Supersonic Man

December 20, 2019

capitalism, free enterprise, and entrepreneurship are three separate things

Filed under: Rantation and Politicizing,thoughtful handwaving — Supersonic Man @ 6:27 pm

Those who claim to speak for the positive value of capitalism, entrepreneurship, and free enterprise often try to convince you that the three are all one thing, and that the arguments in favor of one apply to all. This is not true.

One who practices capitalism may also be an entrepreneur who practices free enterprise, but this is not necessarily the case. A person might be a capitalist, entrepreneur, and free-enterpriser all at once, or any two of the three, or just one (or none).

Let’s start by looking at what, strictly, each term refers to. Then we can look at how the distinction becomes important to keep in mind.

Entrepreneurship is when people invest their personal capital, or capital financed by debt, into starting a new business, and then try to grow the business larger. The key factor is that growth and success depend on their own effort and skill in developing the business, rather than on just the capital that was invested.

Free enterprise is the absence of official and unofficial barriers to trade and business — a condition in which those who have an idea for trying a profitable venture can succeed or fail on the value of the idea, rather than be obstructed by some law, regulation, or privilege. (One gotcha is that when good productive ideas are liberated and empowered, you can also end up enabling opportunities for crooked scams.) The term “free enterprise” is loosely also used to refer to the practice of operating a business venture which depends on these conditions, rather than being dependent on, for instance, subsidies or protectionism. Of course, those whose businesses are dependent on an advantage of this sort often like to pretend otherwise, and co-opt the term even though it doesn’t apply to them.

Capitalism has a strict technical meaning: it is the practice of using wealth to increase the productivity of labor. Someone who buys a nailgun to replace a hammer, or a backhoe to replace day laborers with shovels, is engaging in capitalism. To clarify this, we must also point out that technically the terms capital and wealth do not refer to money, but to tangible assets such as land and equipment. Anything of value is wealth; anything durable which is used productively is capital. It is these physical assets which increase labor productivity, not the money that was spent on them. Assets which enhance productivity can also be less tangible, such as a copy of Photoshop or the contents of a reference manual. (Education and training also increase productivity but are difficult to characterize as capital.)

A main side effect of capitalism is that the more capital is invested in your job, the less you have a claim of ownership over your own productivity. If you can’t do similar production on your own with your own equipment, most of the value of your work will inevitably be claimed by your employer instead of by you.

Using capital to increase the productivity of labor is the classical meaning of capitalism. In modern society, capitalism has another meaning which grows out of this: because after one capitalist invests in productivity, he can then sell that set of productive resources to another for cash… in the end, what capitalism amounts to in places like Wall Street is the practice of using money to buy ownership of workers’ future productivity. Investors end up having no direct connection to, or even knowledge of, the physical capital which actually enables the business to produce; they deal only with money, yet they fill the role of a capitalist because they own these durable resources, and the organizations and systems that have been set up to put them to full use.

And this brings us to why the apologists for Wall Street capitalism want you to conflate what they do with free enterprise and entrepreneurship. Both of those things create wealth, and have a lot of positive value for society. Both are rightly defended against the sort of encroachment that can cause economic prosperity to be undermined. But capitalism as practiced by Wall Street does not create wealth, it only asserts control over wealth. Wealth creation depends on labor and skill, not on money… and especially not on money which is simply used for speculative trading rather than for adding productive capacity. Speculative trading does not count as true capitalism, but those who practice this parasitic means of making money would, of course, rather you did not draw that distinction.

One of the favorite activities of Wall Street capitalists is to wait for an entrepreneurial outfit to get into financial trouble, then use that trouble to buy up control of it at a bargain price. At this point, if the workers are lucky there might be some new investment in productivity, but more often the result is that productivity is sharply decreased, in order to turn durable assets — including intangible assets such as brand reputation — back into money. This kind of raiding is technically the opposite of capitalism, but those who practice it still want to be taken for practitioners of free enterprise and entrepreneurship, because a more honest look at their livelihoods is so much less flattering.

Investment banker types conflate capitalism with entrepreneurship so that they can call themselves “job creators”, even though as a class they often destroy more jobs than they create. And they conflate capitalism with free enterprise so that the social need to liberate creativity and productivity can be misconstrued as an excuse to give free rein to parasites and predators.

If we as a society want to encourage the benefits of capitalism, we should draw a clear line between true investment (which raises production), and activities such as speculative trading and raiding, which do nothing to create new wealth or benefit the overall economy. Our policies should encourage the former but not the latter.

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