Understanding Capitalism Part I: Capital and Society
By - November 20, 2003
One of the great tragedies of the modern world is the general
American understanding of capitalism, or lack there of. When America was
founded the capitalist system as we know it did not yet exist. Modern
capitalism would not develop in America until after the Civil War, when
America's Industrial Revolution took shape. When America was founded,
however, it was home to some of the world's foremost economic
thinkers, such as Alexander Hamilton. Europe, of course, also played
host to a great number of economic thinkers as well, including the
"father of modern economics", Adam Smith, but it was America that
eventually took center stage in the world as the "bastion of
In 1776, the same year that America launched its war for
independence, Adam Smith published his masterpiece, An Inquiry into the Nature and Causes of the
Wealth of Nations; a work that set the ideological foundation
for the development of capitalist economy.
American understanding of capitalism today is in many ways very
different from the teachings of the man who we consider to be the father
of the very economic ideology which this country espouses to champion.
Understanding capitalism requires a strict understanding of the
importance of property ownership in the capitalist system. Property
ownership is the core of the capitalist system.
Capital is productive property. Capital is property that has
some productive economic value. Your television at home is not
"capital", however it can be capital if you use that television set in a
way to earn money, for example if you used it to give a paid
presentation to an audience.
As Adam Smith states in The Wealth of Nations:
The stock that is laid out in a house, if it is to be the
dwelling-house of the proprietor, ceases from that moment to serve
in the function of a capital, or to afford any revenue to its owner.
A dwelling-house, as such, contributes nothing to the revenue of its
inhabitant; and though it is, no doubt, extremely useful to him, it
is as his clothes and household furniture are useful to him, which,
however, makes a part of his expense, and not of his revenue.
So, the first thing to understand is that capitalism revolves around
"capital", i.e. productive property.
The next thing to understand is that a capitalist is someone who
receives money through the ownership of capital, i.e. someone who
receives money through the ownership of property.
A more useful description of the word capitalist would be someone
whose primary means of income is through the ownership of property. In
other words, someone like Donald Trump is a true capitalist. He makes
money through the buying, using, and selling of property. His primary
form of income is not a salary; his primary means of income is not
labor. A factory owner or a professional investor is a capitalist. An
average citizen in America today may own some stock, which is a form of
capital, but they have essentially no control over the property that the
stock represents and the stock is not a primary means of income,
therefore simply owning some does not make one a "capitalist."
In a capitalist system property ownership is ultimately the only way
in which value is "realized". Ownership of property grants the owner of
the property full rights to all of the value of that property. That
is, at its core, what capitalism is about, the ownership of
rights to value.
At the same time, labor is the only means by which value is created.
"Labor" can include work done by people, by nature, or by machines, but
nevertheless, the only thing that actually creates new value is doing
This is the key first step in understanding capitalism.
If you own something then you own full rights to all of the value of
that thing.This means, for example, that if I own a piece of metal, and
I get someone to sculpt that metal into a statue, I, through my property
rights, am still entitled to the full value of the statue because I own
the property. The person who took the block of metal and performed work
on it to increase its value is not entitled to anything. He has no legal
claim to any of the value of the object at all, even though he is the
one responsible for increasing the value of the item. In fact, all
of the "added value" as a result of labor is obviously a product of the
In this type of system the property owner may pay a wage to someone
to perform work on his or her property in the hopes that the work
performed will increase the value of the property.
In this case a capitalist may go to the public and offer a fee, of
say $100, to anyone who will perform the work that he or she is
requesting. Someone may take this offer and agree to perform the work.
The worker, of course, still has no rights to any of the value of the
property, the capitalist retains full rights and just agrees to pay the
wage to have the work done. Whatever value results from the work being
done is fully owned by the capitalist. If he pays the worker $100 and
the result is a product that is worth $5,000, then the worker has no
legal claim to anything other than the $100 which he originally agree to
do the work for.
Though the manufacturer has his wages advanced to him by his
master, he, in reality, costs him no expense, the value of those
wages being generally restored, together with a profit, in the
improved value of the subject upon which his labor is bestowed.
- Adam Smith, The Wealth of Nations
Wage-labor, and hence labor markets, are a defining feature of
That's all pretty basic and easy to understand, so now lets go to the
All value in the economic system is ultimately realized
through property ownership.
This means that everything that is done which increases value in our
economy is realized through property rights.
Let's take a look at how this works in our economy.
Land is a good way to demonstrate this concept.
The value of land is affected by many things, but not always by work
done to the property itself. You can buy a piece of land, do absolutely
nothing to it, and its value will change based on "the market". Things
which may impact the value of the land are: development near the land,
changes in population, change in the value of resources that are present
on the land, etc.
Let's say that Jim bought 10 acres of land out in the country in 1970
for $5,000. After buying the land a highway was built that runs near the
land. Over the years more and more development takes place near the
land. Now in 2003, because of the fact that roads and neighborhoods and
stores have been built up near the land, the value of the land has
increased. The 10 acres are now worth $1,000,000.
Jim is now entitled to the full value of the property because of our
property right laws. However Jim did not cause the value of the
property to rise. Jim did not work to create this value. The value of
the property was not enhanced by Jim, but instead it was enhanced by the
people who built the roads and houses and stores near his property. Had
the highway not been built near his property and had growth not taken
place near his property and had the population not increased, then his
property would not have changed in value in this manner.
The value increase of his property was not Jim's creation;
the increase in value was a product of society.
Society is who enhanced the value of the property; Jim is the person
who retained legal right to that value which was created by other
Of course had a city dump been built next to his property the value
may have gone down, but the point is the same, property rights are the
means through which socially created value is realized in a
capitalist system. The property owner may or may not be a contributor to
the change in value of the property, and the extent to which the
property owner is responsible for the change in value varies infinitely
from case to case.
This concept applies to all "property," which is to say everything
that can legally be owned, from land to cars to factories to public
buildings to music to patents, etc. In the case of public property the
State (in theory the citizens) is the owner of the property, but all the
same principles apply.
Now, let's expand this concept.
We are often taught that our economic system works through a system
of exchanges between individuals and that these exchanges are by
definition fair because they are agreed upon by both parties. We are
also taught that these exchanges represent the full expression of value
in our system, with the impression that capitalists and laborers, i.e.
property owners and those that they employ, are on equal footing.
This is not true.
In reality there are an infinite number of factors that contribute to
our economy, and not all of those factors are even a part of the labor
system, in fact not all of those factors are even a part of human
society. In addition to that, capitalists and laborers are not on equal
The value of property can be impacted by environmental conditions,
such as climate, plant growth, water flow and quality, pollution, etc.
If you owned a store in a town and the climate changed and the water in
the region dried up so that the area became a desert, then the value of
the property you owned would be negatively impacted.
The fact that animals grow, plants grow, etc, all has an impact on
value of property, not just land, but all things: cars, clothes,
sporting equipment, music, factories, farms, etc.
For example, fishing equipment is increasingly popular because people
enjoy the sport of fishing. The sport fishing industry is impacted
economically by the number and quality of fish that live in a region. If
a place has a lot of large fish that are fun to catch then the value of
fishing equipment is going to be higher. If all the fish go extinct then
fishing equipment has no value.
So in this way we can see that the fact that fish are out there in
the wild breeding, living, surviving, and doing whatever it is that they
do, has an impact on the value of property related to catching fish. In
a way you could consider the fish to be working for members of the
fishing industry, however the fish, of course, get no compensation.
Thus, capitalists who own fishing related industry, such as factories
that produce fishing rods, are in fact able to realize value added by
these fish. The fish are actually responsible to a large degree for the
value of the property, not just the workers who make the rods or the
owners who own the business, etc.
So, we can see that many things contribute to value, not
just paid labor.
Now, back to humans and our society.
Virtually every single thing that every person does impacts the value
of property in some way.
When I choose to pick up trash on the sidewalk I am doing work that
has an economic result. The neighborhood, be it a business district or
residential, is having its property value maintained, restored, or
increased. We all know this. People prefer shop in a nice clean places,
so in an area that is well-kept business owners are going to be able to
get higher prices for their goods and services than in an area that
looks like a dump.
The clothes I choose to wear, if I choose to take a bath and stay
clean, if I keep my yard clean, if I help a person across the street,
all of that contributes to value in our economy. All of that value is realized through
The most blatant example of this is the occupation of being a
homemaker. A woman, or man, who chooses to stay home and raise children
and possibly volunteer for activities at schools and things of that
nature, is doing a lot of work that adds value to our total economic
system. However, they are not compensated for their work monetarily. What
is important to understand though is that someone is. Again,
value-added is realized at some point. Virtually every single action
that every person, animal, plant, and inanimate object does has some
impact on value. All of these things, positive or negative, are realized
through property rights.
This means that while a homemaker stays home and cares for his or her
child and volunteers in the community they are not being compensated,
but that work does have an impact, and that impact is realized by
the property owners in his or her community, and in theory that concept
of community can be extended to include the entire world.
So what does all of this mean?
It means that we have two types of value-added in our system,
value-added that is compensated for and value-added which is not
compensated for. All of the value-added, including that which is not
compensated for, is realized by property owners through property rights.
It means that all socially created value is realized by
property owners. It means that wages are an insufficient means of
redistribution of value for the contributions made by society. It means
that property owners are the sole monetary beneficiaries of socially
In biology our understanding of ecosystems started out with the "food
chain", but then biologists began to realize that a "chain" of
relationships really does not adequately describe an ecosystem. We then
moved on to the food pyramid model, but again this model, while better
than the food chain model, proved insufficient to describe an ecosystem.
We then arrived at the food web model, which is where we are at today,
and the same is true of an economic system as is true of an ecosystem.
Our economy is comprised of a web of relationships. Everything
influences others things, and these relationship cross national
boundaries as well. The level of education of the population in India
has an impact on the American labor markets and on the price of goods
and services in America and on the value of property in America, and the
same can be said of just about everything in the world. The situation
with the Rain Forests in Brazil impacts the price of wood and food in
America, etc. So we can see that our global economy is indeed a web like
structure of relationships where local conditions are both impacted by
foreign conditions and also serve to impact foreign conditions.
Likewise, it is important to understand the economy web in a more
direct manner. Though the term "self-made millionaire" is a common one,
there is no such thing as a "self-made" millionaire, or a "self-made"
anyone of any economic level. The only person who can be called
self-made is a hermit. For example if a person starts their own pizza
delivery business and then makes it successful and becomes a
millionaire, many will call him "self-made," but in fact he is not
"self-made" any more than a shark living in the ocean is "self-made".
Both are part of a web of relationships that has to exist in order to
support the individual. In order for the man to have a successful pizza
business he relies on established roads, an educated public from which
he can employ workers, consumers who have money to pay for the pizza,
farmers who grow and market the food, etc. This is the full nature of
the economy web.
What we have to understand about capitalism is that a relatively
small number of people in the world own capital. At the same time, the
only people in the world who actually have a stake in the value
of our system are those people who do own capital. We all, every single
living thing on earth, contribute to the value of our economy,
but owners of capital are the ones who realize all of
that value. Some of that value is paid back to workers in the form of
wages, but a large portion of that value is not the product of paid
labor, or even in cases where it is, for example a worker who builds a
road, the "trickle down" effects of that labor are not compensated for,
i.e. the worker is paid a wage to build the road, but he is not paid for
the real value that he added to the other property near the road. In
that case the property owner reaps the reward of all of the work done by
the laborer, and the investments made by the public, and assumes none of
This of course presents a problem when it comes to the issue of
Over the past 20 or 30 years in America ownership of capital has been
consolidated into a smaller number of hands. Companies are consolidating
and a smaller portion of people are owning a larger and larger portion
of American capital. This is not the first time in American history that
this situation has arisen, this took place at the turn of the 20th
century as well, with a few wealthy capitalists such as JP Morgan, John
Rockefeller, and Andrew Carnegie owning or controlling hugely
significant portions of American capital. Not only did those conditions
help contribute to the Great Depression, but the fact is, the conditions
are simply not fair.
Capitalists, by definition, are taking advantage of work that other
people do, and they are, through law, being entitled to the value added
to property by other people. You buy property, you get a piece of paper
that gives you rights to "ownership" of all of the value that that
property represents, and then as the value of that property changes due
to work done by society, you are legally entitled to all of that value.
This is certainly not to say that capitalists don't serve a valuable
role in the economy, they do.
That situation alone presents a problem though, however, its not a
problem that cannot be dealt with within the capitalist framework, but
it is a problem that must be recognized.
There is a "trickle" effect in a capitalist economy, but unlike the
claims of the Reagan Administration, wealth does not trickle
down, it trickles up.
As the graph below shows, in 2001 the top 1% possessed almost 33 % of
the nation's wealth, while the bottom 50% owned less than 3%.
The source data, which comes from the Federal Reserve's Survey of
Consumer Finances, is linked below.
All of the little things that contribute to the economy are realized
by property owners, and property ownership is concentrated in the hands
of a relative few. This is something that we all ultimately understand I
think, we just don't all step back to get the big picture. The more
property you own, ultimately the better off you are, because the more
property you own the more you are taking advantage of the fruits of
society. The easier you have it, because society is doing more and more
work for you. That's obviously why home ownership is seen as such an
important part of preserving the American dream, but what people in
America don't think about as much is ownership of productive
property, i.e. capital.
In addition, the thing about property is that it takes money to buy
property, so the more money you have the more property you can buy. As
Adam Smith says in The Wealth of Nations: "Money, says the
proverb, makes money. When you have got a little, it is often easy to
get more. The great difficulty is to get that little."
It is essentially a system that requires money in order to make money
and the more you have the more you are able to acquire, which is why
property ownership is being increasingly consolidated, yet, in truth
every person in the country is already contributing to property value.
We are all contributing, but only those who own the property are truly
reaping the reward.
As I said, there is a "trickle" effect that does take place in an
economy, and property is like the bucket that catches the water drops.
Property ownership is essentially the right to all of the water in the
So, in this case, we have a system in which people, plants, animals,
and other environmental conditions are casting drops of "value" into
these buckets. In some cases a person may be doing this through paid
labor, for which they are compensated. You may make and agreement with
the bucket owner to cast 50 drops of value into the bucket for a fee,
however you also cast other drops of value into the bucket outside of
that labor contract as well, and so does every person in the country,
and ultimately the world. There are also a few cases of people who take
value from the bucket too, but let's first focus on the value going into
the bucket. So let's say then that 80% of the value being cast into the
bucket is in the form of paid labor, value that is compensated for. The
other 20% of the value cast into the bucket is never compensated for,
that is just "free value" that the bucket owner keeps outright.
Each little thing we do casts drops of value into the buckets of
capital, and the combined effect of everyone in the community,
ultimately the world, casting little drops of value into the buckets of
capital results is a major acquisition of uncompensated value by
property owners, "capitalists".
This is one reason that concentrated ownership of capital is not only
detrimental to society, but in fact quantifiably unjust. It
is a form of theft of socially created value. Any value that
property has that the owner of that property did not employ someone to
create is value that was created by society without compensation.
Okay, so, what to do about it?
First let us reflect on a few more statements by Adam Smith in regard
to conditions that may arise in an economy:
In a country which had acquired that full complement of riches
which the nature of its soil and climate, and its situation with
respect to other countries allowed it to acquire; which could,
therefore, advance no further, and which was not going backwards,
both the wages of labor and the profits of stock would probably be
very low. In a country fully peopled in proportion to what either
its territory could maintain or its stock employ, the competition
for employment would necessarily be so great as to reduce the wages
of labor to what was barely sufficient to keep up the number of
laborers, and, the country being already fully peopled, that number
could never be augmented. In a country fully stocked in proportion
to all the business it had to transact, as great a quantity of stock
would be employed in every particular branch as the nature and
extent of the trade would admit. The competition, therefore, would
everywhere be as great, and consequently the ordinary profit as low
But perhaps no country has ever yet arrived at this degree of
opulence. China seems to have been long stationary, and had probably
long ago acquired that full complement of riches which is consistent
with the nature of its laws and institutions. But this complement
may be much inferior to what, with other laws and institutions, the
nature of its soil, climate, and situation might admit of. A country
which neglects or despises foreign commerce, and which admits the
vessels of foreign nations into one or two of its ports only, cannot
transact the same quantity of business which it might do with
different laws and institutions. In a country too, where, though the
rich or the owners of large capitals enjoy a good deal of security,
the poor or the owners of small capitals enjoy scarce any, but are
liable, under the pretence of justice, to be pillaged and plundered
at any time by the inferior mandarins (mandarins is a negative word
for government officials), the quantity of stock employed in all the
different branches of business transacted within it, can never be
equal to what the nature and extent of that business might admit. In
every different branch, the oppression of the poor must establish
the monopoly of the rich, who, by engrossing the whole trade to
themselves, will be able to make very large profits.
Now, arguably, this is a condition which America may be starting to
face today. This is a condition that has always been understood to be a
condition of market systems. The situation, described here by Smith in
1776, is one where once a nation goes through its rapid growth phase and
its economy becomes more "mature" a point is reached where the wealthy
owners have to establish an oppressive class monopoly in order to
maintain large profits. This is a fact of capitalism, and as Smith
points out, limiting free trade does not help to resolve the problem
The problem that we have in America today is that the wealthy elite
have used the failures of some of the efforts to implement alternatives
to "American capitalism" as justification for the worst aspects of
capitalism. Instead of our culture promoting an understanding of
capitalism, its qualities and its problems, the mantra has simply been
pounded home that any alternative is "evil," and if there is
ever any doubt that this is true, fingers are simply pointed to Joseph
Stalin and the Soviet Union or Fidel Castro in Cuba.
Instead of promoting understanding and looking for alternatives that
would truly benefit society and be fair to all people, the specter of
failed "Socialist" efforts is used in the promotion of the idea that
there are only two choices, either the way of the Soviet Union, or the
way of the "USA" (which people always define according to their own
platform). This all plays into the favor of those few elite property
owners, the American capitalists.
What is truly the ultimate tragedy in all of this is that capitalism
itself, as it is being practiced today, is not even functioning in the
manner intended by its own ideological developers. Adam Smith was not a
man who intended to develop a system whereby a small number of people
would own everything and control everyone's lives and receive undo
benefits from the right of property ownership, as he demonstrated
eloquently in The Wealth of Nations:
It is in the age of shepherds, in the second period of society,
that the inequality of fortune first begins to take place, and
introduces among men a degree of authority and subordination which
could not possibly exist before. It thereby introduces some degree
of that civil government which is indispensably necessary for its
own preservation: and it seems to do this naturally, and even
independent of the consideration of that necessity. The
consideration of that necessity comes no doubt afterwards to
contribute very much to maintain and secure that authority and
subordination. The rich, in particular, are necessarily interested
to support that order of things which can alone secure them in the
possession of their own advantages. Men of inferior wealth combine
to defend those of superior wealth in the possession of their
property, in order that men of superior wealth may combine to defend
them in the possession of theirs. All the inferior shepherds and
herdsmen feel that the security of their own herds and flocks
depends upon the security of those of the great shepherd or
herdsman; that the maintenance of their lesser authority depends
upon that of his greater authority, and that upon their
subordination to him depends his power of keeping their inferiors in
subordination to them. They constitute a sort of little nobility,
who feel themselves interested to defend the property and to support
the authority of their own little sovereign in order that he may be
able to defend their property and to support their authority. Civil
government, so far as it is instituted for the security of property,
is in reality instituted for the defence of the rich against the
poor, or of those who have some property against those who have none
Adam Smith's desire was that his economic observations would lead to
widespread ownership of property by all people who would fairly share in
the fruits of socially created value.
As a primary example of this we can see Smith's statements on the
effects of wages and profits on the price of goods:
In reality high profits tend much more to raise the price of work
than high wages. If in the linen manufacture, for example, the wages
of the different working people; the flax-dressers, the spinners,
the weavers, etc. should, all of them, be advanced two pence a day:
it would be necessary to heighten the price of a piece of linen only
by a number of two pences equal to the number of people that had
been employed about it, multiplied by the number of days during
which they had been so employed. That part of the price of the
commodity which resolved itself into wages would, through all the
different stages of the manufacture, rise only in arithmetical
proportion to this rise of wages. But if the profits of all the
different employers of those working people should be raised five
percent, that part of the price of the commodity which resolved
itself into profit, would, through all the different stages of the
manufacture, rise in geometrical proportion to this rise of profit.
The employer of the flax-dressers would in selling his flax require
an additional five percent upon the whole value of the materials and
wages which he advanced to his workmen. The employer of the spinners
would require an additional five percent both upon the advanced
price of the flax and upon the wages of the spinners. And the
employer of the weavers would require a like five percent both upon
the advanced price of the linen yarn and upon the wages of the
weavers. In raising the price of commodities the rise of wages
operates in the same manner as simple interest does in the
accumulation of debt. The rise of profit operates like compound
interest. Our merchants and master-manufacturers complain much of
the bad effects of high wages in raising the price, and thereby
lessening the sale of their goods both at home and abroad. They say
nothing concerning the bad effects of high profits. They are silent
with regard to the pernicious effects of their own gains. They
complain only of those of other people.
And, of course, we see the exact same excuses being used by
capitalists today to justify the depressing of the minimum wage, which
is currently lower than it was back in 1950.
So, there should be no confusion about which side even the founders
of capitalism were on. Smith, and men like him, were not out to promote
the exploitation of populations for profit, they were out to document
economic processes in order to better understand them so that economic
principles could be better used to promote a fair and productive system,
and that is exactly what we must continue to do today.
So, based on the understanding of capitalism that I have outlined
here, what can be done in order to improve our system, make it more
equitable, more productive, and more resilient?
- Ensure that capital is more evenly
distributed among all members of society.
- Reduce taxes on labor and increases taxes on
- Increase the progressiveness of taxation.
- Promote true free trade, with
trading partners who uphold equal standards of labor justice and
Ensure that capital is more
evenly distributed among all members of society
Charles E. Merrill, the founder of Merrill Lynch,
claimed that his goal was to "bring Wall Street to Main Street". Merrill
spoke highly of the need to democratize American stock ownership. In
1945 only 16% of American households owned some stock and today over 50%
do. The goal of popular investment is obviously a good one. The majority
of American stock ownership today is through pension plans, and despite
the rise in the number of people who own at least some stock, stock
ownership is still extremely concentrated in the hands of the top 1% as
the graph below illustrates.
As of 1998 79% of capital funds were owned by
the top 10% of households.
Stock represents a share of ownership in "capital,"
i.e. the means of production. Investing is a means of sharing ownership
of the means of production, but it is a way that respects private
property rights and allows individuals to share ownership of capital
directly, instead of through a State system.
The problem with investing as a tool for economic
justice, however, is that you have to have money to invest, back to the
ol' "it takes money to make money" scenario; in addition, as we
have recently seen, the system is still not free from corruption.
Nevertheless, investment markets provide an excellent framework for
establishing economic justice. As Supreme Court Justice Louis Brandeis
said: "We can have a democratic society or we can have great
concentrated wealth in the hands of a few. We cannot have both."
I firmly believe that we cannot have economic
justice until every single American has an equitable share in investment
markets. As it stands now ownership of capital is highly concentrated in
the hands of the wealthy. There isn't any way to justify this or to
claim that this is "a good thing". Its not a good thing, its unsafe for
democracy, it leads to corruption, it creates economic instability, and
its unfair given the fact that socially created wealth is realized by
people who do not directly contribute to it simply because they hold a
piece of paper that entitles them to it.
The system though, the investment system of stocks,
bonds, etc., can be a highly progressive tool if properly used by our
society; not as just a means for a few people to get rich quick, but as
a means to distribute socially created wealth equitably in a structured
way that is respectful of property rights and which puts ownership of
"the means of production" directly in the hands of the individual,
not in the hands of the State.
So, how would we go about doing this?
My personal proposal would be to implement a
Federal investment system. Though the Federal government would be
involved, its role would be purely administrative in nature, similar to
the way the Federal government administers the Social Security program,
except the government would actually play an even smaller role and
individuals would have direct control over their own assets, so they
would be out of reach of politicians.
A small flax tax could be implemented, which would
be used to buy shares in a Federally held investment portfolio. The
investment portfolio would contain only index funds. Every individual
would have their own investment portfolio, and it would be just like an
investment portfolio that people have now with private brokerage firms.
In fact the actual holdings could be outsourced to private brokerages
such as Vanguard.
Shares in that portfolio would then be granted
based on the number of hours that a person works. That means that
everyone who works 40 hours a week would receive exactly the same number
of shares. This would also greatly increase investing in American
business as well, bringing more money into our investment system.
What this would do is help people who would not
ordinarily be able to invest get a real piece of the American pie. Poor
and average Americans are never going to be able to "buy their way" into
equality with the established giants of capital. There may a be a few
examples of "average people" who make it big, but the system as a whole
is never going to naturally move towards greater economic equality, it
will always naturally move towards greater economic disparity. What has
brought greater economic equality in America over the past 50 years has
been FDR's New Deal program and government redistribution of wealth. The
rise of the American middle class during the 1950s and 1960s was a
product of government assistance, not of the free market.
A system like what I am proposing would result in
virtually all Americans being truly enfranchised, truly owning
a piece of America. We know that ownership is one of the greatest things
that motivates people to be better stewards of property. All you have to
do is look at the difference between a neighborhood where people own
homes compared to one where everyone is renting. Essentially everyone
who does not own a share of capital in America is "renting" prosperity.
If true ownership were more widely embraced by everyone then people
would act more enfranchised because they would in fact be enfranchised
and this would be reflected in society in the same manner that home
ownership is reflected in society.
Ultimately something of this nature will have to be
implemented because of mechanization and automation.
The ultimate goal for all of us is that we should
all become true capitalists. We should all become people whose
primary means of income comes through property ownership, not labor.
That is ultimately what capitalism is about. Being able to live
off of investments should not be a privilege that is exclusive only to
the top 1% of Americans, and in global terms less that half a percent of
global citizens. We must recognize that we should all be working towards
a day when every person on earth is a "capitalist".
This graph shows Gross Domestic Product produced
per work hour in America over time. As you can see, by 1998 American
workers were producing about 6 times as much "product" per hour as they
were in 1910. That is to say that in 2 hours of work in 1998 the average
"worker" produced as much "product" as was produced in 12 hours of work
in 1910. You can see the link below the graph for more information about
how this index is calculated.
The graph below is an illustration of the concept
of the increasing role of capital income in our economy. The graph shows
a breakdown of the three major types of income in America, income from
labor, capital, and transfer income (income from the government). The
graph shows how we should expect of the role of each of these types of
income to change over time under a system like I am proposing. Without
an increase in capital ownership what you would expect to see is an
increase in Transfer income, i.e. an increase in the Welfare State.
The fact is that our system is continuing to
develop in this direction, in the direction of a system where people are
not needed for labor. There will come a day when we simply do not need
human labor to produce the majority of goods. If people are required to
work in order to be allowed to consume, yet we can produce the majority
of goods with virtually no human labor, then how is anyone going to be
able to buy the goods that we are capable of producing? Capitalism can
solve this problem, but it can only be solved through true popular
ownership. As we advance technologically, in order to truly make the
system continue to work, the share of ownership in the means of
production needs to be constantly increasing.
Right now, the ability to buy into that system of
ownership is the biggest hurdle that our society, and ultimately the
If we don't take action to ensure that capital
ownership becomes increasingly democratic then the economic system will
become limited, not by our ability to create, but instead by our lack of
ability to consume, which will be limited purely by property rights.
Demand will exist, means to supply it will exist, but legal ability to
consume will not be able to keep pace with either production capacity or
Reduce taxes on labor and
increases taxes on capital
Understanding that property is the ultimate means
through which value is realized naturally leads to the conclusion that
it is property that should ultimately bear the greatest burden of
taxation, especially if we are to be working towards a system that will
continually decrease the need for labor.
This has been recognized by many people, and it was
in fact not until World War II and ultimately the adoption of Keynesian
economic ideology, that anything different was ever considered in
Even Andrew Mellon, Republican Secretary of the
Treasury from 1921 to 1932, stated that capital should be taxed more
highly than labor.
The fairness of taxing more
lightly income from wages, salaries or from investments is beyond
question. In the first case, the income is uncertain and limited in
duration; sickness or death destroys it and old age diminishes it;
in the other, the source of income continues; the income may be
disposed of during a man's life and it descends to his heirs.
Surely we can afford to make a
distinction between the people whose only capital is their metal and
physical energy and the people whose income is derived from
investments. Such a distinction would mean much to millions of
American workers and would be an added inspiration to the man who
must provide a competence during his few productive years to care
for himself and his family when his earnings capacity is at an end.
Basically Mellon recognized that taxing labor more
highly than profits from investments was highly unfair to those people
who earned their money from day to day work, as others received money
while they slept.
It is certainly just to tax actual work less than
or equal to profits on investments; in addition though, as our system
evolves to become more efficient and more mechanized and the need for
labor is reduced, what is happening is that workers are being replaced
with machines, and every time that happens tax revenue is lost in terms
of a share of GDP. In other words a smaller a smaller portion of
GDP is being taxed because we are getting more GDP per worker through
the replacement of workers with machines. As this happens, with a tax
system that is based heavily on labor taxes, the tax burden is falling
more and more on working class people, in addition to the changes in the
tax brackets which themselves are also shifting the tax burden onto the
Not only is taxing capital more highly than, or
equal to, labor more fair at face value, but its all the more fair
considering the facts presented: that labor is how value is created and
property rights are the ultimate way in which value is realized. Without
work, all capital is worthless.
What this would mean is increasing corporate income
taxes and capital gains taxes, while at the same time reducing payroll
taxes overall. In fact Corporate income tax rates have been reduced
dramatically over the past 20 years, representing one of the largest
areas of tax cuts.
In addition to those changes, the Social Security
tax cap should be removed as well. The Social Security tax is currently
capped at $87,000 which results in the highest burden in terms of the
Social Security tax falling on those that earn under $87,000 in payroll
How should these things be done?
Through moderate transition. As capital income
becomes a more significant portion of national income, taxation of
capital should be slowly increased. It would have to be or else revenue
would be lost.
Increase the progressiveness of
The validity of the concept of "flat taxation" is
dependant on the existence of a 100% fair and equitable economic system.
Our federal tax system has become increasingly flat since the the 1960s.
The degree to which a taxation system should be progressive is always a
subjective matter to a degree, however "flat" taxation can only be
supported based on the idea that our economic system is 100% fair and
equitable in the first place, and that all individuals receive the true
measure of all of the value that they contribute to the system.
As I have laid out in the first part of this paper,
this is not the case. Wealthy people in America, and
essentially every country, have advantages that others do not have. As
Theodore Roosevelt put it:
...National Government should impose a graduated
inheritance tax, and, if possible, a graduated income tax. The man
of great wealth owes a peculiar obligation to the State, because he
derives special advantages from the mere existence of government.
Not only should he recognize this obligation in the way he leads his
daily life and in the way he earns and spends his money, but it
should also be recognized by the way in which he pays for the
protection the State gives him.
To presume that a man receiving $30,000 a year and
a man receiving $30,000,000 a year are both taking equal advantage of
the fruits of society and the State is absurd at face value, and
likewise to assume that the individual who is receiving $30 million is
contributing to society 1,000 times more than the individual receiving
$30,000 is also absurd. This would be to say that one CEO is more
valuable to America than 1,000 school teachers.
The issue goes well beyond that though. As I have
shown above, much of the wealth which is realized by the wealthiest
members of society is a product of socially created value, and thus the
wealthy are, for the most part, receiving an "unfair" portion of
the national income in the first place. The idea of flat taxation only
makes sense if you assume that everyone is getting exactly their "fair
share" in the first place, which they are not.
As ownership of capital becomes more evenly
distributed, then yes taxation can become less progressive, however,
right now our underlying economic system is highly unjust and
progressive taxation is a means to ensure greater economic justice.
Promote true free
trade, with trading partners who uphold equal standards of labor justice
and environmental care
The "free trade" debate is currently gaining
attention in America today, however the press is not covering this issue
honestly. The debate is being framed as "free trade" versus
"protectionism", when in fact those are not the real positions.
The so-called "free traders," i.e. global
corporations, are not really promoting free trade, they are promoting
increased trade that is made cheaper for certain organizations with
protections for those organizations to limit labor competition.
The serious opponents to this so-called "free trade" are not
"protectionists," they are people who would like to see "real" free
trade, without all the special protections for big corporations.
The problem with so called "free trade" is many
fold. Free trade was originally viewed by its proponents as beneficial
in its ability to exchange goods between regions in such a way as to
share goods that people don't have access to locally. For example, in
the 1600s, furs from North America were valued in Europe and China and
Chinese silk was valued in North America and Europe so furs from North
America would be traded for silks from China, etc.
That is a case of exchanging goods that people
don't have access to locally in order to supply demand. That's great.
That is not what "free trade" is about today
Today the goods being traded, by and large, are
capable of being produced anywhere. In the 1600s the Chinese
simply did not have beavers, and American colonists simply
did not have silks. They had to trade in order for
both people to get these things.
Today we can build virtually anything in the world
that can be built in America just as easily, if not more so, than it can
be built anywhere else. We don't need to trade with China to
get electronics, we can build electronics devices here.
What is really being traded today is
The biggest problem with so-called "free trade" is
that what it ultimately does is make advancement of labor rights more
difficult, and that is the real goal of this "free trade" movement as
well, to hinder the advancement of labor rights. The way that this "free
trade" hinders labor rights is that companies are seeking to make it
easier to move their production from place to place so that if workers
in any area begin to unionize or gain increases in the minimum wage, or
if wages go up in an area due to normal market demands, the companies
can then easily pickup shop and move to a new location. As they do
this they can then constantly keep seeking the cheapest labor markets,
which makes labor rights and advancements in quality of life more
difficult because there is always the threat that the companies can
simply move production to somewhere else.
Another problem is that the US government and these
companies have significantly more influence in many foreign countries
than they have at home here in America. Money can be used in third world
nations to influence policy and leadership. The US has a well documented
history of supporting anti-labor leaders in many countries all over the
world, places like Indonesia/East Timor, South Korea, Nicaragua, Chile,
and Honduras just to name a few. This history goes back to the South
America Banana Republics of the 1800s.
So, when companies are moving jobs out of America
and into some third world country, they are doing it because they have a
greater degree of control over the labor markets there than they do in
the United States. They hold more influence there, they can more easily
bribe and persuade third world leaders and businessmen in these foreign
countries than they can here in America. All of these major companies
court government and business leaders in third would countries and build
strong relationships with them so that those people are loyal to their
interests, instead of them being loyal to the interests of their fellow
Free trade is good, but free trade should be used
to secure resources that we don't have access to. For example, if
there is demand for pineapples and we can't grow them here, then yes we
should import them from somewhere else. However, free trade should not
be used as way to simply empower corrupt regimes to benefit themselves
at the expense of their own people in order to provide higher profits to
American companies. If that is what is going on, that is essentially
American slavery all over again, and the fact is, that is what is
Therefore, trade between the United States and
foreign countries should come with conditions. It should come with the
conditions that workers must be fairly paid, they must have basic human
labor rights, they must be allowed to independently unionize, they must
have safe work environments, and some basic environmental regulations
must be obeyed. In addition, American citizens need to be well informed
on the nature of these conditions in any trade agreement. American
citizens need to be well informed on how these companies really conduct
themselves in foreign countries. The fact is that labor power exists in
all countries and so labor power is not something that really "needs" to
be traded. Labor power is only traded as a means to increase profits of
a few at the expense of the many, not as a means to satisfy demands,
which is the real purpose of free trade.
Ultimately we should be moving towards the
implementation of global minimum wages and basic global labor standards.
Trade can become America's greatest weapon
to truly spread democracy and freedom to the world. Look at how much
money we spend on the military. We can use trade to improve the living
conditions of people all over the world if we want to, however for the
past 50 years the opposite has been going on. We have been using
pressure to keep living conditions depressed in many countries in order
to provide cheap labor. That is exactly where the tension in this world
is coming from. If we use trade responsibly, and require American
companies to be globally responsible, we can benefit not only ourselves,
but all of humanity.
Capitalism is all about property rights and
ownership. As individuals, we all need to be conscious of that and the
real implications of what that means. In order for the capitalist system
to be fair, equitable, and functioning well, it also requires that
everyone understand the role of capital in the economy. The more widely
distributed ownership of capital is the more fair the system is and the
better the system functions, yet the tendency in capitalist systems is
for ownership of capital to become consolidated.
As progress is made so that mechanization and
computerization account for a larger and larger portion of the
manufacture of goods and services it becomes increasingly important for
all citizens to share ownership of capital. We are all contributing to
the value of capital, yet only owners of capital realize that value,
therefore everyone who is not an owner of capital is losing out on value
that they themselves are contributing to our economic system.
Investing provides an excellent means to share
ownership of capital, however, due to the fact that it requires money to
buy into the investment system, and due to the fact that we are all
contributing to the value of capital, it would be a great justice to
find some other means to distribute capital to more people. In addition
to the issue of "fairness", economic principles dictate that if
ownership of capital is not more evenly distributed then our economy
will become limited by the needs of laborers instead of by our social
potential to produce.
Therefore it is ultimately in everyone's best
interest that ownership of capital be more evenly distributed.
Capitalism Part II- Personal Property, Money and Finance
Understanding Capitalism Part III- Wages and Labor Markets
Capitalism Part IV- Capitalism and Culture