I am a staunch capitalist, but reject this assertion made in The Capitalist Manifesto1: “The principle of individual rights is capitalism’s essence” (page 33). That is… not the essence of capitalism, but rather the core of legitimate complaints against it. Capitalism is a mutually rewarding social compact, in which individual rights are subsumed under the founding principles of that compact. This essential misrepresentation joins two others in creating an undeserved image of capitalism, that labor is an outsider and fairness has no place in competitive markets.

    As to the first and most important misconception, individualism does not have primacy under capitalism. Far from being a Libertarian-like “dog eat dog” environment, which characterizes the opening quote, capitalism’s foremost essential is that it is a social compact, freely joined, framed and administered by like-minded individuals, who believe fairness and cooperation frame the legitimate means to increased economic value. While the individual drive for distinctive success is capitalism’s engine, and it recognizes that superior initial positions are unavoidable (e.g., birthright, native intelligence, physical attributes), it is nonetheless a social compact, in which everyone agrees to procedures for conduct that are established “behind a veil of ignorance.” This means capitalists joining the contract “do not know how the various alternatives will affect their own particular case and they are obliged to evaluate principles solely on the basis of general considerations”2 (page 118). This should be self-evident, considering the irrationality of joining an economic system is which the rules of conduct are stacked against you. Whatever means are available to the individual, capitalism offers the promise of maximizing their economic return. Importantly, most of these provisions or rules of conduct are not written, but assumed, guided by innate, human sociality. 

    The equally instinctive and powerful drive to achieve personal dominance, to gain the highest rung in the social hierarchy, is not suppressed, but is met through specialization and unique profit strategies.  Thus, the smartest and hardest-working acquire the greatest wealth, but everyone is on equal footing as to their conduct in achieving personal success. So, in exchange for greater returns on their private investment, individual rights are actually subsumed under the capitalist compact, not expanded. Personal rights and opportunities for distinctive wealth accumulation are, indeed, extensive (else individuals would not freely join the compact), but that makes them neither the essence of capitalism nor unbounded.

    Further understanding of this first misunderstanding begins with this definition: Capitalism is the socioeconomic system wherein the means of production and distribution are privately owned and operated in a competitive environment. Capitalism is not an economic system, but a socioeconomic one, a critical distinction, which means it acts in the economic and social domains, with the latter being the bedrock. No economic system is effective unless embedded within the framework of a civil society. Not only must laws and their enforcement structure be in place and characterized by equal justice, but the citizenry must intrinsically behave civilly. That is, the socialization process must be effective in internalizing cooperative norms of behavior, and the educational system adept at instilling reason and avoiding parochialism—today’s societies are necessarily global, and capitalism follows this scale. In such a worthy society citizens often curtail their private actions in deference to social order, and they, through self-determination (e.g., democracy), give birth to (or welcome) capitalism’s compact and economic machinery. This can be described as the “mother society.”

    Thus, the capitalist compact’s members forego many of their rights, first in deference to the other members (as noted in the opening), and then in exchange for the invitation to join or act within an orderly society. Thus, they owe a considerable debt to society. In modern ones, the capitalist compact arguably becomes first among social institutions, but by no means does it, nor can it, exist outside all other social conventions and institutions. The means of production and distribution are privately owned and operated, but ownership carries a social burden since society gave it life. (I am in good company in so describing the social debt owed by successful capitalists; see the organization, Responsible Wealth3.)

    The second misunderstood essential is this: labor is a full member of the capitalist compact, not an antagonist. An individual’s labor is a means of production, and its distribution privately owned and operated. By joining an enterprise involved in the capitalist economy, an individual becomes a member of the social compact, and, like all other members, is expected to live by its written and unwritten codes (work for a non-capitalist venture if this is not your intent). The value of a single person’s labor is often puny, but bounded only by the individual’s level of risk aversion (and other correctable constraints, like education, access to start-up capital etc., which are outside the purview of capitalism, let alone this essay). If a laborer is unsatisfied with the disparity between his income and that of others, then he should assume greater risks, and reap commensurate rewards.

    Having welcomed labor to the compact, capitalism nonetheless meets its greatest challenge at the juncture of labor, economy and social order. The “mother society” ensures the welfare of all its members (or is not stable enough to support capitalism), and the capitalist compact follows suit. There is little doubt that labor is the most vulnerable member in the dynamic environment suitable to capitalism. After all, they have essentially traded the opportunity to be risky entrepreneurs for the safety of a steady income, and everyone benefits because capitalism fails without risk-averse labor. Thus, safety nets, retraining programs and other aspects of social welfare are required to assuage the personal disruptions inevitable under a vibrant economy, and are an integral part of the capitalist compact effectuated and enforced by its members. The capitalist entrepreneur who derives profits solely by exploiting other members (like labor) is not meeting the standards of the capitalist compact, and other members are free to enforce a penalty. This also requires a free labor market, so individuals can effectively wield their power.

    Free, competitive markets (including the labor market) are integral to capitalism, and their necessary nature represents the third great misunderstanding of capitalism: They are unfair. To the contrary, monopolies, deceptions (e.g., product or service misrepresentations) and other acts serving to give any member unfair advantages are, by definition, violations of the capitalist compact. A free society may choose to permit spurious business practices (like egregiously false advertising so pervasive in America), to abet rapacious, unprincipled activity, but they do not represent capitalism. Creating an innovative profit strategy resulting in greater wealth for an enterprise’s owners and workers is not unfair, but if, for instance, job opportunities are too scarce (for any reason), the market is not free. The capitalist compact ensures an appropriate adjustment, and, if prolonged injustice is suffered by the compact’s most numerous members, forces already present in the “mother society” will take action, namely government.  

    Government is essential to the capitalist compact, but not part of its essence. Capitalism insists that government’s role be limited, but not restricted to enforcement of private economic interests. In addition to policing the competitive environment—catching and punishing cheaters—and being the conduit for the social welfare discussed above, government serves to ensure a smooth integration between capitalism’s economic and social dimensions, which are often in dynamic disequilibrium (a state that is usually healthy for an economy in which capital rapidly flows to the highest valued endeavors). The compact freely-undertaken by private individuals prescribes the resolution of these inevitable conflicts (and does so to keep government “at bay”), but cannot presume to imagine all of them because the dynamic power of capitalism ensures that the future is largely unknown. Furthermore, government might legitimately be involved in building the infrastructure (in its broadest sense) necessary for capitalism’s full course, but only inasmuch as private interests are incapable of amassing the required resources (e.g., space exploration). However, since infrastructure is part of distribution and private wealth often derived as a result of its existence, individuals must bear the burden of its maintenance in sums commensurate with their derived benefits. In assuming these infrastructure and social welfare burdens on behalf of the members of the capitalist compact, another of government’s critical roles is revealed: tax collection and disbursement.

    Thus, we have briefly addressed the salient features of some common misconceptions concerning the essence of capitalism, reaching this conclusion: It is a social compact between individuals, including labor, in which individual rights are subsumed by largely unwritten, contractual order, so that distinctive wealth accumulation might be possible, and it operates at the invitation of a civil society, which ensures the competitive environment and stable social structure, thus creating a social burden for those enjoying the greatest fruits of capitalism.

    In closing, it is important to rephrase one characteristic of capitalism that is not misunderstood, especially by its critics:  capitalism is the antithesis of egalitarianism. Nothing in life is characterized by equality, and attempts to equalize economic wealth are destructive. Social classes and wealth disparities are an essential ingredient to capitalism’s success. Like life-giving weather fronts, disparities create the incentive for healthy movement while also efficiently directing resources, thereby advancing everyone’s welfare. Those seeking a higher class or greater personal wealth can see how they might get there, and thus are self-motivated to do what is necessary. (Addressing the very real and too-numerous impediments to class and wealth movements are outside the scope of this essay, beyond saying they are neither created nor abetted by capitalism. In fact, those entering the capitalist compact can expect others to give them equal opportunity for self improvement.) The intrinsic motivation inherent to capitalism has a proven record of success, whereas extrinsic measures to raise individual well-being (e.g., gifts, unlinked welfare, socialist schemes, and compulsion) consistently fail. However, as noted above, compact members are aware that a great deal of their wealth results from things outside their control (e.g., the luck of birthright, higher innate intelligence). That is, a great deal of personal wealth is not earned, and rightfully belongs to the “mother society” in which capitalism thrives. How to address this realization of unearned wealth (e.g., inheritance taxes) without destroying the overarching power and goodness of private ownership or personal incentive—natural instincts means this includes immediate family—is beyond the scope of this essay, but any answer must accommodate the fact that much of everyone’s individual wealth is not attributable to their effort, but rather the efforts of individuals preceding them as well as the collective efforts of the “mother society.” In joining the mutually-rewarding compact, every capitalist admits that forces outside his control ultimately share in any achievements.

1 The Capitalist Manifesto: The Historic, Economic and Philosophical Case for Laissez-faire, by Andrew Bernstein, University Press of America, Inc., 2005

2 John Rawls, A Theory of Justice, Revised Edition, Harvard University Press, 1999

3 Responsible Wealth, http://www.responsiblewealth.org/