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The Logic of Capitalism Explained!

January 24, 2014

Our World (the global society) lives under a philosophy called Capitalism. Few, however, have an understanding of this political/economic philosophy and its history. What principles underly this economic philosophy? What ideas are central to this philosophy? Has this philosophy changed over the years? Can we still call today’s markets Capitalistic markets? Let’s explore the philosophy of Capitalism as it originated and then discuss why our current economic world is far from original Capitalism. If we understand this evolution (primarily since the closing of the gold window in 1971) we can better understand why our currency markets today are distorted, manipulated, and not representative of real Capitalism. Here goes!

The core/central concept of Capitalism is the legal concept called ‘private property’. We live on a planet which currently has some 7 billion people needing goods and services for their survival. How should a society be structured so that sufficient food, clothing, shelter, transportation, and health care can be provided for everyone? What philosophies have been tried in history and which tend to work the best. History (just the last 100 years) shows that a community type model (under the administration of a central authority) does not provide sufficient prosperity and growth for all the people. Such models as Communism and Socialism sound logical on paper, but when implemented on the ground they tend to create disincentives and distorted motivations among the producers and the consumers. In other words, these ‘isms’ do not work for the benefit of the whole. Capitalism, however, has worked in the past for Americans but events have changed this philosophy!

Communism has been tried in Russia (1913 – 1989) and in Plymouth Rock, Massachusetts (during the time of our pilgrims) and the concept did not work for creating surplus goods for the people (material wealth and prosperity). Socialism, also has not worked well, where it has been tried and tested. We can witness this Socialistic philosophy today in the country of Venezuela. Is it working for the benefit of the common people? The consumer markets as well as consumer prices get so distorted and dysfunctional (via this centralized system) that shortages emerge in many essential goods and services. We witness this situation in Venezuela today. Basically, both Communism and Socialism have not worked well for the vast majority of common people on this planet. So let’s explore why Capitalism worked for a time period (1776 – 1971) and why it now is dysfunctional and obsolete for our new age of the internet and real-time markets.

Capitalism is based on the ideas of sound money and the creation of material wealth by mostly private citizens working within a competitive and private environment. Selfishness, greed, and personal gain is at the core of any successful system which employs Capitalism. The starting point for Capitalism is ‘private property’ and a ‘barter’ environment within a community type marketplace. People offer their privately produced goods and services in exchange for alternative goods and services. In time, the concept of ‘money’ emerges to satisfy the subjective concept of ‘value’. When we exchange any good or product for another we experience the concept of ‘value in exchange’. So what is ‘value’? Why is this such a difficult concept to comprehend? Why has silver and gold been the most desired metals to satisfy the concept of ‘value’?

In reality, ‘value’ is a phantom concept with no objective meaning. But to solve the riddle of ‘value’ in a barter environment, people ‘invent’ the concept of ‘money’. Money emerges as a physical item which solves the riddle of ‘value’ in exchange. If we choose a commodity like Silver as our ‘money’, we can view this metal as having and/or containing ‘value’. Historically, we have called this ‘intrinsic’ value. If we further define a ‘currency’ unit as precise units of Silver, we can calculate and/or measure ‘value’ with this unit (somewhat objectively). So ‘money’ and ‘currency’ emerge from the marketplace to solve the riddle of ‘value’ (the phantom concept within our subjective mind). With this starting point we have the core/central concepts of a viable Capitalistic system. What else must be understood?

Private property, money, currency become the driving forces for our goal of creating material wealth and prosperity for our society. For the philosophy of Capitalism to work our private sector must be decentralized and competition must drive the juices of selfishness, greed, and the determination to gain (financially) from hard/creative work. The ‘invisible hand’ (as defined by Adam Smith) tends to act so that the juices of selfishness, greed, and gain produce real material benefits for the greater society. Capitalism works when there is a shortage of wealth within a society and when free market competition is allowed to flourish. Goods and services get created (in abundance) by private individuals within a competitive environment where gain is administered via sound money principles, sound banking principles, sound political principles, and sound moral principles.

The general philosophy of Capitalism (as defined above) worked quite well for most of our American history. Breakdowns in the principles, however, do happen over time and then a type of destruction emerges for the system. One major breakdown which is now happening in the front of our eyes is the breakdown in our ‘money’ and ‘currency’ units. For Capitalism to work, ‘money’ must be a sound proxy for ‘value’ (which people believe in) and our currency unit (the dollar) must also be tied to the item chosen as our ‘money’. This is absolutely necessary as ‘money’ represents the ‘value’ of the material wealth which is created and produced. Money also represents a ‘store of value’ so that new Capital can enter the system for additional increases in our material wealth. Sound ‘money’ is at the core of a viable Capitalism!

Sound money means an item like physical Silver and/or Gold (coins minted for circulation) must be viewed by the marketplace as meaningful representations of Value and a Store of Value. Value is at the core of wealth creation and also at the core of savings (surplus productivity). People store ‘value’ via a money unit that is physical/tangible and which engenders confidence within the marketplace. This ‘store’ of value then acts as a catalyst for new entrepreneurship and new growth of material wealth. Today, all these core principles of Classical Capitalism have vanished from our marketplace and from our economic/political/educational system. Today, we trade worthless paper and digital currencies which are created via a Centralized Banking System…’out of nothing’. Sound money principles are no longer followed or allowed!

Today, we also have an interconnected global system of communication which has changed all our markets. Our global internet and our interdependent global institutions have created a whole new set of economic and political principles for our World. Our world is now administered by new global institutions (U.N., IMF, WB, WTO, BIS, G20, etc.) which have created a need for some type of New World Order for our planet (and its 7 billion citizens). The digital revolution has also permeated our entire planet with mobile communication devices which make our world a real-time marketplace with 24/7 activity. Furthermore, the economic model of Keynesianism has completely changed all the concepts of wealth, money, savings, debt, etc. We now live with a Centralized Model of money creation and a growing Centralization of political/economic administrators.

All our money creation is now Centralized within global banking institutions which act without any input from our private consumer society. All is becoming Digital and part of a Virtual marketplace for distribution and circulation of our currencies. Our currencies are now mostly digital and created via typing numbers into a computer screen. The entire meaning of money and currency has changed. The concept of ‘value’ is no longer objectified via a physical money item. This has created a global subjective system of money flows (all within the computer screen). Cyberspace has replaced observed reality. Virtual reality has replaced physical reality. And Centralization has replaced Decentralized markets. Robots have replaced much of our need for blue-collar labor.

Today, we live in a different world from prior periods of Classical Capitalism. This means that our current nonfunctional system will need to change radically at some point. We will need to discuss some new ideas for this new system going forward. This missive, however, is meant to inform the reader of what has transpired in the past. Watch the markets to learn about what has changed and why. Understanding what has happened over the past 45 years should help the reader to discern why we now need to think in terms of a new system for our planet. Enjoy! I am:

2 Comments leave one →
  1. john trausch permalink
    January 24, 2014 7:07 pm

    Thanks for this concise article that helps explain much of our current predicament.

    I would like to suggest that your sentence “Selfishness, greed, and personal gain is at the core of any successful system which employs Capitalism.” could perhaps be re-written as: Self-interest and personal gain is at the core of any successful system which employs capitalism. Yet this self interest can be either selfish and greedy or possibly enlightened self interest that takes into account the common good of society. I think this is significant because it underscores the significance of the moral order, and the failure offree market personal property ownership is due to moral defects especially when compounded by the concentration of great amounts of capital by fewpersons followed by collusion with political figures otherwise known as fascism. I look forward to your next posts since I find them worth sharing. Regards, John Trausch


    • January 24, 2014 8:45 pm

      Thanks for reading and for your suggestions. I would agree that the word selfishness can be interpreted in different ways. D


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