Capitalism is an economic system based on private ownership in which activities are primarily determined by the function of a free market rather than by central government planning.1
Be aware that when I speak of capitalism, I am referring to what is known as laissez-faire, meaning 'allow to do'. In other words, an economy with little government intervention. The U.S. is currently under a system known as a mixed economy, which is basically a mixture of capitalism and socialism. Capitalism works well because of the way it deals with self-interest, distributes limited resources, grows standards of living, and provides incentives for excellence. We will discuss these four concepts in detail:
"It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interests." -Adam Smith
The prevailing interest among humans in this world is self-interest. Anti-capitalists call it greed. Religion calls it sin. Science calls it survival. In fact, few philosophies refer to self interest in itself as something good, but it is inescapable. You cannot educate people out of self-interest. It is the natural order of human behavior and the only way to tame this beast is to work with it. Dr. Walter E. Williams describes how capitalism works with self-interest:
"Capitalism is relatively new in human history. Prior to capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man. Capitalism made it possible to become wealthy by serving your fellow man." 2
Don't take this as an argument that capitalism is perfect or produces perfect results. Far from it. However, capitalism is the closest thing to a perfect economic system we will ever see on this earth.
There are a limited number of resources in the world. Therefore, a system is needed that rations out these resources in a manner that benefits all the stakeholders. As we discussed in Gas Shortages previously, prices determined through supply and demand allow resources to be allocated to those who need them most. In the case of a crisis, the person with an empty tank of gas can buy what he currently needs most (because the price will be high enough to deter people who don't really need it).
Standard of Living
While political rhetoric often describes dire economic conditions and the woes of class separation, the truth is, people have access to more products and services than ever before. There are many ways to gauge the current standard of living, but let's discuss a few related to "the poor". Robert Rector of the Heritage Foundation3 wrote using 1990 census data:
- 38 percent of the persons whom the Census Bureau identifies as "poor" own their own homes with a median value of $39,200.
- 62 percent of "poor" households own a car; 14 percent own two or more cars.
- Nearly half of all "poor" households have air-conditioning; 31 percent have microwave ovens.
- Nationwide, some 22,000 "poor" households have heated swimming pools or Jacuzzis.
Capitalism is the only economic system in the world that promotes voluntary excellence in individuals. Individuals are rewarded based on the amount of value they provide to the market. Capitalism provides incentives to be great and invent things that were never thought possible. It is a system that promotes growth among individuals and society as a whole.
While it would be impossible here to fully explain all the reasons why capitalism is the best economic system in this post, there are many books devoted to this endeavor. Some of these books include:
- Capitalism and Freedom by Milton Friedman
- The Wealth of Nations by Adam Smith
- Free to Choose by Milton Friedman and Rose Friedman
- The Politically Incorrect Guide to Capitalism by Robert Murphy
- Freedomnomics by John Lott