Wednesday, 20 July 2011

Capitalism, What Capitalism?

In most countries wealth is created under various economic systems. An economic system is defined by a set of rules defining the relationship between interacting economic agents. For instance, in a feudal system the relationship between the landlords and their subjects was based on serfdom. Similarly the relation between the state and its citizens is exerted through coercion.

By contrast in voluntary and capitalist sectors the relationships between economic agents are defined freely through contractual arrangements. The first is based on bundling resources, risks and benefits while capitalism is based on unbundling them. In a capitalist system capitalists own the resources and profits but take the risks, while guaranteeing a contractual wage paid to workers. Both systems require the right to private property and its protection but only capitalism requires that most transactions between different agents be carried out through free and competitive markets.

The study of wealth predates the emergence of capitalistic systems but the modern economic science has its foundations in Adam Smith’s book on the Wealth of Nations. His book does not use the words capitalism or capitalist (curiously, the word capitalism had been used since 1633 but it was only popularized in the mid 19th century by the Marxist opponents of capitalism). Instead, the book is centered in showing why competition through competitive markets is the most efficient way of allocating resources and producing wealth. Since the capitalist system is the only system dependent on market competition it follows that, apart from a short experiment with communism, the history of modern economics and capitalism are inextricably intertwined.

Yet, the statisticians who have been developing the system of national accounts since the 1930s have never attempted to report the wealth contributed by each economic system – state, voluntary and capitalist. Instead they give us a breakdown of employment and GDP by sectors of activity and type of organization (e.g. households, government, financial and non-financial firms). Thus, when one wants to measure the contribution of the agents working in the capitalistic sector the task becomes almost impossible.

This is so because the so-called for-profit sector includes many types of capitalism. Moreover, the exchanges between for-profit firms and the other two sectors (state and voluntary) have reached a large volume of transactions which are not always executed on a competitive basis. Often such activities create a sector called grey-capitalism.

The various types of capitalism must be defined on the basis of their reliance on free and competitive markets. The purest form of capitalism is called market capitalism and it includes all self-employed and investor-controlled firms which are basically price-takers trading in free and atomistic markets. Other types of capitalism include the regulated industries, oligopolies, and management-controlled firms that operate under various not-fully-competitive systems, namely: managerial capitalism, crony capitalism, socialist state capitalism, corporatist state capitalism or social market capitalism.

Since economic theory has only proved the supremacy of pure competitive systems, any departures from such systems should be accepted only as a second best option justifiable solely by market failures and externalities. However, in the absence of entirely free markets, competition between the various types of capitalism does not ensure that the winner in terms of market share will be market capitalism. Indeed, quite the opposite may happen.

So, paradoxically, a rising share of market capitalism can only be achieved by regulating the growth of the other not-for-profit and capitalistic sectors. The rationale for such regulation is that the maximum collective welfare can be only achieved by a growing sector of market capitalism. That is, true capitalism ≡ market capitalism!


  1. Hello,

    I enjoyed reading your post very much.

    I have a question: with a pro-market-capitalist state that regulates and defends owners, is it possible that one individual, or family over time and generations with the right amount of ambition, could own the whole world?

    If so, is this ethical, on your opinion?

    Best regards,

    Guillaume Riflet

  2. that's "in your opinion", sorry.

  3. Theoretically yes, with or without government support, provided that there is no inheritance taxes. See my previous post on this issue here: