What is Capitalism?

As the Republican Party struggles to redefine its mission in a post-Cold War world, it makes sense to revisit some foundational terms. We might better manage the tension we are experiencing between Capitalism and Conservatism if we took a moment to remember what “Capitalism” actually means.

In a Capitalist economy, the value of things is determined by the price they can command in a free market. Assigning value based on market transactions opens up unheard-of opportunities for ordinary people to be judged by their productive capacity rather than their class, heritage, religion, or other factors that define one’s status in a traditional society.

Capitalism is the greatest instrument we have ever devised to generate wealth and alleviate human suffering. Markets and individual liberty tend to accompany one another in the long term (thought markets and democracy perhaps do not – another subject).

The creative power of Capitalism hinges on the freedom to visit wholesale destruction on anything which fails to compete in this race toward efficiency. Capitalism is an agent of what economists call “creative destruction.”

Creative destruction is not limited to businesses. Markets will tend over time to destroy aristocracies, racial preferences, tradition-based values, religious assumptions, and shared or public resources. It does not matter how valuable something may be in collective or intangible terms. If it cannot hold its own in a commercial transaction between a free, self-interested buyer and seller, it will be devalued, weakened and eventually swept away.

This is where Capitalism finds itself at tension with Conservatism. It is also where Capitalism faces its own internal inconsistencies. This problem has a name: Externalities.

The beauty of Capitalism is the remarkable efficiency of markets in setting prices that accurately reflect value. Unfortunately, markets are unable to incorporate values that are “external” to the transaction between a buyer and a seller.

For example, the market neither knows nor cares whether the goods being traded were obtained by fraud, violence, pollution, or extortion. If a seller is somehow able to produce a cheaper paperclip by polluting your well, kidnapping small children, or simply stealing someone else’s paperclips, a free market with no government intervention will reward that seller and punish anyone who fails to engage in that commercially optimal and socially despicable behavior.

The problem of externalities also affects the survival of core traditional institutions. What is the value of motherhood? What is the value of religious faith? What is the value of respect for our elders? The deeper Capitalism penetrates into a culture the more its emphasis on commoditization erodes values or institutions that are external to any market transaction.

Capitalism reduces everything to a commodity. If fatherhood, for example, fails to pay enough to compensate for its costs, then it gradually becomes too expensive for anyone to afford. In a free market, fatherhood has to go.

The freedom of potential buyers and sellers to reach a price agreement without outside interference is the key to the effectiveness of the system. That same absence of external interference will also destroy that market. The paradox of Capitalism is that its survival is sustained by a partnership between government and markets.

They grow together in constant tension yet feeding on each other. That is why government in a market economy is always larger and more sophisticated than in the agrarian societies that precede it (think of the difference between Northern and Southern states in the US prior to the Civil War).

They are in tension because as a market economy grows more complex and dynamic, its demands on government for infrastructure, dispute resolution, and regulation grow with it. Yet markets still need the freedom to perform independent of intervention to the greatest extent possible. The relationship between government and a free market is like the relationship between a parent and a teenage child. Capitalism is always chafing at restrictions yet unable to support itself without them.

The beating heart of Capitalism is the narrowly self-interested individual in competition with other individuals to wring the maximum commercial value from each interaction. You cannot have unrestrained Capitalism and traditional social institutions any more than you can be hot and cold at the same time. The market value of “family values” is very low and their cost is very high. Without some intervention, non-commercial institutions like churches, community and family life will die under Capitalism.

That is why Charles Murray has found traditional values thriving among the affluent and dying among lower-earners. The erosion of “family values” that so upsets Rick Santorum and James Dobson is a by-product of Capitalism. It is not going away. If we love Capitalism and we love our traditional institutions, then we must recognize this conflict and build a government capable of balancing the needs of both.

In time, Conservatives will likely find themselves moving into partnership with environmentalists and labor in efforts to limit the externalities of Capitalism. If you doubt that, take a close look at the politics of the Catholic Church. Hamiltonian Republicans like Chris Christie and David Brooks will probably move into alignment with traditional Liberals in defense of markets and personal freedom.

Many political earthquakes stand between today’s political parties and a durable post-Cold War realignment. Until that rocky transition is complete, our politics will remain a muddled mess and Washington may be dogged by gridlock. The sooner we all come to remember the meaning of terms like “conservative” and “capitalist,” the faster we can complete this uncomfortable transition.

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About the Author: Chris Ladd is a Texan who is now living in the Chicago area.  He is the founder of Building a Better GOP and has served for several years as a Republican Precinct Committeeman in DuPage County, IL, and was active in state and local Republican campaigns in Texas for many years. (Email: chrladd AT gmail DOT com)