Why Americans Don’t Understand What Capitalism Really Is

(Why) Americans Don’t Understand What Capitalism Really Is

Or, How The Opposite of Capitalism Isn’t Socialism — It’s My Local Record Store

Here’s a tiny question. Across the street from me, a while ago, a little record shop, with a charming little cafe in the back, opened up. Confession time, my friends love it. They go there to have little coffees and buy some vinyl and just generally pootle around.

Now, as far as I can see, there’s a huge difference between the local hipster record store across the street from me, and Goldman Sachs. They couldn’t be more different — sharks in bad suits, versus aging hipsters and folk guitar nights. Yet we’re supposed to think they’re both “capitalism.” Are both these things really “capitalism”? If they are — aren’t we failing to think clearly or well about the subject at all, because we’ve lumped two things that are totally dissimilar together? If you agree with me that my local record store seems a whole lot like the opposite of Goldman Sachs — you should also agree that it’s the opposite of capitalism, and therefore, the opposite of capitalism isn’t socialism, but my little record store.

And yet I read a tweet today that went like this: “the problem isn’t capitalism! It’s this rigged system! America’s never been socialist and never will be!” Sigh. My friends, let me say this gently. Americans have no idea what capitalism actually is, and that is a big part of America’s troubles. Americans have the same relationship to capitalism as the Soviets did to socialism — since it’s the only idea allowed in society, nobody really understands or thinks about it well at all. One consequence of growing up in a Soviet society — in this case capitalism, not communism — is that people grow miseducated about that very system. It becomes all things, everything, and in the end, nothing.

Hence, today Americans conflate capitalism with all the following — all business, enterprise, entrepreneurship, endeavour, industry, trade. But capitalism isn’t all those things — and by failing to understand that, Americans remain stuck because they can’t unpick the basic nuances and distinctions of how to build a better society and political economy. I know that sounds strange, so keep my example of the little record shop vs Goldman Sachs in mind — and let me explain.

Capitalism is a very specific thing. It has a few critical elements. Maximizing profits — a legal obligation to. Returning those profits to shareholders, people who “own” a legally contracted “share” of them — which they can “trade.” Those “shareholders” are the ones who decide how to govern the organization, and sit on its board. Those are the basic ingredients of capitalism.

Now. Think back two thousand years. There were plenty of entrepreneurs and businesses. Wine merchants and carpenters and olive farmers. But none of these were “capitalists.” They had no legal obligation to maximize profits. They might have had partners and even investors — but certainly not formal, abstracted “shareholders”, trading “shares.” And without said “shareholders”, they certainly didn’t have “boards” packed with “directors.”

Do you see how different this is already from modern capitalism? What there were sole traders, maybe trading families of farmers, little carpenters’ shops. None of these were “capitalist” in the slightest. But they were very much just businesses, enterprises, industries, what the later Italian merchants would come to call “negocios.”

Fast forward a thousand years. How is the economy organized? Mostly in guilds. There are guilds of coopers (basketmakers), fletchers, tanners, tuckers, and so on. Those guilds were something like proto-unions — with a twist. You joined, did your time as a junior, rose through the ranks — and the prize at the end was being able to set up your own shop. Maybe you became a master carpenter or mason — and hung out your own shingle. This was a way to provide specialized skills, which society needed — and nurture them until they could become viable businesses. In the end, the entrepreneur was very much a businessman — and the most successful of the master masons and so on made great fortunes.

But again, none of this was capitalism in the slightest. The guilds didn’t have “shareholders”, and the master masons, while they certainly had businesses, enterprises, and organizations, weren’t “CEOs” of “corporations.” So the lesson should already be becoming clear: capitalism is a very different thing from business, trade, entrepreneurship. How so, precisely?

Capitalism required three key institutions to be created — and still does. It needed the nation-state — to create all the legal obligations and protections it enjoys, from profit-maximization, to the idea of a “company”. It needed the modern financial system of markets — to allow it to issue and hold “debt” and “equity”, or “shares”, of these “companies”, which were “capitalized” publicly — sold to all, not just casually, informally shared with friends and buddies and uncles and so on. And capitalism needed public investment for these new “companies” to operate, finally — because not a single company in the world has laid down its whole own public infrastructure, from roads to laws to courts and armies to protect property rights and so forth.

So capitalism is a thoroughly modern creation. Adam Smith never used the word — it didn’t exist in his time. Even when Marx used it, the word “capitalism” was a novelty. Nobody was really quite sure what it meant — so Marx gave it a 19th century definition, “owning capital”, one which today doesn’t quite wash, because “capital” isn’t just “money” anymore, we understand. See the point: capitalism is a thing made possible by modernity, nation-states, laws, courts, rules, markets. But business, entrepreneurship, trade, commerce, industry? These are as ancient as dust.

(The ancients drank wine and ate almonds, grown at vineyards and farms, which were businesses, trading things for money, trying to make a living as enterprises. But they weren’t “capitalist” in any sense of the word — they weren’t mindlessly maximizing profits, they weren’t trading “shares” of “profits”, and they weren’t “owned” solely by disconnected “shareholders” with no interest in the long-term survival of anything whatsoever. They were probably just trying to set a fair and decent price, they were usually loosely family owned to whatever extent was possible, and governed implicitly by social rules, values, and norms, which prized the coexistence and endurance and joint prosperity of all. Nobody in that world would believe that a hedge fund would burn down a beautiful vineyard just because it only earned $4 million of profit this week instead of $40. They’d probably be horrified at the idea that people with no interest in the long-term survival of anything now owned and governed those very things, solely to exploit them.

The Silk Road traders were consummate entrepreneurs and businessmen. But they weren’t capitalists — how could they be? They didn’t “own” the road. There was no legal obligation to maximize profits. There was no legal purpose of the “Silk Road Company” — because there was no company — because there were no nation-states to define such a thing yet. If they were robbed — what police force was there to call? Who were they issuing annual statements to? Did they hold board meetings in the wilds of Turkmenistan? Perhaps you see my point. Business, trade, commerce, industry — these things long, long, predate capitalism. And yet we, especially Americans, imagine that “capitalism” means anyone who was ever in business, or ever traded anything, from the beginning of time — yet when you think about it for even a moment, nothing could be further from the truth.)

What does that tell us? It tells us that capitalism is a kind of tiny subset of business, entrepreneurship, trade, commerce. It is just one way to organize these things — far from the only one. It is the one we use now — and we can and should question whether it’s doing us any good anymore. After all, 80% of Americans live paycheck to paycheck, 70% can’t raise $1000 in emergency savings, and living standards (like life expectancy and happiness) are plummeting. Is capitalism working? You don’t have to be a genius or some kind of smelly leftist revolutionary to conclude: wow, no.

But at the same time, if we imagine that questioning “capitalism” means that we’re also saying “nobody can open a shop or business or restaurant or bar!!! EVER!!” — that is to say, by questioning capitalism, we are also forbidding the existence of business, commerce, trade, industry — then of course no sane person will question capitalism. It is just so much extremist foolishness then. Yet what is really extremist foolishness is to think that questioning capitalism means we are suggesting shutting down, preventing, closing, shuttering all business, commerce, trade. Who would want to do that? So why do we end up thinking that?

That we believe capitalism is the only way to organize business, trade, commerce, and industry reveals we don’t really know what it is at all. It has become a kind of absolutism, a totalism, to us — we cannot think clearly, historically, or in a nuanced way about it at all, because it has come to represent everything to us. It’s exactly the same mistake the Soviets made, ironically. They imagined that their system of communism was the only true socialism — one party, “soviets” (which were councils that fed upwards to the “Supreme Soviet”, or grand council, Politburos, Five Year Plans). Soviet communism only true socialism, comrade! Meanwhile, Europe was happily building social democracies, which pioneered gentler, wiser, kinder, and truer forms of “socialism” (which is exactly what public healthcare or education or childcare is.)

Just as the Soviets thought “socialism” meant you could never open up a dry-cleaning shop, today Americans think questioning “capitalism” must mean you want to shut down all the dry-cleaning shops. But it doesn’t. Questioning capitalism just means the following things (as a brief, incomplete summary) — which are common sense.

That we disagree with the idea that there should be a legal obligation to maximize profits, above all else. That we don’t believe that an organization should be “owned” by “shareholders”, versus say employees, cities, towns, managers, or anyone else, partially or wholly. That we disagree with the idea that “shareholders” should be the only ones to manage an organization.

I’ve put that all very technically, so let me make it a little clearer. That every business, enterprise, project, endeavour, should be legally obligated to be as greedy and selfish and predatory as possible, because the only goal we should ever want is to “grow” into a giant, soul-crushing monopoly of profit — which also means they have to narrow-minded, short-sighted, and end up abusive and harmful to everything from the planet to democracy. That being exploitative and predatory is OK, desirable, good — not corrosive to democracy and survival and prosperity. We’re saying there should be more business, enterprises, endeavors that don’t have to or want to or need to become Goldman Sachs or Big Pharma or Facebook or the lobbying industry. Just decent, human-scale organizations far less interested in psychotically monopolizing all the profit in the economy that they possibly can — because they have to — than in doing exciting, interesting, wonderful, amazing things.

When we question capitalism, we’re not saying “shut down the dry-cleaners!!” — but the very opposite. We’re saying: should a giant pharma company really be able to bank billions off an opioid crisis? Should banks and HMOs have the legal obligation to maximize profits — not people’s well-being? Should all these companies be owned by people who simply “buy” “shares” of “profit” — why not the people who work at them, too, or the towns and cities they operate in, at least in some way, as a form of sanity, protection, a safety check? Should greed and selfishness and abusiveness really be the values by which our organizations are run? Should the idea that monopolizing all the profit in the economy is the sole purpose any commercial organization in it should be allowed to have? How could my local record store, cafe, or boutique be the same thing as Goldman Sachs?

So when we question capitalism, we’re not trying to shut down business, trade, commerce, industry, endeavour, creativity, ideas . We are trying to save it. Rescue it. Take it back. Liberate it. From the monopolies and the predators and the private equity funds and the hedge funds. We are saying there should be more, more, more of your local baker, brewer, and butcher. They’re not capitalists — they never were — at least if they’re just little local guys doing the things they love, instead of trying to build a giant predatory monopoly to maximize their profit, because that’s the only thing the system wants, allows, licenses, encourages, permits.

Do you see the difference? Now. Let me distill a couple of further lessons. This difference is crucial because without it, we are truly stuck, my friends — it leaves us nowhere to go if we cannot make this distinction.

If we believe the choices are — “capitalism” are the only rules by which we can organize all business, trade, commerce, and industry, or no capitalism means Marxist-Leninist socialism, aka nobody can start a dry-cleaning shop — then where is there to go? Then we’re in the uncomfortable position of saying what the hedge funds and private equity funds and banks and monopolies do is perfectly alright. But it isn’t. And it’s an illogical position, too — because quite clearly, there’s a huge difference between the local hipster record store across the street from me, and Goldman Sachs. Are both these things really “capitalism”? If they are — aren’t we failing to think clearly or well about the subject at all, because we’ve lumped two things that are totally dissimilar together?

We need to start realizing that capitalism isn’t all trade, business, commerce, enterprise, industry. It’s just one tiny way to organize them — that’s existed in history for far less time than many, many others. This one subset has brought with it huge, massive problems — from runaway inequality to shattering instability to heart-stopping precarity to falling life expectancy. If we can’t question it — all those things are likely to continue.

It’s on us, my friends, to reject the false dichotomy of “we have to support capitalism, or we can’t have business, trade, commerce at all!” In other words, the strange and mistaken American idea that capitalism is everything is up to us to question now. The idea that “capitalism” means your local dry cleaner who barely makes ends meet and works 18 hours a day is a capitalist, like say Jeff Bezos, the Waltons, or the Sacklers, isn’t just absurd and ridiculous — it’s the precise mirror image of the Soviet belief that “socialism” meant nobody could ever open up a dry-cleaner — the belief that led to the collapse of the USSR. That belief is leading America to collapse in just the same way — like all absolutisms, it leaves us with nowhere to go, but down.

The idea that we have to support capitalism or we can’t have any business or commerce or trade isn’t just false. It reveals just how badly we think about the past, present, and future, too. Remember my record store versus Goldman? Let me ask you again: are both these things capitalism? How could they be? If they’re not — what’s really the opposite of capitalism?

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