What is capitalism?

January 23, 2008

An extremely arrogant business consultant I once had the pleasure of working with told me the secret of capitalism and I’m glad he did.  It took awhile for the weight of what he told me to set in.

Some people equate capitalism and greed, selfishness or robber barons or priveleged, rich folks taking advantage of the poor.  They don’t understand that all of these exist without capitalism. 

Others think of capitalism in terms of it’s textbook definition – the private ownership of capital. 

These ways of thinking of it miss the subtle power of capitalism.

Capitalism allows for a voluntary and willing exchange between two individuals where both sides come out ahead, in other words, where both sides gain value.

I encounter few people who think of capitalism like this  They never stop and ponder why they buy the stuff they buy.  They assume that whoever gets the money gets the value.  They never consider that the only reason they bought a bottle of mouthwash is because they value the benefits the mouthwash provides more than the $4 they gave up.

Think about the stuff you buy.  If you don’t value what you get in the trade more than what you give up, then why do you trade?

Now, multiply the value created on both sides of each trade by all of the willing and voluntary trades that take place under capitalism and you get A LOT of value. 

So, what is value?  More on that later.

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