Long before there was government, there was capitalism. Capitalism is not an institution, it has no leader, is not a part of government, was not invented, it is free, and the only basis for its reoccurring for thousands of years is that it works! In its simplest form it requires: Two persons, two assets and mutual desire of each person to exchange one asset for another.  When two non-money assets are exchanged, it is called “barter”.  Money is the asset that is most often used by the buyer to pay the seller for a purchase.  The seller, then having the buyer’s money can use it to buy a much greater variety of things, than if he obtained some object or service in exchange.  Money facilitates capitalism because it can be used to buy a greater variety of different things.  In addition, money is divisible; the buyer may wish to use it in partial amounts for different products, at different places or at some other time.  Money is called a universal medium of exchange; and it was invented after capitalism came into being.  

Assuming the use of money, by definition, a buyer and seller exchange assets of equal value.  This is because each party to the exchange receives fair value for the asset he receives in exchange for the fair value of the asset he gives up.  We call any transaction where both buyer and seller exchange money and goods of equal value as a fair market value transaction. Based on the above description, we know capitalism has these attributes:  Each party has free choice, no coercion, and expectation of good faith from the other party.  .  

There is and has been for thousands of years government interest in capitalist activities of its citizens (or subjects in the case of monarchies). Government needs its citizens to be productive and profitable, and therefore governments have made laws to protect fair-trade rules.  The English common law courts were sanctioned by the king and decided cases in towns. Today’s Uniform Commercial Code (UCC) is statutory law that is essentially the same in every State in the United States.  Article III courts (courts established by the Constitution) are rarely involved in cases covered because the UCC is so well established in our culture.  The Federal government’s sole power over commerce is limited to interstate transaction with the power to regulate only, says the Constitution.  That power has been expanded by the Supreme Court.

Capitalism has incredibly diverse properties.  For example, a person may offer to sell her asset, but she may still accept the transaction by renting it instead.  The ability to rent instead of purchase has greatly increased the standard of living in the United States from what it would be otherwise. Banking, a government regulated industry, is also instrumental in achieving higher standards of living for the same reasons as renting, which is to lend to the purchaser who repays over time. 

Manufacturers assemble products from parts and commodities produced elsewhere,  delivered to the place of assembly.  Banks and brokers facilitate global trade by managing paperwork, insuring, and guaranteeing payment.  It used to be that only the largest companies conducted trade foreign customers; both buying and selling.  Today, by having consistent rules and bank protections of payments, import and export business is conducted by more companies than previously.  All these separate transactions have the same attributes as described in the opening paragraph and lead to increasing a country’s standard of living. 

A short essay by Leonard E. Read entitled, I, Pencilis an amazing story about  manufacturing a wooden pencil.  I, Pencildoes not explain the role of prices in Capitalism.  Value is subjective, but price is specific.  When a transaction is completed, the price is important information.  Today’s business environment makes price information a valuable information product.  Consider a supermarket.  Every item available for sale is marked with a price to inform the buyer’s decision, on the spot.  Then the actual selling price informs the company that sold the product to the supermarket. Finally, prices form the basis for recording accounting transactions, making capitalism an instrument in determining profit or loss of a business.  Verified prices underlie financial statements required for borrowing money, paying taxes, and more, plus lots of economic information for economists to study.

Publiustoo.com                                                                                      October 24, 2019

Capitalism:  A Lesson in Economics