Capitalism is a political-economic system in which private individuals and groups are allowed to own and profit from capital/the means of production: the physical, non-human inputs used for the production of economic value, such as facilities, machinery, tools, infrastructural capital and natural capital.
Governments and Capitalism
Governments exert control over legal markets by creating and enforcing laws. These laws govern:
- Property. Governments define what it is legal to own, for how long, how it can legally change hands, and what you can do with it.
- Contracts. Governments define what and on what terms legally-binding agreements, including the act of buying/selling, can be made between people and companies
- Bankruptcy. Governments define what happens when a debtor person or company is unable to meet its obligations to creditors.
Inadequate laws or law enforcement causes problems:
- Property. less production due to risk of theft, freedom of individuals or companies to steal.
- Contracts. less consumption due to suspicion, freedom of powerful individuals or companies to dictate terms to others.
- Bankruptcy. less lending and investment due to increased risk.
- Enforcing Property Rights: Stealing is wrong. Not only is theft generally agreed upon to be morally damaging to the individual who steals, and cause suffering to those who are stolen from, but widespread theft (such as the looting that occurs in riots) creates massive market inefficiencies. Fraud is considered a form of stealing (as theft by trick) so it would fall under this.
- There is debate on what counts as stealing. Supporters of Capitalism believe that using or taking property of someone else without permission is stealing, whereas socialists only believe that using or taking "personal possessions" of someone else is stealing.
- There is debate as to what someone can actually own, such as intellectual property. Supporters say that as it was made by someone, the idea belongs to the creator. If creators did not own their own ideas other people could steal them and use someone else's ideas to make a lot of money at the expense of the creator. For example, if Alice were a small businesswoman who discovered a way to manufacture cars more efficiently, Bob, who already has a big business and thus all of the infrastructure in place, could take Alice's idea and apply it to his own plants. Now Alice has paid the R&D costs for the research but Bob is the one making the money on her idea. Opponents say that the reason we have property in the first place is to manage finite resources and define property as "something one person owns to the exclusion of other people owning it." For example, if Alice owned a pencil, Bob could not use that pencil without first taking it from Alice. Ideas, on the other hand, are infinite, that is one person can have it and someone else can use it without diminishing the first person's utility of it. For example, if Alice owned a book and Bob copied it onto his own paper, both of them can still enjoy the book.
- Providing Public Services: Some things, such as infrastructure and clean air are considered almost impossible for an individual person or organization to make a profit from because property rights are near impossible to enforce on these things. The government however can pay for these things with tax money, which they can force everyone to pay. Whether they should do this is the subject of debate among the many different schools of economic thought.
- Included in this could be considered the funding of unprofitable markets until the kinks can be worked out enough for the private sector to make a profit in these markets. Various examples that are pointed to are the funding of the earlier voyages in the age of exploration that spanned the fifteenth to seventeenth centuries, the space race, cancer research, and non-fossil fuel energy sources.
- Helping Out In Recessions: The free market goes through ups and downs. If the economy is bad enough, the government can either print more money or increase spending to boost the economy. It is an agreed principle of economics that these government actions can cause economic expansion, but whether they should is debated by the left and right. (See different schools.)
- Regulating Monopolies and Oligopolies: Producers make the greatest amount of money by selling their products at the highest prices consumers will pay for them. Monopolies and Oligopolies don't have to lower prices below this level in order to compete with others, so they naturally charge very high prices. Governments can break up monopolies to artificially create competition, or allow monopolies to continue to exist. Keynesian and Behavioral economists agree that it is extremely important that sectors with "Natural Monopolies" note should only contain government-owned or (extremely) heavily regulated monopolies to minimize wasteful activity.
- Regulating The Money Supply: If the amount of money circulating in the economy is higher than the demand for money it will cause inflation. If the amount of money circulating in the economy is lower than the demand it will cause deflation. Modern-day Austriansnote like Ron Paul do not believe the government should do this, but even among right-wing economists the need for the government to have a monetary regime is widely supported. (To wit, the person who has used the central bank in the US to increase the money supply most is Ben Bernanke, a Republican.)
- Banning Products: Markets will produce whatever people are willing to pay for even if the product isn't good for society (think heroin, or cigarettes). In these cases, government intervention is the only way to stop production and consumption of them. This creates the black market problem however, such as in the case of illegal drugs. Thus, whether banning the creation of certain products should happen is, again, hotly debated.
- Related, but not as direct as outright banning are quality and/or safety regulations. Things like requiring seat belts and airbags in automobiles, making sure your food is safe to eat, the water and air aren't polluted, and that things are what they claim to be is the floor of this, and it can get far more complicated. Even more than banning, where to draw the line on regulation is hotly debated between different groups.
- Bailing Out Companies: Some companies are considered "too big to fail". If they go under, their suppliers may have to lay people off or go under as well because of the lost business. In situations like this the government can step in but this is very controversial. Opponents saying doing this prevents companies from learning from their mistakes and enforces the behavior that required the bailout in the first place, however, the people most often proposing a bailout are also the people most likely to support regulations that would prevent further occurrences of that "bad behavior". Bailouts are actually a wide variety of fiscal practices, ranging from a simple loan from the government to short-term nationalization of the firm. (IE, the government owns the company for a certain period of time.)
- Adam Smith: Wrote The Wealth of Nations, laying the philosophical foundations of the capitalist system. What Smith actually referred to with his "invisible hand" metaphor is not the same as how the metaphor is often used today. Instead of saying that an "invisible hand" will correct market failures and that regulations are thus unneeded, he was saying that international trade would not harm domestic production because the "invisible hand" of home bias would lead people to invest in their own country. That one time he used the metaphor was stretched well beyond his original meaning. He was also more suspicious of the wealthy and corporations than is often mentioned, even giving his support to a progressive taxation system that lessens the burden on the poor. He also believed that the British colonies would be better off as independent and trading partners with the Crown, and he also realized that the administrative and protection costs of these colonies would ultimately be greater than any profit they managed to bring the Crown.
- David Ricardo: Came shortly after and formulated the basis of trade theory by noticing the difference between comparative and absolute advantage. Absolute means a nation can simply produce more in a given time period, but comparative means that a nation can produce more of one type of good relative to another type. Few nations have an absolute advantage in trade, but having a comparative advantage in something is very useful.
- Carl Menger: Introduced the theory of Marginalism and the Subjective Theory of Value. Léon Walrus and William Stanley Jevons made similar discoveries at roughly the same time, but Menger's work is considered the most complete. The 'Marginal Revolution' heralded the end of the acceptance of the Labor Theory of Value outside Marxist circles and with it the decline of Classical Economics, to be superseded by Neoclassical Economics.
- Alfred Marshall: His methods of quantifying the benefits of production and consumption are the basis of welfare economics. His most important work, Principles of Economics (mercifully, that's the full title) was the leading economic textbook in the English-speaking world for a very long time.
- Henry George: Noted the inefficiency of private landowners benefiting or suffering from public developments that altered the value of land. (For example, a near-worthless piece of land skyrocketing in value as a city grows around it, through no work or influence of the private landowner.) Advocated that the value of land should be socially distributed through a Land Value Tax, which would disregard the value of any man-made buildings, infrastructure, and improvements on land. His philosophy, which came to be known as Georgeism, is popular among environmentalists and green-politics activists. His most important work is Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy (shortened: Progress and Poverty). His works paved the way for the ides of a progressive income tax (the more you make, the higher a rate you pay in income taxes)
- Thorsten Veblen: Veblen's work focuses mostly on studying the relationship between individuals and social institutions in terms of economics. His most famous work is The Theory of the Leisure Class: An Economic Study of Institutions (shortened as The Theory of the Leisure Class).
- John Maynard Keynes: Keynes was the most important economist of the 20th century, and was the first to develop Macro-Economic policies capable of flattening out the boom-and-bust cycle. The first capitalist thinker to seriously propose extensive government intervention in the economy, or at least, the first with a serious following (see the Keynesian schools below). Nearly all major world leaders of capitalist countries, whether on the right or the left, use macroeconomic policies that are, to varying degrees, influenced by Keynes' books. Despite his reputation in some circles as a leftist, he was definitely not a socialist. Whereas economists before Keynes were more focused on keeping inflation low, Keynes was obviously more focused on promoting general economic activity. He proposed that deficit spending by government could be used as direct economic stimulus to help get economies out of recessions, and believed that regulation should be used to surgically remove and prevent the market failures which caused the last recession. His most important work is The General Theory of Employment, Interest, and Money (shortened: The General Theory) in 1936.
- Milton Friedman: Probably the second most important economist of the 20th century. Friedman started from the position that government intervention in the economy was an immoral infringement upon the freedom of its citizens, and developed theories which reflected and supported that view. Keynes had determined that the financial sector had to be regulated and restricted in order to prevent it from distorting and screwing up the 'real' economy, but Friedman hypothesized that the financial sector could be harnessed to drive spectacular growth. Friedman believed that if banks were not prevented from making risky loans, then enough of these would pay off that an economic boom financed by debt would result. Once this became or threatened to become a crisis, the government would then loan massive amounts of money to the banks so that the real value of the debts would be wiped out and the cycle could begin again. Friedman was an economic adviser to Ronald Reagan, and he also highly influenced Margaret Thatcher and other Libertarian leaders. Among his most important contributions to economic theory are his "natural rate of unemployment" and what would eventually be called stagflation. note Crucially, he argued that the only tool governments needed to promote growth and prevent depressions was an extremely aggressive use of the money supply ('Monetarist' policy). Though he disagreed with Keynes' methods, he claimed to have been influenced by Keynesian economics and called Keynes' The General Theory "a great book." He argued that government regulation of the financial sector constituted tyranny and an infringement of 'basic liberties'. He also led to the US having a solely volunteer military.
- Robert Solow: Found that economic growth comes not from adding more input (labor and capital) but through advances in technology. Another notable contribution is the introduction of the Solan-Swan growth model. He is a Neo-Keynesian (see below).
- Paul Krugman: The face of modern Keynesian economics. His is most important contributions have been in trade theory. (He is among the few leftists who are in full support of free trade.) His work fathered both new trade theory, and new economic geography, both of which are way to complex to begin to explain here. Depression Economics may be his most popular work, but his most important works are the papers in Journal of International Economics and Journal of Political Economy which introduced those two theories, which won him his Nobel prize. For the life of us, we can't find the names of those papers but rest assured they're overly long and filled with overly complex vocabulary. He is identified as a Neo-Keynesian, but says he's leaning Post-Keynesian these days. Krugman is self-proclaimed to be One of Us: He specifically studied economics because it was as close as he could get to studying Isaac Asimov's Psychohistory from his Foundation Series; and even (on a lark) wrote an essay in 1978 called The Theory of Interstellar Trade in an attempt "to cheer himself up when he was an oppressed assistant professor" in which he hypothesized about how the time distortion associated with traveling at relativistic speeds should affect billing rates for shipping and transportation across interstellar distances.
- Austrian School: Key thinkers include Ludwig von Mises, and Friedrich Hayek. Since we're trying to avoid massive technical details, imagine these guys as the free-market faithful to the core. Modern supporters include Ron Paul and his followers. Known for their dislike of central banking (ie. the Federal Reserve) and fiat currency ("it's money because we say so" - essentially allows printing money), backing of the gold standard (ie. money is gold and government messing with it would be impossible), and different views of recessions (during the booms people are making bad investments because cheap credit makes them look good, recessions are the inevitable hangover period).
- Chicago School: Central thinker is Milton Friedman. The Chicago school has been noted for being very supportive of free-market fundamentals, but Friedman's more important contributions were to monetary theory, where he, in essence, supported massive government intervention. In short, monetarists are called so because they believe that the primary way the government should intervene in the economy is through controlling the money supply, and should otherwise be rather laissez-faire. This economic model lost some popularity after Pinochet's rule in Chile. Much of the economy during that time consisted of boom-bust cycles and critics of the system were persecuted in the country.
- Georgeists: Based on the thinking of Henry George. As noted, those mostly likely to be Georgeists in the modern age are environmentalists and green-politicians. Milton Friedman held the opinion that their land value tax proposal would be the least damaging method of taxation to the economy.
- Institutional Economics: Developed out of Thorsten Veblen's work. Studies the interactions between institutions and how that produces an economy.
- Keynesians or New Keynesians: First emerged as followers of Keynes during The Great Depression and post-war period. The influence of the Keynesian school and the success of Keynesian policies in practice led the post-war period until the early '70s to be referred to as, alternately, the "Golden Age of Capitalism" and "The Golden Age of Keynesianism". The original school lost support after Keynesian ideas played a key role in the "stagflation" of the '70s as predicted by Milton Friedman (see Chicago School) and after the "Lucas Critique" emerged noting that Keynesianism, as among the first macroeconomic schools of thought, had never bothered to root itself in microeconomics basics. However, many Keynesian economists argue that Austrians are being misleading with this and the quantity theory of money. Although out of fashion for much of the 80s and 90s, when monetarism was in full swing, these days Keynesianism is arguably making something of a comeback thanks to the ongoing financial crisis which began in 2008. Many economists have been making the argument that the recession was caused by a lack of government oversight and deregulation (their opponents vehemently deny this and claim government intervention was the root of the problem) and have supported strong regulation and deficit spending as a response. Ben Bernanke, head of the US Federal Reserve, was a prominent supporter of this view, as is Paul Krugman today.
- Supply-side economists such as Thomas Sowell advocate for an economic system that would trim regulations. This, in turn, would lead greater production/economic output that would then, at least in theory, benefit both owners and workers. Main proponents of this economic system were Reagan (whose brand of supply-side has been dubbed “Reaganomics”), George W. Bush, and currently Donald Trump. Supporters of the system defended it claiming that it lead to the success in the 1980s. Opponents claim that it is the system lead to the early 90s recession, Japanese lost decade, and the Great Recession, claiming that removing the regulations from certain industries like Wall Street lead to them giving loans to people with dubious capacity to repay it if it went bust. Supporters claim that other factors lead to these recessions. Supply-side lost support in 2008 after the collapse was blamed on deregulation, although it still has its supporters, such as political commentator Ben Shapiro.