Capitalism’s Definition is NOT Innocent

The program I’ve designed for today, is one I have long wanted to do and it comes out of a lifetime of teaching and writing in which it became clearer and clearer to me that the very definition of the economic system we live in and depend on, capitalism, is itself something that has been manipulated, changed, adjusted. There’s nothing innocent or neutral about the definition of capitalism and I think I’ll be able to show you by the end of today’s program, that the capitalist system is now in deep trouble and being challenged in a way it hasn’t for a long time. That among the challenges of capitalism are a challenge and a profound one. The very definition that has come to be the dominant one and that I want to challenge. So, let us begin for most of the defenders of capitalism, the definition is pretty straightforward and almost universally agreed to. It goes something like this. Private capitalism is a system of free or private enterprises and the idea here is, it’s a system where anybody, any private citizen, that’s not a government official, a private citizen can start own and operate a business free of government interference. Private in the sense that these individuals who start a business can themselves decide how to operate it, how to run it, what to do with it. That’s half of the definition. Here’s the other half. The conventional half. Of the people who defend capitalism who like it, this one says that the system also moves resources and goods from one person to another from the producers of things to those who will consume them by means of, here we go, free market. What does that mean? It means, that the buyers and sellers meet literally in a place called a market and then they kind of dicker and negotiate and come up with a price, a ratio if you like of exchange. I’ll give you three of my shirts for 12 of your oranges or whatever else is being traded and the idea is that this is a free activity. It is private in the sense that the buyers and sellers are private individuals and they only make a deal if they’re both satisfied with it. The government is to be kept out of all of this. If the government intervenes, that’s called an unfree market or a regulated market. Or the government planning things. Not even using a market and that is not capitalism. So let’s summarize for the defenders capitalism. It is private enterprises and free markets and the antithesis of capitalism, the absence of capitalism, is, argued by its defenders, to be when you interfere with. When you block, when you suppress, when you deny private free enterprises. You don’t let people form them and operate them. The government typically comes in, or if you don’t have a market, if the market isn’t the way we move goods from one person to another but instead there’s a rule or a government again or some regulatory authority. That’s the conventional definition. That’s what the people who like capitalism have always wanted to use as the definition.

Okay, now, let’s examine that. First of all, let’s be clear what a definition is. A definition is a way to distinguish something from other things that are like it. You want to define it to make it unique, so that people will recognize it, so, for example, we make a definition of Mary to distinguish her from other people like her. We make a definition of a dog to distinguish that from other animals. For example, those that have fur or four legs, or other things like it. But we want to distinguish something. We call something a chair to distinguish it from other pieces of furniture. So, the point of a definition is to find and focus on something unique about whatever it is you’re trying to define so that people will say, oh, I can now recognize Mary as opposed to other people; chair, as opposed to other pieces of furniture; and a dog as opposed to other animals.

Okay, let’s look at feudalism. That’s another system. In feudalism you don’t have an employer-employee relationship either, so it’s easy to distinguish it from capitalism. In feudalism you have a lord and a serf and they go into the roman catholic church in Europe which sanctified a kind of ceremony in which the serf said I swear allegiance to this lord and I will do the work that he assigns me to do and the lord promises to protect the serf from rampaging other lords, etc. And so they agree in a kind of ceremony of mutual obligation to work together. Nobody owns anybody and there’s no lawyer. There’s no employer-employee relationship. For example, in slavery and feudalism nobody pays anybody a wage or a salary to come to work. That’s a unique part of the employer-employee relationship. And here’s now the third one, the communist one. And here I’m going to borrow from Karl Marx, who had the closest to a basic definition. What Marks said was that capitalism is different from communism because in communism, here we go, there is no employer-employee relationship. That’s gone. That’s done away with. Instead, the work process, whether you produce a good or a service, is performed by a community of equals. Community is the key word. No employer-employee. That distinction is gone, and so it’s really easy to distinguish capitalism from communism because in capitalism a small group of people are the employers and everybody else is an employee and in the communist idea that Marx puts forward, none of that exists. It’s one person one vote, in a community that together decides what’s going to be produced how it’s going to be produced, what technology is going to be used and at the end of the day the people together, the community owns what was produced it’s not that some people do the work and others get the fruits. Communism is therefore different economic system from the feudal, from the slave, and from the capitalist.

Isn’t it interesting this relationship in production becomes a key way to define capitalism? Wow, final point. Let’s go back to the definition that’s the conventional free enterprise free markets. Here’s the problem with that definition. It doesn’t separate capitalism from everything else. The other system slavery, feudalism, and the communist. They can have markets we know. They did. If you go to the south in the United States, you will visit in every major city the slave market, there is still a sign in downtown somewhere. Where they once, guess what, bought and sold slaves. Likewise, they bought and sold what slaves produced: cotton, for example. So, there were markets in slavery and the same applies to the feudal and the same applies to communist enterprises. That our communities could buy and sell from one another, so you don’t distinguish these systems by the conventional definition which is a real problem. And here is another one, you know, that in many phases of feudalism and slavery and communism all kinds of incentives are given to people to start their own businesses. Their own slave businesses, their own feudal businesses, their own communist collectives that happens all the time. There is nothing distinctive about capitalism that lets people or incentivizes people to set up a business and run it themselves to keep the government out and let private people do it.

I want to drive that point home one more moment. The distinction that is so important for people in modern capitalism, the defenders of it is this notion of private enterprise versus the state as if the presence of the state having its own enterprises is something that undermines or makes us no longer have capitalism. This is strange, because every other system has displayed both private and state enterprises both free markets and markets regulated by whatever the government was. In slavery, for example, were there state enterprises owned and operated by the government that had slaves all the time all over the place in feudalism? Did the state sometimes have its own serfs unlike the private lords? Yes, all the time! There’s no problem about having a mixture of private and state and nobody ever thought to say you don’t have slavery because there’s a state enterprise alongside the private ones that has slaves and no one ever thought to question the feudal system that it isn’t feudal anymore because there is a state enterprise with serfs alongside private enterprise. So, it’s bizarre for capitalists who are people who like capitalism to think that the presence of a state enterprise that hires people just like a private capitalist does somehow means you don’t have capitalism. That’s bizarre and doesn’t kind of work real well. And the same is true of a communist enterprise. Can a collective of individuals who are private, set up a business run like a commune? Sure, they can. Can the government set up a bunch of people to do that? Sure you can. You could have private communist enterprises and public or state communist enterprises so the distinction between private and state doesn’t allow you to separate capitalism from any other economic system which is what a good definition would do.

All right, now, let’s ask and answer the question why given everything I’ve said, why do you think that it has become dominant and I mean dominant to define capitalism with definitions that don’t work and why has it been almost impossible to get people to recognize that the employer-employee relationship is the definition that does work to distinguish capitalism from feudalism, slavery, communism, and so on. I’m going to give you three reasons. There are three reasons why the conventional definition has been the dominant one. Okay, here we go. If you use explanation number one, if you use the conventional definition, you’re going to have a kind of easy time that you won’t have with the correct the better definition. Let me explain with my definition and the one that people like me use the employer-employee relationship. Immediately if you use that you’re going to have a problem. Why? Because this arrangement is very clearly and obviously undemocratic. It’s worse, it’s anti-democratic. Why? Because a tiny group of people make all the decisions for a large group of people and the large group of people are excluded from those decisions. If you go to work in a capitalist enterprise you don’t control the executives, you don’t control the board of directors, you don’t vote on them, you don’t put them in or out of office, you have no authority at all. In contrast they have absolute authority over you, they can tell you on a Friday afternoon don’t come back here Monday, you don’t have a job here anymore. They take your job, they take your income, they throw you out of your situation. You may have to leave the area, you lose your house, your kids lose their school. You understand the importance these people have enormous power over you, and you have none over them. If you were to define capitalism, as you ought to, with a definition that does the job, definitions are supposed to do, you would be vulnerable to the critique that this system that you’re defending is the antithesis of democracy. And you know something they don’t want to have to defend it much better to define it in terms of free enterprise and hope you don’t know that free enterprises existed in slavery feudalism and communism and free markets too.

All right, the second reason, if you understand the employer-employee relationship to be the key defining relationship of capitalism, you’re going to have a thought that comes to your mind pretty quickly after that, that there’s a certain arresting parallel, isn’t there, between capitalism, feudalism and slavery. It’s easy to distinguish them, because only capitalism has the employer-employee relationship. The other two don’t. Capitalists pay their workers, the other two don’t, etc. But you are going to notice something similar in all of those systems. Capitalism, feudalism and slavery, there is a striking similarity despite their differences. In each of those systems the key relationship is between people, among people in the production of the goods and services. Everybody depends on, in all those systems, it’s a dominant small group at the top, large group at the bottom. Small group has all the power, large group takes it all. The masters control the slaves, the lords control the serfs and guess what the capitalists control the working class. You’ve probably noticed that in your own life. And why is this a problem for the defenders of capitalism? It’s a huge problem, and that’s because of history. Capitalism comes into the world making a revolution in this this country, as I mentioned earlier, it revolts against slavery and it presents itself as the system committed to freedom, liberty, equality all of that. Capitalism in the other parts of the world, for example, in France comes about through the French revolution back in 1789. That had on the banner of the revolutionaries’ liberty, equality, fraternity. In other words capitalism wants to be associated with and the leaders and revolutionaries like Tom Jefferson and Benjamin Franklin, in this country, wanted and believed in democracy, equality and all of those things.

They therefore do not want to defend this system that looks alarmingly like the very feudalism they thought they had broken from. That looks alarmingly like the slavery they thought they had broken from. That they wanted to break from, they confront the possibility that by having gotten rid of master-slave and having gotten rid of lord and serve and having replaced them with employer-employee, they may have betrayed the very big wonderful objectives of liberty, equality, fraternity and democracy, that they had in their minds. I’m taking them at their word, that they were sincere in wanting these wonderful humane values but then I have to conclude and so would the defenders of capitalism if they understood the definition of employer-employee as key to understanding capitalism. They would have to admit that the promises made during the revolution that established capitalism have never been fulfilled. We don’t have equality, fraternity, democracy or liberty. We have a system in which a tiny group of people sitting at the top of the corporate ladders run this society and that’s because of the nature of the employer-employee relationship.

And now, the third one the third reason that the defenders like that stuff about free enterprise and free markets has to do with the nice thing that they suggest. Isn’t it wonderful that capitalism has an incentive built in, you know, that you can make money you can become rich by setting up a business and coming up with something interesting for people to buy and perhaps a good way to produce it and you go into business and you’re successful. And you grow these kinds of stories that capitalism permits that to happen are heard every day. They’re the kind of storytelling, sometimes called mythology with which a system celebrates itself, justifies itself and, of course, they would like to define capitalism as a system that allows that. By the way, capitalism does allow people to do that. I have no quarrel with that. But it’s not a good definition, because every other system did that too. There were times and places in slavery when people, even slaves themselves, were given incentives to set up other enterprises with slaves. Were there slaves who had slaves? Yes, in many of the world’s slaveries you had that. In feudalism often you had the following situation. That wealth was inherited by the oldest son. That’s called primogeniture in the feudal system. Of course, that made life a little difficult for the second and third sons, because they didn’t inherit the family farm only the eldest son did. Well, guess what happened. In various kinds of feudalism, lords would give support, they would give a piece of land, they would help clear some land so a second or third son could also start a feudal manner with serfs of his own, etc. etc.

Here’s my point. Other systems, at various times in their history, have also created incentives for free private enterprises to form and to drive the point home, capitalism, at various times blocks, thwarts, prevents private enterprises from forming. For example, we have a patent and a trademark system. You develop something new; you get a patent for it, you can forbid anyone else from making that thing for many years. That’s blocking free private enterprise from forming. Every business wants to become a monopolist, to have such control that nobody else can break into the business. That’s another way that capitalism often blocks or thwarts. In other words, capitalism isn’t uniquely favorable to incentives in private enterprise and other systems are not uniquely absent those things. That’s why it’s not a good definition and finally the same is true of markets. Every system has markets. Every system of which I’ve ever heard, at least in the last three thousand years, anywhere in the world has had some markets. Have they all been free markets where buyers and sellers make all the decisions? No, sometimes they’ve been that way, free sometimes, they’ve been regulated by the local government just like in the United States. We have a mixture of free and regulated markets. You cannot pay below the minimum wage. That market is regulated. You can’t charge anything for various goods and services. They’re regulated. Bottom line, then defining capitalism as free enterprise and free markets doesn’t distinguish it from slavery, feudalism or a communist alternative system. Using employer-employee as the key relationship does the definitional work that needs to be done and the only reason you haven’t heard before of the employer-employee relationship, if indeed it’s new to you, is because the people who run capitalism are afraid of where that better definition leads. So, they prefer a poorer one, because it serves the ideological function of protecting capitalism. There’s nothing innocent about a definition.

I sometimes neglect to remind everyone, that another part of capitalism, besides the employer-employee relationship, is the part designated by that word: capital. What is capital? Marx’s definition is as good as any. Self-expanding value. What does that mean? It means, in simple English, that you’re engaged in something that takes a quantity of money and makes it larger. Expands the quantity of money. Some activity that you can do with money where you start with a hundred and you end with a hundred and ten, that’s money that has gotten larger value that has self expanded, etc. So, where does that fit in? The kind of perfect simple example of what capital is, would be lending money at interest. I give you a hundred dollars as a loan on condition that you pay me back let’s say at the end of the year with an additional amount, the interest payment, so if it’s a five percent interest. I give you a hundred dollars today, on condition that one year from now, you give me back 105. You’re paying me for the use of that money for a year. My money has thereby expanded. If I had just sat on the money or stuffed it in my mattress it wouldn’t be capital, because it wouldn’t have grown to be capital. It has to grow.

Well, there’s a second example that’s also simple, but not yet what we mean by modern capitalism. And why do I say not yet? Well, lending money at interest is thousands of years old. Capitalism as a system begins in the 17th century in England and spreads slowly across the world to the dominant global position it has now. But borrowing and lending at interest is much, much older than modern capitalism. And here’s a second way that you can have your money expand without still being in capitalism. And this has to do with buying and selling. Sometimes, when you buy and you sell, your goal is simply to take an extra bushel of corn that you have and exchange them for an extra bushel of potatoes that the farmer next door has. In that situation you’re not expanding your value, you’re just changing the form of whatever value is in a bushel of corn for whatever value equivalent, value assumedly is in the potatoes you’re not going to give more value of corn for less value of potatoes so it’s an equal exchange. The minute equal exchange arises we don’t have capital, because you don’t have growth. Well, besides lending at interest what’s another way?

Well, again Marx is our guide. Merchant capital, money that goes into a market not in order to exchange one form of value for another with an amount being the same, but to form the particular commodity being different. That’s not why a merchant goes into the market. The merchant goes into the market with an amount of money. With the money he or she buys goods and services in order to resell them. Here comes at a higher price, a merchant. Starts with a hundred, buys a hundred dollars worth of potato chip bags and then sells them in his store for a total of a hundred and twenty dollars. He’s made his capital grow from the hundred dollars he used to buy the potato chip bags to the hundred and twenty dollars he gets when he sells the bags for more than he paid for them. That’s a way of making your money grow, but we still don’t call that capitalism, even though capital is involved.

The word capitalism is reserved for a situation where you combine value creation, the growth of value, with industrial production producing goods and services, which is not what the lender does and is not what the merchant does. The lender gives money, gets back more money. Isn’t producing anything and the merchant buys stuff and resells. It isn’t producing anything, but in a modern factory or workshop and so on production is going on. Raw materials are being converted say, for example, from wood and glue and paint into a finished chair. Workers are working and, here comes Marx. The employer buys the ability to work from the worker and he puts the worker to work for one reason. That worker adds value staying with my chair example, the worker adds to the value of the wood the glue the paint, his own labor. Which is why the chair is worth more than the wood the glue and the paint that are in it. The extra, is what the labor adds and, now, the punchline. Labor adds more value when it works than it is paid as the wage or salary for coming to work. And in that difference, the extra that the worker adds beyond what he gets paid, there is the profit. There is the growth of the value that the employer brings to the workplace. That’s why it’s capitalism. It’s the coming together of production, labor, work on the one hand and the process to hope, the goal of raising the value of your wealth in the process and that’s why the employer snatches the product at the end of the day and sells it, because he keeps the difference between the value of what he sells and what he paid to the worker and to the provider of inputs that went into the production process. Workers produce more of value when they work then it costs the employer to bring them there, and that’s capitalism alongside the employer-employee relationship.