Capitalism is a system in which the providers of investment capital, the capitalists, are different people/companies from those that run/manage businesses. That is its fundamental property. (I focus here upon capitalism in its narrow investment sense, rather than upon the free markets that many consider the natural partner of capitalism.)
A private capitalist system (i.e. a system in which the capitalists are private citizens) is very attractive, for at least three kinds of reason:
- First, those that have money are not always those with the best ideas for how to use it. Under a capitalist system, this does not prevent those with good ideas and talent from getting the opportunity they need. If the provision of capital is diversified - if no one social group has control over the distribution of capital - as tends to happen under a private capitalist system, then a capitalist system is intrinsically the enemy of rigid class or caste structures.
- Second, under a private capitalist system most money tends to be invested depending on risk and return, rather than any other merit of projects. This moral quasi-neutrality is a natural partner to a tolerant liberal society.
- Third, because those projects that will secure the highest returns can find investment capital under a capitalist system, risk-taking and innovation are facilitated. This means that private capitalist economies tend to grow rapidly and evolve dynamically and richly (with a great variety of products and richness of ideas).
Private capitalism is by no means the only investment order, and is in fact a relatively recent and somewhat counter-intuitive one. In many ways there is something rather unnatural about those without any money being able to fund business ideas. The more natural idea, perhaps, is that the wealthy should own and manage businesses. Let us call this the wealthy-owner order.
To function, private capitalism requires a much more sophisticated government infrastructure than the wealthy-owner order. A wealthy-owner order needs, at most, some controls on what the wealthy might do to stewards of their money if they were let down. Private capitalists need to be able to
- establish financing contracts of some sort with the business owners and managers (e.g. specifying how the capitalists will receive their returns)
- secure some appropriate title on their funds under certain circumstances (e.g. Is there a scenario under which the capitalist can assume managerial control of the business or liquidate it? What happens if there are multiple capitalists - who has first bite of the assets?)
- set out some limits to the exposure of the not-wealthy owners or managers (e.g. limited liability companies)
- have arbitration of their disputes
- provide capital in a form that the owners and managers can use (e.g. money, rather than, say, land or camels)
- secure property rights, e.g. as they divide between multiple capitalists or between those capitalists and the managers
and many others
Once we understand this, we can see that a capitalist economic order is by no means some "law of the jungle". It requires, of necessity, a high degree of sophistication and stability in the instruments of the state - contract and property law; the medium of exchange; courts; the tax system; principles such as non-retrospection; and others. Anarcho-libertarians cannot also be believers in private capitalism.
We should also note that one of the key points around which much regulation focuses - the division of control between shareholders, bondholders, and managers of companies - is at the core of the capitalist order. We should not hope that regulation could ever empower the providers of capital with complete oversight of the use of their capital. The very essence of capitalism is that this is not done. It is managers that must manage capital provided to them by others. If you don't like that, if you want to regulate that feature away, you don't like capitalism.
We can also understand the impulse to private capitalism. For if we aspire to a society of opportunity and toleration, we shall find it difficult to avoid being drawn into private capitalism over time - for otherwise opportunity will be restricted to those that control the capital or can gain the favour of the capital-distributors (e.g. by avowing political alignment with them) and out-groups will become excluded from economic participation. If we want a society of diversity of product and idea, private capitalism will always seem attractive. And if we want an economy that grows rapidly, it will occur to us over time that, although other systems may have less volatility than private capitalism (fewer booms and busts - private capitalism will tend to have a higher number of these than other systems because of its encouragement of risk-taking), after a while a capitalist economy will grow fast enough that its prosperity even in its bust phases will be greater than the prosperity of other systems even in their booms.
Private capitalism may be gone for now, but it cannot be extinguished altogether whilst we yet remember how to do it. For the next twenty years the British government may spend more than half the economy and control much of the investment even in the "private" half through its control of the state banks, but eventually the attractions of private capitalism will call to us - and those who remember how to implement a private capitalism economic order should be ready when the moment comes.
