Wednesday, March 10, 2010

What is Capitalism?

Capitalism, free enterprise, free markets: terms often used, often despised, often extolled.

Vaguely, they all mean the same thing. I tend to use them interchangeably, though there are differences.

“Free market” seems to refer to the situation where people are at liberty to trade goods and services for money or other goods and services. Or not to trade. In a free market economy, exchanges happen only when both parties anticipate being better off (wealthier) after the exchange.

“Free enterprise” seems to mean people are at liberty to enter any enterprise or start any business they wish and their operation of this enterprise or business will be free from outside coercion – by the state or otherwise.

“Capitalism” refers to an advanced state of free enterprise where capital (savings) itself becomes a commodity of exchange. When Capitalism appears, people who have saved money (capitalists) can rent their savings to others or directly employ their capital to increase the productivity of the labor of others. Under Capitalism, many people exchange their labor for money directly, using somebody else’s capital to produce things, rather than exchanging for money goods they have labored to produce using their own capital.

Strictly speaking, Capitalism can exist if the capital is owned in common or owned or controlled by the state: State Capitalism. But in common use, “Capitalism” means a free-enterprise, free-market system.

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