What is capitalism?

These days, I hear a lot of people—including people I’ve come across personally—saying they’re against “capitalism.” So I was interested in getting a better understanding of what that word means. Here’s where I’ve gotten so far. (This is all based on Wikipedia, but I’m trying to think it through myself to my own satisfaction.)

1. Capitalism as private property

Initially, I would have been inclined to equate capitalism with a system of private property. In other words, in a capitalist society, goods are owned by private parties, parties who acquired these goods either through some sort of initial acquisition or through voluntary exchange.

This would contrast with a socialist society, where goods are owned by the state. Or you could have mixed systems, e.g. the state owns key industries, but not houses and cars. There are also many other possible systems, e.g. all land is owned by the Church, or by the society’s tallest redhead. 

Aside: What does it mean to “own” something? Let’s say you count as owning something when you are generally agreed to have the right to use it and prevent others from using it, as well as the right to transfer those use- and transfer-rights to others. (Note: this means that under all systems, ownership is a product of social consensus. But this doesn’t make all systems socialist, because the consensus might not approve of the idea of society collectively doing whatever it wanted with particular pieces of property.)

2. Why private property isn’t enough

But on reflection, I no longer think that capitalism is equivalent to private property.

For example, let’s say you have a society where you have a bunch of individual hunter-gatherers, and everyone owns what they hunt/gather. This society would be organized in terms of private property, but I don’t think it would count as “capitalist,” as that term is generally used.

Maybe the difference is that the hunter-gatherer society is probably relatively equal, in material terms, whereas capitalist societies are divided into a rich capitalist class and a poor working class? I don’t think so. Private property plus inequality still don’t seem sufficient to make a society “capitalist.” There were rich people and poor people in Roman times, but “capitalism” is supposed to refer to a system that only came about in the last few hundred years. Nor does inequality seem necessary for capitalism: I think in principle you could have a capitalist society where everyone was equal, e.g. everyone both works for some business and also owns their business that employs other people.

3. Does etymology help?

Maybe it would help to ask: why is it called “capitalism”? What is “capital”?

Capital, according to Wikipedia, means “human-created assets.” And an asset, in turn, is a resource that can be used to produce positive economic value. Tools and machines count as capital, because they can be used to make things like cars, which can be sold for money. Money itself also counts as capital, because you can invest it by buying land and labor that can be used to make cars that can be sold for money. A capitalist is an owner of capital.

Would there be capital in the hunter-gatherer society? Well, if they’re not exchanging anything, then maybe their goods don’t count as having economic value. What about in Roman times? Yes, there were tools and machines that people used to make things with economic value, like axes and scythes and stuff. So the mere presence of capital also doesn’t seem like enough to make a society count as capitalist.

4. Wage labor, capital accumulation, and productivity

Wikipedia mentions two other ideas that seem important: capital accumulation and wage labor.

Capital accumulation means getting more and more capital. You start with some money, which you use to buy factories and workers, which produce things to sell at a profit, which enables you to buy even more factories and workers, and so on. Wage labor means selling your labor for an agreed wage or salary, where your employer gets to keep whatever your labor produced.

But I think the key missing piece is productivity. During the Industrial Revolution, productivity went way up: people invented new machines and methods that enabled a lot more goods to be produced per hour of labor. And because of wage labor, this meant that a given hour of labor could end up generating a lot of profit for the employer (who, again, got to own all the products of the labor), without the worker getting in on the action. And because this profit was also itself capital that could be used to generate even more wealth, this meant that employers could keep getting richer and richer.

This seems like it’s getting at the kind of thing critics of capitalism don’t like. They don’t like that, even though the Industrial Revolution enabled society to create a lot more wealth, the legal structure of private property enabled a lot of this wealth to go to a minority of people, who could get richer and richer while others might remain poor or even get poorer. And there were two things that add insult to injury. First, the poor are the very people whose labor is producing the wealth. And second, because the inequality is generated under a system of private property and voluntary exchange, it can seem fair in a way that inequality generated in other ways—say, lords using their political power to seize people’s wealth—would not.

The hunter-gatherer society isn’t capitalist, then, because there’s no capital accumulation or wage labor, and so the offensive rise in inequality isn’t possible. Roman times weren’t capitalist either, because while there was capital, productivity was low enough that not much capital accumulation through exploitative wage labor was possible. But once the Industrial Revolution starts, we’re off to the races.

So let’s say: a society is capitalist to the extent that it has private property and enough productivity to enable owners of capital to accumulate a lot more of it by employing wage labor.

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