Capitalism
Capitalism is the system of social cooperation under the division of labor in which the material means of production are privately owned, and in which production is directed by entrepreneurs who acquire those factors on the market and are rewarded or ruined by the judgment of consumers. Austrian economists generally prefer the terms free market or market economy, treating "capitalism" as a name given to the system by its critics rather than one chosen by its defenders.
The name
The word entered general use through the socialist literature of the nineteenth century, above all through Karl Marx, and carried from the beginning the implication that the system serves the owners of capital at the expense of everyone else. Ludwig von Mises accepted the term while rejecting that implication, arguing that it names the only arrangement under which the consumer is sovereign, and that its historical achievement was not luxury for the few but "mass production for the needs of the masses."[1]
Consumer sovereignty
The distinguishing feature of capitalism, on the Austrian account, is not the existence of profit but the mechanism by which profit and loss are assigned. Entrepreneurs bid for factors of production in anticipation of what consumers will later be willing to pay. Those who anticipate well earn profits and gain command over more resources; those who anticipate badly suffer losses and lose that command. Ownership is therefore continuously reallocated toward those who have served consumers, and no owner's position is secure against the preferences of buyers.
This is what Mises meant by describing the market as a democracy in which every penny confers a vote, and it is the basis of the Austrian claim that the entrepreneur is an agent of the consumer rather than a master of the worker.[2]
Private ownership of the means of production
Austrian economists treat private ownership of the means of production as the defining institution, because it is the precondition for economic calculation. Where the factors of production are not owned and exchanged, there are no genuine prices for them; where there are no prices, there is no way to compare the countless technically possible ways of producing a thing and select the least wasteful. Mises's calculation argument against socialism is for this reason simultaneously an argument about what capitalism is: not a system distinguished by greed or by machinery, but one distinguished by the presence of a functioning price system for capital.[3]
Capitalism and the intellectuals
Mises devoted a short book, The Anti-Capitalistic Mentality, to the question of why a system that raised general living standards so sharply attracts such persistent hostility from writers, artists and academics. His explanation was that a market society assigns status by consumer valuation rather than by caste or credential, and that those who believe themselves undervalued by it are inclined to blame the system rather than the verdict.[4]
Distinguished from what is often called capitalism
Austrians draw a sharp line between the market economy and arrangements in which the state allocates privileges to established firms. Interventionism, corporatism and the various forms of state-granted monopoly are, on this view, not degrees of capitalism but departures from it, and the business failures they produce are routinely misattributed to the market. The distinction matters because it determines what a financial crisis is taken to demonstrate.
See also
References
- ↑ Ludwig von Mises. XXI. Work and Wages, 2. Joy and Tedium of Labor, Human Action.
- ↑ Ludwig von Mises. XV. The Market, Human Action.
- ↑ Ludwig von Mises. The Anti-Capitalistic Mentality.