Mises Wire

What are Capitalists Good For?

In the market economy, a vote takes place with every purchase. By deciding to buy a specific product and not another one, the consumers elect those companies that manufacture this good to go on with their production. By this vote, the consumers chose these companies and entrepreneurs lead the production process. The ballot in capitalism consists in money, the vote is the purchase. The capitalists are the legal owners of the production resources such as gas stations, restaurants, and shopping malls, yet they only earn a yield on their capital stock by making their property available to the use by the customers. By purchasing the product, the customers determine the value of the capital, which serves to produce this good. Like consumer goods, production goods, too, have no intrinsic value. The price of capital goods reflects their capacity to produce goods, which customers want and will pay for.

The capitalists must maintain and improve the capital stock in order to earn a profit. Stores require maintenance; airplanes need checks and services; machines need repairs. Capitalists must bear the costs of preserving and adapting the capital structure. For this maintenance of keeping the capital structure intact, capitalists make advance payments. They assume the risk as to the uncertainties surrounding the future yield. While the workers receive their salaries right away, the capitalist get their compensation not before the good reaches the final consumer and gets paid. While the workers receive their remuneration during the production process before the goods reach the consumers, the capitalists bear both the initial costs and the risks of whether the capital goods will bring income in the end. The yield comes only when the end user pays for the goods. Whether an investment will have an economic value depends on the extent to which it contributes to producing goods that consumers want and will buy.

The customer expects that shops will provide a rich offer from which to choose. Hardly anyone wonders about who keeps the store in operation and who makes sure that a variety of goods is available. Few customers put much thought into how much capital the capitalists put at the service for the customers before a buyer pays. If the government and its bureaucracy substitute capitalism or regulate, harass and confiscate the capitalists, it does not take long, and the capital structure will disintegrate. All it takes is to diminish the profit expectations of the capitalists and the capital structure crumbles.

Large wealth exists in company stocks or in other forms of participation in companies. Wealth comes from investments, and investments come from savings. More savings mean consumption. The wealth of the owners of a supermarket chain are their stores. The stockholders are the owners. Yet who are the actual beneficiaries of the stores? Those people who shop in these stores and enjoy the products offered.

A considerable number of the super-rich pursue a modest lifestyle. Part of the financial success of these persons comes because of being thrifty and not to waste but to save and invest. Even a great fortune cannot last long when it gets into the hands of a hedonistic spendthrift. Wealth abhors high time-preference and stays with those who know how to economize.

The market itself takes care that wealth accumulation will not go on forever and accumulate in one or only a few hands. The profitability of a company is under constant threat from innovation. From the wealth of the railway barons at the end of the nineteenth century there is little left today. The Ford, Rockefeller, and Vanderbilt families, and the inheritors of the wealth of the other tycoons of the past have vanished from the top list of the wealthy. While Wal-Mart seemed well established only a short time ago, it now faces a challenge from online shopping.

There will always be a group of super rich people, yet under capitalism, the composition among those who make up the high-wealth people, changes. In capitalism, innovation does away with old wealth. As such, capitalism differs from the economic systems of the past. Historically, to own land was the foundation of wealth. Before the industrial revolution, the main source of wealth was ownership in land, which formed the basis for inheritance. The titles on the property came along with the title of nobility and other social rank distinctions. In pre-capitalist times, the rich were the same families for long periods, and almost all those who were born poor were to remain poor.

If one compares the list of the super-rich, which the magazine Forbes publishes annually, few names — if any — show up over a longer period. The people of wealth change with the lines of business. Until the 1980s, there were no super-rich people from the software, electronics and computer sectors on the list, as they are now the broadest group because these production areas were only just at the beginning of their triumph. Now, names from this area dominate the list as in earlier times the owners of railway or oil companies made up the list a hundred years ago.

[This article was adapted from Prof. Mueller’s book Capitalism: Beyond the State and Politics.]

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