What is Capitalism? - Part 2

The Importance of Wealth to Power

When class is addressed in America it has historically been defined by income. The revered “middle class” is usually defined by an annual income ranges from $40,000 to $250,000. The next class, which starts at annual incomes above $250,000, belongs to what has historically been called the "upper class."

Breaking down the classes based solely on income doesn’t accurately reflect the true nature of the class system either in the types of classes or their origin. While there is a rough correlation between income and class centering on exclusively on income misses the true nature of the beast. This is because class is actually a characteristic of power relationships between groups of people. To understand these power relationships one needs to first understand how power is tied to wealth in America.

G William Domhoff (psychologist and author of "Who Rules America?") points out that one needs to start by understanding the meaning of the word "wealth." Economists have a specific definition. They define wealth as "marketable assets, such as real estate, stocks, and bond, leaving aside consumer durables like cars and household items." In addition to marketable assets economists use "financial wealth," which is a person’s net worth minus their net equity in owner-occupied housing.

According to research as of 2001 forty-four percent of all privately held stock, fifty-eight percent of financial securities, and approximately fifty-seven percent of business equity was owned by households in the top one percent of net worth. If one expands this to households with the top ten percent of net worth the percentage of ownership jumps to an enormous eighty-five to ninety percent of stocks, bonds, trust funds, and business equity.

If such wealth was earned largely through one’s own labor it might be excused. Domhoff shows otherwise. The Federal Reserve Bank of Cleveland published a study that indicated that only 1.6% of all Americans inherit $100,000 or more. Another 1.1% inherits between $50,000 and $100,000.

In addition, Domhoff has established through extensive research that there are a very small percentage of the American families who have a long stable history of dominating the American economic and governmental system. He’s documented how these small numbers of families have the controlling shares of stock in American commercial banks, investment banks, law firms, and corporations. By owning the majority of such stocks these families call the shots on the operations of the businesses. These families guide economic and political policies and dominate political institutions from the highest political office down to the local levels.

But the issue isn’t only the wealth but the connection between wealth and power. Domhoff defines power as "the ability (or call it capacity) to realize wishes, or reach goals, which amounts to the same thing, even in the face of opposition." He shows that wealth provides a resource that’s extremely useful in exercising power through political donations, paying off lobbyists, and money to think tanks. Another way wealth provides power is through the control of corporations, which exert extreme power in our society. A third wealth/ power connection is not only does wealth provide power but that same wealth-generated power can create a feedback loop by which it in turn generates additional wealth. This additional wealth can result not only from the reinvestment of proceeds such as dividends and interest, but also through sweetheart loans, quid pro quo deals, and well paying jobs upon leaving a public office.

Therefore, class should be defined not by the amount of income but by wealth and the power that it provides.

In the next post I’ll take this information and apply it to understanding the class system in capitalism.

To learn more about Domhoff's work visit his web site, "Who Rules America?"

What is Capitalism? - Part 1

"Know thy self, know thy enemy. A thousand battles, a thousand victories." ~ Sun Tzu

This is part one of a series in which I try to break down capitalism into its essential elements.

In capitalism we find an economic system with three central components that work together to serve one goal, that is to increase for a small group of people that mysterious and elusive thing called “capital” by which capitalism gets its name. Therefore, it’s with the nature of capital that we begin.

Defining Capital

While many capitalists actually prefer the term “free market” or “free enterprise” rather than “capitalism” (Richard Sennett in his book “The Culture of the New Capitalism” credits Werner Sombart with coining the term “capitalism” though many credit Karl Marx) they inevitably pay homage to capital in their theories. But what is capital and why does it plan such a dominant role as to name a whole economic system after it?

The term capital is used today for nearly every aspect of production. We hear about “human capital”, “investment capital”, “intellectual capital”, and so forth. Even in the political process when President Bush declared that he had earned “political capital” after the 2004 election. But the application of these terms hides the true nature of capital.

Essentially capital is the private investment of money. While private investment is most commonly thought of as stock ownership it also includes speculative investment in commodities, real estate, and financial markets along with the ever growing types of new investment mechanisms. In capitalism the supplier of capital lays legal claim, if not factual, to any profit generated by the investment mechanism, which the supplier of capital may then choose to reinvest. It’s because of this claim by the capitalist to the profits generated that gives capital its self-reproducing characteristic.

By understanding capital as private investment of money we can therefore define a "capitalist" as one who through sufficient investment is able to comfortably live on the profits generated by their investment rather than fruits of their own labor. In addition to claiming the profits the capitalist also lays legal claim to the right to manage any business that he or she invests in. The greater the percentage of shares owned then the greater the capitalist’s claim to the right of management.

In the next installment I’ll address the connection between wealth and power.