What is Capitalism?
- Economic freedom helps political freedom. If governments own the means of production and set prices, it invariably leads to a powerful state and creates a large bureaucracy which may extend into other areas of life.
- Efficiency. Firms in a capitalist based society face incentives to be efficient and produce goods which are in demand. These incentives create the pressures to cut costs and avoid waste. State owned firms often tend to be more inefficient (e.g. less willing to get rid of surplus workers and less incentives to try new innovative working practices.)
- Economic growth. With firms and individuals facing incentives to be innovative and work hard this creates a climate of innovation and economic expansion. This helps to increase real GDP and lead to improved living standards. This increased wealth, enables a higher standard of living; in theory, everyone can benefit from this increased wealth, and there is a ‘trickle down effect’ from rich to poor.
- There are no better alternatives. As Winston Churchill, ‘“It has been said that democracy is the worst form of government except all the others that have been tried.’ A similar statement could apply to capitalism.
The Spread of Capitalism
Capitalism rose to prominence with the end of feudal economies, and has become the dominant economic system in developed countries. Specific tenets of capitalism, such as property rights and wage labor, can also be considered cornerstones of representative government.
While many would argue that there are no examples of true capitalism, some examples of countries employing capitalism include:
- United States
- United Kingdom
- New Zealand
Adam Smith was the world’s first free-market capitalist. He promoted laissez-faire (“hands off”) policies, such as minimizing the role of government interference and taxation. An “invisible hand” (the desire for wealth) guides supply and demand. Smith's economic philosophy is based on self-interest (selfishness or greed)