Lurking somewhere in my scratch pads, perhaps never to be published in a locked node, is a write-up in which I point out that God is not mentioned in the Bible, and that talk of God is a retcon into a tradition that has nothing to do with it. In a similarly counterintuitive, yet correct way, I will explain why the terms "capitalist" or "capitalism" are contradictory to the term "free market", even though the terms are often used hand-in-hand. This is not a radical idea on my part, either. It is something that I think would be covered in any Econ 101 class, although applicability may be ignored.

Let us define our terms: Capitalism is a system where people earn profits through ownership of capital. A free market is a system where there are no barriers to entry in the market.

Say a business man owns a piece of capital. To keep this story somewhat simple, we will imagine a concrete object, such as a bulldozer. He paid $10,000 for it and rents it out for 100 dollars an hour. After 100 hours, or about a month of work, he has paid off his initial investment, and then everything he gains is profit. This would be a capitalist system. But this is a free market, which means there is no barriers to entry. Which means that someone, fairly soon, is going to realize the money to be made and go out and buy their own bulldozer. But this second investor will decide they can get more business, so they will cut their prices in half. It will take them twice as long to recoup their investment, but they will take away all the business from the original bulldozer owner. At least until a third investor buys a bulldozer and goes down to $25 an hour. In a truly free market, prices are bid down to the point where capitalism is not profitable, as such. (Hold that thought while I go over another point.)

Along with consumers bidding prices down, workers will naturally have their wages bid up. If the original capitalist is paying $10 an hour for someone to drive his bulldozer, the second will bid that up to $15 an hour, and the third to $20 an hour. Which, if you are keeping track, leads our third capitalist with a profit of $5 an hour...which hardly seems worth it, but if he doesn't take it, someone else will. So just as consumers end up getting the lowest prices possible in a free market system, workers also get the highest wages possible in a free market system. I should also point out here, towards the end of the paragraph when no one is paying attention, that I lied a little bit about free markets not being capitalistic. Because in a free market system, capitalists are also there, and they also make a profit-but the profit they make is called the normal profit. The normal profit is considered to be the amount of money it takes to make it worthwhile for an investor to purchase some capital. In our example, the last investor might have realized that if he is making a $5 an hour profit, that it was a silly enterprise anyway, and he could have spent his $10,000 dollars on 10,000 boxes of Little Debbie Snack Cakes instead. So in a way a free market system could be called "capitalistic", but there is no more justification for that then calling it a "consumeristic" or "laboristic" system. In a true free market system, consumers, laborers and capitalists all have equal bargaining power.

Having read this, and also presumably having lived out in the real world, the reader may be wondering about the discrepancy between this theory and the actual way that economics work. There are several reasons why capitalists often get the best of a supposedly free market system. First, there are information costs and frictions in real markets, of all sorts. What this basically means is that Johnny Homeowner might not really be in the mood for shopping around for the lowest-priced bulldozer operation in town. And, for that matter, Joey Dozerdriver might not want to go through the process of quitting his job and signing on with another company because he will get a nickel-an-hour raise. And part of this explanation has to do with the fact that unlike in models, in real markets there is not an infinite (or at least indefinite) series of capitalists, workers or consumers. In an idealized market, the efforts of one group to hold out for a better price is stymied by the fact that there is an indefinitely large amount of other capitalists, workers or consumers to offer the price set by market. Of course, of those groups it is often the capitalists who are small enough to control the market by either monopoly or ogliopoly. To put it another way, in an idealized market there are no barriers to entry, but that is not true in the real world. If there were no barriers to entry, some smart capitalists would get together, raise some money and start building stores where they would offer higher wages than Wal-Mart. However, the immense capitalization required means that Wal-Mart has managed to achieve a semi-monopolistic position where they can keep wages below what a true free market would have. (As an exercise for the reader, I will let them decide on what the difference is between having a state owned and run megastore in every town that sets wages and prices by law, and a privately owned and run megastore in every town that sets wages and prices by will. As a further exercise for the reader, how does this situation change when the Chinese Central Bank buys the chain megastore sometime in 2012 so that the US can continue to live its life of rugged individualism for another two months?) And of course the United States is (for all its problems), not a bad place to be a consumer or a worker in. If you are a worker in a third world country, there is a good chance that not only is there only a single factory in your town or district, but that that single factory has a brother-in-law and a goon squad attached. Otherwise, a smart, and possibly humane capitalist would raise some money, and open a garment factory where you only had to work 12 hours a day, and were free from sexual harassment and mandatory pregnancy tests. But the free market model has very little to say about the impact of brother-in-laws and goon squads.

So this is a brief description of how free market systems and capitalist systems differ. What to do about this is left at the discretion of the reader.

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