Opinion and Economic Analysis

HICKS: Is U.S. economy example of capitalism or free market?

December 17, 2011

For some time, I have been unhappy with using the term “capitalism” to describe the ascendant form of economic organization. I prefer “free market” to describe the workings of the United States and much of the world.

I don’t mean to descend too deeply into the pedantic world of precise word usage that is so prominent in academic writing. Capitalism is a prettier term than free market. My problem is that it does not describe our current economy.

Use of the term was inspired by Karl Marx’s description of how investments flowed to the most worthy activities for wealth creation. Most of us remember Marx as the deeply flawed social philosopher he was, but his description of capital flows remains clear and elegant. In some ways, what Marx observed was an economic system that had replaced feudalism in Europe. I call it a system because its participants were few—mostly landed aristocracy—with a plainly understood set of rules. What we have today is quite different.

Over the past 100 years and increasingly since the end of World War II, the developed world (and much of the developing world) has experienced a supplanting of this capital system with one that isn’t really a system. What we have now are markets.

The difference is not subtle. Human beings intentionally create systems. Markets spring spontaneously from the interaction of people looking toward their economic interests. The degree to which markets are free varies with time and place, but the past 50 years have largely seen a movement toward more, not less, freedom.

Of course, there were free markets in the past and the flow of capital still helps drive economic activity, but today most wealth creation is not derived from capital investment. And perversely, now most households (in the United States, at least) are capitalists in the Marxian sense.

In Marx’s time, European gentry lived on inherited land and deployed their wealth as capitalists. Truly wealthy entrepreneurs were rare, and no one was well-off simply from the fruits of their own labor. Today, it’s quite different.

Of the top 25 richest Americans listed by Forbes magazine, 16 are unambiguously entrepreneurs whose wealth was accrued in their lifetimes. Of the remainder, only three have not had a direct hand in the gritty details of growing a business. It is at the local level that the change is even more apparent.

I personally know no one except retirees who live on their accrued capital. Even those who have inherited some money still work. It is the physician, lawyer or local entrepreneur who has replaced the country squire as the local aristocracy.

The term “capitalism” fails most in describing the modern world in that it implies elitist economic interests. Today, about eight in 10 households will own stocks and bonds through retirement funds. We live in a free-market economy—in part because we are all capitalists.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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