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.