Common Misconceptions about Capitalism


Capitalism as an idea was created, or rather given a name, thanks to Karl Marx. Before then, it was simply the way reality worked. Adam Smith didn’t set out to describe a new economic order, he just wanted to make sense of what was already happening.

Marx spends a great deal of time maligning capitalism, and he does so through misrepresentation and misconception. In this article, I am going to make my best attempt to clear up the misconceptions people have.

First, wealth. People confuse wealth with money or property. This is simply wrong. Wealth is people having the things they want to have. Whether it’s Mother Theresa helping the dying in India, someone getting married and having children, or someone simply eating a nice steak dinner, wealth is people obtaining what they want. Obviously, if people value money and property above all else, these things will be what make people wealthy. But if they are a religious sort that value obedience to principles, or peace and quiet, this is also what makes people wealthy.

Next, poverty. If you look at pictures from a hundred years ago, you might think everyone was poor. But they didn’t see themselves as poor. The farmer who had a shack for a house but a hundred acres certainly didn’t feel poor. The city-dweller who landed a factory job even though he lives in a shared apartment didn’t feel poor. Certainly, if you looked at the living conditions of the wealthiest people in the world a thousand years ago and compared it to the average lifestyle of the modern American, you would call them poor.

Poverty is very difficult to define, and I’ve come to the conclusion that it is simply a state of mind. Being wealthy or rich means you have everything you want. Being poor means you lack most of the things you want. Another way to think of it is if you are wealthy, you spend less than you earn, and if you are poor, you spend more than you earn, or exactly what you earn.

It’s important that you understand your own biases when evaluating the wealth or poverty of others. Just because they don’t have what you have doesn’t mean they want it.

This brings me to the corresponding point about inequality. Capitalists look at inequality and point out how that is the natural result of the fact that people don’t value the same things. One person wants money more than anything else; another wants to raise a family; another would rather own property far from the city limits. By achieving their goals, they become inequal, and if we put our own value assessment on them, it looks like one person is getting rich and the other poor, and that can’t possibly be fair. If we’re a socialist, we probably value money more than family or property, so we think the guy with the big bank account is the winner and the other losers. It’s important to realize that it is you who is creating the inequality by judging people unfairly. You are not taking into account what people want.

Let me share a story. I became close friends with a couple who lived a completely different lifestyle than myself. They were from the deep south, spoke with a different accent, and just had a completely different way of doing everything. By all of my accounts, they were the poorest of the poor. As we got to know each other, they started to show me how even though I had things, I lacked some things they felt were more important. They had close ties to their friends and family, they had the freedom to up and move wherever they wanted, and they always had the fallback plan of moving back to their hometown and working there for a tiny income that is enough for their cable bill, a roof, and three good meals a day. By my standards, they were poor, but by their standards, I was poor too. I think this is the trap we fall in to when we look at inequality and poverty, and we have got to grow up and stop telling people what should be important to them.

Now let’s look at money. People confuse money with wealth, but this again, is absurd. Money isn’t wealth. Money is simply something that people use to trade with each other. Money that is good keeps its value well, it easily divided, and almost universally accepted. Money that doesn’t work well loses value or spoils, isn’t easily divided, and isn’t universally accepted. In today’s economy, US dollars are great money, especially if you are living in the US. But go to a foreign country, and you’ll find yourself wanting to trade those dollars in for the local currency. You’ll also find that people might use other resources as money. Obviously gold and silver come to mind, but there are other things that are universally accepted that can become money. That said, it seems socialists are consumed with a fascination with money. Capitalists understand it’s just another thing that has its own purpose and value.

Another misconception: Capitalists have no love. Or even, socialists are the ones who love, while capitalists do not. I think this is an absurd notion. Capitalism isn’t really an economic system any more than physics is. Capitalism and capitalists try to understand how people really behave and they try to use that to their advantage. That’s all there is to it. Assigning love or antipathy to a capitalist is rather pointless. Do we care if a physicist loves people or not? Nevertheless, the one critical feature of capitalism is that it accepts people for who they are. We do not try to change people. We simply try to understand them. It is the socialists who want to program people to be different than who they were, who want to disrupt their lifestyle and traditions, and redefine what is important to them. Capitalists accept people and their values and seek to work with that.

Finally, let’s talk about exploitation. This is a charge laid at capitalists feet time and again. The idea is that if someone is rich and powerful, they got that way because they took something from someone poor and weak. This is simply absurd. In a free market system, which capitalists regularly advocate because it will lead to the highest levels of wealth creation, people will come together, find mutual interests, and enter into mutually beneficial arrangements. If you see someone who is making a lot of money, remember that he’s doing so by trading things with other that they were willing to pay for. That is, a billionaire got that way because he created billions of dollars of happiness and wealth. In a free market system, exploitation is impossible. All business relationships are mutual and temporary. When one party wants to break the contract, they are free to do so (although they might have previously agreed to compensation one way or the other for broken promises.)

If you want to see exploitation, loot at non-free market systems where people are not free to choose what business arrangements they want to participate in. Under such a system, people are not free to leave or change their partners. They are bound by law or force to do things they don’t want to do. That’s what exploitation really looks like. In short, when socialists accuse capitalists of exploitation, they are doing so because they don’t understand what wealth is or how it is created, and because they think the only way to help people is by removing from them their freedom to choose. In short, they accuse capitalists of exploitation because they want to do it themselves.

Finally, let me leave you with this thought. Capitalists do not want to change the world. We don’t want things to be different, we just seek to understand the way the world works and use that to benefit us and the people we care about.

The one thing you’ll hear us talk about is free markets. If you asked us, “How do we get to be rich like you?” we’re going to tell you the same thing, time and again: free markets. Free markets are where people are free to enter into and exit voluntary economic arrangements. In order for free markets to work, some degree of regulation is required to keep out bad actors or discourage bad behavior, but that’s about it. Let prices rise and fall naturally. Let people find their own way to contribute. The poorest hick from the Appalachians is born with the same kind of brain that a Wall Street financier has, and is quite capable of figuring out how to get what he wants just as much as anyone else.

PS: What about the poor? I just told you what about the poor above, but it seems you didn’t get it. If you feel so badly about the poor, then go help them yourself. It’s obvious that you value helping the poor, so by helping them yourself, you will become wealthy because you will get the things you want. I’m not being mean, I’m trying to free you from your own limited mind and circumstances. If you really care about the poor as much as you say you do, then you will find the work of running a soup kitchen or a homeless shelter invigorating and satisfying. Or your job will take on new meaning as you donate 10% or more to charity each month. Go help them yourself, and thank me later for how good it feels to get what you want! This is what capitalism teaches us: go get the things you want, and don’t let anyone tell you no.



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2 Responses to “Common Misconceptions about Capitalism”

  1. Jason Gardner Says:

    Interesting but I think the biological aspect ignored. Free markets work in a homogeneous society where everyone else is more or less equal in ability and understanding. For the average guy, its ok if you’re not a winner if you understand why, (Didn’t take risks, lazy, etc.)

    If you are cognitively different from your peers (dumb) you may not know why you are not rich. This leads to unrest, anger, etc.

    In fact, the wealthiest nations do not have free markets. Norway, Germany, Sweden, Switzerland, etc. they do have high homogeneity, high trust between members, and a history of strong social networks and government programs.

    Free markets appeal to quantitatively minded people because it looks like a nice engineering solution. However, people are not rational and do not behave like electrons. Humans are certainly not introspective or rational. This is why I believe that economics is the king of the pseudo sciences. Free market advocates are well meaning but I think slightly impersonal in their analysis. They ignore what people really do under the assumption of rationality.

    That said… Cool to see you blogging bro!

    • Jonathan Gardner Says:

      Thanks for responding! Many of the ideas I’ve formed have come from conversations we had when we were kids.

      > Free markets work in a homogeneous society where everyone else is more or less equal in ability and understanding.

      I don’t think diversity or the lack thereof has much bearing on whether free markets work or not. Certainly, having a wider variety of people participating in a market means more interesting choices in terms of buyers and sellers and thus more opportunity to find that niche that will maximize your potential. For those people who lack ability or understanding, they can always hire someone to bridge the gap. IE, the poor mexican immigrants in the American Southwest could hire American lawyers and doctors and teachers, but they don’t have those things available in Mexico in such quantity or quality.

      Regarding the Western European success stories, you mentioned trust. I think that’s the core of everything. After centuries and centuries of some of the bloodiest conflicts known to mankind, eventually, they learned to trust each other and that it is better to trade than to fight.

      I don’t give credit to their social programs and governments, however. One of the things that was pointed out regularly among our Founding Fathers was how they had the social programs in Europe and in England and all it did was encourage sloth. The same people who would stagnate in those programs would flourish without them. We put up signs, “Don’t feed the bears” in our national parks for a reason. We don’t want them to grow dependent on us. While we don’t feed the bears, we did feed the Native Americans, and look at how that has helped them become the economic superpower they are today. (Not!)

      And if you think a country like Germany isn’t diverse… they may all have white skin, but I guarantee that there are cultural and language differences that are quite severe. Two neighboring cities come from a history of different experiences and subjugation to different kings and emperors and laws and such.

      I assume you’ve already read Adam Smith’s Wealth of Nations. I believe you can make scientific observations in economics as he did. The problem is that too many people want to inject their utopic ideals rather than observe and accept things for what they are (as Marx did). Only after understanding why things are the way they are can one begin thinking about changing them for the better. The economic realities that Adam Smith observed, when the British government accepted them, made them the economic center of the universe. Because we’ve been embracing most of Adam Smith’s ideas, the US has been the economic center of the universe as well for some time. It is an observable fact that free economies do well, no matter what the color of the skin or racial background or heritage. Today, we see the “African Lions” — those nations which have abandoned socialism and embraced free markets, and they are growing fast. Decades ago, it was the Asian Tigers.

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