and command. All real world economies are a blend of the two. In a market economy, individuals privately own property, and each individual is free to use or trade his or her property as desired. In a command economy, the commander, usually government, decides how property may be used or traded. A key question for all societies is how much to use the market and how much to use command.

Stalin accumulated capital mostly using command; J.P. Morgan accumulated capital mostly using the market. Stalin’s rapid capital accumulation illustrates the usefulness of command, but the injustice experienced by so many powerfully illustrates why the use of coercion is not always best. J.P. Morgan was able to get so many people to allocate their saving to him voluntarily, he was able to consolidate the steel industry and form the first billion dollar corporation, U.S. Steel, in 1901. The ability to fund a large industry without coercion illustrates the usefulness of the market, but the fact that capitalists like JP Morgan can abuse the power provided by their wealth illustrates why complementing the market with some command is useful. The U.S. government eventually broke J.P. Morgan’s company into three companies, a coercive, command anti-trust action designed to limit the power of any one company.

In practice, capitalism is never purely free market. However, capitalism tempered by some command is a system that allows capital to accumulate with minimal coercion. The resulting additional productivity has greatly enhanced average well-being in capitalist oriented economies.

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