How does capitalism work?

Here is how capitalism actually works — uses a legal framework of private ownership to extract value from the labor of others. The end game is a system that hoards wealth, stifles innovation, and ultimately destroys the value created by cooperation among those who seek to do things that cannot be done alone.

If only more people understood how capitalism works. There are “openaccess” features of market systems that encourage innovation and create things of value — but it is NOT capitalism that does these things.

The historic origin of capitalism was the Enclosure Movement in Britain, where peasant farmers were kicked off their land so that an aristocracy could charge rents and earn a profit from the labor of farm workers. This created massive poverty and a cheap labor pool for the newly industrializing urban centers that had factories in need of cheap unskilled labor (where capitalist “owners” extracted wealth in the form of profits as well).

Note how I am not saying the opposite of capitalism to be centralized state control — that false dichotomy masks the true realities of history. Capitalism replaced a feudal (decentralized) system of noble elites competing with one another for wealth and status with a centralized government system of legal contracts for ownership and monetary policy. Nation states arose largely within these capitalist frameworks for binding ownership within an enclosed space. So in a great twist of irony, it was capitalism that centralized power for elites — and it was later the emergence of representative democracies that began to undo this pattern of control via ownership and legal contracts (e.g. corporations).

Fascinating, isn’t it?

One thing you’ll note in the way pro-capitalist advocates frame their ideology is that they always seem to ignore history. You might hear them say something about the use of ownership contracts to protect individual rights. But you won’t hear about the use of those same legal contracts to displace indigenous peoples, engaging in patterns of colonialism that systematically extracted wealth from existing societies, or the marginalization of those who were not legally allowed to participate in the capitalist system (women, people of color, native peoples, etc.).

Capitalism was the refined system version of the colonial empires that it grew out of.

Okay, one might ask, if capitalism centralizes governments and stifles innovation, why is it that prosperity has grown in the last 200 years? The answer was alluded to briefly above — starting with the French Revolution (and quickly followed in a cascade of emerging democracies) the exploited masses of people began to organize themselves and challenge the hegemony of corporate capitalism that had married itself to a feudal system of aristocratic power.

As these aristocracies were toppled, new legal frameworks for human rights challenged the private ownership of human beings (ending slavery) and expanded the definition of economic value beyond money (to things like public safety, human dignity, and the inclusion/protection of minorities). With each new wave of inclusive protections — that countered the drive of capitalism as it sought to “own and control” everything by those with money — we began to experience open marketplaces of ideas that actually do increase innovation and prosperity.

So if you want to live in a world where people come together in a dance of competition and cooperation and solve real-world problems, you’ll want to push back against the capitalist ownership regime of privatization, wealth hoarding, and control over others via debt-servitude. Replace these economic tools of oppression with frameworks for public investment in education, open access to shared knowledge, peer-to-peer frameworks for open collaboration, legal protection of human rights (including those for fair negotiation of contracts), public safety, and all the other benefits that arise through processes of open collaboration in diverse societies.

But please, stop calling these decentralized creative powers capitalism. That is an insult to all who have suffered from colonial exploitation, slavery, marginalization, and debt-servitude throughout the last 400 years.

We can move beyond capitalism and still have open markets, effective governments, safe and prosperous communities, and a great deal more freedom than we get now in the exceedingly unequal world we currently live in.

Dismantling the architecture of wealth extraction that creates systemic corruption across the globe will be essential for freedom and prosperity in the future.

Doing this will require that we properly understand how capitalism works — so we can keep the features that do work (legal enforcement of contracts, for example) while evolving beyond those that don’t (privatization of common resources to extract wealth and hoard it).

Onward, fellow humans.

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