Part 1: Do I Believe in Capitalism?

A while back, during an interesting political discussion with a close friend at work, he asked me a question that seemed pretty simple on the surface:

“You do believe in capitalism, right?”

My answer was almost reflexive.

“Of course I do! I’m a red-blooded American, right?”

I was being a little tongue-in-cheek, but I meant it.

I believe in private ownership and free markets. I believe people should be able to start businesses, invest their money, take risks, compete, succeed, fail, and try again. People who create something valuable should be rewarded for it, sometimes substantially. Competition often makes businesses better. Investment can turn good ideas into useful products. Entrepreneurs should not need permission from the government to pursue every crazy idea they think might work.

Individual economic freedom matters to me too. People should have a lot of freedom to decide how they spend their time, where they work, what they buy, what they sell, what they save, what they invest in, and what they build.

So, I didn’t think much more about the question at the time, even though it was another example of being made to feel like, because I’m an American, there was a particular answer I was supposed to give.

But the question stuck with me.

As time passed, I found myself thinking more about what I had actually meant when I answered so quickly. Then, more recently, during a sales discussion with another coworker, I was asked essentially the same question again:

“It seems like you have a few issues with it, but you believe in capitalism, right?”

This time, I didn’t answer anywhere near as quickly.

My answer was still yes, but maybe with some caveats.

Curiosity had changed the way I thought about the question, so I had another one, mostly for myself:

What exactly would I be saying yes to?

The American economy we routinely describe as capitalist is overwhelmingly organized around private ownership and markets. But capitalism and markets are not quite the same thing. Markets are a way of coordinating exchange and economic decisions. Capitalism also depends on private ownership of productive capital.

That distinction raises questions of its own, including who actually participates in that ownership and how concentrated it becomes. I’m not trying to answer those questions here. But I do think it matters to be clear about what I mean when I use the word capitalism. It also matters that I don’t claim to be an economist. I’m just curious.

The American economy isn’t a pure theoretical version of capitalism, no matter how often rhetoric makes it sound that way. We rely on public schools, roads and bridges, police and fire departments, Social Security, Medicare and Medicaid, unemployment insurance, public infrastructure, and all kinds of other institutions that are not allocated through ordinary free markets.

For a while, I was comfortable describing that as America being “partly socialist.” A lot of people describe it that way. I’m less convinced that description is useful now. It gets tangled up in competing definitions pretty quickly and usually seems to confuse the issue more than clarify it. Not to mention, it’s politically loaded, especially right now.

What seems more important than the label is that the economy we actually live in already uses different institutions for different purposes. So maybe the useful question isn’t whether I believe in free markets or government-run systems in the abstract.

Maybe it’s:

Which one is good at what?

And even that question seems to require another one first.

What is our economy actually trying to accomplish?

Before I can really answer whether I believe in capitalism, I need to know what we expect capitalism to do for us.

“How Much Did We Sell Last Month?”

That question connects with something I’ve thought about for years without really thinking of it as an economic philosophy. I’ve spent much of my professional life in construction sales in one form or another, and that experience has shaped the way I think about value.

Imagine two salespeople sitting with two different customers who have the exact same problem:

The first salesperson takes the time to really listen to the customer, understand the issue, does a thorough inspection, recommends a sound solution that is actually needed, charges a fair price, and leaves the customer with great service. The production crew follows through, and the finished work solves the problem. The customer is happy.

The second salesperson sells a much larger project. Maybe the customer didn’t need everything that was proposed. Maybe fear was exaggerated a little. Maybe the customer’s lack of technical knowledge was used to the salesperson’s advantage. Nothing necessarily rises to the level of fraud. The job is completed. The customer is happy.

This salesperson may simply have given in to pressure from himself, from the company, or both. A bigger contract means more praise in this week’s sales meeting, more company revenue, progress toward a bonus, and a larger commission check.

At the end of the month, which salesperson was more successful?

On the sales report, clearly the second one.

More revenue. More work sold. More money earned. More materials were purchased. More labor employed. Goals were met. The company machine kept moving.

Measured strictly as economic activity, the larger transaction clearly wins.

But did it create more value?

Not necessarily.

That distinction has always mattered to me. Personally, I would rather make the smaller sale that actually solves someone’s problem than the larger one that depends on convincing them to buy something they don’t really need.

Now, if they are fully informed and want it anyway, that’s very different.

And that qualification matters because I have learned that I don’t get to decide what somebody else should value. A voluntary, informed purchase can create real value simply because both people believe they are better off making the transaction.

This isn’t hostility toward profit. Companies should make money for providing great products and services. Salespeople should make money for exceptional work. Production staff should earn more for technical excellence. Good work deserves good compensation.

But there is still a difference between making money because we created value and assuming that the amount of money that changed hands proves that every relevant cost and consequence was accounted for.

Those are not the same thing.

Once I started thinking about that distinction, I couldn’t stop at one transaction, or even one business.

Could the same thing happen across an entire industry, or even an economy?

I once heard a sales rep say he could never sleep at night selling something he knew was bad for people (alcohol was his example) then turn around and sell a homeowner much more than the problem actually required.

Was that purchase good or bad for the homeowner?

I don’t know. Maybe they freely valued what they bought.

But were they fully informed?

Was fear or manipulation doing some of the selling?

Were there costs or consequences that neither side was really accounting for?

Could we produce more, sell more, consume more, and generate more economic activity without creating the same amount of genuine human benefit?

And if we could, how would we know?

What Capitalism Gets Right

I don’t ask these questions because I think capitalism has failed. Quite the opposite. There are very good reasons capitalism has been such a powerful engine of prosperity.

Markets allow enormous numbers of people to make decisions without one entity at the top having to coordinate all of them. A customer decides whether something is worth buying. A business decides whether it can provide it profitably. An investor decides whether an idea is worth risking capital on. An entrepreneur can come up with a new idea and find out whether anyone actually wants it enough to pay for it.

This part matters to me.

You can have an idea, take your own risk, build something, and let other people decide whether you are right. You don’t need everybody to agree first.

Competition creates another kind of discipline. If a business gets complacent, somebody else sees an opening. If prices get too high, there is an incentive to find a cheaper or better way. If a process is inefficient, somebody can make money by improving it.

None of this works perfectly, obviously.

Markets are made up of people, and as we know, people don’t suddenly become rational, honest, fully informed, or farsighted just because money is involved.

But that may also be one reason decentralized markets work as well as they do. They don’t require anyone to know everything. Millions of people can act on little pieces of information, experience, preference, and judgment that no central authority could ever fully possess.

Capitalism also gives people a reason to risk something in order to create something in the first place.

If someone develops a better product, builds a successful company, makes a good investment, or takes a risk other people weren’t willing to take, I think they should be able to benefit significantly when they get it right.

Why wouldn’t they?

That’s a huge part of the American Dream.

If we completely disconnect reward from risk, effort, judgment, expertise, innovation, and responsibility, what happens to the incentive to take those risks in the first place?

Capitalism has also been one of the great engines of material progress.

Things that were once luxuries are now ordinary. Technologies that would have seemed impossible to previous generations sit in our pockets. Medicine treats diseases that once routinely killed people. Products that once required enormous amounts of labor can now be made cheaply enough for ordinary people to afford them. Most mousetraps keep getting better, or at the very least, keep getting optimized.

Material prosperity matters.

It’s easy to minimize that from inside a warm house with electricity, clean water, abundant food, medicine, transportation, entertainment streamed directly into our eyeballs, and instant access to more information than any previous generation could have imagined.

Those things aren’t shallow. They make life better.

Which brings me back to the question:

What are all these mechanisms ultimately for?

Means and Ends

Markets are useful. Profit is useful. Investment is useful. Productivity is useful. Growth is useful. Compensation is useful. Money is useful.

But are any of them the actual purpose of an economy? I don’t think so.

Perhaps they are mechanisms.

Private ownership is a major part of that structure. It matters because ownership helps determine who controls productive resources, who takes the risk, and who participates in the returns. How broadly that ownership is distributed is an important question, but it’s a different question from whether markets themselves do a good job coordinating exchange.

We don’t create businesses just so businesses can exist. We don’t produce goods so production statistics can go up. We don’t work so employment numbers look good. We don’t consume because the economy needs consumer spending to keep growing.

At least, I don’t think that should be the hierarchy.

We do these things because they allow people to build better lives. That sounds almost too obvious to say.

But if it is so obvious, why does so much public discussion about economic success revolve around spending, productivity, GDP, corporate earnings, revenue, employment, profit, and the stock market?

Those numbers matter. I’m not arguing that they don’t.

And it isn’t as though economists, businesses, and public institutions have never thought beyond GDP. Of course they have.

The problem is that public and political rhetoric can still take a handful of headline numbers and use them to make a much broader claim:

“Look how well we’re doing!”

Maybe the numbers are pointing in the right direction.

But are they enough to support that conclusion?

What happens when the measurement slowly becomes the objective?

Workers become units of labor. People become consumers. Consumers become prospects. Families become household spending units. Time really does become money.

And eventually success starts to only mean producing more economic activity this year than we produced last year.

Maybe the measurements aren’t the problem. Maybe we’ve just asked them to answer a question they were never designed to answer.

Should people exist to serve the economy?

Or should a healthy economy serve people?

That doesn’t diminish work. I strongly believe that meaningful work is an important part of a good life. It doesn’t diminish profit. Profit can be strong evidence that a business created something people genuinely value. And it certainly doesn’t mean growth is bad.

It just means none of those things, by themselves, can tell us whether the economy is doing what we ultimately need it to do.

Which leads to the harder question:

What exactly do we need from our economy?

What Counts as Prosperity?

Material prosperity has to be part of the answer.

Food, housing, healthcare, transportation, education, safety, and basic comfort are not abstract things. Higher incomes matter. Better products matter. Nutrition matters. Medicine matters. Technology matters. Safe, secure housing matters.

A society where ordinary people can access goods and services that previous generations could barely imagine has accomplished something very real with real value.

But is prosperity only the amount of stuff we can produce and consume?

Security seems to matter too. Opportunity matters. Health and education matter. Family, relationships, and community all matter. The ability to make meaningful choices about your own life matters. That’s freedom.

And the more I think about it, the more I think time belongs in this conversation.

Time is finite.

If an economy becomes dramatically more productive but people have to give up more hours just to maintain the same level of security, have we really become richer?

If incomes rise but debt rises right along with them, how much progress have we made?

If we can afford more things but have less time to use or enjoy them, what exactly should we call that?

If a household earns a lot more because the people in it are working a lot more, the extra income is real. But so is the time they gave up earning it.

And what kind of “debt” might be building up at home while they are busy at work?

If a company increases output by routinely demanding more and more of its employees’ lives, the extra productivity is real too.

But where does the cost of that lost time show up in the ledger?

That doesn’t mean the trade is wrong. Someone may willingly work extraordinarily long hours to build a company, advance a career, provide more for their family, or because they genuinely love what they do. That choice should absolutely belong to them.

Are we counting both sides of that trade?

Maybe work-life balance isn’t just a lifestyle issue. Maybe it belongs somewhere in the economic conversation too. And not because there is one correct balance for everyone, but because time has value even when no dollar amount is attached to it.

An hour I don’t spend working on something has an opportunity cost. I could have earned something during that hour. But that doesn’t mean working would have been the most valuable use of it. Maybe I spent it with my family. Maybe I played golf, helped a friend, volunteered, slept, or did absolutely nothing.

Economically, I may have given up income. Personally, I may have come out ahead. At times, choosing not to maximize economic production might be exactly what creates the greater human value.

That gets directly at the thing I’m trying to understand.

If we can calculate what I could have earned during that hour but have no clear way to account for what that hour was worth to my life, are we really measuring prosperity? Or just the part of prosperity that happens to be easiest to attach to a dollar sign?

I don’t know if these questions have clean answers. And I definitely don’t want government, economists, or anyone else to decide what a meaningful life is supposed to look like for me, or anyone else.

One person may genuinely want that bigger house and expensive car. Somebody else may prefer a smaller home and enough free time to travel. One person may want to work eighty hours a week building his company. Another may happily take less income for more time raising a family. None of those choices need my approval or judgement.

Preserving people’s freedom to make those choices for themselves is a huge part of why capitalism matters to me so much in the first place.

I also don’t think the answer is to replace GDP with some official government happiness score. Nor am I suggesting economists ignore leisure, distribution, household well-being, environmental costs, or measures beyond GDP. Many of these things are already well studied.

The narrower question is whether the handful of headline statistics we hear most often in political arguments are enough to support the much broader claims people make based so heavily on them.

Maybe a better starting point is this:

A prosperous economy should expand people’s capacity to make meaningful free choices about how they work within it and live their own lives.

That still doesn’t tell us exactly how to measure prosperity. But it may tell us something about what prosperity is supposed to accomplish.

What GDP Actually Tells Us

GDP, or within an individual company, revenue, is an easy target in a discussion like this.

I think some of the criticism misses the mark.

GDP measures economic production. It wasn’t designed to tell us whether people are happy, whether families are strong, whether communities are healthy, whether the environment is protected, or whether people find meaning in their lives.

Criticizing GDP because it doesn’t measure those things is a little like criticizing your car’s odometer because it doesn’t tell you whether you’re headed in the right direction.

The odometer isn’t broken or irrelevant. It’s just measuring something else.

The trouble starts when we ask that mileage measurement to prove something much bigger than it can actually prove.

Economic activity can increase for very good reasons. A medical breakthrough creates real value. Better infrastructure creates value. Better technology creates value. If somebody can produce twice as much in the same amount of time, something important has changed.

But economic activity can rise for other reasons too.

If a storm destroys a neighborhood, rebuilding the houses creates economic activity. The rebuilding is necessary and valuable, but it doesn’t somehow erase the wealth that was destroyed.

If pollution causes damage and we later spend enormous amounts cleaning it up, the cleanup creates economic activity too. If a product wears out earlier than it should and has to be replaced, another transaction happens. If households borrow heavily to consume more today, spending goes up while the obligation to repay gets spread out and pushed into the future.

So what is GDP telling us in those situations?

Exactly what it is supposed to tell us. Production occurred.

The problem isn’t GDP.

The problem is touting a measure of production as a complete picture of prosperity. More production can mean more prosperity. It just doesn’t automatically equate to it.

Which makes me wonder about a broader question:

What did we trade away to produce the prosperity we’re measuring?

Sometimes the answer may be very little. Innovation can simply make us better off. Other times the answer may include time, debt, natural resources, environmental damage, or costs that have simply been moved somewhere else or pushed into the future.

If those costs are real, shouldn’t they matter to us even if they don’t appear in the particular number we happen to be looking at?

Shouldn’t they at least be somewhere on the balance sheet?

Otherwise, maybe the odometer is just telling us how far we’ve driven to eventually get to the wrong destination.

Growth Alone Isn’t the Enemy

This is where the argument can easily go somewhere I don’t mean it to go.

If more economic activity doesn’t always equal more prosperity, does that mean economic growth itself is the problem?

No.

If somebody develops a battery that lasts three times longer, that is progress even if people buy fewer batteries. If a medical breakthrough prevents an expensive disease, that is progress even if healthcare spending falls because of it. If technology lets us create more value with less energy, less material, or less labor, that is progress too.

And if greater productivity means people can produce more in less time, that creates the possibility of higher wages, lower prices, higher profits, more leisure, or some combination of them.

I want that kind of growth.

So maybe the useful distinction isn’t growth versus no growth.

Maybe the better questions are:

What kind of growth are we producing? And what did we consume, use up, or trade away to produce it?

And once I ask these, several harder questions show up pretty quickly.

The Harder Questions

Suppose an economy grows substantially.

Who actually participated in that prosperity?

I don’t believe everyone has to benefit equally.

Someone who risks their own savings to start a company is in a different position from someone who takes a job there. Someone who invests in an idea they believe in should be rewarded for taking that financial risk. Somebody who invents something transformative may create more value than somebody performing a routine task. Expertise, discipline, responsibility, entrepreneurship, reliability, investment, effort, judgment, and risk can all justify very different rewards.

I don’t have any problem with that. That’s how it should be.

But if an economy becomes much wealthier while large numbers of productive people become less economically secure, does that tell us anything about whether the system is succeeding?

And even if it is succeeding in one sense, is that success sustainable?

I think those questions at least have to be asked.

Then there is ownership.

If private ownership is one of capitalism’s defining features, who actually owns the productive capital generating all of this prosperity?

And how broadly does the population participate in those returns?

I don’t know what the right balance of ownership should be, or whether there even is one. But it seems like a fair question to consider.

Then there is power.

Capitalism can create enormous concentrations of wealth. That isn’t automatically wrong. It isn’t automatically unfair either.

But democracy rests on a very different idea:

Political equality.

So, what happens when extraordinary economic power can be converted into extraordinary political influence?

At what point, if any, does unequal wealth begin creating unequal citizenship?

I don’t need to know what the right campaign-finance law or lobbying reform is to think that question matters.

Then there are costs that don’t show up in the original transaction.

A buyer and seller can both benefit while part of the cost is paid by somebody who wasn’t involved in the transaction at all.

Pollution is an obvious example.

Some kinds of production can also create future public costs. The basic issue is whether the important costs created by private exchange are actually reflected anywhere in the calculation.

And when they aren’t, who eventually pays?

Sometimes taxpayers. Sometimes another community. Sometimes workers or consumers. Sometimes the company itself. Sometimes people who haven’t even been born yet.

If that’s true, then the price of a product, the total cost of producing it and eventually disposing of it, aren’t necessarily the same thing.

But simply recognizing that doesn’t tell us what government should do about it. Government often gets things wrong.

It can misunderstand problems, misprice risks, protect politically connected businesses, create unintended incentives, impose unnecessary costs, or solve one problem while creating two others.

Government isn’t some all-knowing observer standing outside the system.

It’s made up of people too, with their own incentives, blind spots, self-interest, and incomplete information.

Which brings me back again to capitalism.

We already use different systems for different purposes. Markets are remarkably good at coordinating many kinds of production and their exchange. Public institutions perform other functions, sometimes well and sometimes badly.

So, asking whether markets or government are “better” doesn’t seem very useful by itself.

Better at what?

Which problems are markets especially good at solving? Which ones require collective action? Where does government improve the outcome? Where does it get too involved only to make things worse?

And how do we answer those questions without starting from our preferred political or economic ideology and working backward?

Those are much harder questions than whether I believe in capitalism.

And there is another dimension I think we ignore too easily:

Tomorrow.

A business can improve this year’s balance sheet by neglecting equipment, failing to train people, burning through good employees, or not investing enough in the future.

The P&L might look great at the end of the year.

But did the business really become healthier?

A household can raise its standard of living for a while by borrowing more than it can reasonably repay.

Did the household actually become wealthier?

Governments and societies can create deferred obligations too, although public debt obviously isn’t the same thing as household debt. Borrowing can fund emergencies, recessions, infrastructure, or investments whose benefits last for decades.

But it can also create obligations that future taxpayers inherit. We can defer maintenance. Use up resources. Exhaust people. Pollute air, land, and water.

The benefits can show up today while some of the costs arrive much later.

So, should prosperity include not only what we create now, but whether we leave ourselves and the people who come after us better able to keep creating prosperity?

I think it should.

What follows from that is a lot less obvious.

Who Decides What Has Value?

There is a major problem with everything I’ve questioned so far.

You may have been thinking about it. I know it.

If economic activity and genuine value aren’t always the same thing, who gets to decide what counts as progress?

That question should make anyone who values freedom uncomfortable. It makes me uncomfortable.

I don’t want government deciding that my neighbor’s new ski boat is unnecessary. I don’t want economists deciding that somebody works too much. I don’t want experts ranking lifestyles and deciding that a vacation creates more human flourishing than a new 75 inch TV, or that saving is morally superior to spending, or that raising a family is somehow more meaningful than building a business.

Different people value different things. If we are really free, we should be allowed to.

That’s one of the strengths of markets in the first place. They allow a lot of different preferences to coexist without requiring all of us to agree.

So, any broader definition of prosperity has to preserve that freedom.

Maybe we don’t need to agree on what a good life looks like. Maybe the better question is whether people have a meaningful opportunity to build their own version of one.

That still leaves another distinction.

A transaction can be voluntary, informed, and genuinely valuable to both people involved while still creating consequences that neither fully bears. The fact that both buyer and seller wanted the exchange tells us something important about value. It just doesn’t necessarily tell us everything about the cost.

Does the economy expand people’s choices or in some cases narrow them?

Can productive participation materially improve ordinary people’s circumstances?

Do people have meaningful choices between income and time, risk and security, spending and saving?

Are some costs being imposed on people who never chose to bear them?

And are we expanding the choices available to the next generation, or using some of their choices up before they even have a chance to choose?

Those questions don’t require us to agree on how everybody should live. But they do require us to ask whether people remain genuinely free to decide that for themselves.

A Better Question

So, do I believe in capitalism?

Yes.

I believe markets are extraordinarily powerful mechanisms.

I believe private ownership matters. Entrepreneurship matters. Competition matters. Investment matters. Profit matters. Progress matters.

And I believe people who create substantial value should be free to become substantially wealthy because of it.

None of that has changed. What has changed are the questions I’m asking.

When I think about that simple sales example, I don’t judge the quality of the transaction only by asking how much was sold. I want to know whether it actually solved the problem. I want the company to prosper because it created something worth paying for, not to assume that because the company prospered, it must have created equivalent value.

Why should I think about the whole economy any differently?

How much did we produce?

How quickly did we grow?

How profitable were our businesses?

How productive were our workers?

How much did consumers spend?

How did the stock market perform?

Those questions matter. But they aren’t the final questions.

What did all of that activity actually allow people to do?

Did it expand their ability to build secure, meaningful, self-directed lives?

Who participated in the prosperity?

Who owned the productive assets that created it?

What costs came with it, and where did those costs eventually land?

What did we trade away to produce the prosperity we measured?

And did we leave the people who come after us with at least as much capacity to build prosperity as we inherited?

I don’t know exactly how to measure all of that.

I don’t know precisely where markets should end and collective action should begin.

I don’t know how broadly prosperity has to be shared for capitalism to remain healthy.

I don’t know how concentrated private ownership can become before it starts changing the character of capitalism itself.

I don’t know how we account for future costs without giving government authority over choices that properly belong to individuals.

And I don’t know whether some of the assumptions behind these questions will survive closer examination.

That’s part of the point.

What I do know is that we can’t meaningfully judge prosperity if we count the benefits while ignoring major costs simply because those costs show up somewhere else, fall on somebody else, or come due later.

And we probably can’t support a sweeping claim about prosperity by pointing to a handful of favorable headline statistics without asking what those statistics actually measure and what they leave out.

Don’t throw out the numbers. Keep an eye on the odometer.

Is our car quiet, comfortable, fuel efficient, and running clean? Or are we leaving a trail of thick exhaust behind us for others to drive through? Have we cared for it as we’ve racked up the miles, or have we skipped some oil changes, deferred important maintenance, and cut some corners just to keep it running? Have we driven it so hard and abused it so much that eventually the engine seizes up prematurely?

We can always buy a new car, right?

That transaction is a good thing, right?

But can we afford it?

Have we driven all this way, not paying attention to where we were going, only to end up lost and broken down in the desert?

I think we have to ask whether we’re looking at all the numbers necessary to support the decisions we’re making. I think the only way to do the math honestly is to keep asking better questions.

These questions are too large to answer in one essay, so this is really the beginning of an effort to pull them apart one at a time instead of pretending they have simple answers.

Before we argue over whether capitalism should be defended, regulated, reformed, or left alone, maybe we should first be clear about what we are asking it to accomplish.

The most basic question may still be the hardest one:

What is our economy actually for?