The standard spectrum of economic systems places laissez-faire capitalism at one extreme and a complete command economy at the other. Everything in the middle could be said to be a mixed economy, where there are some state-run restraints on the ability of free individuals to voluntarily exchange private property. The mixed economy has elements of both central planning and unplanned private business. Within this system, the forces of capitalism have to adopt and adjust to the total level of intervention.

How Capitalism Works

Even though capitalism is often treated like an intentional conceptual entity, such as democracy or socialism, it is actually just shorthand for the combination of private property rights and voluntary exchange. In other words, capitalism is the natural state of things outside of government intervention: human actors trading with one another to pursue their own interests. It's what occurs when people are allowed to own property and keep the results of their labor.

Over time, workers have tended to specialize and group together into cooperative business enterprises. Entrepreneurs organize capital resources, including human labor, to improve productivity and better satisfy consumers. For this reason, capitalism is normally associated with businesses, but its underlying principles exist at the individual level.

Voluntary free markets use prices to communicate information about resources and consumer values. When prices rise, consumers naturally consume less and businesses try to find ways to increase production. The opposite is true when prices fall. These equilibrating mechanisms are the natural result of human exchange.

An example of the complete absence of capitalism could be seen in the old USSR, when the government owned all of the means of production, all of the property (with small exceptions) and controlled exchanges.

How Intervention Changes Capitalism

When governments intervene in the economy, they do so to promote the interests of the state. Restrictions on voluntary behavior or property rights are justified to pursue objectives that have been deemed valuable by members of the ruling body, including national defense, redistributed wealth or punishment for socially unacceptable behavior.

Contemporary mixed economies range in their levels of intervention. The U.S. has less intervention than the People's Republic of China, but both have elements of free market exchange and state control. Often, the state identifies broad economic goals, such as full employment or a positive balance of trade.

Since the Keynesian revolution in the first half of the 20th century, mixed economic policies have typically centered around state-measured economic aggregates. Examples include aggregate demand and supply, consumer price indexes and gross domestic product (GDP). Governments and central banks try to restrict or otherwise manipulate the forces of capitalism through fiscal and monetary policy in pursuit of finding the correct macroeconomic results.

Mixed economies do not produce pure price signals. The choices that individuals can make are limited, and the costs of goods and services become distorted through taxes, subsidies and public provisions. While economists disagree about the desirability of these economic distortions, it's clear that the forces of capitalism must adapt to operate within the confines of state intervention or ownership. This results in a different use of resources, different deployment of labor and a different level of productive output.

  1. What are the main differences between a mixed economic system and pure capitalism?

    Read about the primary differences between a mixed economic system and a laissez-faire, free market economic system with ... Read Answer >>
  2. To what extent can a government intervene in a market economy?

    Find out at what point a market economy receives so much government intervention that it can no longer be considered a market ... Read Answer >>
  3. How are capitalism and private property related?

    Read about the relationship between capitalism and private property rights, and learn why voluntary trade would collapse ... Read Answer >>
  4. What is the history of the market economy?

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  5. How is an economy formed and why does it grow?

    Find out how an economy forms and why it grows, including the role that financial markets play and how productivity increases ... Read Answer >>
  6. What are some benefits of a mixed economic system?

    Learn the benefits of a mixed economic system such as the ability to combine capitalism and socialism and correct for externalities ... Read Answer >>
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