What Is Capitalism?

Free markets may not be perfect but they are probably the best way to organize an economy.

CAPITALISM is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.

The essential feature of capita-lism is the motive to make a profit. As Adam Smith, the 18th century philosopher and father of modern economics, said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect pur dinner, but from their regard to their own interest.” Both parties to a volu-ntary exchange transaction have their own interest in the outcome, but neither can obtain what he or she wants without addressing what the other wants. It is this rational self interest that can lead to economic prosperity.

In a capitalist economy, capital assets — such as factories, mines, and railroads — can be privately owned and controlled, labor is purchased for money wages, capitalbgains accrue to private owners and prices allocate capital and labor between comp-eting uses (see “Supply and Demand” in the June 2010 FèD)

Although some form of capita-lism is the basis for nearly all economies today, for much of the last century it was but one of two major approaches to economic organization. In the other, socia-lism, the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits.


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