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Understanding Capitalism: Human Nature and the Cost of Choice
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- [00:00]
Juan Davalos
Foreign.
- [00:10]
Jeremiah Regan
Welcome to the Hillsdale College Online Courses Podcast. I am Jeremiah Regan.
- [00:14]
Juan Davalos
And I'm Juan Davalos. And I want to thank everybody listening because you have helped us to become part of the top 3% podcast in the United States in the education category.
- [00:26]
Jeremiah Regan
That is amazing. Juan told me he had a surprise. He didn't tell me what it was. I did not know that. Thank you for sharing that with me, Juan. And thanks to all of you for listening. We love doing the podcast. We love helping people learn. And we are very excited to bring you a brand new course it just released.
- [00:42]
Juan Davalos
That's right. The course is Understanding Capitalism. And this course is special because when you think of an economics course like Understanding Capitalism, you. You think of all the, you know, supply and demand and things like that. But this course does a really good job of tying the concept of human nature and the understanding of human nature and why it's important for something like capitalism.
- [01:05]
Jeremiah Regan
That's right. Dr. Steele does an excellent job of explaining how capitalism fits into the greater human experience and how it enhances human life. One of the great things he does in lecture one, which is human nature and the cost of choice, is to explain how capitalism fits. Fits so well into a natural rights republic like we have in the United States of America. He argues that capitalism depends on private property rights. Check. Got that here. Freedom of exchange and contract. Check. Got that in America. Sound money. Well, Dr. Steele will talk to you a little bit about how that's in peril today. But that's a stalwart element of the American political theory is sound money. And finally, the rule of law. All principles that our founders would agree with, all principles that the American system of government depends upon and supports in turn. And I have the special privilege of thanking the Joel and Diane Schleicher family for supporting the production of this course. I got to meet Joel and Diane during the development process for this course. They are generous American patriots. They're delightful people. They're really fun to be around and they love this topic. So I'm pleased to again thank the Joel and Diane Schleicher family for their friendship with Hillsdale College for their support of this course. We had a lot of fun working on this course with both Dr. Steele and with the Schleichers. And I hope you enjoy listening to this podcast.
- [02:22]
Juan Davalos
Now let's turn to lecture one of Understanding Capitalism, Human Nature, and the Cost of Choice.
- [02:41]
Charles Steele
Welcome. My name is Charles Steele, associate professor of Economics at Hillsdale College, and I'm your instructor for this course. We'll Begin our course by examining important features of human nature and human choice and action, including the limits of our knowledge and abilities. We will discuss basic elements of the capitalist system and see how features of this system tend to direct our actions in positive ways that permit us to flourish. Overall, we will emphasize the practical and moral implications of capitalism and we will see why. This is the system that enables human flourishing. But why does this matter? What's the point of learning this material? The mission of Hillsdale College is to provide liberal education. The purpose of liberal education is to free the student to permit him or her to be capable of self government, that is governing himself and also participating in a society governed ultimately by the people themselves. Fundamental to a free people is their ability to provide for themselves and others. One cannot be free if one is dependent upon the government for one's sustenance. That's the path to serfdom, to servility, to being a slave. If we are to remain free, it is necessary that we understand the system that enables us to be free and self sustaining. And it's important that we have an appreciation for why and how it works. If we forget this, we will fall prey to the false notion that things like bureaucratic management or socialism are workable alternatives to capitalism and freedom. And they are not our topic today. What is capitalism? We hear capitalism, capitalistic system on every hand. But just what is capitalism? So what is capitalism? It is not ruled by capitalists. It is not the free market, although free markets are an important part of it. Capitalism is an economic system characterized by four private property rights, freedom of action, exchange and contract, a medium of exchange, money and the rules or institutions that protect and foster these. Let's look at each one of these in turn. The fundamental institution of the capitalist system is private property rights, including ownership of the means of production. This should be understood to include the right to one's own person and efforts, that is labor. These are the rights of human beings. They are rights of the individual. And rights has a particular meaning in this context. It refers to rights inherent in man's nature. These are the rights identified by the 17th century philosopher John Locke in his Two Treatises on Government. They are the inalienable rights of America's Declaration of Independence. When Thomas Jefferson called these life, liberty and the pursuit of happiness, it was commonly understood that ownership of private property is a necessary means for pursuing human flourishing. The recent assertion by the World Economic Forum that in the future you'll own nothing and be happy is nonsense. Owning nothing is the status of a slave. The capitalist System is based first of all on the recognition of individual rights. And there are several ways to interpret these rights from a secular viewpoint. These are the conditions necessary for an individual to use his or her intellect to take care of himself and make himself better off. Alternatively, from a biblical perspective, each individual is given by God, free will and moral responsibility. This can only be exercised when a person's rights are respected, when his freedom is protected. Note that these two perspectives, the same secular and the biblical, are completely compatible and complementary. Now, I emphasize property rights because they are foundational to capitalism. We sometimes hear reference to state capitalism, but this is just another name for government control or socialism. The essence of capitalism is, is that it is an economy directed by individual citizens who exercise control over their own private property and use it in production and trade in free enterprise. This includes, of course, cases where individuals pool their property together to form corporations, partnerships, other kinds of firms and organizations. This remains private property owned by individuals and again is essential to capitalism. A corollary or implication of private property is that individuals are free to use and control their property as they see fit, so long as they do not violate the equal rights of others. This includes the freedom to transfer and exchange rights to pieces of property in mutually agreed upon exchange. We often call this the free market, and that's a useful metaphor. But I don't use the term very much here because it can be misleading. It is not the market that is free. It is people who are free to make their own decisions and exchanges and relations not hampered or commanded by others, such as government officials. Under capitalism, trades must be voluntary for the parties involved. This is why capitalism is able to create mutual gain and prosperity, while alternative systems do not. We will explore this more deeply in later lessons. But for now note that freedom of action means the right to use one's property as one one sees fit, the right to propose exchanges with others, the right to accept or reject any proposed exchange, and the right and ability to enforce the exchange. This is what is meant by freedom of action, an essential part of capitalism. Money, a common medium of exchange, is, is the third fundamental feature of capitalism. Money facilitates trade. Money prices allow each of us to make known to others the things we need and how intensely we want them relative to other things. Money and money prices allow us to compare different courses of action and to choose the one more likely to be desired by others and beneficial to ourselves. Money allows capital, accounting and the very notion of capital which are fundamental to the system. So this is more than just markets. We can imagine a barter system with private property and freedom of action. But that is not capitalism, and it could not sustain a complex economy with many specialized goods and services that that would be impossible to barter. For example, I produce economics lectures. It would be impossible for me to barter them for groceries, gasoline and my mortgage payment. But I can find willing buyers, I can trade my lectures for money, and I use this to buy the things I need. Sound money is fundamental for capitalism. Finally, a fourth component of capitalism is the basic rules or institutions that protect the system. These include both formal and informal rules. Formal rules or institutions are those which are written and enforced, typically by government laws that protect private property, that protect and enforce voluntary contracts, and that limit the ability of government officials to interfere with production. These are essential. Informal rules are those which are followed by the people themselves. Things such as customs, habits, practices, ethics, and a general attitude towards each other's rights. These are the cultural bedrock of capitalism. The economist Ludwig von Mises observed that a market economy can only be preserved if the majority support it. Thomas Jefferson maintained that an educated populace is the best defense against tyranny, more important than laws. That's capitalism. Private property, free exchange, money, and the rules and laws to protect these. But, but why is this important? The answer lies in the nature of man.
- [12:25]
Larry Arnn
On the new episode of the Larry Arne Show, Hillsdale College President Larry P. Arn sits down with pastor, professor and author Kevin DeYoung for a one on one conversation.
- [12:37]
Kevin DeYoung
When Jesus is ascending, about to ascend in Acts chapter one and the disciples ask him, is now now are you going to set up your kingdom? It's amazing. They are still confused. They still are thinking, might this be an earthly kingdom? In John's gospel they want, they try to make him king by force. Some of his followers, they just can't get out of their head that when he talks about the kingdom, the only way they can conceive of power and true influence and might in the world is there's a king on a throne, in a palace, in a castle, in a temple somewhere.
- [13:12]
Larry Arnn
Listen to this exclusive interview with Kevin DeYoung right now only available on the Larry Arn Show. Find it on the Hillsdale College Podcast Network at podcast hillsdale.edu also at Apple Podcasts Spotify and YouTube and subscribe to receive new episodes delivered right to your device. That's Podcast Hillsdale. Edu.
- [13:43]
Hugh Hewitt
Great books, great people, great ideas. Learning about these things is critical to being a well educated human being and we can help with the Hillsdale dialogues. Each week Hillsdale College President Larry Arne joins radio veteran Hugh Hewitt to discuss topics of enduring relevance. And from time to time, they also talk about current events, but always with an eye toward more fundamental truths. And they want you to tune in to a conversation like no other. The Hillsdale Dialogues are posted every Monday on the Hillsdale College Podcast Network at podcast. Hillsdale. Edu. That's podcast. Hillsdale. Edu. Or listen via Apple Podcasts, Spotify, YouTube, or wherever you find your audio.
- [14:30]
Charles Steele
Man is unique among creatures on the Earth. Man is the rational animal. Man, unlike other creatures, is self directed. He chooses courses of action. Every creature pursues some end, and ultimately that end is to thrive according to the nature of the creature. This is what life does. This is what it is about. To flourish is to live in accord with one's own nature. For most creatures, this is not a difficult issue. For an ant in an ant colony, a fish in a school, or an elk in a herd, actions are dictated by their nature. But man is different. Man is a human soul with the power of intellect and the ability to form purposes and make choices. Unlike most creatures, man does not simply respond to urges. Man has choice. He can deliberate. He can learn. He can exercise self control, and he learns about his world. He considers possibilities. He formulates purposes, goals and objectives, and he ranks his opportunities accordingly. He chooses among the possibilities. He can create, innovate and invent. He can change his environment. This graphic illustrates the fundamental relation of economics. Man formulates purposes, but he also faces constraints, ends, and limited means. These require the necessity of choice, and choice in turn implies the necessity of cost. This is the formula describing all human action. All action is involves choice of an end to pursue and always at a cost. To choose one alternative is to forego other alternatives, that is cost. Cost is an inescapable part of all action, all pursuit of human purposes. To understand this is the beginning of economics and the beginning of understanding capitalism. This understanding means that economics is not just about studying the pursuit of material wealth. It is about all action in pursuit of all purposes, including the intellectual, the social, and the spiritual. Economics is fundamentally about how people pursue all their goals. And as we'll see, capitalism is the system that best supports human flourishing. Economics is about much more than material wealth, but material wealth is important. A hungry child cannot eat truth, goodness, and beauty. And there are few things higher than caring for the needs of a child, as parents know. But man does not live by bread alone. And capitalism is the system that permits men to pursue the full range of their needs and values as they understand them. Man, then, is the rational animal who chooses his actions. He is also the moral animal who bears responsibility for his actions and under capitalism, takes the consequences of his action. And he's the imaginative animal who can learn from his environment and discover new options and possibilities. He can innovate and create. He can develop that which is new, bounded, of course, by the laws of reality and of nature. How, then, does a person choose among alternatives? He chooses that which he thinks best suits his needs. He evaluates his options implicitly. He selects according to his values. He ranks the options he faces and chooses what he thinks is best. Economists often observe that value is subjective. Different people with different preferences and purposes will rank things differently. For example, consider two pairs of new shoes, a pair of golf shoes and a pair of running shoes, costing the same amount of money, if you like. Given the choice between them, I, a runner, will choose the running shoes over the golf shoes. The cost of that choice is the golf shoes that I could have had. But alternatively, my colleague is an avid golfer and given the choice, selects the golf shoes. His cost is the running shoes. Therefore, economists say that economic value is subjective. We each value options according to our own purposes and ends. Freedom of choice under capitalism enables us to pursue our different ends. However, sometimes the term subjective value is misunderstood to mean that moral principles and ethics are subjective. Economic values and moral principles, often called values, are very different things. The political philosopher Harry Jaffa clarified this difference nicely. Economic values are simply the rankings that individuals attach to the options they face. For example, how much of one good, say, money, would I be willing to give up to get one more pair of running shoes? As economists put it, I make this decision at the margin, and my answer depends on how intensely I want one more pair of running shoes compared to the other things I might obtain. That value is subjective. It depends on me. Moral principles or moral values, on the other hand, pertain to all men, all human beings. These exist as a moral code that helps us to sort good actions from bad actions. Moral principles are objective and universal. That might be a controversial statement in some circles, but all human societies understand that murder is wrong. And all human societies have a concept of theft. Like rights, morals are also conditions of man's nature, and they are given by God. The subjectivity of economic value and the objectivity of moral principles and values are two different things. And they're compatible. They're not in contradiction. If human flourishing, living and thriving according to one's nature, is a moral good. Capitalism is the system that enables frees, the individual to pursue his best interest as he understands it and restricts him from preventing others from pursuing their best interests. It offers him the opportunity to learn, innovate, grow, and provides means for this better than any alternative system does. It provides the greatest scope for man to exercise his capacity as the rational animal. It allows man the greatest opportunity to advance his knowledge, his vision and his understanding understanding of what is possible and what is good. In the next lesson, we will see how man as the rational animal functions as man, the social animal in the capitalist system.
- [22:10]
Ronald Reagan
I merely wanted us to remember that there's a psychological factor in recession. Too much hammering at it makes recession worse. What pulled us through that ordeal, I'm convinced, is our determination to stick to our program, believe in ourselves and trust in our values of faith, freedom and hard work. Values that have never failed us when we've been done and now receive pain.
- [22:37]
Juan Davalos
Thank you for listening to this episode of the Hillsdale College Online Courses Podcast. If you want to continue learning, please visit Hillsdale. Edu Course. There you will find over 40 free online courses, including Ancient Christianity, the Genesis Story, Classic Children's Literature, and many more. The courses include additional readings, study guides, fully produced videos, and you can chat with your fellow students on a dedicated forum. Upon completing a course, you will also get a certificate. All our courses are free because we believe that what you'll learn will enrich your life and that a virtuous citizen is the best defense for liberty. So pursue the education necessary for freedom and happiness at Hillsdale. Edu coursetoday. That's Hillsdale Edu Course. Thanks for listening.