Home What is Capitalism?
  1. Origins and Evolution of Capitalism
    1. Adam Smith
    2. Mixed Economy
  2. Capitalism in the United States
  3. Capitalism in Developing Countries
  4. Critiques of Free Market Capitalism
  5. Related Sites
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What is Capitalism?

What is capitalism?  What do you think of when you hear the word “capitalist”?  Robber barons of the 19th century?  Hedge fund managers?  Enron executives exploiting the common worker?

Or do you think of industrial giants?  Entrepreneurs whose success drives the economy to higher standards of living for everyone? 

In traditional economic interpretation, capitalism is an economic system – that is a set of institutions designed to provide answers to fundamental questions that every society faces.  These questions are:

“What should we produce?”  How did the automotive industry know to produce 73 million motor vehicles in 2007?  Why are there more CPAs now than in the 1940s?  Who decides how many coffee shops or tee-shirts or animated films will be produced each year?  And why are there not more “mistakes”?  Why don’t we see persistent shortages or constant over-production?

“How to produce it?”  Once a society determines how much of each good or service to produce, a second fundamental question is the “how”.  Do we use a lot of labor or machinery?  Are workers specialized or do they perform basically all tasks?

“Who gets it?”  Finally, society is faced with the question of who gets to own and enjoy the goods and services that we produce?  Which standard should be applied to determine who has access to the goods and services that are so valuable and necessary for life?

The simple answer to the question, then, is this:  capitalism is an economic system in which market forces determine what is produced (supply will meet demand), goods will be produced at the lowest possible cost and only those who are willing (and able) to pay the “market price” will gain access to society’s goods. 

Click here for a tutorial on supply and demand.

This rather simple definition can get complicated, especially when the task is to explore the morality capitalism. 

For example, a capitalist would answer the second question (how to produce goods) by following the least-cost method of production.  This means paying workers the lowest possible wage.  Is that moral?  There are many who advocate a living wage.

Another example is health care.  Should people be denied access to health care because they cannot afford it?  Some say no, that people should not be denied basic health care because of an inability to pay.  Those advocating a strict capitalist system say yes, the market mechanism is the fairest way to determine who gains access to medical resources.  Are there moral obligations that surpass the capitalist answer to this question?

Is the current distribution of income in the United States (in which the super-rich earn billions of dollars while 18 percent of the nation’s children live in poverty) moral?  What is the alternative?  Is it moral to use the power of the government to “redistribute” income from those who have earned it to those who may need it more?

The definition of capitalism is easy.  The morality of capitalism is a much more complicated and interesting intellectual exercise.