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Frequently Asked Questions about Capitalism

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Question: What is capitalism?

Answer: According to the philosopher Ayn Rand in her essay “What is Capitalism?,” capitalism is “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”

Rand continues:

The recognition of individual rights entails the banishment of physical force from human relationships: basically, rights can be violated only by means of force. In a capitalist society, no man or group may initiate the use of physical force against others. The only function of the government, in such a society, is the task of protecting man's rights, i.e.., the task of protecting him from physical force; the government acts as the agent of man's right of self-defense, and may use force only in retaliation and only against those who initiate its use; thus the government is the means of placing the retaliatory use of force under objective control.

It is the basic, metaphysical fact of man's nature—the connection between his survival and his use of reason—that capitalism recognizes and protects.

The mission of our organization is to promote Ayn Rand’s vision of a free and unfettered people as best as our knowledge and abilities allow.
 

Question: Is the Center for the Advancement of Capitalism a spokesman for Ayn Rand and her philosophy of Objectivism?

Answer: No. Given the unfortunate history of the individuals and organizations who have claimed to speak in the name of Miss Rand and her philosophy, yet have held positions deeply offensive and contradictory to Objectivism’s key tenets, it is important that we note that the only authoritative sources for Objectivism are the philosophic writings of Miss Rand herself and the articles by other authors that she published in her periodicals or included in her anthologies.

Why do we and other Objectivists say this? Because it is critical that when speaking of a field as complex and important as philosophy, we be precise about who we are and are not. We are scholars and advocates of Objectivism who seek the application of its principles to our lives and our civilization. We are not, however, Objectivism’s spokesmen, and the responsibility for any divergence from Objectivism that we may make in the pursuit of our mission rests solely with ourselves.
 

Question: Sometimes your positions make you sound like you are conservatives, while other times they make you sound like you are liberals. Which side are you on?

Answer: Neither. Like millions of readers across the globe, we found inspiration in Ayn Rand’s uncompromising vision of free and unshackled minds. Accordingly, we reject the current intellectual status quo and we are neither conservative, liberal, nor anywhere else in-between.

Instead, we represent the first advocates of a sweeping new outlook on existence, the requirements for man’s survival and prosperity, and the means by which man properly comes to know his nature. Animated by the philosophy we seek to uphold and share with others, we are proud radicals for reason, egoism, and capitalism.
 

Question: You say you are in favor of the free market—but can't big corporations interfere with free competition? Can't they force employees, distributors, and suppliers to accept their terms? So isn't government force, such as antitrust prosecution, necessary to protect individuals from this "economic force"?

Answer: As private corporations, business has no power to force anyone. The entire claim that that businessmen can coercive their customers (and, indeed, the entire case for the antitrust laws) is based on equation between economic power and political power. The difference between these two forms of power must be kept strictly in mind—for it is a difference with life-and-death consequences.

In "The Dollar and the Gun" (The Objectivist Forum, June 1983), philosopher Harry Binswanger defines the difference between these two forms of power:

"'Political power' refers to the power of the government. The special nature of that power is what differentiates government from all other social institutions. That which makes government government, its essential attribute, is its monopoly on the use of physical force. Only a government can make laws—i.e., rules of social conduct backed up by physical force. ...The penalty for breaking the law is fines, imprisonment, and ultimately, death. The symbol of political power is a gun.

"Economic power, on the other hand, is the ability to produce material values and offer them for sale. E.g., the power of Big Oil is the power to discover, drill, and bring to market a large amount of oil. Economic power lies in assets—i.e., the factors of production, the inventory, and the cash possessed by businesses. The symbol of economic power is the dollar.

"A business can only make you an offer, thereby expanding the possibilities open to you. The alternative a business presents you with in a free market is: 'increase your well-being by trading with us, or go your own way.' The alternative a government, or any force-user, presents you with is: 'do as we order, or forfeit your liberty, property, or life.'"

The only power a business has to induce customers to give it money is the value of its products. If a business started to produce an inferior product, it would eventually lose its customers. By contrast, the only power that the government has to offer is a threat: "We'll dictate what businessmen can and cannot do—and businessmen better toe the line or we'll throw them in jail."
 

Question: Under capitalism, what will happen to those who are born without the wealth and opportunities enjoyed by others? Doesn't capitalism make the rich richer and the poor poorer?

Answer: Quite the opposite. Capitalism is the one system that leaves everyone free to rise by his own efforts. The history of capitalism provides countless instances of people who improved their lives through work and ability. There are the millions of immigrants who came to America and worked their way up to the middle class—or higher. One of the great historical examples was Andrew Carnegie, who rose from a penniless sweeper at a steel mill to revolutionize the steel industry and make one of the largest fortunes of his day. It is no coincidence that 19th century America—the most purely capitalist era in the nation's history—brought us the phrase "from rags to riches." 

The reason why capitalism allows people to rise by their own efforts is that capitalism is driven by only one fundamental consideration: profit. But profit can only be earned through an increase in the production of wealth: profit comes from inventing a new product, producing a good more efficiently, promoting it to a wider market, etc. It comes from doing things better, faster, and smarter than before. This means that capitalism offer an open field to anyone who works hard to improve his skills—and it offers riches to anyone who thinks hard and comes up with new and better ideas. It is under capitalism, for example, that a company like Microsoft creates scores of millionaires out of individuals whose qualification is not inherited wealth or social connections, but only the ability to create and sell computer programs.

The rule under government regulation, by contrast, is very different. It is a common error today to talk about "crony capitalism." Cronyism is in fact a hallmark of state-run economies. When politicians and bureaucrats hold power over the economy, the only hope for success comes from currying their favor. Thus the competition for wealth becomes a competition, not over who can produce the most, but over who can make the most bribes or call in the most favors. It is under these systems that established wealth, family connections, and the "Old Boy's Network" become the determinants of success, rather than individual ability. But that is a problem created and perpetuated by statism, not capitalism.

Question: If capitalism rewards only ability, what will happen to those who can't compete? What will happen, for example, to people with physical or mental disabilities, who can't work as hard or as fast as others? 

Answer: The first question in evaluating any social system cannot be: What happens to those who are helpless and incapable of supporting themselves? Such people, by definition, are dependent for their survival on others—on those who are capable of working and who can produce wealth. Thus, the first question must be: What happens to the thinkers and producers? What conditions make it possible for them to think and produce? The fundamental answer to that question is: freedom—the freedom to direct their own actions and to keep the property they have produced. Thus, to advocate taxes and regulations on the producers in the name of helping the disabled is a hopeless contradiction—it means helping the non-producers by throttling the producers on whom they depend.

It should also be pointed out that, under capitalism, those who are incapable of supporting themselves are a tiny and ever-shrinking minority. The trend today is to inflate the ranks of the allegedly helpless by defining everything to be a “disability”—including such vague and non-debilitating conditions as “chronic fatigue,” allergies, and “depression.” But the reality under capitalism is that fewer and fewer conditions are disabling. In a pre-industrial society, where most people survived by heavy physical labor, an injury to a hand or leg could make a worker destitute. Today, a quadriplegic can make a living simply from the power of his mind to solve problems—and the power of computers (produced by capitalism) to help him communicate his thoughts.

Under capitalism, therefore, the genuinely helpless are a very small minority who could easily be supported by private charities—charities made possible by a capitalist society’s extraordinary wealth. But the condition that makes this charity possible is that those who cannot support themselves respect the rights and freedom of those who do.

Question: Under capitalism, how do you justify the disproportionate rewards given to CEOs, who earn hundreds of times as much as their lowest-paid employees?

Answer: A recent study claimed that corporate CEOs make, on average, 400 times as much as the company's lowest-paid employee. Let us assume that this figure is correct. Is that really "disproportionate"?

Let us concretize the question. What kind of work is performed by the lowest paid worker in a company? This worker might be, for example, a janitor. His work consists of performing routine, pre-established tasks, requiring little thought and only moderate physical effort. If he performs his work well, there is a moderate benefit: a clean workplace is more productive than a dirty one. But if he performs his work poorly, the consequences are minor—and the worker can easily be replaced by a better janitor; since the skills required are not complex, almost anyone can perform the job properly.

In the case of a CEO, by contrast, his work consists primarily in making decisions—decisions about what products the company should produce, how much it should invest in improvement of its equipment, whether it should raise money through stocks, bonds, venture capital, etc.

Bear in mind that wealth is not produced by blind, uncoordinated action. The best employees in the world working the longest hours are useless unless they are making a useful product backed by adequate funding and good marketing. Consider, as an example, the failure of the satellite telephone venture Iridium, a project with no shortage of brilliant engineers and rocket scientists—but without a realistic business plan.

But ensuring that a company's resources and personnel are being used productively is the job of the CEO.

In justice—if justice means rewarding merit—an employee ought to be paid in proportion to the value he brings to the company. By that criterion, is there anything "disproportionate" about paying the CEO an enormous salary? If there is, the disparity is in the other direction. A good CEO of a multi-billion-dollar company is not worth so little as 400 employees, much less 400 janitors; he is worth as much as thousands of employees. Their work is profitable only as long as he makes the right decisions.

Of course, a bad CEO—one who makes poor decisions and wastes a company's resources—can wipe out the work of thousands of employees. But that is precisely why companies offer their CEOs such enormous financial rewards, rewards that are often dependent on the company's performance. For such a crucial position, nothing less will attract and motivate the best minds.

Question: Aren't capitalists just "exploiters" of laborers? Isn't it workers who physically create products and generate economic values?

Answer: The labor theory of value states that all economic value is created by labor. Thus, on this theory, the value of a loaf of bread, for example, is dependent on how much people worked to produce that loaf. If this were true, then all wages paid for anything other than physical labor (i.e. management work) would be unearned since only labor creates value.

But economic value is objective. That is, value is not produced by sheer physical labor, but also by the mental effort of businessmen who coordinate the efforts of those laborers, and by the entrepreneurs and stockholders who put their money on the line to fund such enterprises (and deserve a return on their investment). The value of the product of this work is determined by both the cost of these things and the value of the product to potential purchasers. This last (among other things) is what the Marxist ignores. By the Marxist theory, labor deserves payment, even if no one wants to buy the product that has been produced, simply because of its labor. Capitalism properly rejects the Marxist's one-sided approach and rewards both physical and mental labor for the value each creates.
 

Question: Under capitalism, would business owners be allowed to discriminate based on race, sex, and other irrelevant characteristics? Wouldn't capitalism help perpetuate racism?

Answer: Freedom to make the right choice has to also include the freedom to make mistakes. Freedom of speech, for example, cannot mean "Say whatever you want, as long as you agree with me." It has to include the freedom to espouse wrong and even vicious ideas (including racism).

For the same reason, individual rights must include the right to act irrationally. People have a right to decide who they will hire and who they will accept as a tenant, customer, business partner, and so on. To take away that freedom is to take away a person's right to control his own life and property. It is contradiction to say, "Your life is yours to live—so long as you don't do anything I disapprove of." 

Left free to control their own lives, some people will act irrationally; they will refuse to hire employees or to accept customers on the basis of race, sex, or other irrelevant characteristics. Capitalism recognizes their right to make such irrational decisions—but it does not grant them the right to escape the consequences of their irrationality.

A man who runs his business on the basis of irrational prejudice will suffer the economic consequences. If he hires a mediocre man in place of a talented woman, he suffers the loss in productivity—while someone else, who does hire the woman, profits from her talent. If he refuses to serve a customer because he is black, he loses a customer—while a rival gains that customer. The free market encourages rationality. It does not encourage a businessman who arbitrarily rejects talented workers and paying customers.

This is why, as a matter of historical fact, every entrenched system of prejudice has been backed by government support. Segregation in the American south and apartheid in South Africa are just two examples. If left free, businessmen will seek profits by hiring the most competent workers and by accepting every paying customer, regardless of race. That's why government regulations—regulations excluding the mixing of races in the workplace and forbidding businesses from serving customers of a particular race—were required to prop up racism.

But that, once again, is a problem created by state controls, not by capitalism.

Question: Doesn't unrestrained capitalism lead to the destruction of the environment?

Answer: The essence of capitalism is man’s attempt to improve his environment—but not in the sense meant by the environmentalists.

The goal of production in a free market is to give man an ever-greater power over his environment. Consider the power man has gained after only 200 years under capitalism’s Industrial Revolution. To give just a few examples that bear directly on human health: fertilizers and pesticides have made possible an unprecedented production of food, eliminating the periodic famines that plagued all pre-industrial societies; rapid and inexpensive transportation, powered by fossil fuels, has made all kinds of foods available everywhere year-round, making improved nutrition possible; universal availability of refrigeration (thanks to CFCs) has made possible the safe storage of food; air conditioning (also thanks to CFCs) has minimized the health danger of extremely hot weather; electrical power, generated by nuclear and coal-fired power plants, provides a source of heat and light that is safer and more reliable than fire; the development of plastics has made possible the invention of numerous life-saving medical implants and devices. This is just the tip of the iceberg. Thanks to thousands of advances such as these, life today under capitalism is incomparably safer, cleaner, and healthier—not to mention more comfortable—than it has ever been in human history. But all of these advances were produced by corporations seeking profit on the free market. Thanks to capitalism, the average lifespan in industrial countries has increased steadily to more than 70 years—compared to less than 40 in pre-industrial societies.

But this is not what the hard-core environmentalists mean by protecting the environment. They seek to protect the environment, not for man, but from man. They do not merely oppose, say, dumping toxic chemicals into the drinking water (which would be illegal under capitalism). They seek to preserve nature in an untouched state for its own sake, and not for any benefit it brings to man. Nature, many mainstream environmentalist thinkers declare, has intrinsic value. Thus, they seek to stop all industrial activity, regardless of whether it helps or harms human life. This is why environmentalists have opposed every single advance mentioned above: fertilizers, pesticides, fossil fuels, CFCs, nuclear power, electric power lines, plastics and so on. The environmentalists oppose these things because they value the inviolability of nature more than they value human life.

If “the environment” means what today’s greens defend—nature preserved for its own sake, apart from and against the value of human life—then we may be grateful that capitalism destroys the environment. What capitalism offers instead is, in reality, the best “environment” for man: nature harnessed by industry and technology and used for man’s benefit.

Question: Don't recent events in Russia and the Far East show the "dark side" of capitalism? Doesn't unrestrained capitalism lead to kleptocracy, cronyism, and anarchy?

Answer: Russia and the Far East are hardly examples of “unrestrained capitalism.” Laissez-faire capitalism means not only private property and the rule of objective law but the complete separation of the state from economic activity—conditions that do not exist in these areas.

The fall of the Soviet Union in 1991 did not usher in capitalism. It merely replaced communism with socialism. Most property there has not been privatized, and the legal system remains anti-business. No businessman in Russia can count on a legal system that upholds contracts. The theft of Western aid by former party officials and state-favored gangsters is only further evidence that a corrupt government, not private business, runs the Russian economy.

Moreover, the Western aid to Russia came from the International Monetary Fund, an anti-capitalist agency whose funding derives from taxes on Western producers. No capitalist system would permit such a theft—whether from taxpayers or by gangsters and cronies of the state posing as independent businessmen.

Russia’s devaluation of the ruble in August 1998 was, again, an act of theft by the state bank and a further example of the expropriation of wealth. Only under socialism does one find such “robber barons.” Under capitalism the money and banking system is owned and operated by private banks, not by financial ministries that are mere appendages of the state.

“Crony capitalism” is a misnomer. Under capitalism, there are no state favors or subsidies to business. Entrepreneurs succeed solely on the basis of merit, not state handouts. It is socialism and a mixed economy that breed “cronyism.” State interference in the economy can make or break businessmen, and thus it’s unavoidable that these businessmen will spend money trying to influence state officials. To get money out of politics, one must get politics out of money-making. That’s what capitalism does. There is no “influence-peddling” under capitalism because the system bars the state from exerting influence over business.

The Far East is also a mixed economy— although with a lesser degree of state control than in Russia. But, like Russia, the Far Eastern finance ministries devalued their currencies and thereby caused a wave of bank failures and recessions. The International Monetary Fund’s involvement in these countries only made matters worse, as the IMF advocated raising taxes, intensifying regulation, and imposing capital controls.

It is commonly believed that socialism means government favors to labor, that fascism means government favors to some racial group, and that capitalism means government favors to business. But what about a system with no government favors to any group? That’s true capitalism.

The labeling of any failed system in the world today as “capitalism” is but a repeat of the same old socialist myth. Once again, just as in the Great Depression, capitalism is being blamed for the evils engendered by statism. Capitalism once again is made into a scapegoat. No rational observer should fall for it. Russia did not become communist in a day and it won’t become capitalist overnight. Achieving capitalism requires fundamental philosophic change: a respect for reason and rational self-interest, the protection of individual rights, and the complete separation of government from business.

Question: How can you refer to a big, powerful corporation as being "persecuted"? Why do businessmen need someone to defend them—as if they didn't have enough money to do it themselves?

Answer: To answer this question, we need only look at the Microsoft antitrust case. Who is arrayed against Microsoft? A coalition of anti-business leftists and self-appointed "consumer advocates"; a cabal of jealous competitors who have hired high-powered lawyers and lobbyists to promote a government attack on Microsoft; and then there is the Attorney General and the Justice Department, with virtually unlimited resources at their command; there is the Congress, where both Democrats and Republicans support the attacks on Microsoft; there is a federal judge who is ignorant of the technical issue in this case and who does not regard the issue of individual rights as relevant to the antitrust laws; finally, there is the press, which alternates between portraying Microsoft as a malevolent Big Brother and portraying the case as too complicated or technical for the layman to take sides.

Who is on the side of Microsoft? There is Microsoft itself—and us. Furthermore, Microsoft's efforts are widely dismissed on the grounds that it is merely protecting its own interests. In the code of modern American politics, it is the victim of government intervention who is considered to have the least right to speak in his own case.

If the majority of businessmen spoke up consistently in defense of their own rights, and the rights of other businessmen, then an organization like ours would be unnecessary. But the tragic aspect of the growth of government controls is that the victims do not understand the justice of their own cause. Part of our goal is to help businessmen to grasp this fact.

In the meantime, who will speak up for the rights of businessmen? Today, even the lowest specimen of humanity—especially the lowest specimen of humanity—can count on support from numerous sources. A homeless drug addict has a dozen different organizations, agencies, shelters, rehab programs, and the like devoted to his aid. A Nazi who burns a cross on his front lawn knows he can call the ACLU to protect his rights. But what if a peaceful, responsible, productive businessman—even a hero of American business—finds himself under attack? Who can he call?

That is our purpose. In her essay "America's Persecuted Minority: Big Business," Ayn Rand called for a "civil liberties union for businessmen." That is one of the functions of the Center for the Advancement of Capitalism.

 

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