I was recently, in my guise as a reporter, at a gathering place of politicians, waiting for a meeting to start. As usual, I had brought a book, in this case, Adam Smith's The Wealth of Nations. Nothing special, just the Penguin Classics edition with the first three books out of Smith's five. I was ploughing through book two at the time, and I still have to read book three. Two of the politicians, as is their way, cruised past to say hello and ask what I was reading. They had never read it. One of them had not heard of it, didn't know what it was about, didn't know who Adam Smith was. When they asked, I had to give the ridiculously short and inaccurate answer: "He invented capitalism."
Now, these are certainly reasonably intelligent politicians who were asking (believe me, I've met the other kind). And they're not atypical. Most modern politicians, whether federal, provincial or municipal don't have a solid grounding in the classics of economic theory. Like most people throughout history, they tend to fall into the is/ought fallacy (things are like this because it's the way they should be) and their entire ambition is to make minor changes to the system.
It wasn't always this way. Before the Second World War, liberal capitalism was just one ideology that fought tremendous intellectual battles with socialism in its many forms. But everything went to hell for socialism. Lenin turned the Soviet state into a horror show, Stalin improved on his bloody work and then Russia spent 50 years falling apart. Mao was just as bad, Pol Pot was so far gone into the depths of savagery that he had his ass kicked by his supposed ideological comrades from Vietnam. Most of the other socialist states were simply puppets of the larger powers.
So, it became increasingly clear that at least one kind of socialism, the centrally planned economy in which the state controls and owns all the capital, doesn't work. I would argue that even if it did work, the only way to force it on people is through a dictatorship, so it's immoral in any case.
Unfortunately,the death of central planning and state capitalism has been hailed as the ultimate victory for free market capitalism, in its current form. Francis Fukayama and others have spilled a great deal of ink insisting that this is the end state of society, that representative liberal democracy and capitalism will last essentially forever.
As a science fiction writer, I can't help but roll around on the floor laughing when I read this kind of crap. I'm sure that in the 1300s, priests and princes said much the same thing about Christian feudalism. Even as merchants and free towns were springing up, unwittingly beginning the process that would lead to the rise of capital power. Before feudalism, the Roman Empire would last eternally, and the Roman Republic before that. Political and economic systems fall apart and change because they are superseded by other systems, sometimes systems that couldn't have existed before because of the social or technological state of the world.
This seems like as good a place as any for a quick description of what capitalism actually is. Hold tight, because this will be so compressed that it is bound to overgeneralize.
In capitalism, individuals or groups own capital goods, which are any items (factory machinery, farmland, clothing stores) which are used to generate money. The capitalist buys these goods either with money already in hand or borrowed from another source, then expects to see a profit by increasing the value of goods which move through his possession. For example, a farmer buys seed, farm implements and hires labourers. He must sell his crop for, at minimum, the cost of the seed, the tools and the wages of the workers. Whatever is left over, the surplus, is the profit of the owner of the capital.
There are two other sources of money in a modern capitalist economy: rent and wages. Rent comes from land (and also, some would argue, from lengthy copyrights and patents) wages from labour (drivng a bus, teaching, "would you like fries with that," etc.).
To be successful, capitalism has to operate in a relatively free market (the two concepts are not exactly the same thing) where individuals can buy whatever consumer goods they want and invest their funds in any capital goods, subject to the law.
Socialists (an almost uselessly broad term) have raised several major objections to capitalism. The primary one is that of surplus value created by workers. If you work for a successful company, you must be doing more work than you are being paid for, or there wouldn't be a surplus value for the capitalist to take home. To again oversimplify, socialists believe workers themselves should own the "means of production," the capital goods of factories, farms, land and stores. They could then receive all the benefits of their hard work. The standard rejoinder is that without the incentive of profit, there would be no entrepreneurship or innovation in business. And innovation drives the system forward, making goods better and cheaper.
Capitalism is one way in which people distribute goods created by labour. But it is built on a number of assumptions about the way the world works. Each time one of those assumptions changes, it tests capitalism. Someday it will likely meet a test it cannot pass, and a new, hopefully better, economic system will emerge (it could be a worse system). There is no way to know exactly when or how this change will occur. However, I'm going to spend some time in the next few weeks (or months) taking a look at some of the ideas that are actually floating around about other ways of running an economy. Those will include a few flavours of anarchism (anarcho-capitalism to anarcho-communism), Georgism and Libertarianism. But I will start with a theory that has been created specifically to replace modern capitalism, called Participatory Economics, or ParEcon.
I hope to write my thoughts on this later today.