Originally feudalistic, the economies in Europe shifted to a more capitalistic system from the Middle Ages onward. Feudalism flourished during the 9th to 15th centuries and the structure of relationships in society were primarily economic. Land holders were empowered with a ruling authority arising from their land holdings and the relationship of the different classes were based on their relationship to the land holding. Rodney Stark argues that capitalism started to take form as early as the 12th century and that by the end of the 13th century “the leading Christian theologians had fully debated the primary aspects of emerging capitalism-profits, property rights, credit, lending, and the like.” [zotpressInText item=”{FBSTGVC8, 66}”]
Capitalism contrasts with the earlier economic system in that it is characterized by the purchase of labor for money wages as opposed to the direct labor obtained through custom, duty or command in feudalism.
Rather than trying to define ‘capitalism’ as a system, it may be better to understand what are the necessary conditions to make a successful economic model work.
Freedom
Freedom is the foundational component for any successful economy. Agents must have the freedom to make the best and most productive economic and business decisions if the system is to work properly. Without freedom, the economy will necessarily be centrally planned and dictatorial. We can see from history that such an economy rarely if ever works. It is not feasible in the long-term because it is built upon and subject to the whims of a small group of ‘elite’ leaders who normally have vested interests in directing the economy. The collective wisdom of the market will often trump the presumed wisdom of a small group of leaders.
Rule of Law
The Rule of Law is essential to the efficient and effectual functioning of an economy for two main reasons: first, it establishes the parameters in which the market operates, and second, it gives the players the confidence necessary to partake in the system. Trying to participate in the economy without the Rule of Law is like playing sports with rules or a referee. It becomes chaos and bows to the whims of the strongest players. Capitalism is not a free for all, but a system in which the players makes decisions with certain expectations and the Rule of Law helps establish and enforce those expectations.
Private Property
Private property is what puts the ‘capital’ into capitalism. Many have tried to argue for a communal or communist attitude toward property from the Bible, often citing Acts 2:44-45 and Acts 4:32. These passages however, are descriptive and not prescriptive. Two of the ‘Ten Commandments’ are a) do not steal (Exod 20:15), and b) do not covet (Exod 20:17). Both of these assume some form of private ownership of property. We also know from experience and human nature, that people tend to respect and value private property more highly than public property and thus they tend to be better stewards of these resources.
But there is another important aspect of private property. Hernando de Soto argues that when the ownership of property is not fully and legally recognised, it is effectively ‘dead’. Without the proper infrastructure and systems to recognise and reinforce ownership, private property cannot be put to its best and more effective use. It is unusable as collateral for credit, which is essential for small businesses. Also, because ownership is questionable, the property itself is frequently kept out of the system. In order for an economy to best utilise its resources and capital, it needs both to recognise and reinforce private property.
Medium of Exchange
In order to have efficient economy, there needs to be some sort of easy and efficient medium of exchange. Money has been that medium for some time now and more recently, the US dollar in particular. Previously people traded goods under the barter system, but exchanging goods of unequal value can be cumbersome. The shift to a monetary system removed the barriers and allows people to trade more freely by creating an easy marker of value.
Free Markets
The free exchange of commodities, products, and services is near the heart of the capitalist system. The freedom to exchange is an essential aspect of an efficient market because without it capital is illiquid. Investors are deterred from injecting capital into the system for fear of not being able to get it out at a later date. Illiquidity must also be considered an opportunity cost of capital, if it could be used more efficiently elsewhere, but cannot be moved.
The main advantage of a free market is that it is a pricing mechanism, representing the amalgamation of all of the buying and selling choices of all of the participants in the market. Buyers and sellers make their choices based on the information available and pertinent to them. The market communicates the real-time accumulation of this information through price fluctuates, reflecting the collective valuation of a particular commodity, product, or service. It is impossible for a central planner to have and understand this depth of information.
Discovery, Creation, and Innovation
At the true heart of a prosperous economic system however, is creation, discovery, and innovation. That is, putting resources to their best and most productive use through human intelligence and ingenuity. God reveals himself and our world to us through the Bible. God is the ultimate creator (Gen 1:1) and man is made in the image of God (Gen 1:27) and in the Garden of Eden, he called Adam to work and steward creation (Gen 2:15). A productive economic system will therefore reflect man’s desire, ability, and calling to understand, produce, and steward the resources that God has put under his control.
Leave a Reply