There are endless myths swarming around public discourse on capitalism, with a million different varieties of the concept subject to individual whim and impressions. But if we’re to be consistent with the definition of what it entails, logically extrapolating from that basis and not from the endless permutations it is put through in the world at large, then the picture of what capitalism actually is would become quite surprising to most people.

So, without further ado, let’s begin demolishing these behemoth falsehoods…

Myth #1: Capitalism Is A Designed System

According to the Oxford English Dictionary, capitalism is defined as “an economic system in which a country’s businesses and industry are controlled and run for profit by private owners rather than by the government.”¹ This definition excludes any centrally planned system, or formal organization under a government. To understand why the definition of capitalism refers to a description of voluntary exchange rather than a designed system that was thought up and imposed upon economic actors, we need to understand the definition.

Country. A geographic area. The definition can include the government which controls the area, and the people who live within that geographic area.

Businesses and industry. Any economic activity, down to the smallest transactions, can fall under this definition. Any attempt to define “business” or “industry” according to a scale becomes an arbitrary exercise where the critic of capitalism must decide that exceeding a particular number of people working together, dollar amount of revenue, value of assets, or earning of profits makes what was previously simple actions into a different arrangement called “business” or “industry.” There is no way to non-arbitrarily differentiate the scale of economic activity. This is important to note because opponents of capitalism that might otherwise pay lip service to freedom often still think that business and industry are a different kind of activity (than, say, small, family-owned businesses) which is potentially exploitative and must be regulated.

Controlled and run for profit. Any economic enterprise where the actor produces a good that they intend to sell is run for profit. This is distinguishable from consumption, where the actor seeks to maximize utility. Wage earning is another form of activity which aims to maximize profits, because the worker sells his labor as a production input.

Private owners. Private owners, when contrasted with government, do not have the aura of legitimacy when it comes to the initiation of force. This does not mean they cannot be malefactors, of course. But “private” means that they do not act under the perception of legitimate authority, as opposed to governments or “public” actors, who can engage in coercion and the initiation of force with the blessing of the political system.

Thus, capitalism cannot be designed in the way that a centrally planned economy is, and should rightly be understood to be a definition, rather than a designed system. Capitalism cannot “fail,” because it is just a word to describe economic activity that is not controlled by the State. Capitalism should rightly be understood to be synonymous with voluntary exchange.

Myth #2: Capitalism Involves Government Action

Since capitalism by definition excludes government action, any economic activity that is regulated in any way by the government cannot be capitalism. Even if two people enter into a supposedly voluntary exchange, political edicts controlling such an exchange remove the ability of the two actors involved to control the exchange without government interference. Even if the exchange requires a 5% sales tax, that exercise of control over the exchange is control that has been removed coercively from the private actors. The tax is something imposed upon them that they would not otherwise choose, thus complete control of the exchange has been denied them.

Myth #3: Capitalism Is Cronyism Or Corporatism

Cronyism and corporatism are the practice of interest groups gaining favorable treatment from the government, and acquiring government positions based upon personal relationships rather than merit. As with any type of political control, the interested party which originates the political action is of no consequence when it comes to defining voluntary exchange. Whether a corporation, lobbyist, or crony attempts to convince a politician to adopt a policy which controls economic activity, or a politician takes it upon himself to adopt such a policy, if the policy removes control of economic activity from any actor, that cannot be capitalism.

Rent-seeking, where individuals attempt to gain favorable treatment from government officials, must benefit the rent-seeker at the expense of other economic actors. The economic actors who are not the beneficiaries of government policies acquired through rent-seeking have their utility reduced. This is not capitalism, because control over their economic activities has been taken from them, in whole or in portion. The actors involved in the rent-seeking are not engaging in capitalistic activity, because procuring favors from the government is not engaging in voluntary exchange.

Myth #4: Capitalism Is Whatever Karl Marx Says It Is

Unlike most socialists/communists today, Marx understood the definition of capitalism. It was all the things he thought were intrinsic to capitalism that were wrong. Marx thought that private ownership of the means of production produced all kinds of terrible feelings among workers. His sophistries are still used by anti-capitalists to this day as arguments for why capitalism is terrible, yet they are as fallacious now as they were then. Rather than seeing the mutual benefit gained by voluntary interactions, Marx saw “class struggle,” alienation, and disaffection among workers. He imputed to capitalism these qualities, yet his analysis of the supposed shortcomings of capitalism ignored the struggle, alienation and disaffection caused by authoritarian regimes. Like modern anti-capitalists, Marx saw the onerous effects of State interventions and concluded that these must be the result of capitalism.

Furthermore, he completely missed the fact that many people would prefer to work a limited number of hours without taking responsibility for all the capital that goes into the product of their labor, at the additional cost of the enormity of blood, sweat, and tears, and time away from the family or leisurely pursuits, which such entrepreneurial labor ordinarily entails. Such folk would rather happily forfeit some of the revenue they provide for the company in exchange for greater freedom from such demands. To make some blanket assessment about all individual workers’ preferences is asinine and unrealistic; not to mention that it would be oppressive to force them to undertake the aforementioned costs. And for those who would rather start up their own enterprise, their explanation is usually that too many government regulations stand in their way, NOT that their employer is somehow forcibly holding them back from it.

Myth #5: Capitalism Is Whatever Proudhon Says It Is

Pierre-Joseph Proudhon was a life-long socialist and advocate of the idea that all property is theft. He was also the first person to call himself an anarchist. Like Marx, he blamed the ownership of property for societal ills and felt that collectivization was the cure. Also like Marx, he made wild leaps of imagination when he wrote about capitalism:

The purchaser draws boundaries, fences himself in, and says, “This is mine; each one by himself, each one for himself.” Here, then, is a piece of land upon which, henceforth, no one has a right to step, save the proprietor and his friends; which can benefit nobody, save the proprietor and his servants. Let these sales multiply, and soon the people — who have been neither able nor willing to sell, and who have received none of the proceeds of the sale — will have nowhere to rest, no place of shelter, no ground to till. They will die of hunger at the proprietor’s door, on the edge of that property which was their birthright; and the proprietor, watching them die, will exclaim, “So perish idlers and vagrants!”²

Modern anti-capitalists who seek to transfer property away from private owners into the hands of a collective assume that freely directing one’s own economic activity leads to greed, and deduce that putting property under the control of collectivist groups will somehow ameliorate this condition. They also accuse capitalism of denying property to those who need it, despite capitalism’s sterling record of supplying increasing quantities of goods, at continually decreasing prices, and continually increasing quality.

Myth #6: Capitalism Is the American Economic System

While the economic system in the United States has elements of voluntary exchange, many economic activities are regulated by federal, state, and local governments. The regulated economic activities cannot be correctly referred to as capitalism. The myriad of government agencies devoted to exercising government power upon the activities of the people it claims to have authority over are not capitalistic, but authoritarian.

The U.S. economy may have more elements of capitalism than other economies³, but this does not make the economic arrangement capitalistic in nature. The interference in economic activity by the U.S. government encompasses a wide range of exchanges, from simple trades between individuals to mergers of large corporations. Exchanges controlled in part by government are not capitalism.

Myth #7: Capitalism Entails Corporate Personhood

The only entity that could grant legal personhood to a corporation is the government. As such, corporate personhood is not a feature of capitalism. I could not declare my car to be a separate entity and blame it for reckless driving. If I did, this would be a manifest absurdity. It is interesting that progressives who detest the Citizens United v. Federal Election Commission ruling seem to see room for more corporatism than do libertarians. Libertarians, on the other hand, would abolish all government protections for corporations. Corporate law already served as a legal shield which protects corporate executives and shareholders from the legal ramifications of wrongdoing or bankruptcy prior to the Citizens United ruling. Libertarians would get rid of such laws altogether.

Going back to my car analogy, let’s say that my car had a special legal status which made the car itself culpable for any accidents which were the result of my irresponsible driving habits. This would be patently ridiculous to any observer, and the moral hazard this arrangement would create would be obvious. Now let’s say that I went one step further and declared my car to be an actual person. Certainly my sanity would be circling the drain at this point, but what have I changed? I was already protected from the legal consequences of reckless behavior. If opponents of corporatism want to get at the heart of the issue, they should oppose the issuing of corporate charters as a government function. Corporate charters are a government grant of legal immunity to owners, and as such are not capitalism.

Myth #8: Capitalism Entails Worship of Profits

Capitalism is neither the worship of profits nor the worship of utility, standards of living, or wages. Capitalism is simply a description of voluntary exchange. Actors in an economy are free to worship profits to any extent they choose to do so, but such worship is not required for an exchange to qualify as engaging in capitalism. Entrepreneurs seek to maximize profits, consumers seek to maximize utility, and workers seek to maximize wages, or the profits they receive by selling their labor. Yet the latter two groups are never demonized for pursuing their best interests.

Many entrepreneurs work themselves to the bone to produce something they would like to see on the market not only to use for themselves, but to benefit millions of people. They might work 60-80 hour work weeks, in the red, for months and months before ever seeing their first profit. And in the end, they need those profits to put food on the table, and hopefully continue to raise the standard of living to make sure their families lead long and healthy, happy lives. The stereotype of the CEO tweaking his mustache whilst watching his butler fill his swimming pool with champagne just needs to die a horrifying death already.⁴

Myth #9: Capitalism Involves the Rich Getting Richer While the Poor Get Poorer

People who level this charge typically do not understand how government regulation and interference tend to benefit the politically connected at the expense of the poor. They do not understand the Cantillon effects⁵, which explains how the government’s cronies and larger firms benefit from inflationary monetary policy. They see the widening wage gap and for some reason assume this must be a feature of whatever freedom remains in the economy. They think that collusion between the government and corporate interests is capitalism. They fail to recognize the benefits which would accrue to the least well-off in an economy if the government were to stop giving favorable treatment to its cronies and reduce it’s interference in the right of people to exchange freely. They assume the Marxist view that capitalism (as Marx defined it) is necessarily exploitative.

However, despite even all of this, the market of voluntary exchange and mutual benefit still has powerful effects, and the rising tide does eventually lift all ships. The following video shows how standards of living have risen, and poverty has been reduced, since the beginning of the Industrial Revolution:

In fact, most people generally don’t stay in the same income bracket they start out in, or even remain in for awhile, their entire lives. As economist Thomas Sowell notes⁶:

Americans in the top one percent, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class” — especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.

 

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.

He concludes,

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

 

Most income statistics do not follow given individuals from year to year, the way Internal Revenue statistics do. But those other statistics can create the misleading illusion that they do by comparing income brackets from year to year, even though people are moving in and out of those brackets all the time.

 

That especially includes the top one percent, who have become the focus of so much angst and so much rhetoric.

Myth #10: Capitalism Entails “Consumerism”

The ability of people to direct their own economic activities free of government interference does not produce greed and envy. When people are free to work together voluntarily, rather than under a government mandate, they do not feel themselves exploited by the beneficiaries of government largesse. Consumerism is an odd accusation to make upon the people that live under freer economic conditions. The idea that an abundance of goods causes envy among consumers has no basis in fact, and the charge is made more strange due to the fact that those who decry “consumerism” frequently also accuse “capitalism” of witholding that abundance from consumers. The people who hate the idea of allowing people to control their own economic activities are summed up perfectly by Ludwig von Mises in The Anti-Capitalistic Mentality:

What makes many feel unhappy under capitalism is the fact that capitalism grants to each the opportunity to attain the most desirable positions which, of course, can only be attained by a few. Whatever a man may have gained for himself, it is mostly a mere fraction of what his ambition has impelled him to win. There are always before his eyes people who have succeeded where he failed. There are fellows who have outstripped him and against whom he nurtures, in his subconsciousness, inferiority complexes. Such is the attitude of the tramp against the man with a regular job, the factory hand against the foreman, the executive against the vice-president, the vice-president against the company’s president, the man who is worth three hundred thousand dollars against the millionaire and so on. Everybody’ s self-reliance and moral equilibrium are undermined by the spectacle of those who have given proof of greater abilities and capacities. Everybody is aware of his own defeat and insufficiency.⁷

When people accuse capitalism of reducing people to a monetary value, they reveal their own desire to receive renumeration just for being a “good person.” They are the ones who think that certain professions should receive higher pay, ignoring the fact that many in that profession do not enter into it with the goal of becoming wealthy. When an anti-capitalist argues in favor of higher pay for teachers, he is saying that teachers are not valued because they are not paid well. It is the anti-capitalist that is looking to the pay scale of the teacher to define their value. They ignore the psychological benefits acquired by teachers with the knowledge that they educate children. They are the ones who seem to forget that a person’s wage does not define their value as a human being.

As for much of the source of consumerism, it can be explained in large part as the result of the misallocation of funds due to the Fed’s expansion of credit via its inflationary printing of currency, and its artificial lowering of interest rates. When the Fed does this, it fools investors, entrepreneurs, and existing megacorps and other businesses into thinking that there are more resources being held off for investment in new production processes than is truly the case. In consequence, they fund and multiply all kinds of fruitless projects built upon artificial signals (and consumers, grabbing at all the new currency trickling down from on high, go out and buy things they normally wouldn’t see fit to), which results in all kinds of hollow, meaningless products that eventually turn sour when the bubble bursts, if consumers don’t turn up their noses at them beforehand.⁸

Conclusion

So, we hope that you the reader see here that much of the public delusion about capitalism is either not a real accounting of reality, or otherwise is usually rightfully directed at government interventionism and irresponsible toying and tinkering in domestic policy by busybody authoritarian politicians, spurred on by their sugar daddy lobbyist plutocrats. Next time you are tempted to condemn capitalism and turn toward socialism for the answer, and have correctly identified that it is indeed occurring, stop for a moment and ask yourself, “Could any government intervention in place have caused this?”

The chances are that more than likely you can find the culprit just there.

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1. Oxford Dictionaries. “Capitalism.” http://www.oxforddictionaries.com/us/definition/learner/capitalism ↩

2. Proudhon, Pierre-Joseph. “What is Property?” ch III. 1840. https://www.marxists.org/reference/subject/economics/proudhon/property/ch03.htm ↩

3. Though, as noted in a previous article, some other countries are actually more business-friendly: http://www.altarandthrone.com/earth-to-bernie-supporters-scandinavia-has-freer-market-than-us ↩

4. Though there are some instances of absurd amounts of luxury, most business owners never see it, and anyway the point is that any demarcating line along the spectrum of wealth is going to be inherently arbitrary and personally subjective in nature. ↩

5. Thornton, Mark. “Cantillon on the Cause of the Business Cycle.” The Quarterly Journal of Austrian Economics 9, No. 3 (Fall 2006): 45–60. https://mises.org/library/cantillon-cause-business-cycle ↩

6. Sowell, Thomas. “That ‘Top One Percent.'” TownHall.com. http://townhall.com/columnists/thomassowell/2007/11/27/that_top_one_percent/page/full. ↩

7. Mises, Ludwig. The Anti-Capitalist Mentality. ch I, sec 4. June 15, 1956. https://mises.org/library/anti-capitalistic-mentality. ↩

8. For a thorough primer on the concepts behind this (and a shorter work than the previously cited Thornton book), I recommend this transcript of a speech on Austrian Business Cycle Theory, and also this chapter of Human Action on Malinvestment.  To quote from this last source,

   Of course, the boom affects also the consumers’ goods industries. They too invest more and expand their production capacity. However, the new plants and the new annexes added to the already existing plants are not always those for the products of which the demand of the public is most intense…

   Mises, Ludwig. Human Action: The Scholar’s Edition. ch. 20. 3rd edition. February 1, 2010. ↩