What is Capitalism?

What is Capitalism?  It is easy to get sucked into a series of punditry, of over generalizations and over simplifications.  I’d like to address some of the myths surrounding Capitalism.

Myth: Capitalism is all about profit.

Fact: Capitalism is about profit.  But it is also about loss.  Capitalists believe in the power of the profit motive to drive resources to where they are most valued.  For example, if there are extra-normal profits in an industry, say personal computers, then profit-seeking entrepreneurs will enter the market, bringing with them additional resources, new innovations, & lower prices.  Likewise, if there are negative profits in an industry, say horse drawn carriages, then firms will exit the market, freeing those resources to be used elsewhere.

Myth: Capitalists are only cronies of the Big Corporations.

Fact: Capitalists are no more cronies of big corporations than any other group of economist.  A capitalist wants to see useful companies succeed just as much as they want useless corporations to fail.  For example, say Company A (a small company) makes personal computers and Company B (a major corporation) makes horse-drawn carriages.  A capitalist would say that Company A, since they make useful (aka productive) products will have success and Company B will falter since their product is no longer seen as useful.  A capitalist would argue to let Company B fail and let the resources it uses (land, labor, capital and entrepreneurial ability) be freed so they can be more productive.

Myth: Capitalists are fat cats.

Fact: Most of them are humans.  The rest of them are dead.

Myth: Capitalists believe everything should be privately-owned.

Fact: Not true.  Capitalists see there are some things that cannot be privately owned (lighthouses, clean air, fireworks, etc).  These things are called “public goods.”  They are non-rival (one person’s consumption of a good does not diminish another’s consumption of the good) or non-excludable (people cannot be prevented from using it).  These things capitalists know cannot be privately owned.

Of course, there are more, but this is all I can cover right now.  Tomorrow, I will look to correct the popular myths surrounding Socialism.

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3 Responses to What is Capitalism?

  1. thewickermandlux says:

    In the example about the horse drawn carriage you could have referenced a certain company that still rents out movies through old brick and mortar type set ups, they are the ones people want to see fail

  2. John says:

    Very nice, you know you are preaching to the choir here. However, we have just had a demonstration of why capitalism can’t deal with dishonesty using bureaucrats as enforcers. We all know that the dirty eatery or shoddy painter will fail due to market forces but when it comes to hedge funds & derivatives, the public must rely upon bank examiners and SEC dicks who are clearly asleep. In a pure system, people sleeping on the job are found and eliminated. We need to do the same in Washington. Why don’t we privatize? But wait, the bond rating firms WERE private…

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