Capitalism Defined

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capitalism

Capital is a word that has different meanings in different contexts. For the purposes of this article, I will define capital as anything of value that has the potential to be exploited for gain. Now I wish to address the word “capitalism.” At its simplest and purest, capitalism is the act of exploiting that potential. So what does that mean? Let’s look at the following example.

Let’s take a young man – Billy. Billy is in his early teens and wishes to make more money than just his allowance, but he has few options open to him. For the past few years, he has been mowing his lawn in exchange for an allowance from his parents in the summer and doing similar work as each other season demanded (raking leaves in autumn, shoveling snow in winter, etc.). So at the beginning of one summer, he asks his parents if, instead of using the lawnmower merely for his allowance, he can exchange doing yard work at his own home for use of the lawnmower on other people’s homes. His parents agree, so he foregoes his allowance in order to start a lawn mowing business using their mower. It’s nothing fancy – just a gasoline-powered push mower that his parents had gotten soon after moving into their first house together.

He spends the summer going around to different parts of his neighborhood on different days to work on people’s lawns, and by the end of the summer, he’s acquired a small cart for the lawnmower, as well as a lawn trimmer and a leaf blower. He even has enough left over to buy a self-propelled lawnmower to use the following summer. The next summer comes, and he’s able to serve even more customers, because it will now take less time to cut each lawn, and he calculates that he can make an extra thousand dollars over the summer. But Billy has a friend – Alex – and Alex also wants to cut lawns, but he lives in a nearby apartment complex and his parents don’t own a lawnmower. Alex asks Billy if he can help him cut lawns so he can also make money. Billy tells Alex that instead of the two of them working together, Billy will let Alex rent his new self-propelled mower for one thousand dollars for the entire summer as long as he sticks to mowing lawns on the other side of his apartment complex. Alex agrees, and at the end of the summer, returns the mower to Billy along with the thousand dollars they agreed upon for the lease. With his profit, Alex buys his own lawnmower for use the following summer. And that brings us to value.

Simply stated, value is what someone is willing to pay; whether it’s for labor, goods, services, or loans. A consumer-driven economy can dictate value much more quickly and accurately than central planning ever could. Providers free from external controls can respond quickly to market demands. If we use the previous story, we can see that Billy and Alex were able to come to mutually-beneficial terms. If some external force (let’s say government regulations) were to impose some arbitrary limitation on such an agreement, like telling Billy he could charge no more than five hundred dollars to lease out his mower or that Alex had to pay at least two thousand dollars to lease a mower for a summer, they both would have suffered. And in the case of government parley, they would have been told it was for their own good.

Billy and Alex both traded the capital they possessed (which was mostly their labor), for things that others had (money). They each had something that others valued and exploited those possessions in transactions that were mutually beneficial for all parties involved. That is capitalism, and that is value: ideas whose elegance lie in their simplicity.

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