Capitalism: A Basic Understanding
An attempt to clear misconceptions and provide understanding
“It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest.”
— The Wealth of Nations, Adam Smith
Capitalism has been misunderstood, and devilized since the dawn of humanity. Christians and Muslims declared the pursuit of wealth as intrinsically in opposition to a moral life. Kuber in India, Midas in Greece, ancient cultures are littered with stories and myths of the rich and overconfident who pay the most expensive price at the end. However, despite all of this most of human history is just a very small powerful individuals ruling over poor masses, and a microscopic percentage of these leaders were actually lavish. It was the birth of capitalism, starting in the Dutch Republic, which created mass wealth for the first time in human history. Furthermore, this mass wealth has created more innovations leading to a higher standard of living across all classes. A working class individual living in a industrialized country has a higher standard of living than most kings and queens of the past.
We are living in the wealthiest era of humanity, its only getting richer, and people’s living conditions getting better faster because of the expansion of capitalism.
All economic systems operate under scarcity, what separates them is how they answer the three economic questions. What is being produced, how is it produced, and for who is it for.
Capitalism’s answers are:
- What: Products or services demanded by the market (people)
- How: Produced in the most efficient way which maximizes profits
- Who: Produced for the market demand (people who need/want)
Thus, by producing products and services which people need capitalism satisfies and improves the lives of individuals. Furthermore, by improving the production process through specialization capitalism uses resources efficiently to satisfy needs. If a capitalist entity fails to provide for market demand or is inefficient compared to its competitors it will fail. Thus, through natural selection only the entities which satisfy demand most efficiently survive or thrive. The power in capitalism lies with the market which are just people. Ultimately, creating a highly efficient system of managing resources under scarcity which improves the lives of consumers.
The makers of tooth paste do not make it because of benevolence, but because their is a demand for it, and by acting in their self-interest the makers of tooth past improve the dental health of others. This is what Adam Smith called the invisible hand. Additionally, competition causes all the makers of tooth paste to continuously strive to provide more value to consumers than everyone else or else risk extinction.
No system is without flaws; thus, it is important to now study the short comings of capitalism. It is rare but sometimes one business is so successful and dominating that it becomes a monopoly, which causes a break down in the capitalist system which relies on competition to succeed. In a case like this government is needed to restore competitive balance. However, sometimes government gets too involved and crony capitalism rises. This is a phenomenon very evident in recent times with lobby groups throwing big money at the worlds capitals, and certain firms keeping a hand in the pockets of politicians along with lips in their ears. This can cause monopolies, and oligopolies to gain further power and completely rip the market.
However, it is rare for monopolies to really survive long term. They are by their very inefficient nature vulnerable to change. Furthermore, firms have a vested interest in making their employees efficient; thus, they must study on best methods of doing so. This has resulted in improvements as firms realized that a happy person will be most efficient. This is one of the reason why capitalists oppose slavery, as violence is a worse incentive than money, and grossly inefficient.
In the future an exploration into more facets of capitalism, including but not limited to the multiplier effect, labor market, economic policies, and fiscal policies must be undertaken.
However, this essay must be concluded for now. Capitalism’s ability create wealth is an interesting and misunderstood topic which deserves the justice of details and study. This basic understanding is a good start; however, there are so many gifts of this fascinating system.
