A:

The proper role of government in a capitalist economic system has been hotly debated for centuries. Unlike socialism, communism or fascism, capitalism does not assume a role for a coercive, centralized public authority. While nearly all economic thinkers and policymakers argue in favor of some level of government influence in the economy, those interventions take place outside of the strictly defined confines of capitalism.

Capitalism Without the State

The term "capitalism" was actually made famous by the system's most notorious critic, Karl Marx. In his book Das Kapital, Marx referred to capitalists as those who owned the means of production and employed other laborers in pursuit of profits. Today, capitalism refers to the organization of society under two central tenets: private ownership rights and voluntary trade.

Most modern concepts of private property stem from John Locke's theory of homesteading, in which human beings claim ownership through mixing their labor with unclaimed resources. Once owned, the only legitimate means of transferring property are through trade, gifts, inheritance or wagers. In laissez-faire capitalism, private individuals or firms own economic resources and control their use. (For related reading, see: How are capitalism and private property related?)

Voluntary trade is the mechanism that drives activity in a capitalist system. The owners of resources compete with one another over consumers, who in turn compete with other consumers over goods and services. All of this activity is built into the price system, which balances supply and demand to coordinate the distribution of resources.

These concepts—private ownership and voluntary trade—are antagonistic with the nature of government. Governments are public, not private, institutions. They do not engage voluntarily but rather use taxes, regulations, police and military to pursue objectives that are free of the considerations of capitalism.

Government Influence in Capitalist Outcomes

Nearly every proponent of capitalism supports some level of government influence in the economy. The only exceptions are anarcho-capitalists, who believe that all of the functions of the state can and should be privatized and exposed to market forces. Classical liberals, libertarians and minarchists argue that capitalism is the best system of distributing resources, but that the government must exist in order to protect private property rights through the military, police and courts.

In the United States, most economists are identified as Keynesian, Chicago-school or classical liberal. Keynesian economists believe that capitalism largely works, but macroeconomic forces within the business cycle require government intervention to help smooth it out. They support fiscal and monetary policy, as well as other regulations on certain business activities. Chicago-school economists tend to support a mild use of monetary policy and a lower level of regulation.

In terms of political economy, capitalism is often pitted against socialism. Under socialism, the state owns the means of production and attempts to direct economic activity towards politically identified goals. Many modern European economies are a blend of socialism and capitalism, although their structure is generally closer to the fascist concepts of public/private partnership with a planned economy.

(For related reading, see: Main Characteristics of Capitalist Economies.)

RELATED FAQS
  1. What are the most important aspects of a capitalist system?

    Understand the main aspects of a capitalist system and how they contrast with the tenets of other types of economic systems, ... Read Answer >>
  2. The differences between capitalism and socialism

    One promotes free market conditions, the other incorporates elements of centralized economic planning. Read more to learn ... Read Answer >>
  3. What is 'capital' in relation to the factors of production?

    Find out what economists mean by physical capital, how it contributes to the productivity of labor and why it is a crucial ... Read Answer >>
  4. What are some examples of free market economies?

    In a free market economy, the law of supply and demand, rather than a central government, regulates production and labor. ... Read Answer >>
  5. What type of funding options are available to a private company?

    Understand how private companies can obtain financing for startup, growth or expansion projects, and learn how this differs ... Read Answer >>
Related Articles
  1. Insights

    Can Socialism Work In America?

    Capitalism has its shortcomings, but pure socialism is not the answer. The American system of capitalism with socialistic touches might be good for the US.
  2. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about this famous British economist's proposed solution to a widespread economic problem.
  3. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  4. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
  5. Insights

    The Difference Between Communism and Socialism

    Communism and socialism are economic and political structures that promote equality and seek to eliminate social classes.
  6. Small Business

    Risks Associated With Government Contracts

    Government contracts can be rewarding, but they also come with a variety of risks.
  7. Investing

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
  8. Trading

    How To Profit From Interventions In The Forex Market

    The forex market can be extremely profitable. Learn how to spot an intervention and trade when it's occurring.
  9. Insights

    5 Economic Effects Of Country Liberalization

    Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification and profit.
RELATED TERMS
  1. Capitalism

    Capitalism is an economic system whereby capital goods are owned ...
  2. Mixed Economic System

    A mixed economic system is one that features characteristics ...
  3. Marxism

    Marxism is a social, political and economic philosophy that examines ...
  4. Karl Marx

    Karl Marx was a 19th century philosopher, author and economist ...
  5. Marxian Economics

    Marxian economics is based on of the work of Karl Marx, which ...
  6. Free Enterprise

    Free enterprise is an economic system where few restrictions ...
Trading Center