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Eighteen years ago, Pope John Paul II wrote in Centesimus Annus:

 

“Can it perhaps be said that, after the failure of Communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this model which ought to be proposed to the countries of the Third World which are searching for the path of true economic and civil progress?

 

The answer is obviously complex. If by “capitalism” is meant an economic system which recognizes the fundamental and positive role of business, the market, private property, and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a “business economy”, “market economy” or simply “free economy.” But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality and which sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative.” (Centesimus Annus, 42)

 

This quote highlights a frequent difficulty in discussing economic systems: What is capitalism?

What do you think about how I’ve described capitalism? What is missing from the discussion? How do you respond to the quote by John Paul II?


 

At a
rudimentary level, Peter Berger’s definition works as well as any: “Production for a market by enterprising
individuals or combines with the purpose of making a profit
.” (The Capitalist Revolution, 19) I think most
economists would agree that capitalism includes at least the following:

 

Specialization of Labor – Specialization
is heightened.  Labor is oriented
toward earning wages as contributors toward the creation of products versus laborers
individually creating products for sale.

 

Market Exchange – Exchange has long been
with us but it pervades capitalism. People once produced most of what they
consumed and traded as a supplement. Now we acquire what we consume and supplement
it with production our own goods. Prices for goods are set by supply and
demand.

 

Private Property – The means of
production are privately owned and managed by private individuals and firms
based on long-term risk and reward.

 

Emphasis on Capital – Historically, land
and labor were the primary means of production. Capital is the dominant means
in capitalism. Capital is wealth placed in productive service. A firm’s
physical plant and equipment are typical examples but it can take other forms
as well.

 

The emergence
of capital as a major factor began at least by Fifteenth Century in Europe with
ocean bound trade expeditions. These undertakings were risky and expensive. The
Dutch and the English developed forerunners of modern corporations allowing
people to pool money and share risk. The big transition came with the advent of
steam and combustion engines in the late Eighteenth Century. These new power
sources enabled construction of unprecedentedly large manufacturing facilities
requiring, by historical standards, astronomically large amounts of private wealth
to be placed in productive service. The construction of the Erie Canal, begun
in 1817, was probably one of the first private ventures in the United States
requiring significant capital, but railroads and manufacturing quickly followed
suit.

 

No economy
exists in a vacuum relative to other cultural values. While the American
economic system is clearly capitalist, it is a mistake to equate capitalism
with the American economy. Other cultures have adopted capitalist models but
have differing concepts of justice. That influences how they evaluate the
efficacy of capitalism and what adjustments should be made to the economic
rules of the game.

 

Critics of
capitalism often speak of the dangers of “unbridled” capitalism. While it is
possible to have insufficient regulation it is not possible to have unbridled
capitalism. That would be anarchy. At least some minimal level of regulation is
required if for no other reason than to protect property rights, enforce
contracts, and adjudicate disagreements. The question is what degree and kinds
of regulation should exist beyond this minimalist level.

 

Economist
Paul Heyne used to use a traffic analogy to highlight important dynamics of
economies. He invited us to ask if an economy is more like air traffic
controllers managing flights in and out of an airport or is it more like an
urban traffic network.

 

“… Air
traffic controllers can reasonably be said to manage the movement of commercial
airline traffic: they impose upon all the pilots flying commercial places a
central plan that dictates precisely for each one the time of take-off, the
speed and path of ascent, the route to be followed, and the time, speed, and
path of descent and landing. But no one manages the flow of vehicular traffic
on the streets of a modern city in this way. Drivers choose their own times of
departure, routes to follow, speed of travel, maneuvers along the way, and
final destination, reporting their plans to no one and continually revising
these plans as they see fit. Drivers are not completely free to do anything
they please, of course. They are constrained by the decisions of other drivers
in the vicinity. There are also “rules of the game,” some of them very specific
but others quite vague, that limit choices drivers may make. Within these
rules, however, and sometimes a bit outside them, drivers pursuing their own
interests with very little concern for the interests of others (largely because
of extremely limited knowledge of those interests) coordinate their
interactions and arrive safely and expeditiously at their destinations.

 

No one
manages this process in the sense of controlling outcomes. Traffic engineers
can influence the process by changing the timing of lights, altering speed
limits, or adjusting parking regulations, and over time they can increase their
influence through street construction and closure. But they can neither predict
nor control the specific results. The most they can aim for is smooth and rapid
flow. An air traffic controller is an oikonomos.
There is no oikonomos in the world of
urban traffic, neither on the streets nor in the control centers of traffic
engineers, and anyone who aspired to become an oikonomos of urban traffic world would have failed to understand
the complexity of the problem.”  (“Are
Christians Called to be “Stewards of Creation?”, Stewardship Journal, Win. 1993, 19)

 

Metaphorically,
pure capitalism is the urban traffic network while pure socialism is the air
traffic control model. (The distributivist “make everything local” model would
be, I suppose, the no transportation model.) In reality, all economies are some
mixture. Other challenges enter the mix that are not captured by this metaphor.

 

For example,
capitalism tends to create large corporations. They are needed for their
productive capacities in some industries but their size presents the
opportunity for a variety of abuses. That requires a strong government to check
abuse. Yet, strong government tends to invite corporate powers to work the
political system in their favor precisely because it is so powerful.

 

Cultural
value systems also come into play. For instance, relative to the United States,
most European nations have flatter income distributions due to redistributive
policies, but also less mobility up and down the economic ladder. The United
States has a wider income distribution but greater mobility up and down the
economic ladder. Europe has tended to value stability while the United States
has tended to value dynamism. Which is better? There are trade-offs either way.
The bottom line is that there is no universal model of capitalism we can point
to in application because many of the specifics are worked in decisions about
trade-offs based on cultural values.

 

The
challenge for theological reflection on economics systems is that the term
“capitalism” carries considerably more baggage for some than I have described
in this post. Capitalism for some names an ethos of greed, selfishness,
consumerism and waste (none of which are essential to capitalism but are values
fed into the system.) Therefore, they recoil when economists and others speak
affirmatively about “capitalism.” Similarly economists view visceral objections
to capitalism (meaning to them, division of labor, market exchange, private
property, and capital) as ideological close mindedness. I continue to be amazed
at the number of books and articles I read that bring capitalism into a
discussion without defining it.

 

Capitalism
is often characterized as an ogre that oppresses people with consumerism. More
accurately the challenge of capitalism is not oppression but seduction. Some
say that the core sin of capitalist societies is greed, but along with Jay
Richards I think it is gluttony. We don’t know how to control our appetites.

 

Another
challenge leveled at capitalism is that it is based on survival of the fittest.
It promotes individualism. Division of labor and trade disconnects us from the
final product and from the natural resources used in production. Yet another
feature of evolution is that of emerging complexity and cooperation in
organisms. Cells cease to be single cell creatures and emerge into multiple
cell creatures with individual cells becoming ever more specialized. It can be
argued that division of labor and markets help integrate humans (cells) into a
more evolved highly cooperative creature.

 

I’ve gone
long (again). It is impossible to capture all the nuances I want to in one post
but hopefully there is enough here to generate some discussion. 

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