In The Communist Manifesto (1848) Karl Marx (1818–83) and Friedrich Engels (1820–95) predicted that capitalism would lead to the impoverishment of the laboring class. Why? Well, to raise profit on capital invested, Marx and Engels argued, entrepreneurs (the capitalists) would exploit the workers. They would reduce wages and worsen working conditions by, say, increasing working hours. From that viewpoint, Marx and Engels put forward an immiseration theory of capitalism.

Worker “Exploitation”

Marxists would not argue that workers’ wages would decline in absolute terms, but certainly in relative terms: the wage incomes of the many would rise less than the incomes of the capitalists, thereby making the former poorer compared to the latter over time. Especially in times of crisis, which are inevitable and recurrent in a capitalist economy, workers would be hit particularly hard, causing their economic and financial conditions to fall further behind of those of the capitalists.

Capitalist “Imperialism”

To make things worse, Marxists argue that capitalism would bring about violent colonialism and imperialism. As capitalists pay less for labor than what is appropriate, the workers cannot buy all available products. Profit-seeking capital is, therefore, seeking to open up new markets in other parts of the world. Conflicts over who controls what arise among nations, paving the way toward war. This is, in fact, the message Vladimir Lenin (1870–1924) hammered home to his readers in his 1917 book Imperialism: The Highest Stage of Capitalism.

If capitalism is bad—if it brings exploitation, misery, and even war to a great many people, and all this comes to the benefit of the capitalists—isn’t it rightful and consequential to do everything to overcome capitalism and replace it with socialism-communism, the alternatives said to bring peace, equality and happier life for the people in this world? Sound economics reveals that the Marxist critique of capitalism, as well as the high-flying enthusiasm for socialism-communism, is tantamount to outright intellectual confusion.

What Capitalism Really Is: Peaceful Cooperation

Many people do not know what capitalism really means. Capitalism is the social and economic order in which the means of production are privately owned. In its “pure” form, capitalism means unconditional respect of people’s private property, free markets, and, most importantly, a form of state that is confined to protecting people and their property against aggression from inside and outside the country’s borders. “Pure” capitalism is no doubt conducive to peaceful and productive cooperation nationally as well as internationally.

It is capitalism that makes mass production possible—the production of goods and services for the consumption of the greatest number of people. The productivity gains that it creates result in a tendency toward a continuous increase in people’s average living standard. Producers are subject to the profit and loss principle: they are economically rewarded only if and when their products meet consumers’ preferences. If they don’t, entrepreneurs will suffer losses, forcing them to improve their output to the benefit of their customers.

Pure capitalism not has only a built-in mechanism to improve the masses’ material well-being. What is particularly wonderful is that under pure capitalism, people’s wages do not depend on individual workers’ productivity, but the marginal productivity of labor in general. Assume a firm makes a productive innovation. To hire new labor, it has to pay higher wages compared to those paid by other employers. The latter, to retain their staff, will also have to offer a higher wage—to the benefit of less productive workers.

It should also be noted here that pure capitalism encourages the division of labor among people, nationally and internationally. This, in turn, entices people to seek peaceful cooperation rather than conflict: everyone realizes that it pays off to cooperate, that this is mutually beneficial to all parties involved. In other words: pure capitalism is a recipe for peace. In a world of pure capitalism, there would simply be no reason for large-scale violent conflicts, let alone state wars.

Interventionism vs. Capitalism

Why do so many people harbor resentment or even hate against the concept of capitalism? One answer is that they presumably look around and see the many evils in this world, such as the recurrence of financial and economic crises; mass unemployment; bailout programs that make big corporations richer, disregarding the fate of small and medium-sized firms; chronically rising costs of living; growing income and wealth inequality; and growing geopolitical tensions and conflicts.

Unfortunately, all these evils are attributed to capitalism. A fatal conclusion, though, because there is no pure capitalism, neither in the US nor in Europe, Asia, Latin America, or Africa. What we find are interventionist-collectivist and sometimes even socialist economic and societal systems. Especially in the Western world, basically all states, and the special interest groups that exert great influence over them, have succeeded in increasingly replacing what little is left of the capitalist system in recent decades.

States have interfered in all areas of people’s lives. Be it education (kindergarten, schools, universities), health, pensions, transport, law and order, money and credit, or the environment, the states and their governments have become major players in markets for goods and services, turning free markets into hampered markets, raising taxes ever higher, and increasingly undermining and even destroying the institution of private property.

Intervention Cripples the Wealth Creation Offered by Capitalism