Capitalism began to emerge in the late Middle Ages, when people joined together for example to pay for a ship voyage to trade goods. When the ship returned, the goods received were sold and after costs were paid the investors split up whatever profits were made. Their investment was called the “capital,” from which comes the word “capitalism.” Each person’s certificate of investment was has “stock,” and his profit was his “return on investment.”
Before capitalism there had been buying and selling for many thousand years. Individual merchants had to use their own money or what they could borrow to obtain the capital they needed to engage in trade or production. Capitalism allowed for larger projects by gathering a larger amount of money. Before capitalism, large projects had to be financed by kings.
If there is a need to be met and an expectation of profit, and the provider issues shares to investors with the promise to share the profits with them, that is capitalism. The combination of capitalism along with the continuation of single-owner businesses is called the “free enterprise system.”
The “free enterprise system” is suitable for needs where a profit can be made. If there is no expectation of profit, such as a building a public road, then the needs would have to be provided for some other way, perhaps as a gift by a rich donor, but today more likely by citizens combining their funds through a taxation system so that their government representatives would allocate the money to the need.
As capitalism developed, it took on other features. One was the recognizing that it was advantageous to have free trade between countries: Adam Smith opined that countries will benefit if they buy certain products from countries that can produce them most efficiently rather than produce them themselves. That meant that a country would benefit by getting cheaper products, even if if it spent cash to get them. (This replaced mercantilism, in which countries felt they had to get more from other countries than they gave to them.)
Another feature was using the market for pricing. The concept was that price should not be based only on costs of production, but also on how much people are willing to pay. The intersection of what people are willing to pay with what a company can produce it for becomes the market price. This interplay is called “supply and demand.” This led to one of capitalism’s greatest strengths: competition. If a company produced a better product, or offered a lower price, people would be more likely to buy from that company rather than another. By competing to meet the actual needs of consumers, capitalism could claim that it provided the most efficient use of investment.
There are also some problems that seem to recur in capitalism. Its history has seen constant cycles of recessions and recovery. When there is a recession, jobs are lost and people’s needs are not met. Another problem has been that the pursuit of profit can be at the expense of public health. For example, tobacco companies’ business plan depends upon consumers acquiring an addiction to smoking. More recently, Big Pharma reaped the benefit of people in pain who became addicted to opioids.
In my view, socialism arose in the 1800’s due to dissatisfaction with the down-sides of capitalism. I define socialism this way: In socialism, production targets and prices are set by central planning, not by consumer demand. The money needed to produce things is provided by public money (raised by taxes) so there are no investors and no profit to share. There is no competition so there is no impulse to improve goods in order to attract customers. There is no reward for the producer to produce more than the central planners request, so shortages can occur.
In the 1880’s, Otto von Bismarck in Germany noted that workers were being attracted to socialism because they were experiencing some of the down-sides of capitalism. He countered this by creating social welfare programs, which would make sure people were cared for when there was unemployment, and that basic needs would be provided for people when they could not afford them during the period while waiting for a recovery. Within decades, social welfare schemes became common in western countries.
I feel, with Bismarck, that robust social welfare is the most powerful antidote against socialism. (I realize that some people feel the opposite, that social welfare is the same as socialism, or is the beginning of a path to socialism.) No one doubts the credentials of Friedrich Hayak, the great proponent of capitalism and opponent of central planning. Yet he emphatically states that it is incumbent upon a capitalist system to have robust social welfare programs. In fact, I believe a robust social welfare system depends upon a successful capitalist economy.
The American economy is a mixed economy, which includes capitalism where appropriate, public utilities where appropriate, and permits co-ops where people are underserved or where the profit motive does not incentivize businesses to meet their needs.
As capitalism developed, other institutions emerged to support it. One is financial services, so that when companies do not issue stock they can borrow from a bank. Another is providing places where people can buy and sell each other’s stocks.
I support capitalism as the best way to continue to produce prosperity, and when I see socialism being used where capitalism should be used I will oppose it. However, I do not oppose social welfare.
As we continue to tweak capitalism, I find it helpful to analyze its components:
1.Cost of supplies
2. Cost of labor, including subcontractors (like ad agencies)
3. cost of infrastructure (roads, utilities)
4. cost of using the commons (air, soil)
5. dividing up the profits
When all these have been monetized accurately, the best decisions can be made. Here are some comments on each.
1.Cost of supplies. Companies do try hard to bargain and to get good prices.
2. Labor. Companies do bargain with salaried employees. For hourly employees, there needs to be a price setting mechanism. I think collective bargaining is the best approach. But now because only 6 per cent of the work force is unionized, the fall-back position is the minimum wage. To me, having a minimum wage is a confession that a price setting mechanism is not working. For example, if the GDP goes up but the lowest wages do not, that means the price-setting mechanism is not working. It is unrealistic to suppose that management would increase wages out of good feelings, any more than a supplier would lower prices out of good feelings. It has to happen through negotiating. Unless unions can make a comeback, the other way to arrive at correct wages would be to pay a wage that does not require the community to subsidize the workers. A wage that requires the community to make sure you have workers could not be called a good “business plan.”
3. Infrastructure includes some needs (like internet access) provided by private companies, and some (like water supply) contributed to by all who use it, usually administered by public officials. Under this topic I include all taxes.
4. The commons. During most of capitalism’s history, it was assumed that the commons could be used for free, but now I believe that it ought to be monetized because it is susceptible to degradation. That is, just like companies are used to paying a fee to get their refuse from production collected, they also could be asked to pay fees when production puts pollutants into the air or water.
5. Dividing the profits. It is usually the board of directors who has the final call on how much net profit will be reinvested and how much will be given to the investors. In recent years there has been talk of expanding the definition of who shall be regarded as a stakeholder. The view of Alan Greenspan of the Chicago school, which was that the only responsibility of a company is to make profit for the stockholders, is being expanded by some CEO’s who consider that the community, the workers, and the environment should also be seen as part of the corporation’s responsibility. I am in favor of this trend.
Should the government have a role in the workings of US capitalism?
A.NON-CONTROVERSIAL LIST. The following list, I believe, consists of ways that government is now involved in business that are not controversial and are widely accepted in our society:
It requires corporations to provide financial reports so that investors are not misled.
It provides the mechanism for registering new businesses.
It (ideally) fosters competition by breaking up monopolies.
It imposes tariffs with the intent of providing a level playing field for American-based companies.It has led in creating a rules-based world trading order.
It sometimes bails out companies.
Since World War Two it has taken on Britain’s role in protecting sea-lanes.
It has assisted business by taking actions against pirates (starting by fighting Tripoli early on).
It protects consumes by setting safety standards and inspecting products (like beef).
It provides a massive system of assembling statistics
It spends public money on Research when there is no expectation of immediate profit
B. CONTROVERSIAL LIST. I think the following list are areas where there are differences of opinion about whether government should be involved, or to what extent it should be involved:
Should it set rules for reducing dangers to the public (like too much mercury from smoke)?
Should it impose parameters for prices and wages?
Should it impose quotas on boards of directors for under-represented groups?
Should it determine who should be included on boards of directors?
Should it mandate Pay for leaves of absence?
Should it demand that businesses preserve job openings for those on temporary military duty?
Should government interfere with market forces by subsidizing private business, whether it be for a long or a short time? Should it instruct states to subsidize particular new businesses?
Should it tell foreign countries how much of a given product they have to buy?
Should it tell corporations what percentage of their product needs to be made in America?
Should it interfere with supply chains?
Should it refuse to allow trade in items that could allow another company to spy on us?
Should the profit from selling shares be taxed at a lower rate than other income?
To what extent should govt influence the market by taxes and money supply?
I believe this last list is worthy of researching together and sharing opinions about. Also you might want to refer to my page on adhering to the constitution.
CRITICISMS. Some criticisms of capitalism are I believe unfair. These problems must be solved, but they will not be solved by changing to another system. Here are some examples.
1) The Wage Gap. Thomas Pikkety has demonstrated that in every system, wealth goes up to there the power is.
2) Pollution. Our industries do create pollution. The pollution produced by the Soviet Union and its satellites was just as bad or worse.
I invite you to send your thoughts to me by messaging on my facebook page, Jim Found
I am able to incorporate additional ideas onto the page.
On this website, you can to the home page at any time by clicking on the header “Personal Growth Ministries.” There is also a search box under the header in which you may type any word or phrase to see if I have written something about it. If you don’t see the search box, click on the three parallel bars in the upper right hand corner.
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INTERESTING LINKS ABOUT ECONOMICS
Nick Hanauer gives TED talk about increasing cooperation and incorporating stakeholders