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Is capitalism the last best hope for worldwide peace and prosperity?

Or is capitalism inherently exploitative, dehumanizing, and inimical to the preservation of our world for future generations? We are talking, here, about an argument that has raged unchecked in the hearts and minds of society for at least a century. Indeed, it is said that a twenty-one year old who is not a liberal has no heart, and a forty year old who is not a conservative has no mind. But is it possible to unite heart with mind, justice with freedom, equity with efficiency in a single argument - or a single economic system?

These questions will remain impenetrable until we are able to properly define our terms. The word "capitalism" is used in two distinct senses. The two senses of this very loaded word may or may not be incompatible, but they are certainly different. Is capitalism

• an economy which preserves the power relationships of the status quo, reducing workers to mere automatons denied both the value and the dignity of their work, and which seeks growth, of markets and profits, above all else?

Or is it

• an economy which respects the rights of workers to the fruits of their labor, and uses the natural benefits of the free market to allocate goods and services in the most efficient way?

True Believers of either the right or the left may not think so, but the difference between those two statements is more than rhetorical. They reveal different conceptions of what capital is. If capital is the rightful property of the person who produces it, then the increase that comes from that capital's use in production also belongs to the producer. How then can capital be an instrument of exploitation?

It is more important to our present discussion, though, to note that the two opposing views contain different underlying assumptions about economic behavior itself. Can we trust ourselves to cooperate? Or are human beings doomed to foul up their communities and their environment, if left to their own greedy devices?

Markets, after all, spring up spontaneously wherever people gather. None of the essential features of a market economy - trade, specialization, entrepreneurship, monetary systems, etc. - require any special or conscious direction; they just happen. This central fact is what Adam Smith called the "invisible hand," and Henry George dubbed the "body economic" - which exists prior to the "body politic", and out of which political systems come into being. These inexorable tendencies toward greater specialization and more intricate forms of trade, fueled by our universal impulse to satisfy our desires with the least exertion, will eventually lead to a market in which workers sell their labor power. Because of specialization, trade, and efficiencies of scale, workers will find exchanging their labor for pay to be a better deal. This will entail, of course, such things as entrepreneurship, and private ownership of capital, driven by the promise of profits. These developments are quite predictable and natural - an insight which led Marx to see an unavoidable "historical materialism" at work in human economic relations.

If the power relationships of the status quo have arisen out of the private ownership of capital, which came from the collection of surplus value by capitalists, then capitalism can't be just. Furthermore, if these evils of capitalism arise out of natural and unavoidable historical processes, then eventually the capitalist system will become intolerable - and the means of production will be seized by the proletariat!

Obviously, these two views lead us toward very different strategies for fixing our economic and social problems.

Before we can sort out what capitalism is as an "ism," we have to recognize that there is quite a lot of confusion over what capital is. There are two competing definitions, both perfectly appropriate for the uses to which they are put - but, as we will see, they don't mix.

Mainstream economic thought (as well as the daily business page) conceives of capital, generally, as assets - that is, of things subject to ownership, and capable of increase. This can include a whole smorgasbord of stuff, such as plant & equipment, bonds, stocks, real estate, and exclusive licences. The term "human capital" is often mentioned, in the context of "maximizing the labor input," making things even more confusing. Intangible assets like "goodwill" and "name recognition" are assigned value and counted up as capital. In mainstream parlance, capital can be seen as a catch-all term that has different shadings in different contexts, but generally means: assets. As in: a business is said to be "undercapitalized" if it lacks enough savings to weather a period of slow sales. Or: the country's stock of "human capital" is weakened by poor public schools.

For the classical economists and Henry George, the definition of capital is precise. Capital is "wealth used to produce more wealth, or wealth in the course of exchange". Capital is wealth, first: that is, material things, produced by human labor, that satisfy human desires and have exchange value. This unambiguous definition allows political economists to understand what payments go to this factor of production.

From these different definitions come our different conceptions of what capitalism really is.

So: was Henry George a capitalist? Of course! If we define capital as Henry George did, then capitalism is eminently desirable. It is nothing more than a system which recognizes the legitimate right of the producer to the wealth produced - and the concomitant right of society to the value of natural opportunities.

Unfortunately, most of the world doesn't define capital this way, at least not all the time. If capital is a term for anything people own that makes them a profit, then a capitalist system allows people to own anything they want. That is not such a good thing. It means there is an inherent structural tendency for the powerful to consolidate their power - and for the poor to get poorer.

So was Henry George a capitalist? Great Heavens, no! Not by that definition. He certainly called resoundingly for public ownership - when it came to the rent of land. He believed the unearned income (and, indirectly, the financial power and leverage) that comes from monopolizing the natural resources should be socially collected.

Comforting as it can sometimes be, pigeonholing really does us little good, because things are not always as they seem. For example, two things that are constantly identified with capitalism are the free market and competition. Wonderful processes; they make the world go 'round - capitalists can't get enough of 'em, right? Wrong. Capitalists are after profit - and they should be, of course, nothing wrong with that. But the more competition they face, the lower their profit will be. Competition always tends to bring prices down to the lowest that the seller can get and still stay in business. While entrepreneurs may praise the free market abstractly, in their own businesses they strive to limit competition as much as they possibly can.

People seek to satisfy their desires with the least exertion. Entrepreneurs are people too; they will seek to gain the most profit from the least labor and risk. Income from other people's labor (such as land rent, or monopoly income generally) is the easiest of all. This, entrepreneurs will seek to capture rent whenever they can. In current economic parlance this is known as "rent-seeking behavior" and it is pervasive in "free-market" economies.

Taxing away the rent of land is the first, best way to remove the rent that rent-seekers seek. If we did that, capital"ists" would be unable to capital"ize" on privilege. They would have to make an honest living.