Tags

“Capital itself is a moving contradiction, (in) that it presses to reduce labor time to a minimum, while it posits labor time as sole measure and source of wealth.”

– Karl Max (1858)

by C.L

It takes a word to spark controversy: capitalism. It’s a word so widely used and criticized that it seems redundant for someone to even write about it, yet here I am! The intention of this writing isn’t to focus on the technical but rather on the philosophical part, namely, capitalism’s rhetoric. Though some definitions may be necessary I am not trying to make a scientific contribution merely to raise a discussion.

Capitalism is an economic system that is preoccupied with the “creation of wealth and ownership of capitals and factors of production”, it is “a doctrine of economic thought that eventually laid the theoretical foundation for free market capitalism”.  Whereas free market is an economic system concerned with the “exchange of wealth, goods, and services”. Hence, these economic systems are different (yet both based on the law of supply and demand) they are correlated as one is an integral part of the other. In other words: free markets are a key component of capitalism. Despite their difference these two terms are so deeply associated that it seems common practice to use them interchangeably.

To clarify: there never was a purely capitalist economic system. Depending on the region you research there is a different “mix” of capitalistic and socialistic practices. In addition, there was never full blown market deregulation. When we refer to capitalist societies, there is actually significant government intervention in areas such as education, health care and transport. Consequently, there is some vagueness to the extent that an economy stops being capitalist and becomes a ‘mixed economy’.

Doing some research it got confusing to even pinpoint when capitalism came to be the predominant economic system of modern history. In any period, what is common is that all types of capitalism[1] imply that the economy is ‘market based’. The one thing consistent about capitalism and free market is the rhetoric. In the aftermath of the 2007 economic crisis advocates of capitalism and free market still talk passionately for markets regulating themselves, about the trickle down benefits of capitalism and the minimum role a government should have in regulating markets.

At the heart of the free market is irrefutably the “Invisible Hand”[2]. It is a metaphor used to describe how: “free individuals operating in a free economy, making decisions focused on their own self interest, logically take actions that result in benefiting society as a whole”. Ergo, when you have self interested choices in a free market an efficient economy emerges. If you leave traders to compete with one another, markets are guided to positive outcome as if by an invisible hand.

In reality, what advocates of capitalism and free market argue is that markets are NOT perfect[3], but that they work better with minimum government intervention. So, by its own nature, capitalism has limitations, which in return means that some level of regulation and legal protection is necessary. Moreover, the fact of the contemporary world is that Politics and markets are irreversibly intertwined; Politics shape markets and vice-versa. Furthermore, “economies can take a long time to reach their equilibrium and may even stall along the way which is why governments usually end up taking things in more visible hands instead”. Likewise, in periods of economic crises advocates arguing that large scale government intervention and regulation of the economy is neither necessary nor beneficial change the rhetoric to the obligation of the state to intervene and “save” the major conglomerates, albeit the markets. In addition, there is the issue of monopolies and monopsonies that capitalism, and by extend the free market, seems to exacerbate.

“The point to grasp is that the market is not the product of the invisible hand but an institution created and nurtured by a visible hand under the rule of law”, so why do we keep insisting in an economic system that seems to be fundamentally flawed?

[1] There are different types of capitalism which can produce completely different outcomes.

[2]The term “Invisible Hand” was coined by Adam Smith to explain exchange, it was only later on that came to be associated with markets regulating themselves.

[3] There is no perfect competition/information, consumers are irrational, there is asymmetric information, conspicuous consumption and expensive goods are a sign of wealth and status.