Introduction: It is difficult to think of terms in the realm of political economy that are less understood and more controversial than capital, capitalist, and capitalism. For the political right, these terms connote liberty, prosperity, opportunity, and the American Dream. For the political left, these words represent evil and injustice. Indeed, so vehement and hate-filled have been the condemnations of capital, capitalist, and capitalism over the years that the words themselves have been stripped of their objective lexicographical definitions. This hinders honest dialogue and renders rational debate nearly impossible. It seems that libertarians and conservatives on the one side, and liberals and other statists on the other, inhabit parallel mental universes in which the same words represent vastly different concepts.
An erstwhile socialist, I now am firmly in the camp of those who think these three c-words are honorable and worth vigorously defending against the ignorant and/or malicious attacks against them. The political left is comprised of individuals who, for a combination of psychological and ideological reasons, crave power over others. Seeking relentlessly to expand government power over individual lives, liberty, and property, leftists employ the scurrilous tactics of caricature, distortion, and Orwellian mutilation to disgrace these terms so that they can more effectively advance their agenda.
What I propose to do in the following 6-part series is to rescue and rehabilitate these three important terms from those who wish to permanently discredit them. Preventing the left from neutralizing our verbal tools by redefining beyond recognition is a necessary task in the struggle to halt their attempts to replace individual rights and liberty, and its economic corollary of the “invisible hand” described by Adam Smith with the heavy hand of government tyranny implemented by taking control over human economic activity.
Let’s get the easy term out of the way first. In fact, since capital is the root of the other two terms, it is the logical starting point anyhow.
Capital. “…In political economy, the product of industry which remains…after a portion of what is produced is consumed, and which is still available for further production.”—Webster1
“Cash or goods used to generate income”—InvestorWords.com2
Compared to capitalists and capitalism, capital is a term that should be relatively uncontroversial and the easiest for us to agree upon an objective definition for it. In its fundamental economic sense, capital is simply one of the factors of production—along with land (natural resources) and labor—that entrepreneurs or managers (whether singular or plural, private or public sector) employ in the production of goods and services. Capital is, or at least should be, a value-free word. It is no more “good” or “evil” than nouns like “rock” or “river,”3 or, more to the point, like “tools,” “machines,” or “equipment”—the various types of capital goods of which capital itself is the more liquid, elemental form.
Whether we are talking about financial capital or the capital goods into which financial capital is translated, capital comes from wealth that has been produced but not consumed. Economists sometimes refer to capital as the “produced means of production.” The classic classroom example of capital is the farmer’s seed corn—the part of this year’s crop that isn’t consumed, but saved for producing future crops. Capital is the produced wealth that is saved so that it can be employed in producing goods and services for future consumption.
In a free society, capital comes either from the savings of individuals or the profits of business enterprises—in either case, from the surplus of income over expenses. In a society where the state controls some or all of the decisions about what and how much is produced, the state appropriates wealth from the private sector to obtain the capital for state-financed projects.
Regardless of the governmental system under which humans live, until we learn where to find daily manna or how to feed over 5,000 people with a few loaves and fishes, it will remain true that every society, without exception, needs capital in order to survive and prosper. It doesn’t matter whether one favors socialism or free markets or some mixture of the two; it is an inescapable fact that people either accumulate and use capital, or languish in economic primitivism and poverty.
The old Marxian notion that capital is the enemy of working people is belied by a simple, undeniable truism: “A country becomes more prosperous in proportion to the rise in the invested capital per capita.”4 Without capital at their disposal, workers’ productivity remains low. The historical record shows that increases in wages and standards of living rise are driven by increases in the productivity of labor. In turn, the primary driver of the productivity of labor is how much capital labor has at its disposal.5
A ditch-digger who uses a backhoe not only moves more dirt per hour and consequently receives more pay, but he also is freed from the backbreaking exertions that a worker equipped only with a shovel must endure. Capital liberates labor from many forms of drudgery. A socialist regime may enforce strict economic equality and so fulfill a socialist theory of justice, but no government can legislate or decree wealth without capital and capital goods to multiply the productivity of labor, any more than a human being can travel at 75 mph or lift a ton of matter using only his own power.
Many critics believe that capital and labor are irreconcilable enemies—that capital evilly exploits labor and keeps workers poor. How then, does one explain the fact that the countries that have the highest capital per capita invested are the countries where the standards of living are highest or whose economies are growing at the fastest rates? The poorest countries are not those where capital is abundant, but where it is most scarce. Every year I break the “bad news” to my Econ 101 students that we Americans have been “exploited” by capital to a greater extent than any other people in the history of the world. It is tragicomic that leftist professors apparently can’t see the irony and idiocy of teaching their students that capital is rapacious, dehumanizing, and destructive when, in fact, more capital has been invested in the USA than any other country in the world and that the USA also happens to be the most affluent country in history.
Poor people in Third World countries don’t share American professors’ disdain for capital; on the contrary, although they may not understand the underlying economics, their daily hope and prayer is that they themselves some day will be “exploited” (enriched) even one-tenth as much as we have been.
Just as foreign capital helped to make us the richest country in the world, so today the astounding explosion of wealth in China is turbo-charged by the jet fuel of FDI (Foreign Direct Investment), i.e., foreign capital, added to China’s considerable supply of domestically accumulated capital. Although China is still nominally a Communist state and far from being a free society, their Communist Party leaders are unmistakably—indeed, emphatically—pro-capital. This stands in marked contrast to Barack Obama’s hostility to capital formation as manifested in his hostility to profits, one of the major sources of capital accumulation. Unfortunately, the hostility and misunderstanding that surround the terms capitalist and capitalism often rubs off on the neutral, objective term capital. The remainder of this series will try to rescue and rehabilitate those two tortured terms.
1 Webster’s Deluxe Unabridged Dictionary, Second Edition, (c) Simon & Schuster, 1983, p. 268.
3 Craig Columbus & Mark W. Hendrickson, God & Man on Wall Street—The Conscience of Capitalism; New York; Brick Tower Press, 2012, p. 18.
4 Ludwig von Mises, Economic Policy, South Bend: Regnery/Gateway, Inc., 1979; p. 14.
5 F.A. Harper, Why Wages Rise, Irvington, NY: The Foundation for Economic Education, Inc., 1957; pp. 14-34.
The Moral Liberal Contributing Editor, Mark Hendrickson, is Adjunct Professor of Economics at Grove City College, where he has taught since 2004. He is also a Fellow for Economic and Social Policy with The Center for Vision & Values, for which he writes regular commentaries. He is a contributing editor of The St. Croix Review, sits on the Council of Scholars of the Commonwealth Foundation, and writes the weekly “No Panaceas” column in the Op/Ed section of Forbes.com. Mark’s published books include: America’s March Toward Communism (1987); The Morality of Capitalism (editor, 1992); Famous But Nameless: Inspiration and Lessons from the Bible’s Anonymous Characters (2011); and God and Man on Wall Street: The Conscience of Capitalism (with Craig Columbus, 2012). Mark Hendrickson’s Archives at The Moral Liberal.