There is certainly a difference in wealth attainment in capitalism, whereas, historically, socialism provides equal poverty. The Cuban people, for example, are generally quite poor, though their leaders are quite wealthy — the people share the equality of poverty.
Capitalism is the greatest wealth creator ever. Capitalism has created more wealth for more people than all other systems combined have — cumulatively. And by a margin. Socialism, on the other hand, tends to devolve into mass poverty. Capitalism has inequality of attainment, while providing higher average attainment; socialism provides equality of misery. Within a capitalist market, we have the opportunity to choose our destiny, to achieve that which we want and are willing to work to attain. We should embrace personal capitalism for our own interest, and that of others as well.
In capitalism the means of production are owned and controlled by private owners for profit.
Socialism is the means of production are owned collectively — socially — ostensibly for the good of the masses.
In capitalism the owner of the production desires to produce that which maximizes their returns to maximize profit and, therefore, well-being.
In socialism the worker-owners share equally in the results; over time, their productivity, like water, seeks a common level. Water seeks its common level at the lowest of its levels; it will flow until there’s nowhere lower to flow to. Likewise, hard workers find over time that working hard provides no benefit when not everyone works hard, leading to a common low level of production. The fruits of socialism are shared equally, but there are fewer fruits.
The incentive of capitalism, that a person can directly own and create their own profits from their endeavors, changed the relationship of work and wealth. Capitalism enabled people to move from poorer to wealthier, to the extent they were willing and able. Without capitalism people could not cross economic class boundaries — except in a downward direction.
Capital
Capital can be considered in two primary forms: fixed and deployed. Fixed capital is in the form of something illiquid, such as farmland or factories. It serves the creation of capital, but not generally by exchange. Deployed capital circulates; it can be money for wages, inventory, or other capital which flows through the economic system to generate more capital. Both forms are necessary, and the relationship between fixed and deployed capital varies between industries and economies.
Return on Capital
The owners of capital seek to deploy their capital to produce a return, or profit. Take the example of a landlord, who has a fixed capital in a place which they desire to rent, and a lesser degree of deployed capital, necessary for repairs and maintenance and to tide over the timing between inflows and outflows. The landlord seeks profit by renting their capital employed in their building.
The landlord seeks a level of rent that provides a reasonable return on their investment, including both their fixed and deployed capital, and an additional margin for risk. The additional margin for risk is necessary as the facility may not always have a tenant, the tenant may not always pay their rent, or there may be other unforeseen problems or expenses.
Business endeavors involve risk, and it only makes sense to employ capital into business if the profits provide a return that compensates for that risk, above a normal return for the use of the capital. The rent is limited by market forces: A landlord cannot charge such a rent as to not have tenants; they can charge only what an equivalent alternative property would rent for, or tenants will go elsewhere.
Note that the landlord who manages risks well can attain a higher net profit. Also it is important to note that supply is a significant factor in pricing, for any capital use. More supply relative to demand will produce lower returns.
Personal Capitalism
The rental example provides a great segue to personal capitalism.
We all need to consider whether it is advantageous to rent a place to live, or whether it is better for us to own. Knowing that a landlord will price a rental to include a profit and additional compensation for risk it should be apparent that over a long timeframe it would be less expensive to own than it would be to rent the identical place. If we own, we assume any risk, but have fewer risks, as we need not consider things like marketing or vacancy. If we own, we do not seek the return of a profit on capital, although over time one is likely. For the landlord it is necessary; for the owner it’s a perk.
It won’t always be to an individual’s benefit to purchase their place to live. If, for example, a person is looking to live in an area for a short period of time (say, less than a few years), the risks of purchase make it less likely to be beneficial. It might be, but it might be at great cost, so the risks tend to outweigh the potential rewards.
In some localities, there is no opportunity for a reasonable purchase. Or for a reasonable rent, for that matter. This is more common in urban areas, with high demand for housing. It could be in an individual’s best financial interest to consider relocating to a more affordable location.
We Are Capital
If we own our own business, we are certainly taking advantage of capitalism, or at least trying to. But we all have that opportunity, whether we are business owners or not.
We all have the opportunity to sell our services at the highest price we can command in the market. If we have significant and desirable skills, we can command a greater rate than if we have only common skills. We all have talents and skills. If we are a doctor or surgeon, these skills are rare and desirable, and we can command a high price in the marketplace. If our skills are general labor, such as unloading trucks or stacking shelves, these are common skills, attainable by most people with little effort, and we cannot command a high price in the marketplace.
Our ability to command a high price in the marketplace is based primarily on what we have to offer.
If we offer tech skills, we are in a strong position; if we offer clerical skills, we are in a weaker position. Both tech skills and clerical skills are important, but tech skills are more difficult to attain and rarer, allowing them to command a higher price in the marketplace.
If we want to command a higher price in the market, we have options. We can develop our existing skills to move higher in the capacity we are currently in. If our present employment, for example, is clerical, we could work to be the best of the clerical workers, and therefore earn more than most other clerical employees. This is constrained by occupation.
Or we can cross occupations. We improve our ability to command a high price in the marketplace by the skills and talents we bring to the marketplace. We can become a plumber or a mechanic or an electrician and earn more than a laborer due to our increased in-demand skills. Education and training increase our personal capital; we can command higher rates in the marketplace.
Capital Creates Capital
Whether we’re employed as the owner of a business, who receives both profit as compensation for deployment of capital plus additional return in compensation of risk, or we’re employed as an employee of another, we receive compensation, which is then our capital. We have choices as to what we do with that capital.
When we spend our capital on furniture or streaming services, we get something we need or want, but our capital provides no additional return to us. Alternatively, we can put some of the capital we earn to use, creating additional capital to benefit our future selves. We do this by investing, such as when we participate in an employer’s 401(k) plan or invest in an IRA.
The caveat with capital creating capital is that the opportunity for it to be used to create additional capital is there, but we have to make the choice to deploy our capital in a productive fashion.
The more we improve ourselves to command more in the marketplace, the more capital we can receive as remuneration for our work, the more we can potentially deploy to create additional capital for ourselves.
The Bottom Line
Capitalism is opportunity. To the extent the existing structure of capitalism has problems, they are easily fixed by removing barriers to opportunity. Everyone should be able to get a high school education and at least a trade education. Those who show sufficient potential and work ethic should be able to further their education.
Much of this happens now, but it needs some work. Many school districts fail at providing a quality high school education to the bulk of their charges, also more common in urban areas. This then inhibits these individuals’ ability to seek higher levels of earnings in the marketplace.
Even in a perfect world, there will be inequality of attainment. The decision to become a doctor will provide different opportunities than the decision to become a plumber or a mechanic. We all have different talents and abilities, and different desires and work ethics, and can attain only what we are willing and able to do.
But we often fail to achieve even a decent proportion of our potential. The opportunity is there for most people, if they are willing to seek it. We can attain pretty much anything we want to attain through capitalism; which provides no restrictions on what a person can do or be. Capitalism has created more wealth, for more people, than all other systems combined have created collectively. The ability to achieve our personal best is why we should embrace personal capitalism.
Source: Centsai, Accessed 1/14/23
This article’s view is the author’s and does not reflect the opinion of any member of CentSai’s management. The author is not being paid by any financial services company nor has been paid to promote any individual product or service. The author is not a financial advisor or a broker-dealer. The content above is education-only and any reader is encouraged to seek advice from a registered financial advisor before taking any action.
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