David Brady Jr: Yes, We Should Defend the Term “Capitalism”

Perhaps nothing is so vilified as “capitalism” in the modern world. According to a study by North Dakota State University, only a quarter of college students have a positive view of capitalism. Bernie Sanders was wildly popular in 2016, nearly dethroning the neoliberal Hillary Clinton, in part because of his disdain for “millionaires and billionaires” and “capitalism” in favor of socialism (though his views of “millionaires” changed once he became one!). As a sad response, proponents of free markets have fled from the term “capitalism” in favor of lukewarm terms like “market processes.”

Many may point to the popular coining of the term by French socialist Louis Blanc or Pierre-Joseph Proudhon as an example. Their argument has been that “capitalism is a term invented by our enemies and so we shouldn’t play into their paradigm.” But Mises, and the insights of the Austrian school, provide a picture why the term should be embraced rather than shunned or apologized for.

Let’s start with what Mises himself says about the term “capitalism” in Human Action:

The system of free enterprise has been dubbed capitalism in order to deprecate and to smear it. However, this term can be considered very pertinent. It refers to the most characteristic feature of the system, its main eminence, viz. the role the notion of capital plays in its conduct. (emphasis added)

It appears that Mises is favorable towards the term. In fact, a simple CTRL+F search through Human Action shows that the term is used 213 times, including sections specifically defending the system. Mises certainly uses the term “markets” to refer to the market economy in many parts of his treatise, but he does not shy away from using the word “capitalism” like many of his modern followers.

Mises is correct that the term “capitalism” is very pertinent. Capitalism is characterized by the private ownership of capital. It is a vitally important feature of the market economy that sadly goes overlooked by many. Private capital ownership allows for economic calculation, first and foremost.

Value is imputed backwards from ends, to consumer goods, to higher-ordered producer goods (capital goods), but every exchange along the way is the purchasing of means for someone’s satisfaction. Someone creating a higher-order good for others is seeking to increase their cash holdings. Economic calculation appears here doubly—in the ultimate profit and loss of industries that create the consumer goods and in those higher-ordered industries. The profit and loss mechanism cannot exist absent private actors being able to engage in valuation and exchange.

But it goes further than this simple insight. Capital is a broader term describing capital goods as a whole. Capital goods are those goods which aid in the creation of consumer goods, those which are indirectly serviceable towards our wants. Capital goods are only accumulated through deferring consumption. The classic example is from Murray Rothbard’s Man, Economy, and State describing Robinson Crusoe accumulating capital goods.

Crusoe may be able to pick berries to satiate his hunger in leisure but he also may be able to prepare a special stick that will increase his berry-picking output. To do so, however, he must forgo berry picking or leisure to prepare the stick (his capital good). He must forgo consumption, the enjoyment of berries or leisure, to create capital goods. As Rothbard writes, “The restriction of consumption is called saving, and the transfer of labor and land to the formation of capital goods is called investment.”

All capital goods are the result of deferring consumption and investing. These goods increase the output of real consumer goods. The development of modern industry is traceable back to the beginning of capital accumulation. Because earlier humans invested in creating further farm equipment, more food was produced and more people could specialize. Because earlier humans invested in the creation of tools for uncovering metals we have modern manufacturing today.

Kamala Harris has become a joke in conservative political circles for her comment: “You think you just fell out of a coconut tree? You exist in the context of all in which you live and what came before you.”

There is some truth to it if we adjust it just a bit. It may work to say: You exist in the context of our capital structure and all that was saved before you. Modern society is built upon the foundations of earlier capital accumulation that allowed us to produce greater consumer and capital goods. Society and civilization has been built upon past saving and investment, upon the actions of past capitalists.

Capitalists provide an even greater service to society and growth than even just mere saving and investment. Capitalists bear risk, not risk in the sense of the natural sciences, but entrepreneurial risk. Mises outlines the crucial role of the entrepreneur:

[T]he entrepreneur is always a speculator. He deals with the uncertain conditions of the future. His success or failure depends on the correctness of his anticipation of uncertain events. If he fails in his understanding of things to come, he is doomed. The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers.

The capitalist-entrepreneur is what spurs the entirety of the market economy forward. The entrepreneur engages in investment, by deferring consumption, forwarding current funds and capital goods in anticipation of what future consumers will desire. The capitalists are those who will suffer the loss if their predictions are incorrect. However, if they succeed, they will have provided a consumer or producer good that their fellow man values, and thus they reap a profit. The capitalist, hated by all, bears risk for their fellow man. Laborers employed by a capitalist-entrepreneur are given current funds for their labor before any profit or loss can be realized by the product they help create.

Capitalist-entrepreneurs drive the economy forward in their desire to satisfy the demands of consumers. Capital goods themselves are the causes of economic growth and progress. Everything we see around us is the fruit of capital accumulation and saving by capitalists.

Rather than decry the term “capitalism,” we should be more willing to use the term than ever. Capitalists and capital are the cause of growth and progress. The whole of the market system relies upon them. Capitalism should be readily embraced by all defenders of free markets as a descriptive term. Capital is a central part of society. The term that Marx gave as a mark of derision is, in fact, a perfect descriptor of the benefits of the market system—one that advocates of free markets should make a term of pride.

David is an undergraduate student at Florida Southern College pursuing a Bachelor’s in Economics. He is primarily interested in the intersection of monetary policy & financial markets, faith & freedom, and international trade policy. This article was first published HERE