What Exactly Is Capitalism, and How Does It Affect You?
In an article titled “Why Gen Z is Turning to Socialism,” Vice made an observation about why Democratic Socialist Bernie Sanders was so successful in unifying so many Gen Zers across so many progressive causes and movements. It turns out that young people were finding common ground in a perceived common enemy: the capitalistic system.
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But beyond political talking points, what is capitalism, exactly? And what about it makes around half of Gen Z — or even a majority, according to several studies — want to do away with it altogether?
The Hallmarks of Capitalism and Socialism
According to the Columbia University Center on Capitalism and Society, “Capitalism is a system of largely private ownership that is open to new ideas, new firms and new owners — in short, to new capital. Capitalism’s rationale to proponents and critics alike has long been recognized to be its dynamism, that is, its innovations and, more subtly, its selectiveness in the innovations it tries out. At the same time, capitalism is also known for its tendency to generate instability, often associated with the existence of financial crises, job insecurity and failures to include the disadvantaged.”
The most important characteristics of capitalism are:
- Private ownership
- A profit motive
- Minimal government intervention
On the other side of the economic spectrum is socialism, where instead of private ownership, a central body controls and allocates the country’s resources. The difference between socialism and communism — the two are often conflated — is that socialist countries elect the central body. In communist countries, the central body is unelected and unaccountable.
A Banana, a Peach and an Apple: Capitalism in a Nutshell
Michael Rossman, the co-founder of the business banking app MachFast, as well as an entrepreneur and banker with an MBA from the University of Chicago, laid out this simplified, but helpful scenario:
“You have a peach, Jane has an apple and I have a banana. You like apples, Jane likes bananas and I like peaches.
- Option A (feudalism/anarchy): Jane attacks me and grabs my banana. You attack Jane and take her apple and banana.
- Option B (communism): We elect Jane to be the supreme leader. She decides who gets what based on her views of the world. She may also choose to keep all the fruit for herself.
- Option C (capitalism): We all chat, agree on some trading rules and trade. I trade my banana for Jane’s apple. I then trade the apple with you for a peach.
We all get what we want based on free choice, rules and personal freedom. I get my peach. You get your apple. Jane gets her banana.”
Down With Capitalism? Gen Z Should be Careful What It Wishes For
Gen Zers who think they’d be better off by replacing capitalism with socialism should look around first. With the exception of maybe Bolivia — although even that is hotly debated — there is not a single example on Earth of a socialist country with a successful and thriving economy.
Capitalism, on the other hand, is the common ingredient in centuries’ worth of economic expansion.
“The main thing that Gen Z doesn’t understand about capitalism is that it is unquestionably the most effective way to lift a population out of poverty,” said Edward Patrick Akinyemi, an economist, founder of the Financial Literacy Movement and a former AmeriCorps VISTA member. “Given that Gen Z came of age during a time of huge turbulence — the Great Recession, climate change disasters, the pandemic, student loan debt crisis, stagnant wages, the gig economy and lack of worker rights, unsustainable levels of income/wealth inequality — they seem to believe that the system is inherently unjust and made to only benefit the rich at the expense of everybody else. But this isn’t true.”
He cites the stunning rise of China as one of the great success stories of capitalism.
“Before China opened up its economy in the late 1970s, it had an agriculture-based economy that was only about 6% the size of the U.S. economy, even though its population was four times greater than that of America,” Akinyemi said. “A staggering 90% of the country’s population lived in poverty. Today it’s the second-largest economy in the world — and is expected to become No. 1 in a few years — and its national poverty rate is in the single digits.”
Socialism: The Guard Rails of Capitalism
Opponents of socialism point to the horrors of Stalin and the contemporary example of Venezuela, where a socialist economy collapsed so thoroughly that stories emerged of people eating their pets to avoid starving to death.
Proponents of socialism, on the other hand, often point to the Nordic countries, which, by and large, are happy, healthy and wealthy thanks to socialist programs like universal healthcare and publicly funded college. The problem is, Norway, Finland, Sweden and the rest are not socialist.
“These countries are social democracies, which are essentially economies that focus on promoting social justice within the framework of capitalism,” Akinyemi said. “I like to describe it as ‘capitalism with guard rails.’ Socialism in its purest form is almost entirely dead in the developed world.”
Without Guard Rails, Capitalism Lets the Strong Eat the Weak
In 2015, hedge fund manager turned “pharma bro” Martin Shkreli became the poster child for corporate greed when he increased the price of a life-saving drug by 5,000% from $13.50 to $750. When pressed on it, he doubled down and said he should have raised the price even higher.
His justification, according to CBS News, was as old as America itself: “This is a capitalist society, a capitalist system and capitalist rules.”
That, thankfully, is not completely true.
“Most countries, including America, are mixed economies that have elements of socialism — unemployment benefits, minimum wage, Social Security, etc. — and capitalism — private property rights, no central price planning, private ownership of capital, etc.,” Akinyemi said.
Capitalism Creates Classes — and the Class With the Capital Always Wins
Capitalism inherently divides society into two classes: those who have the resources to launch businesses (capitalists) and those who have only their labor to sell for a wage (workers).
“This system has several advantages and numerous disadvantages,” said Meredith Phillips, a political consultant with the Lyda Group. “Chief among the advantages is that while markets are healthy, competition among firms can create reasonably efficient balances of production against demand without the need for central planning. The disadvantages center around the consolidation of wealth into a few hands. Capitalism, extended over time, guarantees a declining number of viable firms and of capitalists themselves. These firms and individuals hold a larger and larger share of the total wealth of the economy, which harms the overall health of the society. As the number of firms decreases, the efficiency and competitiveness of markets also declines, and the economy takes on more of the characteristics of central planning, eliminating one of the key advantages of capitalism.”
In other words, left to its own devices, free-market capitalism inevitably creates a tiny monopoly of ultra-powerful capitalists who control nearly everything and therefore determine how all the resources are distributed. But when equipped with the “guard rails” of social policies like unemployment insurance, Social Security and free or low-cost healthcare, it can be a more successful and balanced system that still promotes profit and economic expansion.
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Last updated: Sept. 30, 2021