Capitalism refers to a legal, social, economic, and cultural system that embraces equality of rights and “careers open to talent” and that energizes decentralized innovation and processes of trial and error – what the economist Joseph Schumpeter called “creative destruction” – through the voluntary processes of market exchange. Capitalist culture celebrates the entrepreneur, the scientist, the risk-taker, the innovator, the creator. Although derided as materialistic by philosophers (notably Marxists) who are themselves adherents of materialism, capitalism is at its core a spiritual and cultural enterprise. As the historian Joyce Appleby noted in her recent study The Relentless Revolution: A History of Capitalism, “Because capitalism is a cultural system and not simply an economic one, it cannot be explained by material factors alone.”
Capitalism is a system of cultural, spiritual, and ethical values. As the economists David Schwab and Elinor Ostrom noted in a seminal game-theoretic study of the role of norms and rules in maintaining open economies, free markets rest firmly on the norms that constrain us from stealing and that are “trust enhancing.” Far from being an amoral arena for the clash of interests, as capitalism is often portrayed by those who seek to undermine or destroy it, capitalist interaction is highly structured by ethical norms and rules. Indeed, capitalism rests on a rejection of the ethics of loot and grab, the means by which most wealth enjoyed by the wealthy has been acquired in other economic and political systems. (In fact, in many countries today, and for much of human history, it has been widely understood that those who are rich are rich because they took from others, and especially because they have access to organized force – in today’s terms, the state – and use such force to gain monopolies and to confiscate the produce of others through taxes and then to feed at the state treasury; it is only under conditions of capitalism that wealthy non-thieves have been common.)
Consider what the economist and historian Deirdre McCloskey calls “The Great Fact”: “Real income per head nowadays exceeds that around 1700 or 1800 in, say, Britain and other countries that have experienced modern economic growth by such a large factor as sixteen, at least.” That is unprecedented in all of human history. McCloskey’s estimate is, in fact, quite conservative. It doesn’t take into effect the amazing advances in science and technology that have put the cultures of the world at our fingertips.
Capitalism puts human creativity to the service of humanity by respecting and encouraging entrepreneurial innovation, the elusive factor that explains the difference between the way we live now and how generation after generation after generation of our ancestors lived prior to the 19th century. The innovations that have transformed human life for the better are not merely scientific and technological, but institutional, as well. New business firms of all kinds voluntarily coordinate the work efforts of enormous numbers of people. New financial markets and instruments connect the savings and investment decisions of billions of people twenty-four hours a day. New telecommunications networks bring together people from the corners of the world. (Today I had conversations with friends in Finland, China, Morocco, the US, and Russia, and Facebook comments and communications from friends and acquaintances in the US, Canada, Pakistan, Denmark, France, and Kyrgyzstan.) New products offer us opportunities for comfort, delight, and education unimaginable to previous generations. (I am writing this on my Apple MacBook Pro.) Those changes have made our societies in countless ways dramatically unlike all human societies that have preceded them.
Capitalism is not just about building stuff, in the way that socialist dictators used to exhort their slaves to “Build the Future!” Capitalism is about creating value, not merely working hard or making sacrifices or being busy. Those who fail to understand capitalism are quick to support “job creation” programs to create work. They have misunderstood the point of work, much less the point of capitalism. In a much quoted story, the economist Milton Friedman was shown the construction on a massive new canal in Asia. When he noted that it was odd that the workers were moving huge amounts of earth and rock with small shovels, rather than earth moving equipment, he was told “You don’t understand, this is a jobs program.” His response: “Oh, I thought you were trying to build a canal. If you’re seeking to create jobs, why didn’t you issue them spoons, rather than shovels?” The mercantilist and cronyist H. Ross Perot, when running for president of the United States in 1992, he lamented during the presidential debates that the Americans were buying computer chips from Taiwan, and selling the Taiwanese potato chips. It seemed that Perot was ashamed that Americans were selling mere potato chips; he had bought into Lenin’s view that value is added only by industrial production in factories. Economist Michael Boskin of Stanford University correctly noted that if you’re talking about a dollar’s worth of computer chips, or a dollar’s worth of potato chips, you’re talking about a dollar’s worth. Adding value by growing potatoes in Idaho or by etching silicon in Taipei is adding value. Comparative advantage is a key to specialization and trade; there is nothing degrading about producing value, as a farmer, as a furniture mover (I worked with three movers today to move much of my library and I have a very solid sense of how much value they added to my life), as a financier, and so on. The market – not arrogant mercantilist politicians – show us when we are adding value, and without free markets, we cannot know.
Capitalism is not just about people trading butter for eggs in local markets, which has gone on for millennia. It’s about adding value through the mobilization of human energy and ingenuity on a scale never seen before in human history, to create wealth for common people that would have dazzled and astonished the richest and most powerful kings, sultans, and emperors of the past. It’s about the erosion of long-entrenched systems of power, domination, and privilege and the opening of “careers to talent.” It’s about the replacement of force by persuasion. It’s about the replacement of envy by accomplishment. It’s about what has made my life possible, and yours.
(The only thing that the kings and sultans and emperors had that ordinary people today don’t have was power over other people and the ability to command them. They had vast palaces built by slaves or financed by taxes, but no indoor heating or cooling; slaves and servants but no washing machines or dishwashers; armies of couriers but no cell phones or wifi; court doctors and magi, but no anesthetic to ease their agony or antibiotics to cure infections; they were powerful, but they were miserably poor by our standards.)
Free Market Capitalism vs. Crony Capitalism
In order to avoid the confusion caused by equivocal use of the term “capitalism” by socialist intellectuals, “free market capitalism” should be clearly distinguished from “crony capitalism,” from the system that has mired so many nations in corruption and backwardness. In many countries, if someone is rich, there is a very good chance that he (rarely she) holds political power or is a close relative, friend, or supporter –in a word, a “crony” – of those who do hold power, and that that person’s wealth came, not from being a producer of valued goods, but from enjoying the privileges that the state can confer on some at the expense of others. Sadly, “crony capitalism” is a term that can with increasing accuracy also be applied to the economy of the United States, a country in which failed firms are routinely “bailed out” with money taken from taxpayers, in which the national capital is little more than a gigantic pulsating hive of “rent-seeking” lobbyists, bureaucrats, politicians, consultants, and hacks, and in which appointed officials of the Treasury Department and the central bank (the Federal Reserve System) take it on themselves to reward some firms and harm others. Such corrupt cronyism shouldn’t be confused with “free market capitalism,” which refers to a system of production and exchange that is based on the rule of law, on equality of rights for all, on the freedom to choose, on the freedom to trade, on the freedom to innovate, on the guiding discipline of profits and losses, and on the right to enjoy the fruits of one’s labors, of one’s savings, of one’s investments, without fearing confiscation or restriction from those who have invested, not in production of wealth, but in political power.
The waves of change that free market capitalism creates are often resented. Minorities become uppity. The lower classes no longer know their place. Women assert their own worth. People create relationships based on choice and consent, rather than birth or status. The conservative hatred of free market capitalism, which was very neatly summarized and incorporated by Marx into his writings, reflects anger at such change and often anger at the loss of privilege. Leo Melamed, the Chairman Emeritus of the CME Group (formerly the Chicago Mercantile Exchange) whose own life story of escaping from the Gestapo and the KGB and going on to revolutionize world finance is a story of courage and vision, drew on his experience when he said that “in Chicago’s financial markets it is not what you are – your personal pedigree, your family origin, your physical infirmities, your gender – but your ability to determine what the customer wants and where the market is headed. Little else matters.” Embracing free market capitalism means embracing the freedom to change, to innovate, to invent. It means accommodating change and respecting the freedom of others to do as they please with what is theirs. It means making place for new technologies, new scientific theories, new forms of art, and new identities and new relationships. It means embracing the freedom to create wealth, which is the only means to the elimination of poverty. (Wealth has causes, but poverty does not; poverty is what results if wealth production does not take place, whereas wealth is not what results if poverty production does not take place.)  It means celebrating human liberation and realizing human potential.
 Joyce Appleby, The Relentless Revolution: A History of Capitalism (New York: W. W. Norton and Co., 2010), pp. 25-26.
 David Schwab and Elinor Ostrom, “The Vital Role of Norms and Rules in Maintaining Open Public and Private Economies,” in Moral Markets: The Critical Role of Values in the Economy, ed. by Paul J. Zak (Princeton: Princeton University Press, 2008), pp. 204-27.
 Deirdre McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (Chicago: University of Chicago Press, 2010), p. 48.
 For a simple arithmetic explanation of the principle of comparative advantage, see tomgpalmer.com/wp-content/uploads/papers/The%20Economics%20of%20Comparative%20Advantage.doc
 For a remarkable account of the general decline of the experience of force in human affairs, see James L. Payne, A History of Force (Sandpoint, Idaho: Lytton Publishing, 2004).
 Envy as an impulse harmful to social cooperation and inimical to free market capitalism has been studied by many thinkers. A recent and interesting approach that draws on the Indian classic epic The Mahabharata can be found in Gurcharan Das, The Difficulty of Being Good: On the Subtle Art of Dharma (New York: Oxford University Press, 2009), esp. pp. 1-32.
 The legal historian Henry Sumner Maine famously described “the movement of the progressive societies” from inherited relations, based on family membership to personal liberty and civil society as “a movement from Status to Contract.” Henry Sumner Maine, Ancient Law (Brunswick, NJ: Transaction Publishers, 2003), p. 170.
 Leo Melamed, “Reminiscences of a Refugee,” in For Crying Out Loud: From Open Outcry to the Electronic Screen (Hoboken, NJ: John Wiley & Sons, 2009), p. 136
 I address the issue of poverty and free market capitalism more systematically in “Classical Liberalism, Poverty, and Morality,” in Poverty and Morality: Religious and Secular Perspectives, William A. Galston and Peter H. Hoffenberg, eds. (New York: Cambridge University Press, 2010), pp. 83-114.