Capitalism and Free Markets
Free Market and Capitalism. These two terms are frequently melted together and used to erroneously label one thing. Let’s look at the terms.
Free Market
A free market is described in a number of ways. In a simple explanation, a free market occurs when a seller and buyer agree on a transaction to deliver a product or service at a specific time, place and price. Under supply drives up the price and abundance lowers the price.
Any number of terms or qualification (caveats) can be linked to the agreement detailing the product or service delivered and how it is to be received and how payment should be made.
External restrictions can also exist (usually in law or regulation) that regulate price, taxes, safety, quantity, quality or that protect the public in some way.
Capitalist
For most products or services, some amount or labor is expended to create the “product”. A factory worker makes 100 widgets per hour which the company exchanges for some amount of money or something of value. Labor was turned into a “product” and the company makes a profit if it can sell the product for more than the cost to produce it. Value was added with the aim of making a profit or a return on investment.
In finance, another dimension is added. The bank (or some lender) lends money to someone to finance personal purchases or a business activity. The interest charged represents “utility” or the cost of money. It does not directly require any labor input to get this “profit” from loaning money. The borrower made a decision to pay the interest in order to have the money now (utility) rather than having to save up or use existing cash flow to finance operations.
This is capitalism. Providing the use of money and making a profit in the form of interest for providing this utility.
Profit
Profit has been labeled by some as evil and the cause if all of our troubles. The Marxist hypothesizes that it is only the laborer’s work that provides profit and that the profits from business belong (rightfully) to the workers. A profit is really just a return on investment for the investor’s risk and the investment of capital which could include opportunity, material, finance, intellectual property, facilities, know-how, organization and management (means of production). This represents his salary for providing these things. This has been an accepted concept since people have been exchanging goods and services with each other on a local, regional and international scale.
If labor was supplying the means of production, then Marx would be right. But, in that case, labor would be the owner or they would be capitalist and the argument would fall apart.
The other alternative to having a capitalist system is to have state-run banks and Central Planning. This would be straight forward Communism.
Summary
Free market and capitalism are not the same, but they do go together naturally, hand in hand.
Whether a market is free or restricted is mostly different from whether there is money available to finance operations. Profits can be generated from investing capital which could include opportunity, material, finance, intellectual property, facilities, know-how, organization and management or investing money. On a more basic level, salary (profit) can be generated by producing any sub-product, product of a service.
People who promote governments owning the means of production are saying that the profits belong to the laborers and that portion of profits collected by the government are re-invested for the benefits of labor. Central planning makes all the decisions. This is communism.
People who advocate strict controls and restrictions on business are usually social democrats or fascist.
People who believe that property should be owned by individuals, but regulated by government advocate social democracy or democracy.
Above that, free market individuals think that the natural balance of supply and demand along with prudent regulations will yield the most production and the most competitive prices. This is a free democracy or a free market under any form of government that supports a free market. For example, a constitutional monarchy might favor a free market.
Financial transaction can be regulated and restrictions can be placed on where financial transactions can occur or restrictions on the rates that can be charged. Regulations can be at the state of federal level. At the federal level, regulations can come from the Federal Reserve, the Treasury or any number of bureaus or departments of the Executive branch.
People desperate or quick to find an ideological position use the term free-market capitalist as a pejorative term, but it incorrectly combines a market term with a finance term. It also assumes that all of tenants of the Communist Manifesto are true. We have evolved from mercantilism to modern economic principles and we still argue supply-side versus demand-side economics. It would be helpful to separate these terms so they can be properly understood.
