Renaming Capitalism: Shifting the Emphasis from Financial Investment to Value Creation

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Sometimes it’s okay to let people who oppose your point of view have the honor of also naming your point of view. It happened happily to the early Christians. According to the New Testament book of Acts, followers of Christ were first called “Christians” at Antioch. The “-ian” ending in “Christian” is a diminutive. Thus the word “Christians” originally meant “little Christs.” The name stuck and has served the faith reasonably well for 2,000 years.

Another case of opponents happily naming their opposite occurred with astronomer Fred Hoyle, whose own steady state theory of cosmology ran counter to an expanding-universe theory. The expanding-universe theory suggested that the universe began with a violent explosion. Hoyle, therefore, in an effort to disparage this view, dubbed the initial explosion a “big bang.” Instead of undermining support for this view, however, physicists happily embraced the term, and so “big bang cosmology” came into currency.

Not all baptismal names chosen by opponents, however, have so happy an outcome. Karl Marx and his mid 19th-century fellow socialists despised European business practice, which centered on investing resources to create value within a system of credit, free markets, and enforced contracts. Marx especially resented that paid workers simply collected their pay but the investors got to assert ownership of the value created. Marx dubbed this economic framework “capitalism,” and with his magnum opus titled Das Kapital, the name stuck.

This name is unfortunate because it denotes at best a part of the economic framework to which Marx was objecting and also because it connotes a negative image that has no intrinsic connection to that framework. First connotation: Whenever we hear the term “capitalist,” our first thought is likely to be of an overweight middle-aged man with a huge paunch who is well-dressed (as much as his girth allows) and is throwing around wads of cash (do an internet image search on “capitalist,” and you’ll find plenty such images). This is someone who loves money, lives for it, and couldn’t care less about the people he’s stepping on to get it.

Yet this image has no direct bearing on the economic framework to which Marx was objecting. Anything that humans touch can be corrupted and caricatured. Sure, there are capitalists who fit the fat-cat stereotype. But most capitalists are in fact humble and unenviable: farmers, artisans, shop owners, mechanics, service industry workers, etc. — typically people of modest means who own their own business and need to make a living off of it.

The denotation of the term “capitalism” is even more problematic: What does the full economic framework to which Marx objected look like? Answering this question means going beyond the aspect of it that he focused on, in which the haves exploited the have-nots by paying them subsistence wages and thus reaping huge and unjustified profits. History suggests that Marx’s focus on the exploitation and alienation of workers was itself ill-considered. It was, after all, for Marx an economic inevitability that workers would fare so badly under their capitalist masters that they would, with 100 percent certainty, eventually rise up and throw off their yoke. But that didn’t happen, with workers in subsequent decades actually doing better where Marx’s ideas held less sway. Moreover, the actual rise of Marxist ideas in the 20th century had far more to do with the efforts of small vanguards (Bolshevism) and nationalistic movements (fascism) than with the mass uprisings of workers that he predicted.

Marx’s choice of the term “capitalism” to describe the economic framework he wanted to destroy was rhetorically shrewd. Indeed, how better to discredit a view than to focus on its most vulnerable aspects and choose a name that highlights those vulnerabilities? By the time Marx chose “capitalism” as the name for the economic framework he wanted to destroy, the term capital had already circulated for centuries in financial circles, where it denoted the wealth needed to fund a business initiative. That usage itself derived from an earlier usage where “capital” denoted the principal on a loan (leaving aside interest or usury). The term “capitalism” thus immediately puts one in mind of “financial capitalism,” and downplays the “productive capitalism” that would otherwise make capitalism seem worthy.

The very term capitalism, without further clarification or explanation, denotes the use of wealth to get more wealth and easily suggests the abuse of wealth to make the rich richer and the poor poorer. This focus on wealth to be invested to make more wealth is, of course, easily disparaged, especially when the wealth in question takes the form of money, and when there exist wealthy persons who simply want to maximize their return with no thought about the welfare of the workers who help them increase (though not necessarily maximize) their wealth. Marx, whose untamed vitriol was second to none, was thus in his element attacking capitalism with its primary focus on capital and the abuse of capital by the haves against the have-nots. .

Ultimately, what makes capitalism work is value creation.

Yet to make capitalism about capital — a move so convenient for undermining it as an economic framework — misses the point. What makes capitalism work is not in the end money or even wealth in some broader sense, nor is it the investment of money or wealth or any other scarce resources. Ultimately, what makes capitalism work is value creation. Moreover, value can be created without anything like extensive existing resources. Think of the massive companies that began in a garage. Think of the software developers who create million-dollar apps by simply punching away at a keyboard. Or, with technologies considerably older, think of sculptors or wood carvers or painters who create priceless works of art.

Sure, it can take considerable capital to break into a market and turn a profit. Elon Musk, for instance, with Tesla needed needed massive financial resources, from investors and lenders, to build his electric cars, and thereby create value. But what makes capitalism work is its ability to create value and do so efficiently, with minimal friction from the market or from the government for that matter. Indeed, to the degree that an economic system fails to create value or does so inefficiently, to that degree it is a failed economic system.

Yet there’s one more piece to capitalism that needs to be emphasized, and indeed that cannot be overemphasized, and it’s this. Within capitalism, value created belongs to the one who created the value. This claim may seem self-evident and indeed axiomatic to what is meant by property and the right of anyone to own property. But in fact, redistributionist moral and economic systems exist and are wildly popular that would dispute this fundamental principle of ownership within capitalism.

For instance, a utilitarian, who sees morality as whatever benefits the greatest number to the greatest extent, might argue that the value created by one individual will have far more benefit if taken from this individual and shared with the society at large. Alternatively, a socialist, who sees all property as belonging to the people as a whole, or to its surrogate, the state, might argue that no individual or even corporate entity can rightly be regarded as creating value because all value created depends on taking advantage of prior resources belonging to the collective (whether the society at large or the state). The latter view was encapsulated sometime back with the catch phrase “you didn’t build that.”

It becomes an interesting point to consider how value creation depends on the existence of prior value and how ownership of that prior value can rightly be assigned in determining ownership of subsequently created value. Does a woodcarver, for instance, have the right to take a piece of driftwood, claim it as one’s own, and then forming it into a work of art, get to claim ownership of the work of art? That seems reasonable given that driftwood exists aplenty and no one seems intent on claiming widespread ownership of it. But typically laws and conventions decide who owns what, and how ownership can, often with the exchange of money, be transferred from one party to another.

And yet, if an individual can rightly be said to own something, and then transforms it in a way that creates value, capitalism would say that individual owns the value created. Interestingly, this view of capitalism suggests that socialist countries have frequently harbored capitalist enclaves. Take Soviet mathematics. Soviet mathematicians (such as Andre Kolmogorov) produced some fantastic mathematics in the mid 20th century. They created much of value in the world of mathematical ideas. Moreover, those who created the new concepts and proved the new theorems were given proper credit and rewards by the Soviet government. In a real sense, they got to enjoy the fruits of their labor. The same could be said for Soviet athletes, who were able to “own” their accomplishments and see reward for them.

But contrast such a capitalist incentive, even within ostensibly socialist economies, with its absence for collective farmers, say, whose produce the state could take away entirely, and who would be given back only what the state was inclined to redistribute. In such cases, the rift between value creation and value ownership was stark.

Capitalism in the human context is never creatio ex nihilo (creation from nothing).

In human contexts, value creation is always a matter of value transformation, taking some pre-existing value and transforming it to bring about additional value. A capitalist who sees value creation as the essence of capitalism will therefore disagree with the politician who said “you didn’t build that,” but will nonetheless concede “you built that, yes, but you also had help.” Capitalism in the human context is never creatio ex nihilo (creation from nothing). Rather, it is a derivative form of creation in which the new is created by reworking the old. That does raise an interesting theological point, however, namely whether God is the ultimate capitalist in that God is said to create from nothing (i.e., from no prior existing stuff), and so can claim complete ownership of all creation because no part of it is owed to anyone but God.

In any case, the essence of capitalism, whether in human or theological contexts, is that that ownership of value derives from creation of value, the creator becoming the owner. To see this as the essence of capitalism immediately makes clear what is not capitalism, namely, anything that takes away ownership of value created from the value creator. Actually, this form of denying capitalism is too stark. Value creation takes place within a political, social, legal, and economic infrastructure (markets, banking, contracts, law enforcement, military security, etc.), and these require support, usually in the form of taxation. So it is legitimate to say that even though the essence of capitalism is ownership of value belonging to the creator of value, the state or society, in providing the infrastructure for the creation of value, has some partial claim on the value created.

So, at what point do we leave the essence of capitalism and devolve into something different, such as socialism or gangster capitalism (which is really just extortion)? I’m reliably told that some handicraft workers in Moscow, in selling their wares to tourists, were allowed to keep not more than ten percent of the selling price, the rest going to gangsters. Extortion like this is hardly in the spirit of capitalism as characterized in this essay, where the point is that if you build it, you get to keep it. Indeed, whatever moniker one uses to describe the alternative to capitalism, at the end of the day it becomes a matter of taking more than is due. But what is due? Herein lies a source of endless debate.

Many of the examples considered so far in this essay concern the lone individual creating something of value largely from scratch (i.e., from something without any significant pre-existing value). But what about the business person who has some financial resources, but requires the skills and efforts of other workers to build something of value? This business person agrees to pay the workers for their labor and, in exchange, gets to claim ownership of whatever they build. Capitalism would regard this exchange of pay for labor as fair provided neither party in the exchange engages in it under duress. In a sense, the business person is delegating work that he or she would otherwise do to the workers, and giving them money for their time and effort, but with the business person retaining the right to claim ownership of the thing built.

Ultimately, it is the fairness of such arrangements that lies at the heart of debates over capitalism. Unfortunately, there’s no objective, uncontroversial way to decide what constitutes fairness here. It seems that two fundamental intuitions collide in trying to decide whether capitalism is fair in conjoining value ownership with value creation. One intuition sees it as axiomatic that ownership derives from creation. The other sees ownership as needing to fulfill some good independent of creation (such as equality or utility).

Although in their pure forms these intuitions are irreconcilable, in practice societies work with some compromise of the two. Value ownership as a function of value creation has the practical advantage of incentivizing the value creators: if I get to keep what I make, I’m more inclined to make more. Siphoning some of that value ownership from the value creators has its appeal as well, since taking, and especially making laws that legitimize taking, is straightforward and typically easier than value creation. I write this without cynicism. There’s a place of society to take a portion of value created. And there comes a point where taking too much becomes counterproductive, and disincentivizes further creation. Wisdom is deciding how to balance these two intuitions.

I titled this essay “Renaming Capitalism.” In fact, it seems we’re stuck with the term “capitalism.” “Value creationism” simply doesn’t roll off the lips very easily and is unlikely to gain currency. Nonetheless, it seems like a valuable exercise to consider what language one would use to describe capitalism if one couldn’t use the term. This essay can be seen as an exercise in that vein. Capitalism is better than what the term connotes or denotes. At its best, it captures the creation of value that benefits both the one who creates the value and those who in some fashion consume or get to enjoy the value, in the process making the world a better and richer place for us all.