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Capitalism has been defined in various related ways by different economic theorists, and is commonly understood to mean an economic or socioeconomic system in which the means of production are predominantly privately owned and operated for profit, mostly through the employment of labour. In such a system, money mediates the distribution and exchange of goods, services, and labour in largely free markets. Decisions regarding investment are made privately, and production and distribution is primarily controlled by companies or businesses each competing and acting in its own interest.

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

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 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

Some emphasize the private ownership of capital as being the essence of capitalism, or emphasize the importance of a free market as a mechanism for the movement and accumulation of capital. Others measure capitalism through class analysis, including the class structure of society and relations between labor and the capitalist class. Some note the growth of a global market system. The essential premise of capitalsim, however, is the socially acceptable pursuit of profit and profit alone through a circulatory system of monetary exchange.

In describing capitalism, Hayek points to the self-organizing character of economies which are not centrally-planned by government but rely on the free price system to coordinate the distribution of resources. 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 "common good," maintaining that by individuals and firms pursuing their self-interest the good of society is more effectively achieved. Karl Polanyi, a seminal figure in the field of economic anthropology, argued that at the time Smith was primarily describing a period of organization of production along commercial lines. For Polanyi, capitalism is distinguishable from earlier mercantilist and commercial eras by the commodification of land, labour-power, and money. It appeared in mature form as a result of the problems raised when an industrial factory system, requiring long-term investment and entailing corresponding risks, was introduced into an internationalized commercial framework. Historically speaking, the most pressing needs of this new system were an assured supply of the elements of industry - land, elaborate machinery, and labour, and these imperatives led to the aforementioned commodification; not through a process of self-organizing activity, but rather as a result of deliberate, often forceful, state intervention. (see Karl Polanyi, The Great Transformation)

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 complex of political, social, and cultural institutions.

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") . In addition, as suggested by Karl Marx, the products of labour are directly distributed "to each according to his need" , 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." 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 capitalism

This section is on history of capitalist theory. See History of capitalism for the system's history in practice.

Main article: History of theory of capitalism

Most theories of what has come to be called capitalism developed during the 18th, 19th and 20th centuries, 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 owned by private individuals (sometimes referred to as "capitalists") 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 parliamentarian, 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).

The conception of what constitutes capitalism has changed significantly over time, as well as varying depending on the political perspective and analytical approach. 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), capitalism 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. 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 are 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

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. Private property was embraced in some earlier legal systems, such as in ancient Rome , but protection of these rights was sometimes difficult, especially since Rome had no police . This system and some earlier systems 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 access to 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." 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.

Private enterprise

In capitalist economies, a predominant proportion of productive capacity has belonged to companies, in the sense of for-profit organizations. These 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 tradable 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.

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 one must satisfy some need among other persons that they are willing to pay for. Also, some 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 money in return for their labor, pays other overhead costs, and keeps the remainder as profit. 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 additional money with a promise to pay it back with interest. In effect, it may rent more capital.

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 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; this state of affairs is also called laissez-faire. 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.

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 wish to buy fewer goods at that price than the sellers are willing to produce), while a price below the equilibrium point 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.

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. Every society (in time and place) however has its own ideas about the fitness of goods for treade, and thus sometimes there were restrictions on the production or trade of specific goods: either because such restrictions were deemed necessary toward another goal, for example to enhance the status of a local lord/hero/chief, or because the idea itself that something could be traded was considered an abomination. This of course prevented truly free markets in the modern sense of the word.

Even in modern economies, governments do not allow unfettered market operation in many areas; but price restrictions, for example, are much less burdensome than the privileges granted to guilds in the Middle Ages. Most ecomonies are a mix of a free market and a non-market. Overall free markets are an important aspect of capitalism, but the two are not the same. There can be free markets without capitalism and vice versa.

Economic growth and mobility

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 much lower and progressed much slower until the industrial revolution and the emergence of the modern capitalist economy, and that it has since increased rapidly in capitalist countries . Also, even before the industrial revolution, some countries had some caracteristics of modern capitalism and had superior standards of living than others, these include 4th century BC Greek civilzation, 1st century Roman Italy and 15th century North Italy. 17th century Netherlands is one of the best examples, it per capita income was various times larger than any other coutry at that time, it did achieve standards of living comparable to 18th century England, but did not achieve an industrial revolution like England did.

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 Sustainability.

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

Supporters of capitalism state that such an economic system can organize itself into a complex system without an external guidance or planning mechanism. This phenomenon is called "self-organization." Nobel prize winner 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. Even this limited control has problems since it is extremely difficult to predict the economy more than at most a year or two into the future. Nobel prize winner Milton Friedman has argued that the Great depression was caused by the erroneous policy by the Federal reserve.

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.

Ancient Rome (particularly during the late republic and early empire) and China under the Song dynasty are examples of societies with some of the characteristics of capitalism: absence of feudal fiefs, (weak) property rights, some economic growth, and advanced technology for their times. 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 many small states compete for allegiance, as in the city-states of ancient Greece and renaissance Italy, the most developed regions of the world at their time.

Which economies are "capitalist"?

The eminent sociologist Max Weber described capitalism as being present "wherever the industrial provision for the needs of a human group is carried out by the method of enterprise". In his introduction to the 1920 edition of The Protestant Work Ethic and the Spirit of Capitalism he offered a broader definition which included Marx's 'antediluvian forms of mercantile and usury capital as well as any profit-making by opportunity (for example speculation) - not just by direct economic activity (Sayer 1996).

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."

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.

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.

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.

Mainstream economists, for their part, admit that the present economic systems have diverged from earlier forms labeled "capitalism", but many believe that some of the modern economies are still best described as being "capitalism".

Index of Economic Freedom

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" 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. 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. Other studies have shown similar results.

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 . Many developing countries are now trying to strengthen and simplify their property rights system after the successful application of his ideas in Peru . Others have emphasized the importance of a functioning credit system, especially microcredit.

The future of capitalism

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 . 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 stabilized, leading some such as Milton Friedman to express some hope that the tide may reverse toward more capitalism . Former Fed chairman 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.

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 fiscal conservatives, would instead argue that the regulations restrict competition, that the taxes go to the special interest groups with the most political clout, that governments do things less efficiently than the private sector, and that market failures are actually caused by government regulations, such as the minimum wage, and public schools.

Criticisms and counter-criticisms of capitalism

See: Criticisms of capitalism

Notes

Definitions of capitalism. Wikiquote, (2006)
Merriam-Webster Third New International Unabridged Dictionary defines "competition" in business as "a: the effort of two or more parties to secure the custom of a third party by the offer of the most favorable terms. b: a market condition in which a large number of independent buyers and sellers compete for identical commodities, deal freely with each other, and retain the right of entry and exit from the market"
The West and the Rest in the International Economic Order by Angus Maddison,
Case, Karl E., Fair, Ray C., Principles of Macroeconomics, Chapter 22 Globalization, Prentice Hall (2004)
Planned economy in Merriam-Webster Third International Unabridged Dictionary

External links

Capitalism Basics
"How the U.S. Economy Works" from U.S. Department of State Article from the U.S. Department of State says the U.S. is a mixed economy
"Capitalism/Anticapitalism" On the origin and features of capitalism
Protestantism and the Rise of Capitalism - by Max Weber

Pro-capitalist

Adam Smith Institute The Adam Smith Institute is the UK's leading innovator of free-market policies.
Copenhagen Institute The Copenhagen Institute
The Bernstein Declaration "On the Principles and Possibilities of Capitalism" (from the “Celebrate Capitalism” organization)
Capitalism.net: A treatise on economics, by George Reisman
The Austrian Forum - Discussion of Austrian and other economic schools
In Defense of the Free Market
Ludwig von Mises Institute, adherents of the Austrian school
The Fraser Institute Index of Economic Freedom
The Heritage Foundation Index of Economic Freedom
Alan Greenspan Speech Alan Greenspan defends "free market capitalism" in speech to the NIAF (2005)
Capitalism by Robert Hessen - says "capitalism" is a misnomer for "economic individualism"
Nine Myths About Capitalism from Education and Capitalism by Herbert J. Walberg and Joseph L. Bast
Capitalism.org
The Ayn Rand Institute

Anti-capitalist

Understanding Capitalism Part I: Capital and Society
Information and Economics: A Critique of Hayek
Anti-Capitalism: Modern Theory and Historical Origins
Anti-Capitalism as an ideology... and as a movement
Rejection of the label Anti-Capitalism
Value, Price and Profit - Karl Marx on the basic features of capitalism.
Social economy: A Market Economy without Capitalism
Capitalism is a Society of Wolves by Fidel Castro
What is Capitalism? an MP3 of a speech giving a Marxist perspective on the structure of capitalism
Partcipatory economics — a critique of and alternative to capitalism