The Essence of Capitalism

Sometimes we need to look at the basics of things to understand how they fit. Capitalism is such a thing.

It is easy to take it to be a political system and it is often sold that way. That is as far from reality as it is possible to get. Capitalism is not political. If anything it is anti-political. Capitalism is a way to allocate scarce resources. It is an economic system not a political system.

In capitalism we trade. I exchange money for something I want or need. I get the money by trading my time and skill to someone who needs that.

If I ignore the money part I trade my time and skill for the things I need.. Money just makes it easier.

The key issues:

  1. I voluntarily pay my money for the things I want. I might need them or I might just want them. Shiny objects at the checkout maybe.
  2. Someone else voluntarily pays me to satisfy some need they have.

All of us benefit.

The essence of capitalism is mutually beneficial voluntary relationships.

Politics is different.

Politics is about who makes decisions about what happens in society. They use the money the people have made by trading their skills and time and sometimes their invested capital to create the outcomes they want. The transfer of wealth to the government is not voluntary. You don’t pay taxes, they take them.

Capitalism is wealth creating and works best when it is left alone, but it needs some societal support. Some things are necessary and must be paid for. National security, a system of laws, major infrastructure, and some limits on the rapacious character of people. These are reasonable things for government to provide and we would all agree to pay for those.

The problem is polticians must appear to be doing something to seem useful. What do they do when the major problems have been dealt with? Of course they just address other things that are not significant problems. Those things cost overhead money and add little if anything. The pool of capital available for society shrinks.

Governments seldom, if ever, do objective cost benefit studies. It is likely a bridge that connects two parts of the economy is worth its price over time. Same for highways, airports, and an electricity grid. In the beginning these would be too costly for market participants to afford. We share the cost through taxation.

But what about regulations like the one in Europe that legislates how dark a restaurant can cook toast? Big economic win or pure cost?

There will be differing viewpoints about what the government should do. If we adopt the idea that things that create more wealth provide an advantage, then we have a basis for discussion. General welfare might provide an advantage. Same with medicare. We would of course be required to find the most efficient way to deliver those. Cost – Benefit, remember?


Understand the meaning and avoid the superficial arguments. Change may be necessary but when assessing what to change try to leave the parts that work and eliminate the burden.

I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.

Please be in touch if I can help you. 705-927-4770

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