What is Capitalism?

David Veksler

November 1, 2003

Part 1: Theory

What is capitalism?

The Encarta dictionary defines capitalism as “an economic system based on the private ownership of the means of production and distribution of goods, characterized by a free competitive market and motivation by profit.”  While private property, free markets, and profits are indeed important aspects of capitalism, they cannot exist without a legal and social framework that respects the freedom to engage in and to profit from productive activity.  Capitalism requires certain legal, social, technological, and cultural conditions in order to exist, and has significant social consequences on the society that adopts it.  Therefore, a comprehensive examination of capitalism must approach it as a social system, rather than an economic or political system.  The study of any society must start with its smallest minority – the individual.  In examining the nature and morality of capitalism therefore, the first question to ask is “What is man’s nature?” and “Is capitalism in accordance or in opposition to it?”

An examination of man’s nature begins with his relation to the rest of the world.  Reality is objective –it exists independently of anyone’s perception of it.  Thinking, wishing, and praying will not change it.  The function of man’s consciousness therefore, is to perceive and comprehend reality, not to alter it.  Because man cannot rely on instinct or any other supernatural method, reason is his sole means of reaching valid knowledge of reality.  Like all living organisms, man can be distinguished from non-living matter by the fact that in order to remain alive, he must act to attain the values needed for his survival (such as food, water, shelter, clothes.)  For animals, which operate entirely on the perceptual level, this guidance comes automatically through their facility of instinct.  Man does not have any automatic means of attaining the values needed for his life.  He may have urges (hunger, thirst, etc) – but he has no automatic means of fulfilling them.  As a conceptual being, his survival depends on correctly using reason to identify and attain the values necessary for his life.  As a volitional being, his thinking is neither automatic nor infallible, but is an active process that requires a constant focus on correctly identifying the facts of reality and applying them to achieve the values needed for his well-being.  Unlike the automatic function of animal instinct, man must choose to think, – and his thoughts will determine his actions, his values, his emotions, and his character.  The primary choice of every individual – to think or not– corresponds to his primary alternative – to live or not.  His own life is the primary moral value of each individual– whether he chooses to accept it or not.  Rational self-interest, or egoism is therefore the proper morality each man must adopt if he wishes to live – the application of his reason to achieve the values needed for his survival.  A man may choose not to think or to reject his life, but to the extent he does so, he chooses to act towards his death.

In relation to other men, each man is fundamentally independent – not because he can live on his own, but because he can only think with his own mind – there is no “collective consciousness.”  All creative effort, every invention in history, every advance in the process that created the wealthy, industrial society in which we now live in, and which distinguishes us from the proto-humans that lived short, violent lives in caves without the aid of tools or fire was created by the mental effort of individual men and women.  Sometimes they worked together, and their knowledge was increased by the work of predecessors, but each advance they made was their own.  The mind cannot be received, shared, or borrowed.  Every new idea in human history was a product of the work of an individual mind. 

In a human society – one that recognizes the independence of each man’s mind – each individual is an end in himself.  He owns his life, and no one else’s.  Other men are not his slaves, and he is not theirs.  They have no claim on his life or on the values he creates to maintain his life, and he has no claim on theirs.  In a free society, men can gain immense values from each other by voluntarily trading the values they create to mutual gain.  However, they can only create values if they are free to use their minds to exercise their creativity.  A man is better living off on his own than as a slave to his brothers.  Individualism is the recognition that each man is an independent, thinking being.  An individualist recognizes no authority higher than his of judgment of the truth, and no higher standard of value than his own life.  That which furthers his life is the good, while that which destroys it is evil.  Individualism is opposed to collectivism, the idea that man does not have an independent mind, does not own his life, and lives as a slave to his brothers.  Collectivism holds the evil idea that man’s life has value only so far as it servers the society, State, or race.

To pursue the values necessary for his life a society, man requires only one thing from others: freedom of action.  Freedom does not mean the freedom to act by permission of a state or a dictator, but the freedom to act however one pleases as long as one does not infringe on the same and equal freedom of others.  To live in a society, man requires rights to protect the actions necessary to sustain his own life.  All rights derive from a man’s right to his own life, including the rights to life, liberty, property, and the pursuit of happiness.  Thus, rights are moral principles defining his freedom of action in a social context.  Rights are inalienable – they are not given to man by any government and may not be morally infringed upon.  A man may have his rights violated by a criminal or a corrupt regime, but morally he remains in the right, and the dictator and criminal in the wrong.  Rights are not guarantees to things or obligation placed on others, but only guarantees to freedom from violence (the right to life), freedom of action (the right to liberty), and the results of those actions (the right to property).  The only obligations one’s rights impose on other men is to respect the same and equal rights of others – the freedom to be left alone. 

In a political context, freedom means solely the freedom from the initiation of force by other men.  Only by the initiation of force can man’s rights be violated.  Whether it is by a theft, force, fraud, or government censorship, man’s rights can be violated only by the initiation of force.  Because man’s life depends on the use of reason to achieve the values necessary for his life, the initiation of force renders his mind useless as a means of survival.  To live, man must achieve the values necessary to sustain his live.  To achieve values, man must be free to think and to act on his judgment.  To live, man must be free to think.  To be free to think, man must be free to act.  In the words of Ayn Rand, “Intellectual freedom cannot exist without political freedom; political freedom cannot exist without economic freedom; a free mind and a free market are corollaries.

Because force renders man’s mind useless, every man has the right to self-defense – and the right to use force to retaliate against those who initiate force against him.  However, no man – and no group of men – has the right to initiate force against any individual.  The initiation of force is a great moral evil, but the use of force in self-defense is a moral requisite.

In a state of nature, men are allowed complete discretion in the use of force in self-defense and in the pursuit of justice.  However, a lack of objective legal control over the use of force is anarchy: a perpetual state of civil war and warfare.  Government is the agency that enforces objective control of force by having a monopoly on the legal use of force.  This monopoly may be used for only one just purpose: to carry out justice against those who initiate force according to objectively predefined laws.  Thus, the sole function of government is to protect individual rights by defending its citizens and retaliating against those who initiate force.

Just as no individual has the right to initiate force against anyone, neither does any group of men, in any private or public capacity.  It is immoral to initiate force against any individual for any reason.  This includes the initiation of force for “the public good.”  The “public” is merely a collection of individuals, each possessing the same rights, and each being an end in himself.  Any attempt to benefit the “public good” is an immoral attempt to provide a benefit to one group of individuals at the expense of another.  In a free society, no individual benefits at the expense of another: men exchange the values they create in voluntary trade to mutual gain.

Therefore, the sole function of government is to protect individual rights by establishing a legal monopoly on the use of force.  It does so by three agencies: The police protect against domestic criminals, the courts settle honest disputes, enforce contracts, and punish criminal according to objectively predefined laws, and the military provides protection against foreign invaders.

To ensure that the government respects individual rights, and that politicians cannot turn the power of the police against any of its citizens, the power of government must be strictly defined according to objectively defined laws.  The rule of law has just purpose: to protect the rights of the individual.

The basic purpose of a government is enshrined in its constitution.  The purpose of a constitution is to explicitly define the valid powers of government.  Thus, a citizen remains to free to do whatever is not explicitly forbidden by law (in a proper legal system, that is solely the initiation of force), but an official of the state is only allowed to carry out what is explicitly permitted.  A capitalist government is not the mob rule of democracy, but a constitutionally limited federal republic.

The proper name for a social system based on political freedom is capitalism.  The essence of capitalism is not private property or market-based prices – these are the consequences, not the essentials of such a system.  A capitalist society is based on the recognition of individual rights, including property rights.  Under capitalism, all property is privately owned, and the state is separated from economics just as it is from religion.  Economically, capitalism is a system of laissez faire, or free markets.  What kind of society does capitalism create?

Part 2: Practice

Part 2 Coming Soon…








Anything that won't sell, I don't want to invent. Its sale is proof of utility, and utility is success.-Thomas Edison

Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others.-Ayn Rand

The first condition for the establishment of perpetual peace is the general adoption of the principles of laissez-faire capitalism.-Ludwig Von Mises           

            The meaning of economic freedom is this: that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society.-Ludwig Von Mises       

            All people, however fanatical they may be in their zeal to disparage and to fight capitalism, implicitly pay homage to it by passionately clamoring for the products it turns out.-Ludwig Von Mises

If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.-Milton Friedman

Every coercive monopoly was created by government intervention into the economy: by special privileges, such as franchises or subsidies, which closed the entry of competitors into a given field, by legislative action.-Ayn Rand

In a capitalist society, all human relationships are voluntary. Men are free to cooperate or not, to deal with one another or not, as their own individual judgments, convictions and interests dictate.-Ayn Rand

A competent and self-confident person is incapable of jealousy in anything. Jealousy is invariably a symptom of neurotic insecurity. -Robert A. Heinlein