Capitalism FAQ: Theory (2022)

Capitalism: Frequently Asked Questions

  1. What is capitalism?
  2. What is capitalism'sessential nature?
  3. What are thephilosophical underpinnings of capitalism?
  4. What is therole of government in a capitalist society?
  5. What doescapitalism have to do with freedom?
  6. Is capitalisma just social system?
  7. What is acapitalist?
  8. How is democracyrelated to capitalism?
  9. What is theopposite of capitalism?
  10. Is socialismideal?
  11. Who are thedefenders of capitalism?
  12. How is theoryrelated to practice?

1. What is capitalism?

Laissez faire capitalism means the complete separation ofeconomy and state, just like the separation of church and state. Capitalismis the social system based upon private ownership of the means of productionwhich entails a completely uncontrolled and unregulated economy where allland is privately owned. But the separation of the state and the economyis not a primary, it is only an aspect of the premise that capitalism isbased upon: individual rights. Capitalism is the only politico-economicsystem based on the doctrine of individual rights. This means that capitalismrecognizes that each and every person is the owner of his own life, andhas the right to live his life in any manner he chooses as long as he doesnot violate the rights of others.

2. What is capitalism's essential nature?

The essential nature of capitalism is social harmony through the pursuitof self-interest. Under capitalism, the individual's pursuit of his owneconomic self-interest simultaneously benefits the economic self-interestsof all others. In allowing each individual to act unhampered by governmentregulations, capitalism causes wealth to be created in the most efficientmanner possible which ultimately raises the standard of living, increasesthe economic opportunities, and makes available an ever growing supplyof products for everyone. The free-market operates in such a way so thatas one man creates more wealth for himself, he simultaneously creates morewealth and opportunities for everyone else, which means that as the richbecome richer, the poor become richer. It must be understood that capitalismserves the economic self-interests of all, including the non-capitalists.

Contrary to widely held beliefs, capitalism is not a system which exploitsa large portion of society for the sake of a small minority of wealthycapitalists. Ironically, it is actually socialism that causes the systematicexploitation of labor. Since the socialist state holds a universal monopolyon labor and production, no economic incentive exists for the socialiststate to provide anything more than minimum physical subsistence for theworkers except to perhaps prevent riots or revolutions. Exploitation isinherent to the nature of socialism because individuals cannot live fortheir own sake, rather, they exist merely as means to whatever ends thesocialist rulers -- the self-proclaimed spokesman of "society," may havein mind.1

3. What are the philosophical underpinnings of capitalism?

All political systems are ultimately the expression of some underlyingphilosophy. For example, Marxian socialism upholds that man is a collectiveentity shaped by economic forces beyond his control whose greatest goodis to serve the ends of "society." Capitalism, however, is implicitly basedupon a world view which upholds that man's mind is competent in dealingwith reality, that it is morally good for each person to strive for hisown happiness, and that the only proper social arrangement for men to liveunder is one in which the initiation of physical force is banished. Thisis the ideological basis upon which the United States of America was implicitlyfounded. The importance of recognizing the philosophy upon which capitalism-- and America rests upon, lies in the fact that no social system can beproperly understood or defended apart from its broader philosophical framework.

In regards to morality, capitalism is the only moral (meaning pro-human-life)social system because it safeguards a human's primary means of survival:his mind. Through upholding individual rights, capitalism recognizes thefact the each and every human being must use his own mind to grasp realityand act accordingly to better his own life. Capitalism is the only politicalsystem that is based upon man's true nature as a being who possesses thefaculty of reason -- capitalism is the only system that recognizes thathuman beings can think. Indeed, individual rights and capitalism not onlyprotect the individual person and property of each human being, but mostimportantly, they protect the individual mind of every human being.

Historically speaking, capitalism has been claimed to be consistentwith philosophies such as utilitarianism, social Darwinism, and even fundamentalistChristianity. However, these philosophies are in fact antithecal to thetrue nature of capitalism because they subordinate the good of the individual'slife on earth to some "higher good." In fact, the only philosophy thatis completely consistent with the theoretical requirements for understandingand promoting capitalism is the philosophy of Objectivism.

4. What is the role of government in a capitalist society?

The only purpose of government would be to protect its citizens fromforce or fraud.

The protection from force, that is, the protection of individual rights,would be achieved through the use of a police force to protect the rightsof citizens at home; a military, to protect the rights of citizens fromforeign aggression; and a court system to enforce contracts and settledisputes between citizens. Since rights can only be violated by initiatingforce, the government would only use force in retaliation of thosewho initiated it.

The greatest aggressor against man -- the greatest spiller of humanblood, has been the various governments that man has adopted throughouthistory. Because the government holds a legal monopoly for the use of force,the crimes committed by individuals acting on their own behalf are trivialcompared to the crimes, tyrannies, and wholesale barbarism that governmentsare responsible for. This is why it is crucial that governments be limitedin their ability to use force by a constitution based upon individual rights.That was the key insight of the Founding Fathers which made Americafreer than any other nation on earth.

Any other function of government than those listed above, nomatter what its intentions, would necessitate the violation of rights byinitiating the use of force against the people it is supposed to protect.For example, compulsory tax-supported education forces some people to payfor the schooling of others for whom they would not have voluntarily paidfor.

5. What does capitalism have to do with freedom?

Everything. Capitalism the only system in which freedom and liberty canreally exist.

Freedom means the absence of physical force, including all formsof fraud. An individual is free when force is not being initiated againsthim, which means that there is only one source of unfreedom for any individual:other men. That is, a man's freedom can only be infringed upon when anotherperson or group of persons initiates the use of physical force againsthim. The fact that an individual is unfit to run a mile in under four minutesor too poor to buy food is not a violation of his freedom. Why? Becausein both of these cases no one is forcibly stopping the individual fromattaining his ends. However, the fact that an individual cannot start hisown electric company is a violation of his freedom. Why? Becausein this case his actions are impeded by the use of force -- the government'slegal monopoly on utility companies prevents him from starting his ownelectric company through the threat of force. Freedom is only a negative,it imposes no positive constraints on other people's actions. In a free(or capitalist) society all men may act as they choose as so long as theydo not infringe on the freedom of others -- by violating their rights throughforce. Subsequently, it is only a government limited to protecting individualrights that fails to violate the freedom its citizens. Since capitalismupholds individual rights as absolutes, capitalism upholds freedom as absolute.

All non-capitalistic societies force some men to live at the expenseof others. Whether you are forced to live, in part or in whole, for thesake of God (as in a theocracy), "the underprivileged" (as in the welfarestate), or the latest sadist in power (as in a dictatorship) does not matter,it is only the fact that some individuals are violating the freedom ofothers, not the method by which they do it, that matters.

6. Is capitalism a just social system?


In fact, capitalism is the complete embodiment of social justice. Insocial or political context justice means that every person gets no more,and no less, than what he gains through voluntary association with othermen. A capitalist society is a just society because all individuals areconsidered equal under the law. Capitalism recognizes that it is just fora man to keep what he has earned and that it is unjust for a man, or groupof men, to have the right to what other people have earned. Since all peoplemust live independently under capitalism, all of the material values thata person acquires must be earned. Thus, the expression of social justiceunder capitalism is that what a man earns is directly proportional to whathe produces, with no antitrust laws or progressive income taxes stiflinghis achievement for the sole fact the he did achieve. All other forms ofgovernment, such as the welfare state, institutionalize injustice by legallyexpropriating the property of some men and giving it to others.

Many people have trouble accepting that capitalism is a just systembecause of the existence of economic inequality. It is observed that famouscelebrities and sports stars have very large incomes for work that is perceivedas trivial, and that many hard working people make incomes which pale incomparison for jobs that are perceived to be a greater benefit to society.What people must realize is that it is perfectly just for a superstar athlete,even with little or no education, to make a hundred times the income ofa scientist who has a Ph.D. and works much longer and strenuous hours.Why? Because the athlete creates enormous profits through ticket salesand product endorsements whereas the scientist generates very little revenuethrough his research. That is, each of them deserves what they earn,and what they earn is the result of how much wealth each of them creates(Incidentally, this is not to say that the athlete is morally superiorto the scientist because he is wealthier). Since each man has the rightto the product of his labor, it is completely just for the disparity inincomes to exist, and the only injustice to occur would be or the governmentto take money from the athlete and give it to those who supposedly deserveit on the basis of their "need."

7. What is a capitalist?

From a purely economic point of view, a capitalist is a person who buysin order to sell for profit. However, the productive role that capitalistsand businessman serve cannot be overstated.

Far from being exploiters, the true function of capitalists and businessmen"... is to raise the productivity, and thus the real wages, of manuallabor by means of creating, coordinating, and improving the efficiencyof the division of labor."2 By continuously improvingthe efficiency of labor, capitalists and businessmen are responsible forraising wages and creating employment which serve to raise the standardof living of everyone. Furthermore, by funding research and capital investments,corporations and capitalists make possible all of the modern day conveniences,from laser surgery to orchestra halls, that most people take for grantedevery day. In fact, since capitalists make available so much life-savingand labor-saving technology to so many people, they should be regardedas some of mankind's greatest benefactors. A few capitalists and businessmenhave done more to help mankind live a more enjoyable life (indeed, mostpeople would not even be alive today if it weren't for capitalists) thanall of the humanitarians, social workers, and clergy men combined. If oneconsiders human life a value, then they should regard capitalists as oneof its greatest promoters. (If Mother Theresa really wanted to help people,she should try and accumulate enough capital to start a factory in a poornation and employ thousands of people who would not have jobs without her.)

In a more fundamental sense, a capitalist is anyone (from a janitorto a millionaire) who lives solely by his own effort and who respects therights of others. The best symbol of a capitalist is the trader.That is, the man or woman who only deals with other people on a voluntarybasis. A capitalist is not an "exploiter" nor necessarily a "greedy" individual.

8. How is democracy related to capitalism?

An absolute democracy, which means unlimited majority rule, is incompatiblewith capitalism and freedom. This is so because capitalism rests on theprinciple of individual rights. In an absolute democracy, rights wouldreally have no legitimate meaning because they could always be voted awayin the next election. Individual rights must be consistently upheld ifcapitalism is to be achieved, and if the majority may do whatever it wantsregardless of the rights of the minority, capitalism cannot exist, noteven in principle.

When most people think of "democracy" they usually mean a constitutionallylimited democracy. The function of a limited democracy is to decidewho held political power and how that power is specifically exercised (suchas how many policemen or judges are needed), but what that poweris should be strictly defined and limited in the constitution. (This isbasically the original American system.) In a proper capitalist nation,a constitution based upon individual rights would be necessary to limitthe actions of its citizens and the government. Under capitalism, the majoritywould never be able to vote to violate the rights of the minority, no matterhow large the majority or how small the minority. Individual rights wouldnot be subject to vote.

9. What is the opposite of capitalism?

Statism, in any form.

Statism is the concentration of power in the state at the expense ofindividual freedom. Capitalism is the only system which protects individualrights and freedom, but the variety of political systems which violateindividual freedom are numerous: socialism, communism, fascism, Nazism,absolute monarchies, military dictatorships, theocracies, or the welfarestate are all systems which infringe upon individual rights, which meansthey institutionalize the initiation of force against their citizens.

It must be realized that there are only two fundamental political philosophies:those who are for freedom and individual rights and those who are againstthem. The types of political systems who are against freedom and individualrights are numerous, for there are many ways to violate the rights of man,but there is only one political-economic philosophy which upholds thatthe rights of man are absolute and immutable -- capitalism.

10. Is socialism ideal?

In order to answer one must first ask: What is an ideal and what purposedoes it serve? An ideal is that which is held as a standard of measurement,or of excellence. As a standard, it is used to determine the merits ofany system put forth to a specific end. A social system is a code of lawswhich men observe in order to live together. The measurement of socialsystems consists of the appraisal of, the relationships between men andthe laws and institutions which govern the forms of association. In orderto measure a social system, one must hold to an ideal, i.e. have a standardagainst which performance can be gauged. There is only one such possiblestandard: man's life.

A social system must be measured according to its ability to sustaineach man's right to life, i.e. its recognition of man's nature and as suchits defense of the requirements of a conceptual consciousness. Recognitionof man's right to life means the recognition of the necessity of the freedomof man's mind, with reason as his sole means of survival, and of the freedomof man's body, by which the products of the mind are brought into reality.Therefore, an ideal social system must respect the nature of man, and providea context in which the defining moral principle is the freedom to sustainone's own life by voluntary, uncoerced choice. Such an ideal system exists,if only in the minds of men, but it's name is not socialism.

Socialism holds that man is not an end in himself, and that he mustsacrifice his own convictions for the sake of the "greater good" of thecollective. Socialism requires the sacrifice of the individual mind, andhence denies the sole means of survival of man and in fact his very natureas a rational being. Such a system cannot honestly be held as an ideal.

11. Who are the defenders of capitalism?

There are two thinkers who stand as virtual twin towers in the historyof pro-capitalist thought, namely the novelist-philosopher AynRand and economist Ludwig von Mises.

The importance of Rand's ideas to the furthering of capitalism cannotbe overstated, for she gave capitalism what it has badly needed: a philosophicdefense. Rand recognized that the supremacy of reason and the moralityof egoism are the indispensable philosophical foundations upon which capitalismis based. In particular, her connection of capitalism to individual rights,and her recognition that individuals have the moral right to live for theirown sake makes her philosophy of Objectivismof utmost importance for a thorough and consistent defense of capitalism.

The other tower of pro-capitalist thought is the most prominent memberof the Austrian school of economics, and the greatest economic thinkerof all time, Ludwig von Mises. (The Austrian school has been the leadingschool of pro-capitalist economic thought since 1871). Mises's identificationof capitalism as being the system which benefits all, his refutation ofvirtually every accusation made against capitalism (such as the claimsthat capitalism leads to exploitation and depressions), and his proof ofthe economic impossibility of socialism rank him the as other great defenderof capitalism of all time. Other major pro-capitalist economists are themembers of the Austrian school such as Eugen von Bohm-Bawerk and Carl Menger,the French economist Frederic Bastiat, and members of the British classicalschool such as Adam Smith and Dave Ricardo. Furthermore, economists andpolitical philosophers such as George Reisman, Henry Hazlitt, Tibor Machan,John Locke, and the Founding Fathers of the United States, and less consistentdefenders such as Milton Friedman, F.A. Hayek, and Murray Rothbard allconstitute important names in the defense of capitalism.

12. How is theory related to practice?

The Capitalism FAQ is divided into two parts: Theory and Practice. Thisis not to suggest a dichotomy between the two. Theory does not exist quafloating abstraction, without reference or basis in reality. It is notan "essence" apart from cognition. Theory is human theory, and itis theory about something: existence. As such it is a reflection on thenature of existence, the nature of man, and the relationship between thetwo. Practice, or action, is human action. It is volitional, i.e.chosen (among alternatives), directed at a specific end, and based on avalue judgment(s) of the facts of reality.

Political-Economic theory is the body of fundamental principles underlyingthe science of human action. Theory is abstraction. It is a process ofidentification; an attempt to describe perceptual data by means of a consciousfocus of the human mind. To identify the ideal economic system, one mustobserve and understand what is, and what man is. Obviouslythen, theory is not an object (idea) detached from its subject (man). Ifa theory is correctly formulated, it is eminently practical. After all,if theory has nothing to do with reality, i.e. cannot be "put into practice",then how does one evaluate whether it is good or not? Ideas are not apartfrom those who think them. Actions are not apart from those who act. Andactions are implementations of ideas. One may defend capitalism on thebasis of its practicability as long as one is aware that the reason "itworks" is because it is good theory.

1. Reisman, George. Classical Economics Versusthe Exploitation Theory. pp. 17-18
2. Ibid. p. 11
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