The Crucial Differences Between Capitalism And Free Enterprise

Capitalism is an economic system that has both passionate defenders and fierce critics. But both sides in the debates over capitalism’s beneficial and harmful affects tend to conflate capitalism with free enterprise. Much of the defense of capitalism takes the positives of free enterprise and incorrectly attributes them to capitalism and much of the condemnation of capitalism incorrectly includes free enterprise in that condemnation. To have a fruitful, honest discussion, we need to get past errors and propaganda—such as how capitalism has co-opted the term “entrepreneur”—and clear up how capitalism and free enterprise differ. When we do, we see that the opposite of capitalism is not necessarily “communism” (whatever version of that you have in mind).

Capitalism and free enterprise are different approaches to doing business. Both approaches produce goods and services but with different results and side effects. The easiest way to think about the differences is to ask these questions: In considering a store, ask who owns the store and where are they? In considering a product, ask who made this and what was their relationship to it? Because of their different approaches, capitalism and free enterprise have different relationships with labor, money, customers, and by extension, society as a whole. How these different relationships manifest in social life have important consequences.

Different Relationships With Labor

Karl Marx got a lot wrong, but one of the things about which he was absolutely correct is that it matters who does the work and who owns the products of the work. It is a beautiful thing to see someone create something into which he or she poured his or her expertise and pride. It combines the pride of a job well done with the pride of ownership. Not every business has that level of ownership, though, and instead many workers are separated from their labor and the products of their labor.

In free enterprise, there is a short, direct connection between who does the work and who owns the end results. In capitalism there is little to no link. The reasons are expressed in the names themselves: free enterprise is about enterprise—directly participating in the labor of delivering products and services. Capitalism is about capital—investing in someone else’s labor. For example, I can buy fruits and vegetables from either a shop owned by two individuals or from a branch of a supermarket chain. The fruit and vegetable shop is free enterprise—individuals started a business that they own and operate by dealing directly with suppliers and customers. The chain store is capitalism—investors owning but not directly participating in the business activity.

Who does the work? In the small shop, the owners of the business perform the work. In the branch of the chain store, the owners of the corporation do not do the work. In a small company, like a retail shop, the owners could hire employees to assist in the business activity, but the workers deal directly with the owners. Workers in capitalism work for a corporation. They don’t get to deal with the owners.

Free enterprise is business in which the sphere of ownership and the sphere of labor heavily overlap or are one and the same. Management activity, decision making, and responsibility, remains within the sphere of labor—the workers who do the work. Capitalism is business in which the spheres of ownership and labor are separate. Management activity and decision making are handed down from a level removed from the sphere of labor. Ownership does not participate in the work but extracts profits from the sphere of labor. What’s more, in capitalism, unlike in free enterprise, the ownership and management of the company is an apex of authority above the sphere of labor, harkening back to monarchist social structures.

The hierarchical separation of ownership from the sphere of labor is why capitalism can be said to exploit labor. Let me take a moment to disabuse anyone of simplistic and false notions of what “exploits” means in this context. That workers are paid and not physically abused does not mean they are not exploited. Marx did get another thing correct when he pointed out that capitalism takes the surplus value of workers’ labor. Workers produce more value than they are reimbursed for. Some of the value produced by labor is funneled out of the sphere of labor into the possession of the capitalist investors. That is how capitalism functions, for good or ill.

One of the talking points used to defend capitalism is that capitalism creates jobs. The talking point does not say that capitalism is the best way to create jobs. That is because all economic activity potentially creates jobs and capitalism is just one type of economic activity. The reality is that only customers create jobs. Only when there is someone to pay for a product or service will anyone make money selling that product or service. Capitalists know this. The capitalist never says “oh, I have a pile of money, I’ll create a job.” They only hire employees if they believe they are needed to fill the requests of customers, resulting in sales and further resulting in profits that the capitalist can…. well… capitalize on. Customers create jobs.

Different Relationships With Money

Capitalism and free enterprise have different attitudes toward and relationships with money. Money, like ownership, is separated from labor in capitalism but overlapping with labor in free enterprise. Capitalism is appropriately named; it is about capital: money. Free enterprise is also appropriately named; it is about the business enterprise.

A primary, if not the primary, purpose of any business activity is to generate money. We work to make money so we can purchase the things we want and need. To make money, you have to either own your own business or work for someone else’s business. Starting and owning your own business is not easy. Most businesses require startup money. Up front costs are why owning one’s own business is out of reach for many and growing a business requires skill and tenacity that are beyond many.

Already having wealth makes it much easier to start and maintain a business, which is why many assume that business is synonymous with capitalism. “Rich people start businesses and create jobs,” is a common saying of right-wing political parties. It’s a distortion of economic reality (see above about who creates jobs), but the saying goes hand-in-hand with the veneration of “investors” as if they are magic genies that we need to summon to save us.

Investors are one step further removed from the sphere of labor. Often, investors are not involved in any decision-making in the business. They supply money and they receive profits back. Their income is passive income. It is the case that putting one’s money at risk in an investment merits the possibility of a positive return on the investment. But money is only one part of running a business—you also need labor and materials. Whatever value investment money adds to a business is only part of what contributes to the success of a business. So then, why are investors disproportionately rewarded for their contributions? They provide money, yes, so deserve a return on their investment, but the way capitalism is structured, the investor class receives a disproportionate share of money compared to the workers who produce the profits for the business.

Owners of a small free enterprise business are direct active investors in their business. The spheres of money, labor, and ownership are largely the same. As a customer, I can deal directly with the owners of a local shop. It is their shop and the money I pay goes directly to them. If I buy from the free enterprise business person, my money goes to someone who lives in my area and the money stays in my area. I have no idea who the owners are of the corporate chain store because while they legally own the store, they are absent from it. If I buy from the corporate chain store, my money goes god knows where, far, far away.

In a capitalist corporation, workers create profits, but seldom benefit from increased profits that they help produce. Their pay is fixed and increased profits go to the capitalist investors. Some see this as fair, because there is an entrenched veneration of wealth and those who possess it. The idea is an ancient one, but has been amplified by the doctrines of Calvinism, which equated wealth with moral virtue.

Calvinism permeated British and American society, and scholars, like Max Weber, have pointed out its tight relationship with capitalism. In capitalism, the Calvinist-capitalist credo goes, those who have money are more deserving than those who have to work for it.

In free enterprise, business owners put their own money and labor into the business and the money made by the their labor is the owners’ to keep. Within a small company, like a retail shop, any employees hired by the owners have more of an opportunity to benefit directly from increased profits that they help produce. It is not a given, but it is far more likely than in a capitalist corporation.

Capitalism is an economic and political system. As such, capitalists use their monetary power to structure legal and economic institutions to their advantage. That is not suggesting a big dark conspiracy, it is just how power works. Those who have power, use that power to maintain and expand their power. Capitalists use their money—by the legal bribery of campaign donations and lobbying— to influence the political system to give preferential treatment to capitalist corporations over free enterprise small businesses. The inherent advantages of money are strengthened by a system rigged by money.

Different Relationships With Customers

Capitalism also uses its money to offset its biggest business disadvantage: its different relationship to customers. Customers are the driving force of any business. No customers, no business. It’s that simple. Capitalism and free enterprise differ the most from each other in their relationships with and perceptions of customers.

I can buy a piece of furniture from someone who makes furniture or from the chain store of a corporation that mass produces furniture. As a customer, the relationships I can have with either store are very different. I can go to the artisan furniture maker’s shop and talk with him or her. With the free enterprise artisan, I can discuss what I want and what they have to offer. In the corporate store, I can choose from what they offer, but there is little to no chance of discussing what my specific wants are much less interacting with the people who actually make the furniture. The workers are in a factory far away, maybe even on another continent.

Similar to how capitalism separates ownership from labor, capitalism separates ownership from the customers. There is only a one-way relationship between a corporation and its customers: the corporation makes and the customer consumes. Corporations don’t think of customers as individuals but in terms of demographic groups. “How do we sell to 16- to 24-year-olds?” is what a corporation asks, meaning you are either a faceless instance within that demographic or you are left out.

In capitalist corporations, marketing and distribution take priority over the quality of the product. If you have any doubt about this, look at the most popular brands and their levels of advertising and quality. Corporations manufacture products as cheaply as possible to squeeze out as much profit as it can for the owners and shareholder investors. Customer satisfaction does matter to the capitalist corporations, but in abstract demographic groupings with the built-in assumption that increased marketing can offset customer dissatisfaction. Capitalism is a numbers game. A customer is simply a number.

In sharp contrast, in the free enterprise local shop, customers are people who can deal directly with the owners. The free enterprise purveyor knows his or her customers and serves them as valued people. Free entrepreneurs try to give more value to their customers than they charge because they can’t just replace lost customers with massive corporate marketing campaigns. The free entrepreneur can cater services and products to individual customers and can be more responsive to the specific needs of individual customers.

The drawback of being small and responsive is that a business can’t take advantage of the economies of scale available to the capitalist corporation. An artisan producer can’t produce as cheaply as the corporation. For the most part, poor people can’t afford to buy artisan products and are forced to purchase cheaper, mass-produced alternatives. One is only slightly cynical to realize that this is an incentive for capitalists to keep consumers poor. The irony is that the wealthy capitalists can afford to purchase custom-made items from free enterprise artisans, and often prefer to do so over buying the mass produced lower-quality products churned out by capitalist factories.

In short, free enterprise is dedicated to maximizing quality of product and service to customers. Corporate capitalism is dedicated to maximizing quantity of pay outs to executives and shareholders.They are entirely different approaches to customers.

Different Effects On Society

Unsurprisingly, these differences in relationships affect society. Some of those effects have been touched on already. The aggregate effects are that capitalism leads inexorably to a more fragmented society in which money and ownership of businesses are separated from workers and customers. The capitalist two-tiered society is an extension of the two-tiered feudal system, with the lord-serf relationship being replaced by the capitalist-worker relationship.

Karl Marx was correct in recognizing how capitalism was a new form of feudalism but he misread the social movements of his time and for that reason proposed a draconian solution. He missed that the alternative to capitalism already existed—free enterprise, which had long been an alternative to feudalism. Free enterprise is the economic practice in which the worker owns the means of production. That is one count on which Marx was short-sighted. He threw out free enterprise with the dirty bathwater of capitalism.

Marx also mistakenly thought that because capitalism corrupts government, both capitalism and government need to be demolished (don’t pretend that the Soviets or Mao were Marxists). Capitalism has corrupted government, but that doesn’t mean that government or the state is the problem as believe Marx and those who follow him. The capitalists also want to eliminate government or at least shrink it down to, as one capitalist said, small enough that it could be drowned in a bathtub. Anarcho-communism is not the opposite of anarcho-capitalism, they are different colors of the same desire to concentrate power. Most conceptions of Marxism and pseudo-Marxism also preclude free enterprise in their opposition to existing economic practices.

In capitalism, corporate ownership and the investor class use the power of their money to influence political and legal systems to advance their own interests. Governments in capitalist systems thus disproportionately represent the interests of the capitalists, and structure society to benefit the wealthy capitalists.

In a society that honors free enterprise, the government does not favor the interests of corporate owners. Therefore. it does not dictate who owns what or what should be produced. Market forces are good at determining what is produced and in what quantities. Government does have a vital role to play in free enterprise in protecting the public interest and ensuring fair economic competition. Capitalism inherently trends toward monopoly because a monopoly/oligarchy increases prices without increasing costs. We see in capitalist-controlled countries how much governments defend the monopolistic interests of capitalist ownership over the diverse and competitive interests of free entrepreneurs, workers, and customers. We also see in capitalist-controlled countries governments acquiescing to corporations’ demands against regulations protecting employees, customers, and the environment.

Obviously, small business owners can be nasty human beings and can exploit their employees and customers. But by definition, in a true free enterprise economy such possibilities are minimized. One, a small business owner lacks the power and reach that corporations can achieve, and two, the real competition in free enterprise gives workers and customers greater range of choices that will pressure small business owners to coincide with community norms.

Also, because small business owners are part of the community, they must be more responsive to the desires and opinions of their neighbors, who are also their employees and customers. This was how Adam Smith meant for his concept of enlightened self-interest to work. Because in capitalism, the sphere of ownership is removed from the spheres of workers and customers, the capitalist owners have much less need to be responsive to their customers or their employees. Thus, enlightened self-interest, one of the checks on business that Adam Smith insisted must be in place (government regulation being the other), is weakened in the capitalist system.

If a society can ensure that there are no structural impediments to anyone operating his or her own business, then the spheres of ownership, labor, and customers are not separated and people can interact in harmony. This is free enterprise and it requires the will of people to actively and continually be involved in their communities and their governments and resist the anti-free enterprise forces of totalitarianism and capitalism, which is a system highly compatible with totalitarianism. We will get the society for which we work.