Overview

Names can lead to misunderstandings and miscommunication, so it’s important to first define what we’re talking about when addressing, “capitalism”.

Simply put, capitalism is an economic system that's based on private ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined by the free and voluntary trade between them.

This was a revolutionary system compared to the systems that came before it, such as:

• Feudalism: A historical economic system where wealth and power were concentrated in the hands of landowners, and peasants worked the land in exchange for protection and subsistence.

• Mercantilism: An economic system focused on maximizing national wealth through strict regulation of trade and accumulation of precious metals.

And it is in contrast to other economic systems developed after the advent of capitalism, such as:

• Socialism: An economic system where the means of production (e.g., factories, land, and capital) are owned and directed collectively, either by the state or the workers.

• Communism: An economic system based upon classless society where all property and resources are communally owned, the production and distribution of goods and services are based on communal decisionmaking.

• Fascism: An economic system where the property continues to be privately owned, but the use of that property is directed by the state towards national ends. 

• Mixed Economics: Attempts at combining two or more of these economic systems together. 

Each system depends on certain principles that guide the way they operate. For example, mercantilism was based on the principle that real value lay in precious metals. Socialism and Communism are based on the principle that distribution of wealth and production should be based on need rather than ability. And Fascism is based on the principle that a national interest should guide economic decisionmaking.

Capitalism too is based on certain underlying principles. At its core is a belief in the principle of Respect for Individual Agency. The concept of private property depends on the agency of each individual to own him or herself and extends to their actions and that which they produce. Similarly, when engaging in trade with others, their agency means they have the freedom to choose what trades to engage in or not engage in, engaging in negotiations and agreements as individuals. To believe in private property is to believe in the respect that each person deserves for what they have created and only become entitled to what is theirs if they agree to trade it. 

There are several other principles of capitalism that deserve note as well, including: 

• Creating Value - Rather than relying on a conception of preordained value, there is a presumption that value is determined by what people reveal is valuable to themselves. There are some things that are objectively valuable, such as food, health, purpose, etc. But how to provide those for people, maximize that value, and more,  Profit is a byproduct of creating value for others that did not exist before. Making money is different from taking money from others. 

• Opportunity to Create - Because individuals have agency and can determine what is most valuable for themselves, they have the opportunity to not only choose what to purchase, but also what they want to contribute. There is a presumption that people have the agency to start new businesses, improve existing ones, develop new products or services, and pursue opportunities that others do not see or believe in. Rather than certain jobs or industries being imposed on them, they get to seek out what they want to do. 

• Collaboration, i.e. Working Towards Aligned Interests - What’s more, to engage in voluntary trade, there must be an alignment of interests, what is called nowadays as a win-win-win where everyone is better off thanks to the trade. What’s more, to engage in economic trade, people need to collaborate. Capitalism isn’t about competition as much as collaboration between people, finding ways to help each other. Voluntary trade only happens when interests align in a win-win-win scenario. But such scenarios are not obvious. We must get outside ourselves and understand what others value. This cannot happen in secret nor can it be realized in armchair philosophy. Aligning interests is the collaboration of learning about each other and teaching them about ourselves. Engaging in capitalism is agreeing to collaborate in the learning, teaching, and exchanging of value. Competition can only happen after people have agreed to collaborate.

• Bottom-Up Experimentation - Core to all this is the principle that the best way to advance prosperity is through experimentation. Many attempts by many individuals and private entities can either reveal insights or develop new innovations that deliver value not considered before. This is also known as entrepreneurship. 

These principles do not stand alone. Capitalism is a system of interdependent, connected, principles and it takes theoretical exploration to understand these connections and their effects. This is the core of Adam Smith's landmark work, The Wealth of Nations, and why it remains relevant today.

Smith is the first to systematically show us how capitalism creates an ecosystem for massive increases in productivity that benefit everyone so long as we can freely trade. This is a lesson humanity needs to re-learn every generation. If we do not embrace it, who will? Smith cannot sit on a shelf gathering dust precisely because we have seen the effects of his insights over the nearly 250 years since he first made the argument:

• 200 years ago, 85% of the world lived in extreme poverty, defined as less than $1 a day. As of 2024, that is now down to 9.2% and continues to decline. To put that in perspective, from 1990 until 2020, 128,000 people escaped abject poverty every day. 

• Average GDP per capita globally has risen from $1,300 in 1982 to $17,527 in 2022, a 1,248% increase. This translates to real-life benefits for people, such as diminishing hunger. As Vaclav Smil points out: “in 1950 the world was able to supply adequate food to about 890 million people, but by 2019 that had risen to just over 7 billion: a nearly eight-fold increase in absolute terms,” and “"rising food production reduced the malnutrition rate from 2 in 3 people in 1950 to 1 in 11 by 2019."

• Global average life expectancy rose from 28.5 years in 1800 to 71 years in 2022.

• In 1820, world literacy was 12%. In 2022, it was 87%. 

There are ample examples to compare and contrast capitalist economic systems from non-capitalist systems over this time. After adopting capitalist policies and encouraging free trade and association, places like Hong Kong, Dubai, and Singapore grew significantly.  What’s more, over the decades since the partition of Korea, the North has economically stagnated while the South has become one of the highest per-capita GDP’s in the world. 

The case for capitalism is not merely that it delivers the best results for people. It is also that capitalism provides for a process that respects the moral authority of every individual. In 1759, almost two decades before he wrote The Wealth of Nations, Adam Smith wrote The Theory of Moral Sentiments. In it, he articulates how people respect one another in society through moral engagements. That each person is a unique agent with the ability to recognize and collaborate with others is what makes us human. This provides the moral basis for capitalism: every person has moral agency, which both means we are capable of showing respect for others and they have a moral claim to demand that we provide that respect in our engagements with them. This is not limited to mere politeness or manners, but extends to the most fundamental ways we interact with each other, including economic activities. This is where the free and voluntary nature of economic production and trade comes into play. Capitalism is premised upon the belief that each person has the freedom to choose what they want to accomplish in life and pursue it as they best see fit.