The Nature of Capitalism: A Politico-Economic System Based on Individual Rights

What is Capitalism? Is it purely an economic system? Or: is it exclusively a political system? Is it a social and ideological system?

I am not supposed to discuss this matter since I have this preconceived notion that everybody knows that capitalism- or its opposite, socialism or communism- are both political and economic systems. To use a more specific term, capitalism is a politico-economic system. Also, it is a social system.

One of the most ignorant, ridiculous claims in our age is that capitalism is purely an economic system- that it is not a political system or a social system. I was engaged in a series of online debates in the past in which some people, who unfortunately call themselves ‘advocates of economic liberalism’, made this same ridiculous claim. They argued that capitalism is purely an economic system and they rejected the notion that is a politico-economic system.

The problem with the mindset or process of thought of these people is that they don’t clearly understand the conceptual foundation of capitalism as a social system. They merely see the appearance of this system and ignore its conceptual foundation. They are merely looking at one picture or side of capitalism– its economic side or aspect, which involves production, distribution, monetary policy, market prices, etc. But what about its political foundation or aspect?

I call this problem ‘conceptual bankruptcy.’ They somehow believe that politics and economics are opposites or perpetually at odds with each other. It is true that capitalism is a system that separates state and economy, but it does not require the separation of politics and economics. In reality, politics is the foundation of economics. Without established political foundation and principles, the economic aspects of a system cannot be enforced or realized. Politics and economics are not at odds with each other; they compliment each other.

To back their claim, these people point out the dictionary definition of capitalism. Merriam-Webster, for instance, defines capitalism as  ”an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.” But such is simply a reportive definition of the term. What these clueless ‘political pundits’ tend to forget is that capitalism, like socialism or communism, is an ideological concept.

Definitions are important because they keep conceptual order in man’s mind. Definition is a practical application of the law of identity, which means A is A. You define things according to their nature, character, appearance, etc. Its purpose is to differentiate a concept from all other concepts. Capitalism and socialism are abstractions; abstractions do not exist. Only concretes exist. Examples of concretes include stone, paper, table, pen, computer, tablet, mug, battery, etc. Examples of abstractions are love, pain, effort, duty, justice, system, etc. Thus, a definition is important to distinguish an ideological abstraction (capitalism) from other ideological abstractions (e.g., socialism, communism, corporatism, social democracy, fascism, nazism, etc.)

Let me take this opportunity to point out, or expose, one of the most notorious mental problems of the leftists or communists or liberals. They have a big problem, which is conceptual bankruptcy, when it comes to definition. They somehow think that capitalism has no definite, exact definition or that it is indistinguishable from other social systems. Due to this definitional problem, the leftists confuse capitalism with corporatism, with crony socialism, or with any form of statism. They define capitalism only according to their terms and naive understanding or political agenda.

Going back to the main topic, let’s try to understand how the proponents of capitalism define this system.

From this source:

“Capitalism is a social system based on the principle of individual rights. The term capitalism is used here in the broader philosophical political sense, and not in the narrower economic sense, i.e. a free-market.”

From this source:

“Laissez faire capitalism means the complete separation of economy and state, just like the separation of church and state. Capitalism is the social system based upon private ownership of the means of production which entails a completely uncontrolled and unregulated economy where all land is privately owned. But the separation of the state and the economy is not a primary, it is only an aspect of the premise that capitalism is based upon: individual rights. Capitalism is the only politico-economic system based on the doctrine of individual rights. This means that capitalism recognizes that each and every person is the owner of his own life, and has the right to live his life in any manner he chooses as long as he does not violate the rights of others.”

From Ayn Rand:

Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.

The recognition of individual rights entails the banishment of physical force from human relationships: basically, rights can be violated only by means of force. In a capitalist society, no man or group mayinitiate the use of physical force against others. The only function of the government, in such a society, is the task of protecting man’s rights, i.e., the task of protecting him from physical force; the government acts as the agent of man’s right of self-defense, and may use force only in retaliation and only against those who initiate its use; thus the government is the means of placing the retaliatory use of force under objective control.

From economist George Reisman:

“Capitalism is a social system based on private ownership of the means of production. It is characterized by the pursuit of material self-interest under freedom and it rests on a foundation of the cultural influence of reason. Based on its foundations and essential nature, capitalism is further characterized by saving and capital accumulation, exchange and money, financial self-interest and the profit motive, the freedoms of economic competition and economic inequality, the price system, economic progress, and a harmony of the material self-interests of all the individuals who participate in it.” (Capitalism: A Treatise on Economics)

Economist Reisman also wrote:

“Laissez-faire capitalism has a definite meaning, which is totally ignored, contradicted, and downright defiled by such statements as those quoted above. Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual’s rights against the initiation of physical force.”

Economist Milton Friedman:

“The possibility of co-ordination through voluntary co-operation rests on the elementary – yet frequently denied – proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed. Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy – what we have been calling competitive capitalism.”

Also, Encyclopedia Britannica states: “Socialism is a political and economic system in which most forms of economically valuable property and resources are owned or controlled by the public or the state. The term socialism also refers to any political or philosophical doctrine that advocates such a system.”

In response to a blog commenter who said: “ your equating the political system with the economic system (socialism or capitalism) begets a lot of surprise”, I stated the following:

How do we know these definitions are correct? LOGIC! You only have to apply logic to understand the proper concept of capitalism or socialism or communism. You cannot separate politics and economics. Economics is, at root, political. You cannot simply say, “Well, the system is purely economic.” That’s wrong. Yes, such systems as capitalism and socialism are economic systems, but they are also political systems, as they require political foundation and structure. You cannot implement capitalism without political support or foundation. For instance, capitalism requires the protection and implementation of property rights, contracts, trade, individual rights, etc. This makes this system inherently political. But at the same time, it is an economic system and a social system. By contrast, you cannot implement socialism without a centralized political power.

I had a heated debate with [someone] in which he desperately presented flawed, erroneous sources to support his baseless, ignorant claim. One of his sources claims that capitalism is a “political party.” Well, after critiquing his source, I found out that the author was talking about “political parties” that promote capitalism. It appeared that [this guy] didn’t even bother to study his source.

The blog commenter also stated the following: “Politics is mainly about the allocation of power between individuals and/or groups of individuals in the polity; while economics is mainly about the production, distribution, and allocation of scarce resources in the society–and which processes, under a capitalistic system, is essentially governed by the price mechanism; and, under a socialistic system, essential governed by the government (the political system).”

In response I wrote:

Then that proves that capitalism is both an economic and a political system. It is a social system. It is wrong to claim that capitalism is purely an economic creature or concept- and that it is not concerned with politics. That simply shows your misunderstanding of capitalism or socialism. Capitalism is not merely concerned with “production, distribution, and allocation” of resources. Those are merely the “economic” aspects of the system- and those values or activities won’t exist without the system’s concepts and/or principles of:

1. Limited government;

2. Individual rights;

3. Rule of law;

4. Private property;

The problem with your so naive an evaluation, sir, is that you’re merely focusing on one part- or aspect- of the concept of capitalism or socialism. Take the whole picture- look at it- and then apply logic.

Both the advocates of capitalism and socialism understood this. Ludwig von Mises was not merely focusing on the purely economic traits and aspects of capitalism in defending freedom and the free market system. In defending capitalism, he FIRST defended its political aspects or principles. This is what Hayek, Ayn Rand, and even MIlton Friedman did. You cannot defend those areas or aspects of “production, distribution, and allocation of scarce resources” without defending the political areas and principles of capitalism, namely, limited government, individual rights, rule of law, and private property.

Capitalism is a social system that guarantees the freedom and rights of individuals. This is actually the best distinction of capitalism from all other social or politic0-economic system. Now here’s my challenge to those who have the same claim or evaluation:

“Is it possible to defend or support Capitalism’s economic aspects (e.g., production, distribution, monetary policy, prices, etc.) without its political foundation such as individual rights, limited government, rule of law, and private property?


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