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In common usage capitalism refers to an economic system where the means of production are privately owned and operated, and where the investment of capital, and production, distribution, income, and prices are determined not by government (as in a planned economy) but through the operation of a market where all decisions regarding transfer of money, goods (including capital goods), and services are voluntary. In capitalism, the means of production are generally operated for profit. For a survey of definitions, see Wikiquote.

Although some developed countries are regarded as capitalist, some of them have been called "mixed economies", due to government-owned means of production and economic interventionism.

Capitalism is "also called free market economy," or "free enterprise economy."

Etymology

The word "capital" has roots in the trade and ownership of animals. The Latin root of the word is capitalis, from the proto-Indo-European kaput, which means "head", this being how wealth was measured. The more head of cattle, the better. The terms chattel (meaning goods, animals, or slaves) and even cattle itself also derive from this same origin.

The lexical connections between animal trade and economics can also be seen in the names of many currencies and words about money: fee (faihu), rupee (rupya), buck (a deerskin), pecuniary (pecu), stock (livestock), and peso (pecu or pashu) all derive from animal-trade origins.

The first known use of the word "capitalism" was by novelist William Thackeray in 1854[unverified]

The first known use of the word "capitalism", if not yet in our sense, was by novelist William Thackeray in 1854

The first use of the word Kapitalist was in 1848 in the Communist Manifesto by Marx and Engels; however, Kapitalismus, the German equivalent of capitalism, was not used. The first use of the word capitalism is by novelist Thackeray in 1854, by which he meant ownership of a large amount of capital, not a system of production.

In 1867 Proudhon used the term capitalist to refer to owners of capital, and Marx and Engels refer to the "capitalist form of production" ("kapitalistische Produktionsform") and in Das Kapital to "Kapitalist", "capitalist" (meaning a private owner of capital). However, the first person to use the word "capitalism" as it is commonly used today was Werner Sombart in his Modern Capitalism in 1902. Max Weber, a close friend and colleague of Sombart's, used the term in his The Protestant Ethic and the Spirit of Capitalism in 1904.

The Oxford English Dictionary cites the use of the term "private capitalism" by Karl Daniel Adolf Douai, German-American socialist and abolitionist in the late 19th century, in an 1877 work entitled "Better Times", and a citation by an unknown author in 1884 in the pages of Pall Mall magazine.

The definition of capitalism given in dictionaries has changed over time. For example, the 1909 Century Dictionary defined capitalism as:" The state of having capital or property; possession of capital. The concentration or massing of capital in the hands of a few; also, the power or influence of large or combined capital."

The contemporary definition, however, probably influenced by the philosophical and ideological debates of the 19th century, refers to an economic system (as Sombart and Weber did). For example, the Merriam-Webster Third International Unabridged Dictionary refers to capitalism as: " an economic system characterized by private or corporation ownership of capital goods, by investments that are determined by private decision rather than by state control, and by prices, production, and the distribution of goods that are determined mainly in a free market."

However, the Oxford English Dictionary (1987 edition) describes it as: "The condition of possessing capital; The position of a capitalist; A system which favours the existance of capitalists". This difference with the American dictionary defintion is also likely to stem from ideological differences and etymological interpretion.

Capitalist theory

Capitalism is contrasted with feudalism, where land is owned by the feudal lords, which collects rent from private operators; socialism, where the means of production are owned and used by the state; and communism, where the means of production are owned and used by the community collectively.

Some emphasize the private ownership of capital as being the essence of capitalism, or emphasize of the importance of a free market as a mechanism for the movement and accumulation of capital, while others measure capitalism through class analysis (i.e., class structure of society, relations between the proletariat and the bourgeois). Some note the growth of a global market system.

Others focus on the application of the market to human labor. Still others, such as Hayek, note the self-organizing character of economies which are not centrally-planned by government. Many, such as Adam Smith, point to what is believed to be the value of individuals pursuing their self-interest as opposed to altruistically working to serve the "public good."

Many of these theories call attention to various economic practices that became institutionalized in Europe between the 16th and 19th centuries, especially involving the right of individuals and groups of individuals acting as "legal persons" (or corporations) to buy and sell capital goods, as well as land, labor, and money (see finance and credit), in a free market (see trade), and relying on the state for the enforcement of private property rights rather than on a system of feudal protection and obligations.

Due to the vagueness of the term, debates and controversies have emerged. In particular, there is contention on whether capitalism is an actual system, or an ideal, i.e. on whether it has actually been implemented in particular economies, or if not, then to what degree capitalism exists in them (see mixed economy). From a historic point of view, there is an argument on whether capitalism is specific to a particular era or geographic region or if it is a universally valid system that may exist throughout various times and spaces. Some interpret capitalism as a purely economic system; others however contend that capitalism is a political, social, and cultural system as well. Debate also rages about the characteristics of capitalism: is it fair; is it rational; is it a coherent concept?

Contrasts with capitalism

Capitalism contrasts with (and in Western Europe, developed out of) feudalism, where a monarch holds both law-making power and the ability to claim ownership over the land rather than having to purchase it; the monarch loans the land to vassals in exchange for various services, and the vassals, in turn, use serfs to work the land.

Capitalism contrasts with socialism, where the means of production are theoretically owned and run by popular collectives (or by the state) for the people. It contrasts with communism where the means of production are owned collectively rather than privately by bosses or employers, and the produce of labor is collectivized, resulting in the "abolition of bourgeois property" ("private property") [2]. In addition, as suggested by Karl Marx, the products of labour are directly distributed "to each according to his need" [3], and "buying and selling" is abolished (Communist Manifesto).

Capitalism as it exists in market economies is said to be in opposition to planned economies, where "the elements of an economy (as labor, capital, and natural resources) are subject to government control and regulation designed to achieve the objectives of a comprehensive plan of economic development."[6] Capitalism also contrasts with corporatism, where private businesses work more closely with the government in an ostensible attempt to serve the interests of the nation. Countries undergoing periods of dynamic class struggle (as in times of revolution) would be accompanied by significant changes in material conditions such as industrialisation and display features such as the war economy and Commodification.

Participatory economics and council communism are alternative systems of workers' and consumers' councils utilizing self-managerial methods for decision making, as opposed to an economy dominated by big corporations or state enterprises.

History of theory of capitalism

Adam Smith is widely regarded as the intellectual father of capitalism

Most theories of what has come to be called capitalism developed in the 18th century, 19th century and 20th century, for instance in the context of the industrial revolution and European imperialism (e.g. Chydenius, Smith, Ricardo, Marx), The Great Depression (e.g.Keynes) and the Cold war (e.g. Hayek, Friedman). These theorists characterise capitalism as an economic system in which capital is privately owned and economic decisions are determined in a market - that is, by trades that occur as a result of agreement between buyers and sellers; where a market mentality and entrepreneurial spirit exists; and where specific, legally enforceable, notions of property and contract are instituted. Such theories typically try to explain why capitalist economies are likely to generate more economic growth than those subject to a greater degree of governmental intervention (see economics, political economy, laissez-faire).

In his 1765 book The National Gain, Anders Chydenius, a Finnish parlamentarian, became the first to propose freedom of trade and industry and the principles of liberalism, 11 years before Adam Smith in The Wealth of Nations (1776).

However, Anders Chydenius was the first to propose free trade and industry and to lay out the principles of liberalism in 1765, eleven years before Adam Smith

The conception of what constitutes capitalism has changed significantly over time, as well as varying depending on the political perspective and analytical approach taken. Adam Smith's advocacy of economic liberalism focused on the role of enlightened self-interest (the "invisible hand") and the role of specialisation in making capital accumulation efficient. Some proponents of capitalism (like Milton Friedman, Ayn Rand and Alan Greenspan) emphasize the role of free markets, which they claim promote cooperation between individuals, innovation, economic growth, as well as liberty. For many (like Immanuel Wallerstein), capitalism hinges on the elaboration of an economic system in which goods and services are traded in markets, and capital goods belong to non-state entities, onto a global scale. For others (like Karl Marx), it is defined by historically unprecedented social relations resulting from the creation of a labor market in which most people have to sell their labor-power in order to survive. As Marx argued (see also Hilaire Belloc), capitalism is also distinguished from other market economies with private ownership by the concentration of the means of production in the hands of individuals. The economists of the Austrian School expound that an economy that is not planned or guided by governmental authority will be superior in efficiency and organization due to the phenomenon of self organization. Many others use capitalism as a synonym for a market economy.

Characteristics of capitalist economies

A set of broad characteristics are generally agreed on by both advocates and critics of capitalism. These are a private sector, private property, free enterprise, profit, unequal distribution of wealth, competition, self-organization (or catallaxy), the existence of markets (including the labor market) and the pursuit of self-interest.

An economy with a large amount of intervention - which may include state ownership of some of the means of production - in combination with some free market characteristics is sometimes referred to as a mixed economy, rather than a capitalist one. [1] If intervention occurs to such a degree that it overwhelms private decision, such an economy is often referred to as statist. Some economists, such as Milton Friedman, oppose all or almost all such state control over an economy. However, such distinctions are disputed. By some definitions, all of the economies in the developed world are capitalist, or as mixed economies based in capitalism. Others see the world integrated into a global capitalist system, and even those nations which today resist capitalism, operate within a globalized capitalist economy.

Private Ownership of the means of production

Cattle on an Amish dairy farm
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Private ownership of the means of production is an essential characteristic of capitalism

An essential characteristic of capitalism is the institution of rule of law in establishing and protecting private property, including, most notably, private ownership of the means of production (as opposed to state ownership and communist ownership). Private property was embraced in some earlier systems legal systems such as in ancient Rome [2], but protection of these rights was sometimes difficult, especially since Rome had no police [3]. Such and other earlier system often forced the weak to accept the leadership of a strong patron or lord and pay him for protection. It has been argued that a strong formal property and legal system made possible a) greater independence; b) clear and provable protected ownership; c) the standardization and integration of property rules and property information in the country as a whole; d) increased trust arising from a greater certainty of punishment for cheating in economic transactions; e) more formal and complex written statements of ownership that permitted the easier assumption of shared risk and ownership in companies, and the insurance of risk; f) greater availability of loans for new projects, since more things could be used as collateral for the loans; g) easier and more reliable information regarding such things as credit history and the worth of assets; h) an increased fungibility, standardization and transferability of statements documenting the ownership of property, which paved the way for structures such as national markets for companies and the easy transportation of property through complex networks of individuals and other entities. All of these things enhanced economic growth.

Capitalism is often contrasted to socialism in that besides embracing private property in terms of personal possessions, it supports private ownership of the means of production. Those who support capitalism often credit the lack of control over the means of production by government as crucial to maximizing economic output. Ludwig von Mises, in Liberalism, says that the "history of private ownership of the means of production coincides with the history of the development of mankind from an animal-like condition to the highest reaches of modern civilization." [4] In all modern economies some of the means of production are owned by the state, however an economy is not considered capitalism unless the bulk of ownership is private. Some characterize those that have a mixture of state and private ownership as "mixed economies."

Many governments extend the concept of private property to ideas, in the form of "intellectual property." It has been argued that the introduction of the patent system was a crucial factor behind the rapid development and widespread use of new technology and memes during and following the industrial revolution. [5]. Some oppose the establishment of intellectual property as being counterproductive or coercive. Others argue that some intellectual property rights may be too rigid or constraining to innovation, favoring weaker protections.

Free market

The notion of a "free market" where all economic decisions regarding transfers of money, goods, and services take place on a voluntary basis, free of coercive influence, is commonly considered to be an essential characteristic of capitalism. Some individuals contend, that in systems where individuals are prevented from owning the means of production (including the profits), or coerced to share them, not all economic decisions are free of coercive influence, and, hence, are not free markets. In an ideal free market system none of these economic decisions involve coercion. Instead, they are determined in a decentralized manner by individuals trading, bargaining, cooperating, and competing with each other. In a free market, government may act in a defensive mode to forbid coercion among market participants but does not engage in proactive interventionist coercion. Nevertheless, some authorities claim that capitalism is perfectly compatible with interventionist authoritarian governments, and/or that a free market can exist without capitalism (see market socialism).

A legal system that grants and protects property rights provides property owners the entitlement to sell their property in accordance to their own valuation of that property; if there are no willing buyers at their offered price they have the freedom to retain it. According to standard capitalist theory, as explained by Adam Smith in Wealth of Nations, when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable commodity. This notion underlies the concept of mutually-beneficial trade where it is held that both sides tend to benefit by an exchange.

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The Chicago Mercantile Exchange. A free market consists of voluntary trade without interventionist regulation. Prices, for example, are determined by trade rather than by government.

In regard to pricing of goods and services in a free market, rather than this being ordained by government it is determined by trades that occur as a result of price agreement between buyers and sellers. The prices buyers are willing to pay for a commodity and the prices at which sellers are willing to part with that commodity are directly influenced by supply and demand (as well as the quantity to be traded). In abstract terms, the price is thus defined as the equilibrium point of the demand and the supply curves, which represent the prices at which buyers would buy (and sellers sell) certain quantities of the good in question. A price above the equilibrium point will lead to oversupply (the buyers which to buy less goods at that price than the sellers are willing to produce), while a price below the equilibrium will lead to the opposite situation. When the price a buyer is willing to pay coincides with the price a seller is willing to offer, a trade occurs and price is determined.

However, not everyone believes that a free or even a relatively-free market is a good thing. One reason proffered by many to justify economic intervention by government into what would otherwise be a free market is market failure. A market failure is a case in which a market fails to efficiently provide or allocate goods and services (for example, a failure to allocate goods in ways some see as socially or morally preferable). Some believe that the lack of "perfect information" or "perfect competition" in a free market is grounds for government intervention (see perfect competition). Other situations or activities often perceived as problems with a free market may appear, such monopolies, monopsonies, information inequalities (e.g. insider trading), or price gouging. Wages determined by a free market mechanism are also commonly seen as a problem by those who would claim that some wages are unjustifiably low or unjustifiably high. Another critique is that free markets usually fail to deal with the problem of externalities, where an action by an agent positively or negatively affects another agent without any compensation taking place. The most widely known externality is pollution. More generally, the free market allocation of resources in areas such as health care, unemployment, wealth inequality, and education are considered market failures by some. Also, governments overseeing economies typically labeled as capitalist have been known to set mandatory price floors or price ceilings at times, thereby interfering with the free market mechanism. This usually occurred either in times of crises, or was related to goods and services which were viewed as strategically important. Electricity, for example, is a good that was or is subject to price ceilings in many countries. Many eminent economists have analysed market failures, and see governments as having a legitimate role as mitigators of these failures, for examples through regulation and compensation schemes.

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Nobel economist Milton Friedman is a noted advocate of free markets

However, some economists, such as Nobel prize-winning economist Milton Friedman as well as those of the Austrian School, oppose intervention into free markets. They argue that government should limit its involvement in economies to protecting freedom rather than diminishing it for the sake of remedying "market failure." They tend to regard the notion of market failure as a misguided contrivance wrongly used to justify coercive government action to further various political agendas, such as egalitarian goals. These economists believe that government intervention creates more problems than it is supposed to solve --as well-meaning as some of these interventions may be. Laissez-faire advocates do not oppose monopolies unless they maintain their existence through coercion to prevent competition (see coercive monopoly), and often assert that monopolies have historically only developed because of government intervention rather than due to a lack of intervention. They may argue that minimum wage laws cause unnecessary unemployment, that laws against insider trading reduce market efficiency and transparency, or that government-enforced price-ceilings cause shortages. While economists tend to offer pragmatic arguments, some individuals put forth moral justifications for opposing coercion in favor of free markets.

Some believe that free markets and capitalism are not synonymous, arguing that particular aspects of capitalist entitlement or property enforcement violate the ability of individuals to trade in the absence of coercion. Others dismiss the whole idea of "free markets", claiming that markets are exploitative or coercive in essence. For example, some say that wages set by a free market rather than by government decree is exploitative since capitalists have appropriated private ownership of resources, thereby putting individuals in a position to accept low wages in order to survive. However, many believe that decreases in wage rates are the result of the same thing as deflation in any other market: the price of labor falls due to either a lower demand for labor or a larger supply thereof.

Financial markets, though some of these markets are far from being free due to heavy regulation, allow the large scale, standardized, and easy trading of debt, foreign exchange, and ownership of companies. See finance capitalism. Similar changes have taken place for products from agriculture, mining, and energy production. Standardized markets have even appeared for pollution rights and for the prediction of future events like future weather and political elections.

Markets have, of course, existed throughout human history. Hunter-gatherers used to exchange their goods in barter. The appearance of money in Antiquity facilitated exchanges, permitting the flowering of trade fairs in the Middle Ages. Nevertheless, many regulations existed, and the influence of the guilds prevented truly free markets. In modern economies, governments likewise do not allow unfettered market operation in many areas, but the price restrictions are much smaller than those imposed by guilds.

Profit

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The pursuit of profit is one characteristic of capitalism

The pursuit and realization of profit is an essential characteristic of capitalism. Profit is derived by selling a product for more than the cost required to produce or acquire it. Some consider the pursuit of profit to be the essence of capitalism. Sociologist and economist, Max Weber, says that "capitalism is identical with the pursuit of profit, and forever renewed profit, by means of conscious, rational, capitalistic enterprise." However, it is not a unique characteristic for capitalism, some hunter-gatherers practiced profitable barter and monetary profit has been known since antiquity. Opponents of capitalism often protest that private owners of capital do not remunerate laborers the full value of their production but keep a portion as profit, claiming this to be exploitative. However, defenders of capitalism argue that when a worker is paid the wage for which he agreed to work, there is no exploitation, especially in a free market where no one else is making an offer more desirable to the worker; that "the full value of a worker's production" is based on his work, not on how much profit is created, something that depends almost entirely on factors that are independent of the worker's performance; that profit is a critical measure of how much value is created by the production process; that the private owners are the ones who should decide how much of the profit is to be used to increase the compensation of the workers (which they often do, as bonuses); and that profit provides the capital for further growth and innovation.

Self interest

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Ayn Rand was an outspoken advocate of the role of self-interest in capitalism

The pursuit of self-interest is commonly regarded as playing an essential role in capitalism. Many writers, such as Adam Smith and Ayn Rand, point to what they believe to be the benefit of individuals trading for their self-interest rather than altruistically attempting to serve the "public good." Smith, widely considered to be the intellectual father of capitalism, says in Wealth of Nations: "By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good." Ayn Rand, probably the most outspoken advocate of the role of self-interest in capitalism, says in Capitalism: The Unknown Ideal: "America's abundance was created not by public sacrifices to the common good, but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes." Nobel-economist Milton Friedman also embraces the role of self-interest in capitalism. In his famous article The Social Responsibility of Business is to Increase Profits, as he asserts that business has no social responsibility other than to increase profits and refrain from engaging in "deception or fraud." He maintains that when business seeks to maximize profits, while respecting the guidelines of a free market by not defrauding or deceiving, it almost always incidentally does what is good for society. Friedman does not argue that business should not help the community but that it may indeed be in the long-run self-interest of a business to "devote resources to providing amenities to [the] community..." in order to "generate goodwill" and thereby increase profits. Some, including some supporters of capitalism, dislike the focus on self-interest. For example, self-described "free market libertarian" founder and CEO of Whole Foods Market, John Mackey, claims in an article in Reason magazine that he is serving customers and society out of "love" rather than self-interest while he boasts the profitability of his company in that article. (Rethinking the Social Responsibility of Business, Reason magazine October 2005).

Private enterprise

In capitalist economies, a predominant proportion of productive capacity has belonged to companies, in the sense of for-profit organizations. This include many forms of organisations that existed in earlier economic systems, such as sole proprietorships and partnerships. Non-profit organizations existing in capitalism include cooperatives, credit unions and communes.

More unique to capitalism is the form of organization called corporation, which can be both for-profit and non-profit. This entity can act as a virtual person in many matters before the law. This gives some unique advantages to the owners, such as limited liability of the owners and perpetual lifetime beyond that of current owners.

A special form of corporation is a corporation owned by shareholders who can sell their shares in a market. One can view shares as converting company ownership into a commodity - the ownership rights are divided into units (the shares) for ease of trading in them. Such share trading first took place widely in Europe during the 17th century and continued to develop and spread thereafter. When company ownership is spread among many shareholders, the shareholders generally have votes in the exercise of authority over the company in proportion to the size of their share of ownership.

To a large degree, authority over productive capacity in capitalism has resided with the owners of companies. Within legal limits and the financial means available to them, the owners of each company can decide how it will operate. In larger companies, authority is usually delegated in a hierarchical or bureaucratic system of management.

A bank in Rotterdam: Banks act as merchants of money and suppliers of capital in capitalist economies.

Importantly, the owners receive some of the profits or proceeds generated by the company, sometimes in the form of dividends, sometimes from selling their ownership at higher price than their initial cost. They may also re-invest the profit in the company which may increase future profits and value of the company. They may also liquidate the company, selling all of the equipment, land, and other assets, and split the proceeds between them. The price at which ownership of productive capacity sells is generally the maximum of either the net present value of the expected future stream of profits or the value of the assets, net of any obligations. There is therefore a financial incentive for owners to exercise their authority in ways that increase the productive capacity of what they own. Various owners are motivated to various degrees by this incentive -- some give away a proportion of what they own, others seem very driven to increase their holdings. Nevertheless the incentive is always there, and it is credited by many as being a key aspect behind the remarkably consistent growth exhibited by capitalist economies. Meanwhile, some critics of capitalism claim that the incentive for the owners is exaggerated and that it results in the owners receiving money that rightfully belongs to the workers, while others point to the fact that the incentive only motivates owners to make a profit - something which may not necessarily result in a positive impact on society. Others note that in order to get a profit in a non-violent way, one must satisfy some need among other persons that they are willing to pay for. Also, most people in practice prefer to work for and buy products from for-profit organizations rather than to buy from or work for non-profit and communal production organizations which are legal in capitalist economies and which anyone can start or join.

When starting a business, the initial owners or investors typically provide some money (the capital) which is used by the business to buy or lease some means of production. For example, the enterprise may buy or lease a piece of land and a building; it may buy machinery and hire workers (labor-power), or the capitalist may provide the labor himself. The commodities produced by the workers become the property of the capitalist ("capitalist" in this context refers to a person who has capital, rather than a person who favors capitalism), and are sold by the workers on behalf of the capitalist or by the capitalist himself. The money from sales also becomes the property of the capitalist. The capitalist pays the workers a portion of this profit for their labor, pays other overhead costs, and keeps the rest. This profit may be used in a variety of ways, it may be consumed, or it may be used in pursuit of more profit such as by investing it in the development of new products or technological innovations, or expanding the business into new geographic territories. If more money is needed than the initial owners are willing or able to provide, the business may need to borrow a limited amount of extra money with a promise to pay it back with interest. In effect, it may rent more capital.

Economic growth

One of the primary objectives in a social system in which commerce and property have a central role is to promote the growth of capital. The standard measures of growth are Gross Domestic Product or GDP, capacity utilization, and 'standard of living'.

The ability of capitalist economies to sustainably increase and improve their stock of capital was central to the argument which Adam Smith advanced for a free market setting production, price and resource allocation. It has been argued that GDP per capita was essentially flat until the industrial revolution and the emergence of the capitalist economy, and that it has since increased rapidly in capitalist countries [6][7]. It has also been argued that a higher GDP per capita promotes a higher standard of living, including the adequate or improved availability of food, housing, clothing, health care, reduced working hours and freedom from work for children and the elderly. These are reduced or unavailable if the GDP per capita is too low, so that most people are living a marginal existence.

Economic growth is, however, not universally viewed as an unequivocal good. The downside of such growth is referred to by economists as the 'externalization of costs' (see externality). Among other things, these effects include pollution, the disruption of traditional living patterns and cultures, the spread of pathogens, wars over resources or market access, and the creation of underclasses.

In defense of capitalism, liberal philosopher Isaiah Berlin has claimed that all of these ills are neither unique to capitalism, nor are they its inevitable consequences.

See also the "Sustainability" section below.

Economic mobility

One of the key markers of entrepreneurial economies and 'growth' in a society is its economic mobility, defined as the existence of large changes in the make-up of its socio-economic strata. This is manifested as the occurrence of large fluctuations in the various deciles or quintiles of income and wealth among the population, and the existence of large changes over a person's lifetime in relation to their real earning power. In standard economics, a capitalist system provides more opportunities for an individual to rise faster in the world by entering new professions or establishing a business venture. The instability of economic strata is contrasted with traditional feudal or tribal societies, which are considered to have more stable wealth relationships, and with the egalitarianism that exists in socialist societies, which distribute more of their wealth in the form of social benefits and therefore reduce income mobility, particularly among those who own capital and wish to trade it.

However, the existence of large fluctuations in income deciles does not always represent income mobility - with individuals receiving regular wage increases over their working lives and then retiring, such fluctuations alone do not show that there is 'mobility' per se. Moreover, it is argued by many labor economists that wage instability represents the transfer of risk to workers and particular sectors of the economy such as agriculture, and away from the holders of capital.

Self-organization

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Friedrich Hayek advocated allowing an economy to self-organize, maintaining that government cannot access or coordinate the widespread distribution of information possessed by millions of individuals.

While a great deal of planning is undertaken among individual companies and other organisations in capitalist economies, few significant mechanisms for imposing overall direction are available to governments. There is also a scarcity of reliable predictive tools and foreknowledge of how an economy is likely to behave or perform more than a year or two into the future. While most transactions may be planned and agreed by the actors involved, many society-wide phenomena that emerge from the markets and its transactions are often not planned, predicted, approved or authorised by anyone. Nevertheless, such an economic system can organize itself into a complex system without an external guidance or planning mechanism. This phenomenon is called "self-organization." Friedrich Hayek coined the term "catallaxy" as a market where "spontaneous order" emerges when no centralized control source (government) overrides decisions of individuals pursuing their own ends. However, in all large-scale modern economies the State conducts a degree of centralized economic planning (using such tools as allowing the country's central bank to set base interest rates), ostensibly as an attempt to improve efficiency, attenuate cyclical volatility, and further particular social goals.

Some economists use chaos theory to argue that it is impossible to make accurate long-term economic predictions. They view the decentralized nature of economic planning and development that occurs in capitalism as one of its greatest strengths, arguing that it permits many solutions to be tried, and that real-world competition generally finds a good solution to emerging challenges. This is opposed to the central planning approach to the running of a society, which often selects inappropriate solutions as a result of faulty forecasting. One possible example is the experience in Somalia where the previously regulated telecommunications industry is reported to be "thriving" now that, and reportedly because, the country lacks a government. [8]

Capitalist economies typically contain numerous companies, and people are free to enter into many different types of arrangement with each other. Such an economy reacts to technological change, new discoveries and other developments through continual readjustments in the relationships which exist among companies and individuals. In this way the economy's control mechanisms and how information flows through it evolve over time, and are characterised by a kind of "survival of the fittest" selection and evolution process which is not dissimilar to that exhibited in natural systems and their component relationships.

Ancient Rome and China under the Song dynasty are examples of societies that had some of the characteristics of capitalism, like no feudal fiefs, (weak) property rights, economic growth, and for their times advanced technology. It is much debated why these societies did not have their own "industrial revolution" and thus achieve industrial capitalism in the modern sense. It has been suggested that these states formed monopolies in their parts of the world with very limited competition from other states. The ruling class then become complacent and the successful institutions were overturned in order to enrich certain special interest groups. Much innovation has historically taken place when there where many competing states, like in the city states of ancient Greece and renaissance Italy.

Analysis of the networks of connections and arrangements in the economy has shown a degree of similarity to other networks such as phone systems or the Internet. [9] contains examples of networks of company board members. Networks of customer links and monetary flows exhibit similar characteristics.

Which economies are "capitalist"?

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As exemplified by the title of this book, some do not believe that capitalism has been fully implemented.

Some believe that it is inaccurate to call any or some of the major industrialized economies "capitalist" because of the level of government intervention. For example, some assert that the market in the United States of America is significantly less than "free", and that therefore it is more appropriately termed a mixed economy that is merely skewed more toward capitalism than most national economies, rather than being a true representation of capitalism. Still others might say that the U.S. economy is capitalist, but the U.K. economy is a "mixed economy," or the Hong Kong economy is capitalist and the U.S. economy is mixed and so on, depending upon their perception of how much economic freedom exists in those locales. According to economic and business historian Robert Hessen of Stanford Graduate School of Business: "a fully free economy (true laissez-faire) never has existed, but governmental authority over economic activity has sharply increased since the eighteenth century, and especially since the Great Depression...Today the United States, once the citadel of capitalism, is a "mixed economy" in which government bestows favors and imposes restrictions with no clear or consistent principle in mind." [10]

A similar classification, associated largely with the Austrian school of economics, regards most present economic systems as a perversion of capitalism, sometimes called crony capitalism, and envisages a de-cronied capitalist ideal. Similarly, some use the phrase "laissez-faire capitalism" to distinguish between "ordinary capitalism," believing that there is a difference. Others find the phrase "laissez-faire capitalism" redundant, pointing out that the common definition of capitalism explicitly refers to trade occurring in a "free market".

Many Marxists, anarchists, Greens and anti-globalists agree that the governments in capitalist societies, that is to say societies where a capitalist class is the ruling class, are not serving in the role of protecting "the free market", but would go on to say that these governments are, in fact, acting to protect the owners of capital and corporations as their first priority. Noam Chomsky says that "There's nothing remotely like capitalism in existence. To the extent there ever was, it had disappeared by the 1920s or '30s." (interview with Detroit Metro Times). Libertarians and other free-market advocates may also share this opinion regarding some or all of the major economies. However, in the 18th century in America, production and distribution of goods were regulated by government ministries. Also, government subsidies were granted to agriculture. Economic intervention continued throughout the 19th century.

A map of the Heritage Foundation's Index of Economic Freedoms. Various reserachers have argued that nations with a higher economic freedom have a higher GDP/capita and less poverty.

Proponents of the world-system perspective suggest that the whole globe has been incorporated into a single capitalist world-economy. Even though a state (such as Cuba) may be socialist, it works in relation to a much larger, overarching capitalist world-economy.

Many believe that some of the modern economies are still best described as being "capitalism".

Criticisms of capitalism

Unequal distribution of wealth and income

Main article: Economic inequality

It is reasonable to expect that some disparity in wealth and income among individuals would exist in a capitalist system as this is determined through market forces rather than by centralized governmental authority. Some view a significant disparity and concentration of wealth to be problem and that such is endemic to capitalism, while others do not have such egalitarian concerns. Some opponents of capitalism assert that there should be no inequality in wealth and earnings among individuals commensurate to their inheritance, skills, abilities or efforts. Defenders of capitalism respond that since free market capitalism distributes wealth and earnings among individuals commensurate to their inheritance, skills, abilities and efforts, it provides inherent incentives for human beings to hone their skills, improve their abilities, and make strong efforts to meet the needs of each other, incentives that are missing or significantly less present in any other type of economic/political system.

Excessive inequality

Other critics argue that inequality may be necessary but that the distribution of wealth and earnings is unfair, dysfunctional, or immoral in capitalism. In the capitalist economies, the distributions of earnings and, especially, of wealth are concentrated and skewed to the right. In the US, the shares of earnings and wealth of the households in the top 1 percent of the corresponding distributions are 15 percent and 30 percent, respectively [11].

Some critics note that there are very few people who are twice as tall as average, or who can run twice as fast, or have twice as high an IQ. Some critics argue that the fact capitalism doesn't distribute wealth in a similar fashion means that something is fundamentally wrong with the system. Supporters argue that human contributions vary much more than humans vary in height or IQ (as can be illustrated, for example, by comparing the contributions of an arsonist and an inventor/producer of antibiotics).

Critics also note that there are many people who have no wealth. If wealth followed a a bell shaped curve (standard normal distribution), as many other human characteristics and it might be surmised people's ability to be productive, then there should be very few people with no wealth. Supporters might argue that human productivity and especially the tendency to save wealth is not bell-shaped.

An untamed capitalist system may have inherent biases favoring those who already possess greater resources. For example, rich people can give their children a better education and inherited wealth. This can create or even increase large differences in wealth between people who do not differ in ability or effort. There are some data supporting this, like that in the US 43.35% of the Forbes 400 richest individuals were already rich enough at birth to qualify. [12], or a study that indicates that in the US wealth, race, and schooling are important to the inheritance of economic status, but IQ is not a major contributor and the genetic transmission of IQ is even less important [13]. On the other hand, at least some of the difference in wealth between people of equal ability may be explained by that some people voluntarily, maybe because they see other things as more valuable, make life choices that make them earn or save less than other people with the same ability. Defenders respond that since 30.1% of the individuals on the Forbes list of the 400 richest did not inherit great wealth (meaning they did not inherit at least $1 million in assets) this shows that even such people can gain the very highest level of wealth in capitalist economies. For opposing views of IQ and income, see IQ. There are also some data indicating that income inequality for the world as a whole is diminishing, see below in "Marxist critique of capitalism".

Supporters argue that a problem with using "distribution of wealth" as a standard to measure economic systems is that such a standard can produce seemingly irrational judgments. Under the "distribution of wealth" standard, a system where everyone has nothing is judged as equal to a system where everyone has enormous wealth since the distribution of wealth in the two systems is equal. The claim is made that capitalist economics are not zero-sum games and that more wealth for most people is actually "created" through innovation, entrepreneurship and risk-taking. Rewards for this may cause a necessary inequality. Regarding the inheritance of wealth, this may be necessary so that the most productive people continue to do productive work and save money when they get older. Thus, people who see uneven wealth distribution as a lesser or unavoidable problem tend to argue that if inequality leads to higher average wealth and higher wealth and income for most people, then wealth inequality may be acceptable. Several peer-reviewed studies show that the relative income share of the poorest do not decrease with higher economic freedom, but their absolute income increases. For example, one study found that the poorest 10% earn $823 per year in the quintile of nations with the lowest economic freedom, but earn $6877 per year in the quintile of nations with the highest economic freedom. [14][15][16][17].

Some advocates of capitalism may partly agree with the critics but think that the problem can be resolved with solutions like progressive taxation, wealth tax, and/or inheritance tax. They note that such taxes are already implemented in most capitalist states. The best extent of such taxes and how much inequality there should be is much discussed and researched, but these variables can be changed without abandoning capitalism.

Other points of view on capitalism's unequal wealth distribution include:

  • Pro-Capitalist:
    • Robert Nozick has argued that no condition of perfect equality could be maintained for very long. If all agents possess the same amount of wealth, they will immediately begin investing it in different ventures which will pay off to varying degrees. But if voluntary economic exchange is seen as leaving both parties (since both would not be trading unless the outcome of the trade was mutually beneficial), even if the resulting distribution is not even, it is better than if there were no trading.
    • Lack of established property rights force the poor to operate in extralegal markets, keeping them from unlocking the capital in their assets. When only the politically privileged can leverage capital, the division between formally and informally owned property is an unbalancing barrier to the benefits of a modern market economy.
    • Wealth tends to be directed toward individuals in proportion to how productive they are in terms of creating and providing goods and services that others value, therefore the possibility of becoming wealthier than others can be seen as an incentive to benefit society. A limit on freedom of individuals to reap a disproportionate amount of wealth would dampen incentive. Technological progress would stagnate, and, as a result, the standard of living would suffer.
    • The inequality of consumption is far less than the inequality in wealth, since there is no way most of the wealthy could consume all their wealth. To the extent that they consume their wealth, they are redistributing it to others. To the extent that they are not consuming it, they are generally either managing it to create more wealth or giving it away.
    • Many rich give significantly to charity (see also philanthropist). Some argue that charity is more efficient than state welfare.
    • The economist Thomas Sowell has attributed factors such as geography, climate, culture, and natural resources as contributing factors to inequality inside of and between nations.
    • The income share of the poorest 10% do not decrease with higher economic freedom but the absolute income of the 10% poorest, prosperity, economic growth, democracy, and freedom from corruption increase, see Economic freedom index.
  • Anti-Capitalist:
    • The capitalists gather their wealth by exploiting the workers. A worker is not paid the entire produce of his labor, as the employer retains a portion as profit. Profiting in this way tends to further enrich those with capital while not significantly enhancing the material well-being of workers. This perpetuates concentration of wealth in the hands of a few.
    • Wealth and unequal distribution can create social problems (such as higher crime rates). These problems affect both poor and rich.
    • Government interference in markets can be skewed to benefit the wealthy. In particular, wealthy people have the financial means and incentives to influence or corrupt government officials and to lobby for favourable legislation.
    • Many people have little wealth left over after living expenses, so they can't make it grow quickly.
    • Persistent long-term inequality of wealth undermines the motivation of the poor to improve their stance.
    • Wealthy people save relatively more than poor people. Hence some economists believe that an unequal distribution of wealth undermines an economy's mass buying power, effectively leading to lower aggregate sales, reduced wealth production, unemployment and crises. (see Keynes) Economists, however, argue that saving is also necessary in an economy, since it provides the means for investment into new technologies and processes.
    • Wealth is defined and judged incorrectly, in many different ways. In particular, people may attach value to things for seemingly irrational reasons (sentimental value). Some may also value spiritual development more than material wealth.
    • The wealthy may not put their wealth to productive use. For example, they may buy land just to deny access to it to others, for personal or environmental reasons. Other critics of capitalism, however, would ask whether or not capitalistic production narrowly-defined is a good thing, especially if it is seen as damaging the environment, and such an action of denial may be seen as the lesser of two evils.

Employment/unemployment

Since individuals typically earn their incomes from working for companies whose requirements are constantly changing, it is quite possible that at any given time not all members of a country's potential work force will be able to find an employer that needs their labor. This would be less problematic in an economy in which such individuals had unlimited access to resources such as land in order to provide for themselves, but when the ownership of the bulk of its productive capacity resides in relatively few hands, most individuals will be dependent on employment for their economic well-being. It is typical for true capitalist economies to have rates of unemployment that fluctuate between 3% and 15%. Some economists have used the term "natural rate of unemployment" to describe this phenomenon.

Depressed or stagnant economies have been known to reach unemployment rates as high as 30%, while events such as military mobilization (a good example is that of World War II) have resulted in just 1-2% unemployment, a level that is often termed "full employment". Typical unemployment rates in Western economies range between 5% and 10%. Some economists consider that a certain level of unemployment is necessary for the proper functioning of capitalist economies. Equally, some politicians have claimed that the "natural rate of unemployment" highlights the inefficiency of a capitalist economy, since not all its resources -- in this case human labor -- are being allocated efficiently.

Some libertarian economists, such as Henry Hazlitt, argue that higher unemployment rates are in part the result of minimum wage laws, as well as in part the result of misguided monetary policy, and are not inevitable in a capitalist economy. In "Economics in One Lesson", Hazlitt argues that if the value of the work of some potential employees is lower than the minimum wage, it would penalise the employer to employ them. Accordingly, if the value of the productive capacity of a given employee is worth less to the employer than the minimum wage, that person will become unemployed, and therefore unemployment will exist whenever the legal minimum wage exceeds the true economic value of the least productive members of the labor pool. Likewise, if the amount of money a person can obtain on welfare approaches or equals what they could make by working, that person's incentive to work will be reduced.

Some unemployment is voluntary, such as when a potential job is turned down because the unemployed person is seeking a better job, is voluntarily living on savings, or has a non-wage-earning role, such as in the case of a traditional homemaker. Some measures of employment disregard these categories of unemployment, counting only people who are actively seeking work and have been unable to find any.

Marxist critique of capitalism

Main article: Marxism,

Karl Marx recognized that capitalism was immensely productive but also generated immense social problems (which probably explains the stern look on his face)

Marxists define capital as "a social, economic relation" between people (rather than between people and things). They seek to replace capitalism after it has completed its positive work as a stage of economic history. In the cartton version of Marxism gavored by both vulgar Marxists and anti-Marxists, all Marxists are said to believe that private ownership of the means of production does nothing more than enrich capitalists (owners of capital) at the expense of workers ("the rich get richer, and the poor get poorer"), and that this is the cause of modern social ills. Anti-Marxists counter this criticism by claiming that ownership of productive capacity provides motivation to owners to increase productive capacity and so generally increase the average material wealth ("we all get richer"). Marxists counter this by pointing out the unchanged after-tax income of the poorest quintile of the U.S. population during the last two decades. While at the same time the average income and especially the income of the rich have increased. [18]. According to "United for a Fair Economy," in 1982 CEOs of major corporations in the U.S. earned 42 times the annual wages of the average worker; in 2002 the ratio stood at 282:1 [19]. Anti-Marxists point out that the percentage of people in developing countries living below $1 per day have halved in only twenty years, especially in countries like China that have embraced aspects of capitalism such as the markets [20]. Life expectancy has almost doubled in the developing world since WWII and the gap to the developed world is starting to close [21]. Looking at the world as a whole and not just at the U.S. shows that income inequality is in fact diminishing [22]. Marxists counter that the greater equality seen in other advanced industrial democracies, as opposed to the U.S., is the result of social-democratic public policies that redistribute wealth.

Marxists believe that capitalism allows capitalists — the owners of capital — to exploit workers. The private ownership of the means of production is seen as a restriction on freedom, whereas supporters of capitalism believe that private ownership is essential to enriching society as well as preserving personal freedom. Marxists also argue that capitalism has inherent contradictions that will inevitably lead to its collapse. Capitalism is seen as just one stage in the evolution of the economy of a society.

Marxists also often argue that the structure of capitalism necessarily leads to unjust exploitation of workers, regardless of whether or not the political system is one of an bourgeois democracy. For this reason Marxists typically emphasise the capitalist economic system of Western countries rather than the democratic political system. A capitalist system is an economic system - although often associated with democratic political systems, they are independent from each other. Capitalist systems have often functioned under unelected governments: the classic case is the United Kingdom, where less than 20% of adult males could vote prior to 1885, and women did not receive the vote until 1918.[23] Some recent examples include Hong Kong, Singapore, and Chile under the rule of General Pinochet. It is also argued by Marxists that governments espousing fascist (or "national socialist") rhetoric do not make substantive changes to the capitalist economies when they assume power.

In mainland China differences in terminology sometimes confuse and complicate discussions of Chinese economic reform. Under Chinese Marxism, which is the official state ideology, capitalism refers to a stage of history in which there is a class system in which the proletariat is exploited by the bourgeoisie. In the official Chinese ideology, China is currently in the primary stage of socialism with Chinese characteristics. However, because of Deng Xiaoping's dictum to seek truth from facts, this view does not prevent China from undertaking policies which in the West would be considered capitalistic including employing wage labor, increasing unemployment to motivate those who are still working, transforming state owned enterprises into joint stock companies, and encouraging the growth of the joint venture and private capitalist sectors.

Capitalism in decline or on the rise?

Citing the ideal of a free market, many consider an economy with lower taxes, smaller government and fewer regulations to be more capitalistic. If government spending is used as a gauge of government expansion, the last century saw a very large increase in the role of government in Western countries. Combined U.S. government spending increased from 3-4% of GDP to 33% flattening somewhat since 1983 when the sharp upward trend was broken during President Ronald Reagan's term. An average for 16 industrial nations jumped from 8% of GDP to 45%. Non-defense spending in the U.S. as a percentage of net income increase from 11.5% in 1945 to 30% in 1983, remaining stable through 2003 (some exclude defense spending when gauging government expansion). Compliance with more regulations is increasingly costly [24][25]. Thus it can be argued that the degree of capitalism has seen a remarkable decline in Western nations. However, since 1983 the percentage of non-defense government spending in the U.S. has stabilised, leading some such as Milton Friedman to express some hope that the tide may reverse toward more capitalism [26]. Alan Greenspan, in a speech in 2005, expressed his belief that "free-market capitalism" is being rediscovered through deregulation after a period of stifling regulation brought about by Keynesian economics. [27]

One explanation for this is that the Western nations have increasingly averted or regulated various market failures such as pollution, health care, unemployment, wealth inequality, and education. Supporters of less state interference, such as libertarians, neoliberals, and financial conservatives, would instead argue that the regulations restrict competition, that the taxes go to the special interest groups with the most political clout, and that the almost constantly expanding governments do things less efficiently than the private sector.

Sustainability

An economic system that causes strong economic growth may inevitably have a large effect on the environment. Some question the continued sustainability of this, arguing that many aspects of the environment have been degraded since the industrial revolution. Defenders of capitalism note the many environmental disasters in communist states. Yet this argument constitutes an evasion more than a defense. While it may be true that state-communist governments in economic competition with capitalism tended to mindlessly ape its industrial processes, sometimes producing more environmentally destructive results, it hardly lets capitalism off the hook.

Some defenders note that many aspects of the environment in developed nations have improved recently, after the dangers of certain pollutants have become known. Examples include greatly reduced emissions of chlorofluorocarbons affecting the ozone layer, removal of lead from gasoline and other products, greatly improved cleaning of emissions from fossil fuel power plants, and much stricter control of emissions into rivers, lakes, and oceans. However, some leading conservation organizations such as the WWF and The United Nations Environment Programme argue that the impact of humanity on Earth is continually increasing. They in 2004 jointly reported that "humanity's Ecological Footprint grew by 150% between 1961 and 2000" and that most of this growth occurred in the 27 wealthiest countries of the world, in other words, the leading capitalist countries [28]]. Critics note that the statistical methods used in calculating Ecological Footprint have been criticized and some find the whole concept of counting how much land is used to be flawed, arguing that there is nothing intrinsically negative about using more land to improve living standards. [29][30]

This view, however, does not recognize biodiversity as an intrinsic good. Monoculture, paving and other human activities reduce the amount of earth's surface available to support diverse communities of life.

Supporters of capitalism argue that in many cases environmental problems are greatest when a common exists and there is no clear owner. See Tragedy of the commons, Free market environmentalism, and a proposal to have natural resource wealth owned by all people equally. Defenders of capitalism also note that world population has greatly expanded due to higher living standards since the industrial revolution. However, this growth is declining due to the demographic transition and the world population is expected to stabilize at nine billion.

Yet many environmentalists have long argued that the real dangers are due to the world's current social institutions that they claim promote environmentally irresponsible consumption and production. Under what they call the "grow or die" imperative of capitalism, they claim there is little reason to expect hazardous consumption and production practices to change in a timely manner. They also claim that markets and states invariably drag their feet on substantive environmental reform, and are notoriously slow to adopt viable sustainable technologies. [31][32]. Immanuel Wallerstein, referring to the externalization of costs as the "dirty secret" of capitalism, claims that there are built-in limits to ecological reform, the costs of doing business in the world capitalist economy are ratcheting upward because of deruralization and democratization, he therefore sees no exit from our dilemnas within the framework of the capitalist world-system.[33]

Strong economic growth also requires increasingly greater amounts of natural resources and energy and some question whether this can continue in the future. Those arguing for continued growth note that numerous past predictions of shortages have failed since new technology has continuously allowed exploitation of previously unavailable resources. That this continues in the future is of critical importance, especially for energy which may face a peak in fossil fuel production. Since 1970, each 1% increase in world GDP has yielded a 0.64% increase in energy consumption. See Future energy development.

Human rights violations, imperialism, and democracy

Detractors claim that ills caused by capitalism include imperialism, poverty, oppression exploitation and abuse of human rights. They point to lack of democracy and systematic violence against political opponents (like in Chile under the regime of Pinochet or China today); exploitative wars (like the Opium wars or the Sino-Japanese War); and large scale democide (like in the Congo Free State). Many of these violations occurred during a time period and in states sometimes considered being more capitalist than today since the government share of the economy was much smaller.

Proponents of capitalism point out that these problems have been widespread through all of human history, including in states characterized as socialist such as in Cambodia under Pol Pot. Some assert that these practices are not consistent with principles of capitalism even though they have existed in nations or in the colonies of nations commonly, or loosely, labeled as capitalist. They deny that many of the colonies had capitalist economic systems and claim that their economies mostly continued to be feudalistic. Instead they emphasize that it was capitalist states that abolished slavery throughout the world and that it was capitalist states who developed the modern democratic system. The strong economic growth during capitalism may encourage democratization, or vice versa. There is debate about whether liberal democracy, in the sense of electoral rights and civil liberties, is a consequence of economic growth [34], a cause of it [35], or completely unrelated to it [36]. These studies tend to indicate that establishing the rule of law in protecting private property and free markets, rather than mere democratization, is what is most instrumental in generating economic growth.

One of the very few studies simultaneously examining the relationship among economic freedom (see below), economic development (measured with GDP/capita), and political freedom (measured with the Freedom House index) found that high economic freedom increases GDP/capita and a high GDP/capita increases economic freedom. A high GDP/capita also increases political freedom but political freedom did not increase GDP/capita. There was no direct relationship either way between economic freedom and political freedom if keeping GDP/capita constant. [37]

One common criticism that Marxists make about Capitalism is that it is only democratic to the Bourgeoisie (the exploitive class that owns the 'means of production') citing examples such as not being able to criticize one's boss out of risk of getting fired and not expressing opinions on tv due to lack of funds to afford a channel.

Marxists also criticize capitalism for needing Imperialism (the exportion of capital to other nations) to survive. Due to Capitalism not being a planned economy it inevitably overproduces commodities and overuse resources. This leads it to expand it markets into and drain the resources out of other nations.

Other approaches

Capitalism in political ideologies

Main article: Capitalism and related political ideologies

Indices of economic freedom

File:Index2006 EconFreedomMAP.jpg
A map of the Heritage Foundation's Index of Economic Freedoms. Various reserachers have argued that nations with a higher economic freedom have a higher GDP/capita and less poverty

There are two controversial pro-business Indices of Economic Freedom sometimes used in economic research. The most popular of the two is published by the Washington, D.C.-based Heritage Foundation and the Wall Street Journal. A second such index is published by the Canada-based Fraser Institute. Both attempt to measure of the degree of economic freedom in countries, mostly in regard to rule of law, lack of governmental intervention, private property rights, and free trade. The Index of Economic Freedom defines "economic freedom" [38] as "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." (This is otherwise known as laissez-faire).

They use statistics from independent organizations like the United Nations to score countries in various categories like the size of government, degree of taxes, security of property rights, degree of free trade and size of market regulations. Many peer-reviewed papers have been published using this material on the relationship between capitalism and for example poverty, mostly by researchers independent from the think tanks.[39] The Fraser Institute argues that more advanced capitalist countries have much higher average income per person, higher income of the poorest 10%, higher life-expectancy, higher literacy, lower infant mortality, higher access to water sources and less corruption. The share of income in percent going to the poorest 10% is the same for both more and less capitalistic countries.[40] Other studies have shown similar results.[41]

Attempts to decide the importance of the subcomponents of the indices have often yielded contradictory results. Strong property rights may be important - the economist Hernando de Soto has argued that weak property rights, especially for the poor, play a major role in poverty and underdevelopment in developing countries [42] [43]. Many developing countries are now trying to strengthen and simplify their property rights system after the successful application of his ideas in Peru [44]. Others have emphasized the importance of a functioning credit system, especially microcredit.

Notes

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See also

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Further Reading

  • Braudel, Fernand. Civilization and Capitalism : 15th - 18th Century 3 vols.
  • Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass., and London: Belknap Press of Harvard University Press, 1977.
  • Galbraith, John Kenneth. The New Industrial State, 4th ed., 1985.
  • Harvey, David. "The Political-Economic Transformation of Late Twentieth Century Capitalism." In Harvey, David. The Condition of Postmodernity. Cambridge, MA: Blackwell Publishers, 1990. ISBN 0631162941
  • Heilbroner, Robert L. The Nature and Logic of Capitalism, 1985.
  • Landes, David S. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, U.K.: Cambridge University Press, 1969.
  • Marx, Karl. Capital: A Critical Analysis of Capitalist Production, 3 vol., 1886–1909; first published in German as Das Kapital: Kritik der politischen Oekonomie, 1867–1894.
  • Muller, Jerry Z., "The Mind and the Market - Capitalism in Modern European Thought". New York: Alfred A. Knopf (Random House), 2002
  • Rand, Ayn. Capitalism: The Unknown Ideal ISBN 0451147952
  • Rostow, W. W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press, 1960.
  • Rothbard, Murray. Man, Economy, and State: A Treatise on Economic Principles, (2 volumes.) 1962.
  • Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.

See also

External links

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