What Is Capitalism?
Contributed by Dr. Page West, Professor of Strategy and Entrepreneurship
In the 21st century economic development is one of the driving forces of social and political stability and change in countries around the world. The system of capitalism is at the core of the dynamic economic development and progress experienced in industrialized nations over the last two hundred years.
Capitalism is a form of economic organization where the means of production are privately owned and where, in order to generate new productive operations that can earn a profit, decisions to deploy capital are determined by individuals in response to market forces.1 Capitalism is generally believed to flourish where private property rights and the “rule of law” are enforced.2 Credit and money are central to its lubrication, division and specialization of labor to its production systems, and competition to its energetic pace. These features imbue the system with openness to invention and innovation, often through entrepreneurial behavior, and with its own selection mechanism for value-creating innovative and economic activity.3 Since the inception of modern capitalism from the 15th century, economies organizing themselves on capitalist lines have experienced greater economic dynamism: increasing productivity, increasing employment, and generating more rapid advances in economic wealth, living standards, and improved health of the population. Yet the system of capitalism is also associated with adverse results. These may include economic instability, the periodic occurrence of financial crises, job insecurity, inequality in wealth distribution, economic exclusion of some parts of the population, and environmental degradation.
In the 21st century capitalism exists in several forms. These include 1) free market or market-led capitalism such as we are accustomed to in the U.S.; 2) corporatist or state-led capitalism where the government exerts significant guidance, leadership, and influence over the deployment of private capital (e.g. France, Japan in the 1980s); and 3) managed capitalism, in which worker groups and broad social welfare issues exert significant influence on private corporate behavior (e.g. Sweden, Germany).4Whereas some evidence suggests that market-led capitalist economies experience greater economic dynamism and higher rates of per capita income growth than economies with other forms of capitalism,5 other evidence points to less volatility and fewer inequities in other forms of capitalism than in market-led economies.6
The 2008-09 world financial markets crisis has put a spotlight on the differences and contradictions inherent in capitalism’s forms and consequences. The disruption in financial markets, falling levels of GDP in countries around the world, increased unemployment, and significant government interventions into market processes and private capital investment decisions have prompted both calls for a re-examination of the nature of capitalism and defenses of its merits.
Against this background of significant turmoil in the business, economic, social, and political environments, in 2008 The BB&T Center for the STUDY of Capitalism was formed at Wake Forest University. The objective of the Center is to engage faculty and students – as well as the public – in serious and sustained examination of capitalism vis-à-vis competing economic systems, the philosophical foundations of capitalism, its practical impacts in society, the obligations of institutions that operate within capitalist systems, and related social and political issues. The Center’s program is intended to encourage rigorous and imaginative analysis of the intersection between capitalism, business organizations, the state, and the public good.
1 J. S. Mill, 1848, Principles of Political Economy.
2 H. De Soto, 2000, The Mystery of Capital, Basic Books: New York. F. A. Hayek, 1944, The Road to Serfdom, University of Chicago Press: Chicago. J. Rawls, 1971, A Theory of Justice, Belknap Press: Cambridge MA.
3 W. J. Baumol, R. E. Litan & C. J. Schramm, 2007, Good Capitalism, Bad Capitalism and the Economics of Growth and Prosperity, Yale University Press: New Haven CT.
4 D. Coates, 2000, Models of Capitalism, Blackwell: Malden MA.
5 R. L. Heilbroner & W. Milberg, 2006, The Making of Economic Society, Prentice-Hall: Upper Saddle River NJ; E. Phelps, 1999, “Lessons from the Corporatist Crisis in Some Asian Nations”, Journal of Policy Modeling, 21 (3), 331-339. E. Phelps, 2007, “The Economic Performance of Nations: Prosperity Depends on Dynamism, Dynamism on Institutions”, in E. Sheshinski, et al, ed., Entrepreneurship, Innovation, and the Growth Mechanism of Free Enterprise Economies, 342-356, Princeton University Press: Princeton NJ.
6 M. Walker & R. Thurow, 2009, “U.S., Europe are an Oceans Apart on Human Toll of Joblessness”, Wall Street Journal, May 7, A1.