What Is Capitalism?

 1. Introduction: man’s nature

Ladies and gentlemen, to begin at the beginning—in one’s approach to political economy and to the evaluation of various social systems—one must begin by identifying man’s nature—that is, those essential characteristics which distinguish him from all other living species. 

Man’s essential characteristic is his rational faculty. Man’s mind is his basic means of survival—his only means of gaining knowledge.

Man cannot provide for his simplest physical needs without a process of thought; he needs a process of thought to discover how to plant and grow his food or how to make weapons for hunting; he needs a process of thought to discover how to light a fire, how to weave cloth, how to forge tools, how to make a wheel, how to make an airplane, how to perform an appendectomy, how to produce an electric light or an electronic tube or a cyclotron or a box of matches. Yet his life depends on such knowledge—and only a volitional act of his consciousness, a process of thought, can provide it.

A process of thought is an enormously complex process of identification and integration, which only an individual mind can perform. There is no such thing as a collective brain. Men can learn from one another, but learning requires a process of thought on the part of every individual student. Men can cooperate in the discovery of new knowledge, but such cooperation requires the independent exercise of his rational faculty by every individual scientist. Man is the only living species that can transmit and expand his store of knowledge from generation to generation; but such transmission requires a process of thought on the part of the individual recipients. As witness: the breakdowns of civilization, the dark ages in the history of mankind’s progress, when the accumulated knowledge of centuries vanished from the lives of men who were unable, unwilling, or forbidden to think.

In order to sustain its life, every living species has to follow a certain course of action required by its nature. The action required to sustain human life is primarily intellectual: everything man needs has to be discovered by his mind and produced by his effort. Production is the application of reason to the problem of survival.

If some men do not choose to think, they can survive only by imitating and repeating a routine of work discovered by others—but those others had to discover it, or none would have survived. If some men do not choose to think or to work, they can survive (temporarily) only by looting the goods produced by others—but those others had to produce them, or none would have survived. Regardless of what choice is made in this issue by any man or by any number of men, regardless of what blind, irrational, or evil course they may choose to pursue—the fact remains that reason is man’s means of survival and that men prosper or fail, survive or perish in proportion to the degree of their rationality.

Since knowledge, thinking, and rational actions are properties of the individual, since the choice to exercise his rational faculty or not depends on the individual, man’s survival requires that those who think be free of the interference of those who don’t. Since men are neither omniscient nor infallible, they must be free to agree or disagree, to cooperate or to pursue their own independent course, each according to his own rational judgment. Freedom is the fundamental requirement of man’s mind.

A rational mind does not work under compulsion; it does not subordinate its grasp of reality to anyone’s orders, directives, or controls; it does not sacrifice its knowledge, its view of the truth to anyone’s opinions threats, wishes, plans, or “welfare.” Such a mind may be hampered by others, it may be silenced, proscribed, imprisoned, or destroyed; it cannot be forced; a gun is not an argument. 

2. Individual rights

The social recognition of man’s rational nature—of the connection between his survival and his use of reason—is the concept of individual rights.

“Rights” are a moral principle defining and sanctioning a man’s freedom of action in a social context. They are derived from man’s nature as a rational being and represent a necessary condition of his particular mode of survival. The right to life is the source of all rights, including the right to property. (For a fuller discussion of rights, I refer you to my articles on “Man’s Rights” and “The Nature of Government” in my book Capitalism: The Unknown Ideal, which has just been issued in its paperback edition.)

In regard to political economy, property rights require special emphasis. Man has to work and produce in order to support his life. He has to support his life by his own effort and by the guidance of his own mind. If he cannot dispose of the product of his effort, he cannot dispose of his effort; if he cannot dispose of his effort, he cannot dispose of his life. Without property rights, no others rights can be practiced. 

3. What social system is appropriate to man?

Now, bearing these facts in mind, consider the question of what social system is appropriate to man. 

A social system is a set of moral-political-economic principles embodied in a society’s laws, institutions, and government, which determine the relationships, the terms of association, among the men living in a given geographical area. 

There are only two fundamental questions (or two aspects of the same question) that determine the nature of any social system: Does a social system recognize individual rights?—and: Does a social system ban physical force from human relationships? The answer to the second question is the practical implementation of the answer to the first.

Is man a sovereign individual who owns his person, his mind, his life, his work and its products—or is he the property of the tribe (the state, the society, the collective) that may dispose of him in any way it pleases, that may dictate his convictions, prescribe the course of his life, control his work and expropriate his products? Does man have the right to exist for his own sake—or is he born in bondage, as an indentured servant who must keep buying his life by serving the tribe but can never acquire it free and clear?

This is the first question to answer. The rest is consequences and practical implementations. The basic issue is only: Is man free?

In mankind’s history, capitalism is the only system that answers: Yes.

4. Capitalism: what it is

Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.

The recognition of individual rights entails the banishment of physical force from human relationships. Basically, rights can only be violated only by means of force. In a capitalist society, no man or group may initiate the use of physical force against others. The only function of the government in such a society is the task of protecting man’s rights—that is, the task of protecting him from physical force. The government acts as the agent of man’s right of self-defense, and may use force only in retaliation and only against those who initiate its use. Thus, the government is the means of placing the retaliatory use of force under objective control.

It is the basic metaphysical fact of man’s nature—the connection between his survival and his use of reason—that capitalism recognizes and protects.

In a capitalist society, all human relationships are voluntary. Men are free to cooperate or not, to deal with one another or not, as their own individual judgments, convictions, and interests dictate. They can deal with one another only in terms of and by means of reason—that is, by means of discussion, persuasion, and contractual agreement, by voluntary choice, to mutual benefit. The right to agree with others is not a problem in any society; it is the right to disagree that is crucial. It is the institution of private property that protects and implements the right to disagree—and thus keeps the road open to man’s most valuable attribute: the creative mind.

This is the cardinal difference between capitalism and any form of collectivism.

5.  “The common good”

The moral justification of capitalism does not lie in the altruist claim that it represents the best way to achieve “the common good.” It is true that capitalism does—if that catch-phrase has any meaning—but this is merely a secondary consequence. The moral justification of capitalism lies in the fact that it is the only system consonant with man’s rational nature, that it protects man’s survival qua man, and that its ruling principle is: justice.

Every social system is based, explicitly or implicitly, on some theory of ethics. The tribal notion of “the common good” has served as the moral justification of most social systems—and of all tyrannies—in history. The degree of a society’s enslavement or freedom corresponded to the degree to which that tribal slogan was invoked or ignored.

“The common good” (or “the public interest”) is an undefined and undefinable concept: there is no such entity as “the tribe” or “the public”; the tribe (or the public, or society) is only a number of individual men. Nothing can be good for the tribe as such; “good” and “value” pertain only to a living organism—to an individual living organism—not to a disembodied aggregate of relationships.

When the “common good” of a society is regarded as something apart from and superior to the individual good of its members, it means that the good of some men takes precedence over the good of others, with those others consigned to the status of sacrificial animals.

What makes the victims accept it and permit a society to perpetrate a moral atrocity of that kind? The answer lies in philosophy—in philosophical theories on the nature of moral values.

6. Three theories of “the good”

There are, in essence, three schools of thought on the nature of the good: the intrinsic, the subjective, and the objective. The intrinsic theory holds that the good is inherent in certain things or actions as such, regardless of their context and consequences, regardless of any benefit or injury they may cause to the actors and subjects involved. It is a theory that divorces the concept of “good” from beneficiaries, and the concept of “value” from valuer and purpose—claiming that the good is good in, by, and of itself.

The subjective theory holds that the good bears no relation to the facts of reality, that it is the product of a man’s consciousness, created by his feelings, desires, “intuitions,” or whims, and that it is merely an “arbitrary postulate” or an “emotional commitment.”

The intrinsic theory holds that the good resides in some sort of reality, independent of man’s consciousness; the subjective theory holds that the good resides in man’s consciousness, independent of reality.

The objective theory holds that the good is neither an attribute of “things in themselves” nor of man’s emotional states, but an evaluation of the facts of reality by man’s consciousness, according to a rational standard of value. (Rational, in this context, means: derived from the facts of reality and validated by a process of reason.) The objective theory holds that the good is an aspect of reality in relation to man—and that it must be discovered, not invented, by man. Fundamental to an objective theory of values is the question: Of value to whom and for what? An objective theory does not permit context-dropping or “concept-stealing”; it does not permit the separation of “value” from “purpose,” of the good from beneficiaries, and of man’s actions from reason.

Of all the social systems in mankind’s history, capitalism is the only system based on an objective theory of values.

7. The philosophical base of rule by force

The intrinsic theory and the subjectivist theory (or a mixture of both) are the necessary base of every dictatorship, tyranny, or variant of the absolute state. Whether they are held consciously or subconsciously—in the explicit form of a philosopher’s treatise or in the implicit chaos of its echoes in an average man’s feelings—these theories make it possible for a man to believe that the good is independent of man’s mind and can be achieved by physical force.

If a man believes that the good is intrinsic in certain actions, he will not hesitate to force others to perform them. If he believes that the human benefit or injury caused by such actions is of no significance, he will regard a sea of blood as of no significance. If he believes that the beneficiaries of such actions are irrelevant (or interchangeable), he will regard wholesale slaughter as his moral duty in the service of a “higher good.” It is the intrinsic theory of values that produces a Robespierre, a Lenin, a Stalin, or a Hitler. It is not an accident that Eichmann was a Kantian.

If a man believes that the good is a matter of arbitrary, subjective choice, the issue of good or evil becomes, for him, an issue of: my feelings or theirs? No bridge, understanding, or communication is possible to him. Reason is the only means of communication among men, and an objectively perceivable reality is their only common frame of reference; when these are invalidated (that is, held to be irrelevant) in the field of morality, force becomes men’s only way of dealing with one another. If the subjectivist wants to pursue some social ideal of his own, he feels morally entitled to force men “for their own good,” since he feels that he is right and that there is nothing to oppose him but their misguided feelings.

Thus, in practice, the proponents of the intrinsic and the subjectivist schools meet and blend. It is doubtful whether anyone can hold either of these theories as an actual, if mistaken, conviction. But both serve as a rationalization of power-lust and of rule by brute force, unleashing the potential dictator and disarming his victims.

8. Objective values as the base of capitalism

The objective theory of values is the only moral theory incompatible with rule by force. Capitalism is the only system based implicitly on an objective theory of values—and the historic tragedy is that this has never been made explicit.

If one knows that the good is objective—that is, determined by the nature of reality, but to be discovered by man’s mind—one knows that an attempt to achieve the good by physical force is a monstrous contradiction in terms which negates morality at its root by destroying man’s capacity to recognize the good, that is, his capacity to value. Force invalidates and paralyzes a man’s judgment, demanding that he act against it, thus rendering him morally impotent. A value which one is forced to accept at the price of surrendering one’s mind, is not a value to anyone; the forcibly mindless can neither judge nor choose nor value. An attempt to achieve the good by force is like an attempt to provide a man with a picture gallery at the price of cutting out his eyes. Values cannot exist (cannot be valued) outside the full context of a man’s life, needs, goals, and knowledge.

The objective view of values permeates the entire structure of a capitalist society.

The recognition of individual rights implies the recognition of the fact that the good is not an ineffable abstraction in some supernatural dimension, but a value pertaining to reality, to this earth, to the lives of individual human beings. Note the right to the pursuit of happiness. It implies that the good cannot be divorced from beneficiaries, that men are not to be regarded as interchangeable, and that no man or tribe may attempt to achieve the good of some at the price of the immolation of others.

9. The objectivity of value on a free market

The free market represents the social application of an objective theory of values. Since values are to be discovered by man’s mind, men must be free to discover them—to think, to study, to translate their knowledge into physical form, to offer their products for trade, to judge them, and to choose, be it a material good or an idea, a loaf of bread or a philosophical treatise. Since values are established contextually, every man must judge for himself, in the context of his own knowledge, goals, and interests. Since values are determined by the nature of reality, it is reality that serves as men’s ultimate arbiter: if a man’s judgment is right, the rewards are his; if it is wrong, he is his only victim.

It is in regard to a free market that the distinction between an intrinsic, subjective, and objective view of values is particularly important to understand. The market value of a product is not an intrinsic value, not a “value in itself” hanging in a vacuum. A free market never loses sight of the question: Of value to whom? And, within the broad field of objectivity, the market value of a product does not reflect its philosophically objective value, but only its socially objective value.

By “philosophically objective,” I mean a value estimated from the standpoint of the best possible to man, that is, by the criterion of the most rational mind possessing the greatest knowledge, in a given category, in a given period, and in a defined context. (Nothing can be estimated in an undefined context.) For instance, it can be rationally proved that the airplane is objectively of immeasurably greater value to man (to man at his best) than the bicycle—and that the works of Victor Hugo are objectively of immeasurably greater value than true-confession magazines. But if a given man’s intellectual potential can barely manage to enjoy true-confessions, there is no reason why his meager earnings, the product of his effort, should be spent on books he cannot read—or on subsidizing the airplane industry, if his own transportation needs do not extend beyond the range of a bicycle. (Nor is there any reason why the rest of mankind should be held down to the level of his literary taste, his engineering capacity, and his income. Values are not determined by fiat nor by majority rule.)

Just as the number of its adherents is not a proof of an idea’s truth or falsehood, of an art work’s merit or demerit, of a product’s efficacy or inefficacy—so the free-market value of goods or services does not necessarily represent their philosophically objective value, but only their socially objective value, that is, the sum of the individual judgments of all the men involved in trade at a given time, the sum of what they valued, each in the context of his own life.

Thus, a manufacturer of lipstick may well make a greater fortune than a manufacturer of microscopes—even though it can be rationally demonstrated that microscopes are scientifically more valuable than lipstick. But—valuable to whom?

A microscope is of no value to a little stenographer struggling to make a living; a lipstick is; a lipstick, to her, may mean the difference between self-confidence and self-doubt, between glamour and drudgery.

This does not mean, however, that the values ruling a free market are subjective. If the stenographer spends all her money on cosmetics and has none left to pay for the use of a microscope (for a visit to the doctor) when she needs it, she learns a better method of budgeting her income; the free market serves as her teacher: she has no way to penalize others for her mistakes. If she budgets rationally, the microscope is always available to serve her own specific needs and no more, as far as she is concerned: she is not taxed to support an entire hospital, a research laboratory, or a space ship’s journey to the moon. Within her own productive power, she does pay a part of the cost of scientific achievements, when and as she needs them. She has no “social duty,” her own life is her only responsibility—and the only thing that a capitalist system requires of her is the thing that nature requires: rationality, that is, that she live and act to the best of her own judgment.

10. Who succeeds on a free market?

Within every category of goods and services offered on a free market, it is the purveyor of the best product at the cheapest price who wins the greatest financial rewards in that field—not automatically nor immediately nor by fiat, but by virtue of the free market, which teaches every participant to look for the objective best within the category of his own competence, and penalizes those who act on irrational considerations.

Now observe that a free market does not level men down to some common denominator—that the intellectual criteria of the majority do not rule a free market or a free society—and that the exceptional men, the innovators, the intellectual giants, are not held down by the majority. In fact, it is the members of this exceptional minority who lift the whole of a free society to the level of their own achievements, while rising further and ever further.

A free market is a continuous process that cannot be held still, an upward process that demands the best (the most rational) of every man and rewards him accordingly. While the majority have barely assimilated the value of the automobile, the creative minority introduces the airplane. The majority learn by demonstration, the minority is free to demonstrate. The “philosophically objective” value of a new product serves as the teacher for those who are willing to exercise their rational faculty, each to the extent of his ability. Those who are unwilling remain unrewarded—as well as those who aspire to more than their ability produces. The stagnant, the irrational, the subjectivist, have no power to stop their betters.

(The small minority of adults who are unable rather than unwilling to work have to relyon voluntary charity; misfortune is not a claim to slave labor; there is no such thing as the right to consume, control, and destroy those without whom one would not be able to survive. As to depressions and mass unemployment, they are not caused by the free market, but by government interference into the economy.)

The mental parasites—the imitators who attempt to cater to what they think is the public’s known taste—are constantly being beaten by the innovators whose products raise the public’s knowledge and taste to ever higher levels. It is in this sense that the free market is ruled, not by the consumers, but by the producers. The most successful ones are those who discover new fields of production, fields which had not been known to exist.

A given product may not be appreciated at once, particularly if it is too radical an innovation; but, barring irrelevant accidents, it wins in the long run. It is in this sense that the free market is not ruled by the intellectual criteria of the majority, which prevail only at and for any given moment; the free market is ruled by those who are able to see and plan long-range—and the better the mind, the longer the range.

The economic value of a man’s work is determined, on a free market, by a single principle: by the voluntary consent of those who are willing to trade him their work or products in return. This is the moral meaning of the law of supply and demand; it represents the total rejection of two vicious doctrines: the tribal premise and altruism. It represents the recognition of the fact that man is not the property nor the servant of the tribe, that a man works in order to support his own life—as, by his nature, he must—that he has to be guided by his own rational self-interest, and if he wants to trade with others, he cannot expect sacrificial victims, that is, he cannot expect to receive values without trading commensurate values in return. The sole criterion of what is commensurate, in this context, is the free, voluntary, uncoerced judgment of the traders.

11. Capitalism: progress without sacrifice

The magnificent progress achieved by capitalism in a brief span of time—the spectacular improvement in the conditions of man’s existence on earth—is a matter of historical record. It is not to be hidden, evaded, or explained away by all the propaganda of capitalism’s enemies. But what needs special emphasis is the fact that this progress was achieved by non-sacrificial means.

Progress cannot be achieved by forced privations, by squeezing a so-called “social surplus” out of starving victims. Progress can come only out of individual surplus, that is, from the work, the energy, the creative over-abundance of those men whose ability produces more than their personal consumption requires, those who are intellectually and financially able to seek the new, to improve on the known, to move forward. In a capitalist society, where such men are free to function and to take their own risks, progress is not a matter of sacrificing to some distant future, it is part of the living present, it is the normal and natural, it is achieved as and while men live—and enjoy—their lives.

Now consider the alternative—the tribal society, where all men throw their efforts, values, ambitions, and goals into a tribal pool or common pot, then wait hungrily at its rim, while the leader of a clique of cooks stirs it with a bayonet in one hand and a blank check on all their lives in the other. The most consistent example of such a system is the Union of Soviet Socialist Republics.

Half a century ago, the Soviet rulers commanded their subjects to be patient, bear privations, and make sacrifices for the sake of “industrializing” the country, promising that this was only temporary, that industrialization would bring them abundance, and Soviet progress would surpass the capitalistic West.

Today, Soviet Russia is still unable to feed her people—while the rulers scramble to copy, borrow, or steal the technological achievements of the West. Industrialization is not a static goal; it is a dynamic process with a rapid rate of obsolescence. So the wretched serfs of a planned tribal economy, who starved while waiting for electric generators and tractors, are now starving while waiting for atomic power and interplanetary travel. Thus, in a “people’s state,” the progress of science is a threat to the people, and every advance is taken out of the people’s shrinking hides.

This was not the history of capitalism.

America’s abundance was not created by public sacrifices to “the common good,” but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America’s industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance—and thus the whole country was moving forward and profiting, not suffering, every step of the way.

12. Capitalism needs a proper moral base

Do not, however, make the error of reversing cause and effect: the good of the country was made possible precisely by the fact that it was not forced on anyone as a moral goal or duty; it was merely an effect; the cause was a man’s right to pursue his own good. It is this right—not its consequences—that represents the moral justification of capitalism.

But this right is incompatible with the intrinsic or the subjectivist theory of values, with the altruist morality and the tribal premise. It is obvious which human attribute one rejects when one rejects objectivity; and, in view of capitalism’s record, it is obvious against which human attribute the altruist morality and the tribal premise stand united: against man’s mind, against intelligence—particularly against intelligence applied to the problems of human survival, that is, productive ability.

While altruism seeks to rob intelligence of its rewards, by asserting that the moral duty of the competent is to serve the incompetent and sacrifice themselves to anyone’s need—the tribal premise goes a step further: it denies the existence of intelligence and of its role in the production of wealth.

It is morally obscene to regard wealth as an anonymous, tribal product and to talk about “redistributing” it. The view that wealth is the result of some undifferentiated, collective process, that we all did something and it’s impossible to tell who did what, therefore some sort of equalitarian “distribution” is necessary—might have been appropriate in a primordial jungle with a savage horde moving boulders by crude physical labor (though even there someone had to initiate and organize the moving). To hold that view in an industrial society—where individual achievements are a matter of public record—is so crass an evasion that even to give it the benefit of the doubt is an obscenity.

Observe how seldom and how inadequately the issue of human intelligence is discussed in the writings of the tribal-statist-altruist theoreticians. Observe how carefully today’s advocates of a mixed economy avoid and evade any mention of intelligence or ability in their approach to politico-economic issues, in their claims, demands, and pressure-group warfare over the looting of the “total social product.”

It is often asked: Why was capitalism destroyed in spite of its incomparably beneficent record? The answer lies in the realm of philosophy. 

Capitalism could not survive in a culture dominated by mysticism or altruism. No social system (and no human institution or activity of any kind) can survive without a moral base. On the basis of the altruist morality, capitalism had to be—and was—damned from the start.

The guiltiest men today are not the collectivists; the guiltiest men are those who, lacking the courage to challenge mysticism and altruism, attempt to bypass the issues of reason and morality and attempt to defend the only rational and moral system in mankind’s history—capitalism—on any grounds other than rational and moral. 

Thank you.

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