I am currently going through a video by Peter Schiff from the occupy Wallstreet period where he is talking with the protestors at the time. I'm pretty early in the video and Mr. Schiff makes the following statement

"The way a capitalist gets rich is by enriching everybody else" - Schiff (4:21)

I take the above to mean that "Capitalism increases the net wealth of everyone. This is something that I have personally heard before, but never looked into. So, I tried to google the following

Does capitalism cause a net increase in wealth

What I was looking for was essentially an Econ101 level explanation of possibly the argument for and against this but the different links that appeared were:

  • How Capitalism Actually Generates More Inequality - evonomics.com
  • Is Capitalism To Blame For Inequality? - inequality.org
  • ECONOMICS AND CAPITALISM - capitalism.com

Which all by their article or website name alone seem like they would be biased.

So I ultimately want to pose the question here in two points. Firstly, did I interpret Schiff's own quote properly? Secondly, what is the basic Econ 101 explanation for the above-bolded statement?

  • $\begingroup$ I'm currently trying to go through the wiki page for capitalism, but it's pretty dense and has a lot of terms to look up to make sense of it all. $\endgroup$ – akozi Jul 22 '20 at 16:56
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    $\begingroup$ Capitalism in economics is poorly defined. Most economics textbooks do not even have the word capitalism in them. Hence there is no Econ 101 explanation for the above statements. In fact even moving away from econ 101 you will rarely encounter the term as it is too value laden and scientists avoid such terms whenever possible as value laden terms often help to obscure rather than illuminate. Unless you provide some concrete definition of capitalism the above questions can’t be answered and even then it would be best to narrow your questions down a bit as they are bit too broad for this site. $\endgroup$ – 1muflon1 Jul 22 '20 at 17:32
  • $\begingroup$ There is a difference between (a) "total wealth is higher with System X than with System Y" and (b) "each individual's wealth is higher with System X than with System Y" and neither of them answer whether (c) "wealth inequality is higher with System X than with System Y" $\endgroup$ – Henry Jul 22 '20 at 17:33
  • $\begingroup$ @1muflon1 Ah, I didn't know that capitalism was a poorly defined term, I'll keep looking into this and see if I can make up a concrete example. $\endgroup$ – akozi Jul 22 '20 at 17:43
  • $\begingroup$ @Henry I think I was leaning the question towards option (b) as the original statement seemed to imply that one person cannot get make a profit without most other people benefiting as well. $\endgroup$ – akozi Jul 22 '20 at 17:43

Good question!

An important thing to understand about the word "Capitalism" as used by Schiff is that he views economics from the framework of the so-called "Austrian School". They reject the validity of a lot of mainstream concepts ("rational actors", "utility functions", and basically all mathematical/statistical tools such as GDP) in favor of "praxeology". In short, they start from the axiom that at any given time, humans engage in purposeful behavior to satisfy their most important wants. With this starting point in mind, Austrian economists try to explain economic phenomena such as the emergence of trade, interest rates, money and the generation of wealth by logical deduction and by analyzing people's different preferences.

For example, Schiff would likely agree with the following description of "Capitalism":

Suppose that you, I and Schiff were stranded on a deserted island. Since "being alive" is valued very highly by all of us, we are forced to catch fish with our bare hands for sustenance. One day, you are lucky and catch enough fish to sustain you for a whole week. Instead of simply relaxing on the beach, you decide to spend the day constructing a fishing rod that will allow you to catch even more fish in the future. One might say that you have "invested" in "capital equipment" that has "grown the economy" by making it easier to satisfy an important want.

You may catch so many fish that you don't value eating the 50 most recent ones very highly compared to other things you could do with them. If Schiff happens to be good at building huts, but finds himself stuck catching very little food with his hands, it might be beneficial for the two of you to "trade". You trade 50 fish to him in exchange for the labor he expends building a hut for you. Maybe Schiff can obtain a steady supply of fish by exchanging more and more elaborate huts, comfortable furniture etc. for them. Perhaps you offer him 50 fish now so he can build a fishing rod of his own, while requiring that he gives you 60 fish at some later date. More useful equipment that enhances production is built and thus our standard of living is raised.

This process of saving up resources for investment and voluntary exchange of goods and services would be what Schiff thinks of when he says "Capitalism". We can be certain that these exchanges are viewed as beneficial for both of you; if you did not think they would be beneficial, why would you engage in them voluntarily?

Now suppose that I coercively intervene in the aforementioned process. Maybe I am alarmed by the gross wealth disparity between the owners and non-owners of fishing rods. This can happen very directly by robbery or more indirectly. For instance I might promise to "protect" Schiff from being "exploitatively" paid less than 100 fish per day in exchange for hut-building labor, meaning that he never gets hired to do this job in the first place. If I artificailly force you to direct your resources away from whatever use you think is most important, I am getting my needs met at the expense of your needs. When force is involved, one person wins while the other one loses. It also becomes more difficult for you to save up enough to invest in whatever project you deem most necessary, hampering the process of investment and wealth generation.

Schiff and Austrian economists in general believe that it is inaccurate to use the word "Capitalism" for the economic system prevalent in the West today. In their view, given that the amount of economic regulation, taxes, unionization of industries, redistribution schemes via public services, monetary expansion by central banks, government subsidies (corporate welfare), etc. has only increased since the ultra-liberal Victorian era, it is more likely "Interventionism" that is to blame. For example in the Austrian view, the 2008 financial crisis that motivated the Occupy protests shown in your clip was a direct result of Congressional involvement in issuing mortgages to people who could not afford them as well as credit expansion by the publicly chartered Federal reserve.

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    $\begingroup$ Thank you! This is very much the kind of example I was looking for that explains the concept in an isolated and ideal sense and then also explains the intricacies that arrive in the real world. :) $\endgroup$ – akozi Jul 22 '20 at 21:03
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    $\begingroup$ This may be the Austrian view, but I think the question is not asking what the view is, but whether it reflects reality. $\endgroup$ – user253751 Jul 23 '20 at 11:55

Here is a graph of labor productivity per hour for the United States since WWII.

enter image description here

This is fairly typical of capitalist economies. Even Karl Marx and revolutionary socialists recognize that increasing labor productivity is a general characteristic of capitalism. So yes, the pie keeps getting bigger and bigger as a result of this in combination with population growth.

The question of inequality is a somewhat separate one. If the whole pie is growing big enough, the absolute size of my slice can grown even if my relative share as a percentage of the whole is getting smaller. In other words, the total wealth of society keeps increasing, and so in absolute terms, even the poorest see some benefit. In relative terms, that gets more complicated.

  • $\begingroup$ The question is what is capitalist economy. According to some political scientists Soviet Union was a capitalistic economy (state capitalism). Yet in that kind of capitalism there was a lot of stagnation and even decline in some periods. In economics, capitalism is term that’s not defined. USA would also most likely not be capitalist according to Marx who used the word to describe contemporary England. 19th century England had virtually no labor laws, minimum state intervention, and government spending was below $10\%$ of GDP. If we set those standards then US is far from that. $\endgroup$ – 1muflon1 Jul 22 '20 at 17:48
  • $\begingroup$ It's true there is a lot of complexity I'm not dealing with in this answer. The case of the USSR might be a fair point. But state regulation has nothing to do with Marx's definition of capitalism, and I'm not aware of any serious argument (Marxist or otherwise) that the USA is not a basically capitalist economy. $\endgroup$ – Brian Z Jul 22 '20 at 18:00
  • $\begingroup$ well you will hear a lot of arguments from some heterodox political economists, from for example the Austrian school, that would disagree with that, since some of them would consider US not capitalistic. I don’t endorse such views by any means but they exist. Even aside from that if we make a broad definition of capitalism that includes USSR then the above answer you given is not a general answer. Then you are just talking about US capitalism, whatever that is, and not about capitalism per se. $\endgroup$ – 1muflon1 Jul 22 '20 at 18:06
  • $\begingroup$ @1muflon1 Those are fair points that would require a lot more sublty to address. I hope for the person asking the question, my answer will provide more illumination then confusion. $\endgroup$ – Brian Z Jul 22 '20 at 18:25
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    $\begingroup$ @BrianZ Thank you! The example is very helpful in showing that the total production in the US (which I've learned can be debated as a capitalist society) has increased. I also appreciate the pie analogy as it pointed out that wealth can increase but inequality also gets worse. I've given the checkmark to Ole Kraup, as he explained in simple terms how the production increases in an ideal sense, however, I really appreciate your answer as well. :) $\endgroup$ – akozi Jul 22 '20 at 21:08

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