One of the many problems caused by the ongoing financial crisis is renewed criticisms of the capitalist system in general. Our current system is deeply flawed and certainly deserves some of it, however there is bathwater and there is the baby, and we conflate the two at the risk of exacerbating the financial crisis rather than mitigating it or preventing a recurrence.

Bathwater = increasing fragility, instability, and systemic risk; regulatory, institutional, and govermental capture; crony capitalism; privatized profits and socialized losses; too big to fail; increasing financialization of the economy -> increasing concentration of paper wealth -> outsourcing of real wealth creation -> increasing concentration of political power -> tyranny of the minority, etc.

Baby = the core mechanic of capitalism - real wealth creation.

Paul Graham wrote an excellent essay on how to create wealth as an entrepreneur. That’s the micro take on it, and I’d like to add the macro take:

There are only two ways of creating real wealth:

1. Harvest raw materials + apply labor + capital + innovation + time = finished product worth more than the total cost of inputs. [value of final product - total cost of inputs] = [real wealth]. We call it ‘profit’ or ‘net revenue’ but what it really is, is wealth that didn’t previously exist anywhere in the world and was created out of thin air.
   For example, we used to take hundreds of dollars worth of iron and wood, and turn it into thousands of dollars worth of trains and ships. Now we take millions of dollars worth of sand, copper, and aluminum, and turn it into billions of dollars worth of microchips. Miracle. Magic. Alchemy. Science. And, the core mechanic of capitalism. This is the greatest magic trick the human race has ever invented, the ultimate rabit-from-the-hat, lead-into-gold alchemy, and is what makes all else in our modern world possible.

2. Provide a service that reduces the cost of inputs or increases the value of the final product of #1. For example, there is great economic value in a government and legal system that incentivizes wealth creation #1 and disincentivizes wealth destruction (via fraud, crime, etc.). Improving health and education also reduce the costs of inputs and increase the value of outputs. A system of efficiently allocating capital to real wealth creation ventures (when it’s working correctly) provides great value to #1 as well.

These are two the two fundamental ideas of economics, the core mechanic of capitalism, that everyone living in a modern economy must understand. Two more good essays drawing the distinction between the current problems of capitalism and its core mechanics are by Judge Richard Posner and Gary Becker. There is much to criticize of our current incarnation of capitalism, but any criticism that fails to understand and account for real wealth creation is probably flawed.