Capitalism is an economic system in which the means of production and distribution are privately or corporately owned. Operations are funded by profits, and not controlled by a state government.
Individual rights rule the capitalistic ideal and implementation. Private individuals, small businesses, organizations, and corporations make independent decisions about prices, production, and distribution of goods, ideally resulting in a self-regulating market.
A prerequisite to capitalism is freedom. According to the Index of Economic Freedom, a database that measures economic freedom based upon quantitative and qualitative factors i.e. regulatory efficiency, the following countries can be considered capitalist countries, listed in order of those with the greatest quantifiable economic freedom:
- Hong Kong
- New Zealand
- United Arab Emirates
- United Kingdom
- The Netherlands
- United States
- South Korea
Concepts of Capitalism
A capitalist society is one that supremely values 1) private property rights, 2) the enforcement of contracts, and 3) voluntary exchange. However, there are varying deviations from capitalism’s purest form, most specifically when private property rights are eroded by governmental influence.
Let’s take a look at some of the most notable variations of capitalism’s purest form.
Crony capitalism refers to situations where a business’ success is impacted by strategic influence from civil servants, politicians, or those in authority.
Orson Welles’ famous film, Citizen Kane, provides a good illustration of crony capitalism. This quasi-biographical film, set in the early 20th century, examines the life of a newspaper magnate (loosely based on several tycoons of the day, such as William Randolph Hearst) who bought off politicians in return for favors.
Dr. Edward Younkins, author of Capitalism and Commerce, describes three tenets of democratic capitalism: (1) an economy based predominantly on free markets and economic incentives, (2) a democratic polity, and (3) a classical-liberal moral-cultural system which encourages pluralism. The democratic capitalist system assumes pluralism, recognizing that individuals have different opinions and interests, allowing them to associate freely in order to further those interests.
The Founding Fathers of the United States believed in democratic capitalism, firmly placing value on liberty and equality in the United States Constitution.
Finance capitalism is characterized by a pursuit of profit from the purchase and sale of financial products such as currency, stocks, bonds, and other derivatives. Lending money at a specified interest rate also comes under the category of finance capitalism.
Real estate delves deeply into finance capitalism. Buying real estate demonstrates this variant of capitalism, especially when individuals do this for investment purposes i.e. flipping houses.
Laissez-faire capitalism is an offshoot of capitalism where the economy operates under a total absence of rules. Here, the government leaves the people alone regarding all economic activities, with a complete separation of economy and state.
It has been asserted that The Great Depression resulted from a laissez-faire capitalist society. In the time leading up to The Great Depression, massive amounts of money, value, energy, wealth, capital, and power rested in the hands of a very small number of individuals, causing the United States’ money velocity to grow at a slower rate.
Mercantilism is an example of an early form of capitalism, dating back to the late 16th century. The premise of mercantilism is that the wealth of a nation is increased through a well-managed balance of trade with other nations. Mercantilism is the mixture of national business interests, state-grounded interests, and imperialism.
The early American colonies practiced mercantilism. Colonists were only allowed to trade with their mother country, such as Britain or France.
Social Market Economy
A social market economy alludes to an economic system where government intervention is minimized. However, the state provides a lot of social services (such as unemployment benefits and social security) to reward labor rights.
Sweden operates under a social market economy. Many citizens consider themselves beneficiaries of the country’s complex social welfare infrastructure. Mutual aid and common welfare embody a system that many can benefit from, such as new parents who receive extended parental leave.
With state capitalism, the government controls the economic system and may own all or part of the businesses.
An example of state capitalism dates back to the great powers during World War I and World War II. During this time, the government controlled the inventory and output of production, as seen in Nazi Germany and the former Soviet Union.
Famous Quotes About Capitalism
“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” – Winston Churchill
“Doing well is the result of doing good. That’s what capitalism is all about.” – Ralph Waldo Emerson
“The problem of social organization is how to set up an arrangement under which greed will do the least harm. Capitalism is that kind of a system.” – Milton Friedman
“What makes the difference is whether the environment permits and encourages ideas and work, or instead puts obstacles in their way. That depends on whether people are free to explore their way ahead, to own property, to invest for the long term, to conclude private agreements, and to trade with others. In short, it depends on whether or not the countries have capitalism.” – Johan Norberg, author of In Defense of Global Capitalism
“America is the greatest engine of innovation that has ever existed, and it can’t be duplicated anytime soon, because it is the product of a multitude of factors: extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, a risk-taking culture with no stigma attached to trying and failing, a noncorrupt bureaucracy, and financial markets and a venture capital system that are unrivaled at taking new ideas and turning them into global products.” – Thomas L. Freidman, author of Hot, Flat and Crowded
“Founded in 1949 as a hard line socialist country, the People’s Republic of China has steadily embraced the tenets of capitalism, especially since economic reforms were enacted in 1978. Today, China’s economy is the second-largest in the world and will likely overtake the U.S. sometime this century.” – Frank Holmes, CEO and Chief Investment Officer for U.S. Global Investors
Free and Fair
To be a truly capitalist society, free market and private ownership rights must remain paramount. As we can see, however, governmental forces tend to assert themselves into the economy. When it does, capitalism, in its purest form, becomes altered and we see these varying degrees take shape.
Around the world, capitalism will always have its supporters and detractors. On one hand, a free market and private ownership can present tremendous economic opportunity. On the other, greed and political corruption sometimes manifest and must be addressed – hopefully through honest and mindful democratic process.