What Is Capitalism?

Chapter 6 of Morality and Capitalism: A Dialogue on Freedom

Capitalism is what people do when you leave them alone. — Kenneth Minogue

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Tyro: Solon, I am puzzled.

Solon: That is a good thing, Tyro. Puzzlement is the beginning of wisdom. What is it that puzzles you?

Tyro: Today in school, our history teacher told us that some guy named Karl Marx wrote that capitalism is just a temporary evolutionary stage in human history that empowers the wealthy, exploits the working class, and keeps them poor. He also told us that socialism will eventually replace capitalism.

Solon: Why does that puzzle you, Tyro?

Tyro: Because our teacher also told us that America is a capitalist country. But most people in America are certainly not poor. It seems to me that America is one of the richest countries in the world, and that lots of other countries that are not anything like capitalist countries do have lots of poor people.

Solon: Perhaps your teacher does not know what capitalism really is.

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Capitalism is a social system of political economy. In the words of Ayn Rand,

[A] social system is a set of moral-political-economic principles embodied in a society’s laws, institutions, and government, which determine the relationships, the terms of association, among the men living in a given geographical area. … Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.

Milton Friedman, the preeminent Nobel laureate and defender of capitalism, offered the following description of capitalism:

A working model of a society organized through voluntary exchange, is a free private enterprise exchange economy—what we have been calling competitive capitalism.”

Tens, if not hundreds of writers have proposed definitions and descriptions of capitalism. But in the end, the four essential, defining elements of capitalism are (1) private property, (2) voluntary exchange, (3) freedom, and (4) just law. To understand what capitalism is — what it really is and what it is not — we must explore the genesis, meaning, and implications of these four foundational elements of capitalism.

Private Property

What does it mean to own property? What can someone own? How does anyone come to own anything in the first place? If we all agree that Callie owns something today, how can Annie or Bobby come to own that same property tomorrow?

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Tyro: I know what it means to own something. I used to own an iPhone, but someone stole it from me.

Solon: Indeed, Tyro. We would have no meaning for stealing without first having a meaning for private property. What do you think it means to own something?

Tyro: Owning something means it’s mine and that I have property rights.

Solon: What does it mean to say something is yours, Tyro? What rights do you think owning something gives you?

Tyro: If something is mine, that means I have the right to do with it whatever I want.

Solon: Is that so? If you own a car, would that mean you have a right to drive it at 120 miles per hour through town?

Tyro: Of course not.

Solon: So, owning property does not appear to mean that you have the right to do with it whatever you want.

Tyro: Okay; I see your point. But I would have property rights. I would have the right to use my car any way I chose that did not harm other people. I would have the right to use my car, sell it to someone, or even give it away, if I wanted to.

Solon: I think you and every other person has but one fundamental right; we each have the right to be free of unjust compulsion from others. If that proposition is true, what would it mean to say you have property rights?

Tyro: If our only right is to be free of compulsion from others, then the only property right I could have is that others have no right to compel me to use my property in any particular way, or to interfere with how I choose to use my property, so long as I do not compel others.

Solon: Excellent, Tyro! What we commonly call property rights are really limitations on what others can do, just as James Sadowsky wrote in his essay, Private Property and Collective Ownership.

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What it means to own property is deeply ingrained in each of us. All people know what private property is, because we each own some — ourselves. The idea of self ownership, which is so fundamental that it seems entirely self evident, is sometimes attributed to John Locke, who wrote,

Though the earth and all inferior creatures be common to all men, yet every man has a "property" in his own "person.” This nobody has any right to but himself.

We all agree with Locke. Just as surely as you know you own yourself, so do all people know that they also own themselves.

Yet, ownership of one’s self has not always been honored in statutory law. Slavery, as a legal institution of one human owning another human, has been a common practice throughout ancient and modern history around the world. Sadly enough, even the original United States Constitution, the supreme law of America, held that a human could be owned by another. Not until the late 20^th Century did slavery acquire its now universal condemnation in statutory law. How very strange that such a fundamental principle in natural law would require such a long time in human history to become universally proclaimed in codified law.

Most people, also following Locke’s theory of property, agree that individuals naturally own the product of their own labor. Locke wrote,

The "labour" of his body and the "work" of his hands, we may say, are properly his. Whatsoever, then, he removes out of the state that Nature hath provided and left it in, he hath mixed his labour with it, and joined to it something that is his own, and thereby makes it his property.

But very little can be produced by labor alone, save perhaps a few elementary services. Production of even simple services requires use of land, if for nothing more than a place to stand. Production of goods and services typically requires all three categories of scarce resources; notably, what economists call land, labor and capital. As a shorthand, following the terminology of classical economics, let us call all naturally occurring, non-living, non-human resources “land.” Tools, machinery, buildings, and other such physical co-agents of production, which are not naturally occurring, but must themselves be produced by humans, we will call “capital.”

According to Murray Rothbard, ownership of one’s self is the foundation of private property of any kind, including land. For if one did not own one’s self — if someone else somehow did, instead — then the whole idea of ownership of any kind of property would be self-detonating, self-contradictory, unintelligible, and meaningless. For if one does not own one’s self, then others would also not own themselves, by the Principle of Reciprocity and ontological equality. The proposition that one does not own one’s self degenerates into an infinite regress in which no one owns anything. Rothbard’s argument is interesting logically, but unnecessary, since every human agrees that we each are the sole owners of ourselves. People also agree that we each are the sole property owners of whatever we produce ourselves (perhaps with voluntary, contracted assistance from others). But what about private property in land?

Even if we all agree that we each own ourselves and the products of our own labor, that leaves open the question of who could and should own “land”—not just terra firma itself, but minerals found naturally in the earth, the spontaneous fruits of nature, ground water, rivers, the oceans of the earth, the atmosphere, and so on. How is it that a particular person comes to own land? A broadly agreed answer to that question is essential for a workable political economy.

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Tyro: Our sociology teacher told us that in an ideal society land would be owned collectively. Individuals would not and could not own land.

Solon: Did he really? How interesting. If no one owned land, how would people sort out who controls the use of land and who would own the goods and services people produce using land?

Tyro: He said that Karl Marx solved that problem with the maxim “from each according to his ability, to each according to his need.”

Solon: And what do you think of that Marxian maxim, Tyro?

Tyro: Well, I’m not sure it’s clear who would decide what anyone needs or how anyone would know who is able to provide what some other person needs. And why would someone who does happen to be able to produce something be willing to produce it for someone else?

Solon: Perhaps Marx did not think carefully about those questions. In any case, some one person, or some very small committee of persons, always owns particular land; otherwise, the land is not owned at all. Collective ownership of land is a naive notion that is impractical and not really possible in practice.

Tyro: Why do you say that collective ownership of land is not really possible?

Solon: Can you say that you own property that you do not and cannot yourself control? Do you own property that you cannot use as you yourself choose? Do you really own property that you cannot sell to another, if you chose to do so?

Tyro: No, I guess not. Not really.

Solon: You guess correctly, Tyro. In all societies and in all times, some particular person, or perhaps some very small committee of persons (which committee is usually dominated by some one person), always controls the use and disposition of particular land; otherwise, that particular land is not yet owned. The person who controls the use of land is the de facto owner of the property, regardless of any legal or nominal distinctions that someone might like to make to the contrary.

Tyro: What about public property? Don’t governments own land in the name of the people as public property? What about public roads? What about the oceans? What about national parks?

Solon: Good questions, Tyro. Still, in every case, someone controls the use and disposition of so-called “public property.” Just because that someone happened to be elected by majority rule, or perhaps was appointed by some elected politician, does not alter the meaningful statement that the real owner of land is whoever can and does control the use and disposition of so-called public property. Calling roads, national parks, and other land controlled by a government “public property” is more an obfuscation of who the true owner is than a meaningful declaration.

Tyro: But don’t we all get to use public roads and other kinds of public property?

Solon: Sometimes — at least until some of us, or all of us, are not allowed to do so by the true owner. Recall what happened to public air space and airports, following the villainous attacks on 9-11. Government operatives can and do declare roads closed as they choose. You and I are not allowed to “trespass” on real estate claimed by the federal government as “government property,” but “authorized” persons can. Governments sometimes blockade free and open passage even of the oceans. Operators of national parks charge admission and close their gates as they choose. All land is either unowned or owned. All land that is owned is owned by someone. Whoever controls the use and disposition of land is the true owner.

Tyro: So, we should quit using the term “public property”?

Solon: No, Tyro. That would be impractical. It is fine to call certain land “public property,” provided we understand that such property is not and cannot be owned “collectively.”

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The Homestead Principle posits that a person gains just ownership of previously unowned land by performing “acts of original appropriation.” Acts of original appropriation include using land productively (e.g., cutting trees on unowned land and making lumber; mining ore found in unowned land and making iron), marking the land (e.g., fencing in land; writing coordinates of land in a register), or joining the land with something one already owns (e.g., building a house on previously unowned land; building a dock on the bank of a previously unowned pond).

For John Locke, mixing one’s labor with previously unowned land is an act of original appropriation that establishes original ownership justly. Merely declaring ownership is manifestly insufficient, notwithstanding the arrogant practice of long-dead European kings. In accord with the ideas of Locke, Murray Rothbard also proposed that a person comes to own land by “mixing” one’s labor with the land, which land would then become one’s property. Rothbard writes in Man, Economy, and State,

… the origin of all property is ultimately traceable to the appropriation of an unused nature-given factor by a man and his “mixing” his labor with this natural factor to produce a capital good or a consumers’ good. For when we trace back through gifts and through exchanges, we must reach a man and an unowned natural resource. In a free society, any piece of nature that has never been used is unowned and is subject to a man’s ownership through his first use or mixing of his labor with this resource.

For Rothbard, claims of original ownership of natural resources based on any premise other than first use (by “mixing” one’s labor with the land to produce either capital goods or consumption goods) are bogus.

Yet, other philosophers, including Robert Nozick, question the notion of “mixing” one’s labor with land as a criterion for justly vesting original ownership of land. In Anarchy, State, and Utopia, Nozick devotes several paragraphs to raising fascinating and important questions about Locke’s principle of original acquisition. For example, Nozick writes,

If I own a can of tomato juice and spill it in the sea so that its molecules (made radioactive, so I can check this) mingle evenly throughout the sea, do I thereby come to own the sea, or have I foolishly dissipated my tomato juice?

Nozick did not propose an alternative principle for “just acquisition of land.” But he did give us the important insight that it is not only persons favoring private property who need a theory of how property rights to land originate justly. People who think the earth is (or should be) owned collectively—such as proponents of Georgism — also share the burden of producing a theory of how persons living in a particular area come to own a particular territory jointly. Nozick writes,

[people who believe in collective ownership of land] also must provide a theory of how such property rights arise; they must show why the persons living there have rights to determine what is done with the land and resources there that persons living elsewhere don’t have.

No one has produced a viable alternative to the Homestead Principle, although many philosophers and political thinkers have proposed that land should not be owned, or that land, if owned at all, should be owned collectively. Opponents of private ownership of land are unable to propose workable schemes for using land (which is clearly necessary for human survival) that do not amount to control and disposition of land by someone. Whoever that someone is, is the de facto owner of the land, to the exclusion of all others.

Anthony de Jasay and Hans-Hermann Hoppe argue that denial of the Homestead Principle is self contradictory, since such denial presupposes a prior ownership claim. Anthony de Jasay writes,

The opponent of this simple thesis (the Homestead Principle) is trying to have it both ways: he is both asserting that the thing (land) has no legitimate first owner from whom a second or n^th owner could have legitimately obtained it by agreed transfer, and that there is nevertheless somebody who has been and still is entitled to use the thing (land) and therefore can validly object to being excluded from it.

Hans-Hermann Hoppe goes a step further, arguing that denial of the Homestead Principle would also contradict the principle of self ownership. Hoppe writes,

… it (denial of the Homestead Principle) would be incompatible with the already justified [principle of] self-ownership, for if one could appropriate resources by decree, this would imply that one could also declare another person’s body to be one’s own.

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Tyro: I think it is beyond dispute that we each own ourselves and the things we ourselves create. But I am having a harder time with private ownership of real estate and other natural resources.

Solon: How so, Tyro?

Tyro: We each are born on Earth through no choice of our own, into circumstances we did not choose. Surely we each have a birthright to the earth itself and its naturally occurring resources, don’t we?

Solon: People who count themselves as Georgists are proponents of that very theory, Tyro. Henry George argued in Progress and Poverty that land and every naturally occurring thing found in nature belong to all of humanity.

Tyro: I like that idea, Solon. I think I may be a Georgist.

Solon: You, Tyro, are a naturally occurring thing found in nature. Do you belong to all of humanity?

Tyro: Okay. So I’m not a Georgist.

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Given that the idea of collective ownership of land is utterly impractical, and in the lived world of practice, an obfuscation of the de facto owner (the person who controls the land), and given that we each definitely own ourselves, must we not agree with Locke, Rothbard, de Jasay, and Hoppe? The Homestead Principle appears to be the only just principle for original acquisition of land. A person comes justly to own previously unowned land by being the first to mark and use previously unowned land.

Marking land as owned is a necessary condition for homesteading. For unmarked land appears to others to be unowned, and therefore others may rightly think the land remains available for homesteading. In Threesville, suppose Bobby sees a lovely meadow, which he decides to homestead, thereby making it his private property. Callie visits the next day and sees Bobby erecting a fence around the meadow. Callie tells Bobby the meadow belongs to her, unmarked by her for ownership though it is. Now what? Evidently, not marking adds up to not homesteading, and therefore, not meeting a necessary condition for original acquisition of land. Had Callie somehow marked the meadow clearly, in a way that Bobby and Annie agreed constituted marking, Callie would have established original ownership, but without some kind of marking, she did not.

Using land — what Locke and Rothbard called “mixing” one’s labor with land —may imply ownership, but without somehow marking the land, use alone leaves others unaware of the extent of claimed ownership. In Threesville, suppose Annie plants a garden on a small patch of previously unowned land, thereby mixing her labor with the land. But without further unambiguous marking, Bobby and Callie would not know that Annie takes herself to be homesteading an entire square mile of land that surrounds her garden. Just as Nozick and others have argued, the act of “mixing” one’s labor with land is too ambiguous by itself to constitute a sufficient act of original acquisition.

Marking is a necessary condition for homesteading land, but is marking by itself sufficient to establish a homesteading claim? Can Callie simply mark a plot of unowned land, say by building a fence around it, but use the land in no obvious way further, and thereby acquire the previously unowned land, in accord with the Homestead Principle? Marking alone is both necessary and sufficient to acquire unowned land originally. But using land, in the common parlance of what constitutes “use,” may not be a necessary condition for homesteading. What if Callie wants to own a natural habitat to preserve it indefinitely in Threesville — just for the value it gives her of knowing the habitat is preserved? Can Callie simply fence in a parcel of land, leaving it in its natural state with no further use, and thereby retain ownership until she voluntarily transfers ownership to Bobby or Annie?

Like Locke, Rothbard proposed that homesteading requires initial use (“mixing” one’s labor with the land), and that land acquired by homesteading remains the property of the original homesteader until the land is transferred voluntarily, regardless of whether the homesteader continues to use the land. But what if the fence Callie builds to mark her land deteriorates, leaving the land unmarked. Is the land now available for homesteading by Bobby or Annie? Would Callie have abandoned the land and lost ownership of it by allowing the fence to deteriorate?

We can see that private ownership of land, though necessary for human survival, is not an easy, straightforward social institution. Nonetheless, private ownership of land is pervasive throughout human history. As Ludwig von Mises wrote in Human Action,

“if history could teach us anything, it would be that private property is inextricably linked with civilization.”

The Homestead Principle appears to be the only rational principle of justice in acquisition, but to make the Homestead Principle practical and operational, members of a society must agree to rules (laws) about what constitutes “marking” and “using” previously unowned land. Will digging a hole in the land constitute using the land? Maybe. Can Bobby declare that he owns Threesville’s moon; would that declaration be a sufficient mark, given that the moon is well defined as a visible whole? Probably not. Can Annie “mark” a plot of land by registering latitude and longitude coordinates with a duly constituted government agency? Perhaps. Today’s technology suggests possibilities for marking land that would have been impossible a century ago (photographs taken from space). But merely recording coordinates might seem akin to simply declaring ownership, like arrogant kings of old were wont to do. Clearly unacceptable. Bobby cannot simply declare that he owns Annie; neither can he simply declare that he owns some particular previously unowned land in Threesville.

Ultimately, people living together in a society must and do answer these and other questions about what constitutes legal and just “marking” and “using” to homestead land. People do so through the institutions that comprise their society’s political economy, which includes its legal system. Indeed, societies around the globe have done so throughout human history.

We would be hard-pressed today to identify real estate on Earth that remains free of an original claim of ownership. For most practical purposes, all real estate on earth has already been homesteaded. Sovereign governments claim ownership even of parts of oceans. It no longer matters much (at least on planet Earth) how real estate came originally to be owned privately. What matters much more today is how ownership of land may be transferred justly from its current owner to its next owner.

Nozick explored the question of just transfer of property exhaustively in Anarchy, State, and Utopia, summing up with these words:

From each according to what he chooses to do, to each according to what he makes for himself (perhaps with the contracted aid of others) and what others choose to do for him and choose to give him of what they’ve been given previously (under this maxim) and haven’t yet expended or transferred.

Admitting that these words made for an unwieldy maxim (and certainly less than memorable), Nozick offered this pithier version:

“From each as they choose, to each as they are chosen.”

Put plainly, Nozick argued (as have many other philosophers) that voluntary exchange is the only just principle of transfer of ownership, including transfer of ownership of land.

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Tyro: The Homestead Principle is reasonable, Solon. Still, homesteading seems to place great importance on being first. What’s so special about being first?

Solon: Only that first is more special than being second, Tyro. By what reason would a late comer have a superior claim over and above the first homesteader?

Tyro: Hmmm. I see what you mean.

~ ~ ~

Land and labor are the minimally necessary ingredients for producing goods and services that people want. Capital goods, although not absolutely necessary for production, vastly magnify the ability of humans to produce consumer goods. Without tools, machinery, trucks, buildings, roads, bridges, computers, and the technology embodied in such capital goods, human productive power is meager, capable only of the grinding, harsh poverty that was a universal and ordinary condition of nearly all humans as recently as 250 years ago. But human productivity wanes without privately owned land, labor and capital. All of history demonstrates the truth of that positive statement.

Understanding why private property is essential for human prosperity dates at least as far back in time as Aristotle, who argued convincingly and well against the ideal polis proposed in Plato’s Republic, a polis that featured communal ownership of land, instead of private property. Foreshadowing Garrett Hardin’s explanation in Tragedy of the Commons of why communally owned property fails, Aristotle pointed out that resources owned collectively are not as productive as resources owned privately, because people give their greatest attention, interest and care to what they own privately. Communal property also breeds discontent, as some complain that others receive more than they deserve, while contributing too little to the store of communally owned goods. Private property, Aristotle argued further, is in our human nature. We delight in what we own. He also noted that private property has existed everywhere and always in human experience. To conclude his rejection of Plato’s proposed communism, Aristotle argued that without private property people have no opportunity to be virtuous by engaging in benevolence and philanthropy. One cannot give to others what one does not own.

Private property is a necessary, foundational, and defining element of capitalism. A system of political economy that is not based on private property, simply is not capitalism. Moreover, without private property, no one would own anything to exchange with others, which leads us to the second essential and defining element of capitalism.

Voluntary Exchange

Adam Smith wrote in The Wealth of Nations that

“man has almost constant occasion for the help of his brethren.”

If people were independent, solitary creatures, relying entirely on themselves to produce the goods and services they want, few people could enjoy more than a paltry, subsistence level of life. Among Adam Smith’s most important insights is his explanation that specialization in performing particular productive tasks and division of labor (dividing productive activity into several discrete subtasks, in which different individuals specialize) are the foundation and wellspring of vastly expanded capability of humans to produce valuable goods and services.

Comparative advantage (a technical term of economics) among people in performing productive tasks gives rise to specialization, division of labor, and voluntary exchange. In Threesville, Annie, Bobby, and Callie will find that each has a comparative advantage in performing particular physical and mental tasks. Even though Annie is more talented and possesses greater physical and mental skills than Callie in every dimension, Callie will still have what economists call a comparative advantage in performing some tasks. Callie’s comparative advantage will provide an avenue for specialization, allowing her to produce some goods or services of value, which she can then trade to Annie and Bobby for other goods she wants, goods which Annie or Bobby specialize in producing.

Readers who do not like detailed numerical examples should skip this paragraph and the next two. As an example of comparative advantage, suppose Annie can catch 20 fish per day, hoe 4 acres of corn per day, or spend her productive efforts doing some of each task. Callie, due to physical and mental limitations endowed by her genes, can catch only 16 fish per day, hoe only 2 acres of corn per day, or do some of each. Annie is more capable and talented in producing both caught fish and hoed corn. But as it happens, Callie has a comparative advantage over Annie in fishing, and Annie has a comparative advantage over Callie in hoeing corn.

The cost of hoeing an acre of corn is 5 fish for Annie (cost correctly reckoned is value that must be given up when people choose one action over another). That’s because Annie must give up 5 fish if she chooses to use her time hoeing an acre of corn. The cost of hoeing an acre of corn is 8 fish for Callie. Callie is the high-cost producer of corn hoeing, compared to Annie. Annie is the high-cost producer of fishing, compared to Callie. On average, every fish Annie catches requires the sacrifice of 0.20 acres of hoed corn (divide 4 acres by 20 fish per day). Every fish Callie catches requires the sacrifice of only 0.125 acres of hoed corn (divide 2 acres by 16 fish per day). Given their physical and mental capabilities, Annie can specialize in hoeing corn and then acquire fish by trading acres of hoed corn to Callie for Callie’s fish. Callie can specialize in fishing and acquire hoed corn by trading fish to Annie for Annie’s corn hoeing.

A favorite lesson of economists who teach a foundational class in economics is to demonstrate to their neophyte students that through specialization in production coupled with voluntary exchange, both Annie and Callie can enjoy more fish and more hoed corn, compared to independent, solitary production. For example, Annie, who is the low-cost producer of hoed corn, can hoe 3 acres of corn a day for herself and 1 acre a day for Callie. Callie, who is the low cost producer of fish, can fish all day and trade 6 of her 16 fish for 1 acre of corn hoeing, which Annie offers in exchange. Callie ends up with 1 acre of hoed corn per day and 10 fish per day. Annie ends up with 3 acres of hoed corn per day and 6 fish per day. If Annie and Callie produce both fish and hoed corn independently for themselves, without specialization and voluntary exchange, Annie could have 3 acres of hoed corn but only 5 fish per day, while Callie could have 1 acre of hoed corn but only 8 fish per day.

Just as the classical economist David Ricardo taught us long ago, people are better off through specialization in production combined with voluntary exchange, compared to independent, solitary production of the goods and services they want.

If the example of fish and hoed corn just above seems a bit technical and eye-glazing, do not despair. The example is not essential for understanding human willingness and ability to exchange value for value. Adam Smith also observed in The Wealth of Nations that people have a propensity to “truck, barter and exchange one thing for another.” Voluntary exchange — people willingly and freely choosing to trade one thing for another — is an unusually important kind of human interaction. Most of us exchange our labor services for goods and services produced by others, whether we are doctors, accountants, store clerks, teachers, or any of thousands of other vocations. Yes, we first exchange our labor for money, and then exchange our money for goods and services we want, but the money is just a medium of exchange. We don’t really want the money we receive for our labor services. Money is only a temporary store of value that greatly facilitates voluntary exchange with others.

Through self-production alone, without voluntary exchange, none of us would be able to enjoy the wide range of goods and services we want. We would not know how to produce most goods and services for ourselves, even if we were so inclined. The celebrated article, I, Pencil, published in 1958 by Leonard E. Read, explains how no one person knows how or is able to make even something as simple as an ordinary #2 pencil. Readers who have not already read I, Pencil, will find the article a fascinating and revealing insight into the power of voluntary exchange to generate human prosperity.

Each of us tends to specializes in producing goods or services for which we have a comparative advantage. We then exchange what we own from our own production to acquire nearly all other goods and services we want—goods and services produced by others. We don’t know how to produce all those other goods; moreover, we would not want to, or be able to, even if we did know how. The resulting reduction in our wealth and value forgone (cost) due to solitary self-production would simply be too excessive. Specialization, division of labor, and voluntary exchange are the engines that enable the unparalleled success of capitalism in generating human prosperity.

As Aristotle said, humans are social and political animals. As social animals, people interact with others almost continuously. But all human interactions (many of which are exchanges—trading one thing for another) occur in one of just two possible modes: voluntary or compulsory. Voluntary exchanges are those that people choose freely without overt aggressive force, threat of force, or intentional deception from either party to the exchange. Compulsory exchanges are those forced upon us by another, either by overt aggressive force, threat of force, or intentional deception initiated by one of the parties to the exchange.

Aristotle in ancient Greece (384 BCE), and Pope Benedict the 16^th in the 21^st Century, both got it wrong, saying as they did that “just” exchange (trading) requires exchange of equal values. In fact, voluntary exchange creates greater value for both parties to the exchange. If it didn’t, people wouldn’t bother exchanging one thing for another. If Bobby offers Callie a dozen eggs in exchange for two fish, and Callie voluntarily agrees to the exchange, both Bobby and Callie have reason to say “thank you,” because each receives greater value in return for the value given up. Why else would Bobby part with a dozen eggs? Why else would Callie give up two fish?

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Tyro: What if I were dying of thirst in a desert. Along comes a water caravan, just in time to save me from dying. But the owner of the caravan tells me he sells water for $100 a gallon. Am I not compelled to pay his outrageous price to stay alive? I would not voluntarily exchange $100 for a gallon of water if I didn’t have to. I would need the water to stay alive.

Solon: Who says you have to stay alive, Tyro? If you pay the vendor’s price, you evidently agree that a gallon of water is more valuable to you than whatever else you could do with your $100.

Tyro: I certainly would want to stay alive. If I want to stay alive, I have to pay $100. That doesn’t seem like voluntary exchange to me.

Solon: But voluntary it is. You get to choose among competing values without compulsion from the water vendor. You compare the value of spending your $100 one way — on a gallon of the vendor’s water — to the value of spending the money in various different ways. If you buy the water, clearly you value the water more than myriad other ways you could spend your $100.

Tyro: I can die or I can pay $100 for water. I don’t like my options.

Solon: Life is often like that, Tyro. Is the water vendor required for some reason to offer terms of trade that you like?

Tyro: Better terms of trade would be the right thing to do.

Solon: No, Tyro, better terms of trade might be a good thing to do — good for you, certainly, and perhaps even good for the vendor — good for the vendor’s soul, perhaps. Aristotle, Plato, and other ancient philosophers believed that virtuous behavior is good for one’s soul. But the water vendor has but one duty; to act morally. The vendor acts morally so long as he does not compel you. If both you and the vendor exchange voluntarily, both you and the vendor receive greater value than given up.

Tyro: But wouldn’t the vendor be compelling me to die if I do not pay $100 for water? Wouldn’t that be immoral. What if I don’t have $100 dollars?

Solon: The vendor compels you in no way. The vendor broadens your opportunities; he does not diminish them. Compelling others always diminishes opportunities for others. If you do not have $100, perhaps the vendor would extend credit, if you asked. Perhaps the vendor would even give you water if you asked. Most people do behave virtuously, after all. Virtuous behavior is all around us most of the time.

~ ~ ~

Robert Nozick wrote in Anarchy, State, and Utopia,

A person’s choice among differing degrees of unpalatable alternatives is not rendered nonvoluntary by the fact that others voluntarily chose and acted within their rights in a way that did not provide him with a more palatable alternative.

But as Robert Nozick also wrote,

“whether a person’s actions are voluntary depends on what it is that limits his alternatives. If facts of nature do so ( … or actions of others that are within their rights), the actions are voluntary.”

Certainly, the actions of others may impose limits on our opportunities. But if the actions of others are moral, our choices among available alternatives are voluntary. Nozick illustrated the point with the fascinating example that follows:

Suppose there are twenty-six women and twenty-six men each wanting to be married. For each sex, all of that sex agree on the same ranking of the twenty-six members of the opposite sex in terms of desirability as marriage partners: call them A to Z and A’ to Z’ respectively in decreasing preferential order. A and A‘ voluntarily choose to get married, each preferring the other to any other partner. B would most prefer to marry A’, and B’ would most prefer to marry A, but by their choices A and A’ have removed these options. When B and B’ marry, their choices are not made nonvoluntary merely by the fact that there is something else they each would rather do. This other most preferred option requires the cooperation of others who have chosen, as is their right, not to cooperate. B and B’ chose among fewer options than did A and A’. This contraction of the range of options continues down the line until we come to Z and Z‘, who each face a choice between marrying the other or remaining unmarried. Each prefers any one of the twenty-five other partners who by their choices have removed themselves from consideration by Z and Z’. Z and Z’ voluntarily choose to marry each other. The fact that their only other alternative is (in their view) much worse, and the fact that others chose to exercise their rights in certain ways, thereby shaping the external environment of options in which Z and Z’ choose, does not mean they did not marry voluntarily.

People act within their rights so long as they do not compel others unjustly. We may not like the actions of another person for many reasons, each of which reasons no doubt entails something we ourselves do not value. Our personal evaluations of another’s actions may have bearing on whether that person’s actions are virtuous, but not on whether the other person’s actions are moral, so long as we are not compelled unjustly.

Voluntary exchange is the mechanism of Adam Smith’s metaphor of the invisible hand. Smith wrote in The Wealth of Nations the oft quoted words,

It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.

Smith understood that voluntary exchange is motivated by each person seeking to gain additional value from the trade, with each party to a voluntary exchange knowing that he or she must offer value for value, else no exchange will occur.

Without voluntary exchange, social cooperation is unlikely, if not impossible. Voluntary exchange enhances individuals’ awareness of others and their desires, including total strangers. In a society that insists that exchanges must be voluntary (a.k.a., a capitalistic society), one can’t prosper without supplying some good or service that others want. Moreover, in a capitalist society that allows only voluntary exchange, people who best supply goods and services that others want will prosper most. People who produce little or nothing that others want are unlikely to prosper in a capitalist society, except by the benevolence of others.

Voluntary exchange relies on persuasion instead of force to accomplish human interaction. Persuasion or force are the only two modes of human interaction possible. If Bobby wants Annie’s cabin, he can persuade Annie to trade with him, or he can force Annie to accept his chickens in trade for her cabin. No other possibilities exist. Capitalism relies on and requires persuasion; all other systems of political economy rely on force, in one way or another.

~ ~ ~

Tyro: Suppose I live in a small town with unusually limited job opportunities. Suppose the only work available is hard manual labor at a textile mill, and suppose the pay for such labor is really quite low—below what some people call a “living wage.” Am I not compelled to work for the owner of the textile mill for whatever wage offered? That sort of job may be exchange, but it doesn’t seem voluntary.

Solon: Would the owner of the textile mill force you to work at the mill?

Tyro: No, but I wouldn’t have any other options.

Solon: Could you choose to live and work elsewhere, somewhere that affords better job opportunities? Could you choose to start and operate your own business? Is it the mill owner’s responsibility to provide alternatives you find attractive?

Tyro: Isn’t it immoral for the owner of the mill to offer such low wages, causing me to remain poor and live in poverty?

Solon: The owner of the mill offers unforced employment, an opportunity for voluntary exchange, thereby expanding your opportunities. You choose to accept the terms offered or not. I see no compulsion, and therefore, no possibility of immorality on the part of the mill owner.

Tyro: Well, having such poor alternatives doesn’t seem fair.

Solon: What do you mean by “fair,” Tyro?

Tyro: (after a prolonged silence) Fair means equal. Outcomes are fair if everyone ends up with the same access to goods and services.

Solon: So, in Threesville, you think it would be fair if Annie, Bobby, and Callie share equally all the goods and services each produces, even though Annie produces six times as much as Callie and three times as much as Bobby each day, and even though Annie, Bobby, and Callie do not want the same goods and services, being individuals as they are, with entirely personal values, likes, and dislikes?

Tyro: It isn’t Callie’s fault that she is not as able to produce goods and services as well as Annie and Bobby. Besides, everyone wants food, shelter, and other basic needs.

Solon: If you must speak of fault, is it Annie’s or Bobby’s fault that Callie is less able? Does everyone want the same food, shelter, and whatever else you think are basic needs?

Tyro: No, of course not. But Callie is entitled to at least some minimal level of goods and services to meet her basic needs.

Solon: What are Callie’s “minimal” basic needs, Tyro? And if Callie is “entitled,” as you say, who has responsibility to provide Callie’s entitlement to minimal basic needs, and why would Bobby or Annie have such responsibility?

Tyro: Callie’s basic needs are enough food, shelter, and other stuff like health care to stay alive. Society has the responsibility to make sure everyone has enough to live a decent life.

Solon: Society does not exist, Tyro. Please speak of Bobby, Annie, and Callie in Threesville, not society. Do you now propose that “fair” means having just enough food, shelter, and “stuff” to stay alive?

Tyro: That’s not what I mean.

Solon: What do you mean, Tyro? You seem to have moved away from the notion that “fair” means “equal,” which is good, since equal outcomes for all is not possible, and hardly anyone thinks equal outcomes for all would be desirable, even if it were possible.

Tyro: I guess I don’t really know how to say what “fair” means.

Solon: You are not alone, Tyro, even though people use the word as if it had a clear, definite meaning that is known to all. I prefer not use the word “fair,” since I am unable to define the word.

~ ~ ~

Sometimes people are inclined to claim they have no choice, if the alternatives available are not to their liking. “I had to steal,” says the thief. “I didn’t have money to buy food for my family.” Others are inclined to claim that it isn’t fair that their lot in life is so materialistically meager. Stealing, some might say, is just “righting the wrong.” This point of view is particularly common if theft is accomplished by elected officials (through mandatory taxation) for redistribution of income. Such notions of “fair” seem to undergird John Rawls’s notion of “justice as fairness.”

Voluntary exchange is the second foundational, defining element of capitalism. Any system of political economy that compels exchange (e.g., slavery, drafting people into the army, or requiring people to buy health insurance) is not capitalism. Nor is a system of political economy that limits voluntary exchange (e.g., forbidding the sale of alcohol on Sunday, forbidding cutting hair commercially without a license, or forbidding people to give investment advice for a fee without approval of the state’s bureaucracy).

Private property is the first defining element of capitalism. Voluntary exchange is the second, but second only because without private property, voluntary exchange is not possible. In the end, voluntary exchange is the very core of capitalism.

Freedom

Jean-Jacques Rousseau opened his treatise The Social Contract with the words,

“man is born free, and everywhere he is in chains.”

But people who live in a truly capitalist society are not in chains. Capitalism requires that people be free to act as they choose, provided their actions respect the Moral Imperative. Capitalism requires that people be free to choose all aspects of their lives without interference from others. Capitalism requires that people be free to choose where to live, what occupation to pursue, what kind of car to drive, who to associate with (and who not to associate with), who to contract with (and who not to contract with), and thousands of other choices. Capitalism requires freedom — freedom constrained only by the moral law.

Rousseau proposed that individuals should and would agree to sacrifice personal freedom in return for protection of their remaining rights, as did Thomas Hobbes, John Locke, and more recently, John Rawls. But what these four philosophers and many other proponents of social contract theory failed to grasp is that freedom is inalienable for rational beings, and that freedom is the natural, logical consequence of people obeying the Moral Imperative.

Notwithstanding the theories of Hobbes, Locke, Rousseau, and Rawls, rational beings do not willingly abjure personal freedom, agreeing tacitly or explicitly to be compelled by state operatives. Whether the state operatives are monarchs, dictators, or legislatures elected by majority rule makes no difference whatsoever.

Rational people have but one right, the right to be free of unjust compulsion of others. Unjust compulsion is aggressive force, threat of force, or deception with intent to benefit the aggressor and disadvantage the person compelled. The only “social contract” that rational people agree to is “I will not compel you, if you will not compel me.” Agreeing to allow another to compel us in return for “social order” is the antithesis of freedom and is a logical contradiction.

Freedom to choose one’s actions, limited only by the Moral Imperative and just law is the third foundational, defining element of capitalism. Denial or restriction of personal freedom is antithetical to capitalism, whether the denial comes from a tyrant dictator or government operatives elected by a majority of voters. Throughout human history, some people have been more than willing to deny freedom to others. That propensity of a small minority of people, people who are willing to ignore and violate the Moral Imperative, gives rise to the fourth essential element of capitalism — just law.

Law

Can the law—which necessarily requires the use of force—rationally be used for anything except protecting the rights of everyone? I defy anyone to extend it beyond this purpose without perverting it and, consequently, turning might against right. — Claude Frédéric Bastiat

What is law? Why do societies have laws? What is the purpose of law? Where do laws come from? Under what conditions is law authoritative? Philosophers, theologians, legal scholars, novelists, and playwrights have written copiously since antiquity to offer answers to these questions. This brief essay on law seeks only to explain how just law is the fourth defining and essential element of capitalism.

Law is a set of explicit, codified rules that all members of a society are obliged to obey. Through the institutions of government, law is promulgated, interpreted, and enforced by government operatives (elected or appointed), with explicit penalties for violation of the law.

All societies adopt laws. Members of a society adopt laws to guide and prescribe behavior for members of society, which is the purpose of law. Thomas Hobbes believed that a powerful, compelling state — a leviathan — was necessary to keep people from compelling one another, or as Hobbes put it, an all-powerful state to “over-awe them all.”

Throughout human history, some people have been willing and able to violate the Moral Imperative. Consequently, law and enforcement of law by force seem to be necessary for humans to live together in society. Hobbes placed his confidence in an all-powerful state to make and enforce laws. Kant, on the other hand, believed that just law must ultimately come from within us, which leads us to ideas about the source and authority of law.

All law is one of two kinds: natural law or positive law. Natural law comprises inherent inalienable rights of people, conferred not by acts of legislation or dictate, but by God, human nature, or reason (depending on one’s beliefs about deity). Positive law (from the infinitive “to posit”) is law stipulated by particular persons (such as a legislature or a king or a dictator) that specifies and requires specific action. Positive law applies at a certain time and place (not universally). Positive law is statutory law, created by government operatives of an organized society.

Natural law is authorized entirely by human reason and logic. As Thomas Aquinas explained in the Prima Secundae of the Summa Theologica, natural law springs from practical rationality of humans (which rationality Aquinas believed came from God). Natural law is universally binding for humans and universally knowable by humans. Natural law is just law, because it stipulates equal rights for all people. But the only right that all people can have equally, without violating the same right of others, is to be free of compulsion from others. In the end, natural law is the Moral Imperative.

Paradoxically, positive law claims to be self-authorizing. The source of all positive law is some particular person or set of persons, who are authorized by law to create laws! According to positive law theory, we are obliged to obey positive law because it is the law. Positive law is a curious kind of self-licking ice cream cone. The authorization for positive law is positive law.

Writing in The Market for Liberty, Morris and Linda Tannehill object to any statutory law whatsoever. They argue that all one has to do is ask if one is aggressing against another to decide if an act is justly legal. But members of society may benefit from some positive law, e.g., drive on the right-hand side of the road, contracts for sale of real estate must be in writing, the age of majority is 18 for voting, and so on. Some positive laws merely coordinate certain actions of members of society and are beneficial or neutral for nearly all members of a society. The kind of positive law the Tannehills and other classical liberal philosophers reject is law that benefits one set of people at the expense of another. Bastiat put the matter this way:

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.

Bastiat’s essay, The Law, is a classic statement of the distinction between just law and unjust law. In that essay he writes,

What is law? What ought it to be? What is its scope; its limits? Logically, at what point do the just powers of the legislator stop? I do not hesitate to answer: Law is the common force organized to act as an obstacle to injustice. In short, law is justice.

The law is the organization of the natural right of lawful defense. It is the substitution of a common force for individual forces. And this common force is to do only what the individual forces have a natural and lawful right to do: to protect persons, liberties, and properties; to maintain the right of each, and to cause justice to reign over us all.

When law and force keep a person within the bounds of justice, they impose nothing but a mere negation. They oblige him only to abstain from harming others.

But when the law, by means of its necessary agent, force, imposes upon men a regulation of labor, a method or a subject of education, a religious faith or creed – then the law is no longer negative; it acts positively upon people. It substitutes the will of the legislator for their own wills; the initiative of the legislator for their own initiatives. When this happens, the people no longer need to discuss, to compare, to plan ahead; the law does all this for them. Intelligence becomes a useless prop for the people; they cease to be men; they lose their personality, their liberty, their property.

A substantial portion of positive law in the world today is plunder. Positive law that goes beyond the beneficial coordination of social interaction (e.g., stop at red lights) is immoral, if it imposes by force the will of one set of people on another.

Capitalism is a social system of political economy defined by these four essential elements: private property, voluntary exchange, freedom, and just law. Any social system of political economy that lacks these elements is not capitalism, and should not be called capitalism, if clarity and meaning of expression are valued.

Is Capitalism Moral?

If morality is respect for and self-willed obedience to the Moral Imperative, and if capitalism is a social system of political economy that consistently requires private property, voluntary exchange, freedom, and just law, then capitalism is a moral system of political economy; moreover, capitalism is the only system of political economy that is moral. A straightforward syllogism makes the case:

Major Premise: Compelling people unjustly is immoral.

Minor Premise: Capitalism does not compel people unjustly.

Conclusion: Capitalism is moral.

Any system of political economy that includes or allows unjust compulsion of one by another — or compulsion of one set of people (members of society) by another set of people (government operatives) — is immoral, by the same logic. Socialism, communism, democratic socialism, fascism, monarchy, and every other system of political economy aside from capitalism, not only allow, but require for their very existence, unjust compulsion of one by another. Consequently, not only is capitalism moral, it is the only system of political economy that is moral.