Capitalism

There’s been a lot of talk about the differences between capitalism and socialism (or democratic socialism or communism, etc.). Unfortunately a concrete definition of those terms is rarely part of the discussion, and even when it is the definitions that are typically used are too vague to be really uses. For example:

An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

or

Capitalism is an economic system in which private individuals or businesses own capital goods. The production of goods and services is based on supply and demand in the general market—known as a market economy—rather than through central planning—known as a planned economy or command economy

When people criticize capitalism I don’t think they’re often saying that there’s anything fundamentally wrong with an economic system that allocated scarce resources based on supply and demand, or one that allows private ownership. What we really mean when we talk about capitalism is a subset of these broader descriptions of a market based economy. It just happens that the only kind of market based economy that exists right now is capitalism.

If we’re going to try and identify problems with capitalism I’d start with the fact that it’s the laziest way to “design” an economy. Or more accurately, it’s what happens when we don’t put in any effort to design anything at all. The key feature and definition of capitalism is that it’s:

An economic system that places little or no prior restrictions on what kinds of contracts can be created

If we don’t put in any laws or social norms regulating what we can agree to, then once we have a country where we can make and uphold contracts, we’ll have capitalism. And that’s because when there’s no restrictions on what can be agreed on in a contract, it means whatever parties write and agree to the initial contract has *enormous* power and leverage. In almost every case the first parties to an economic contract in a capitalist society are the entrepreneur that needs funding and the investor (or capitalist) that’s providing it. Generally these two parties end up accruing most of the gains that are the potential result of any company or deal that comes out of their agreement. And that’s just because they’re the first ones to have any say, and we don’t put any restrictions on them.

The limited liability corporation is really the greatest example of this. It’s like a one-way valve that only allows profits to flow through to investors, but prevents them from ever having to absorb losses. There’s a lot of benefits to this kind of system, but it clearly puts the investor first, and everyone else (including every other person in society) second.

Well, maybe some restrictions, we generally won’t allow or enforce contracts that require something illegal like murder or theft. And as time has gone on we’ve introduced some worker protections like (mostly) preventing child labor, and protecting some disadvantaged classes, etc. So the US isn’t 100% perfect capitalism, we’ve decided to put some pre-existing limitations on what investors can agree to or require.

I can imagine that we might eventually decide that giving capitalists (or investors or landlords, etc.) nearly unfettered power to set any initial rules, isn’t a great idea. For example, I could imagine a country deciding to say that all companies formed might have to:

* Give at least 50% ownership to everyone that works for the company, proportional to the number of hours worked (or wages paid, or by seniority or whatever)
* Give the government some percentage ownership in the profits of the company, or otherwise explicitly require the company to pay for the benefits they use. This is basically what taxes are, but they’re often described as unfair and unnecessary fees that are burden instead of a just requirement
* Require that some group of initial investors always has to have financial liability. There can never be a limited liability corp where all losses never accrue to *anyone*. Hopefully this would reduce risk taking?
* Require *legal* liability to explicitly rest with investors who own over a certain percentage of the company. If you own enough that you have influence over the choice the company makes, then you’re legally liable when those choices are criminal.

I’m not sure if any of those are good ideas, but they’re the kinds of restrictions or requirements that are absent in our current market based economy. We have capitalism because we allow for, and enforce, contracts – but we have essentially no restrictions on what can be in those contracts. Countries absolutely do have the ability to limit what kinds of contracts/businesses can be created, set up initial/pre-existing conditions on them, and we’ve seen different experiments and attempts at this around the world and in recent history. Capitalism is the first, easiest, and arguably laziest, economic system once we’re enforcing contracts. But that certainly doesn’t mean that it has to be the best, or the worst.