Adam Smith is considered by many to be the father of Capitalism. His “The Wealth of Nations,” is a seminal book that represents the birth of free-market economics, but it’s not without faults. It lacks proper explanations for pricing, or a theory of value and Smith failed to see the importance of the entrepreneur in breaking up inefficiencies and creating new markets.
The basic definition of Capitalism is: “an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.”
History of Free Market Capitalism
Capitalism came about following feudalism, which took place during medieval Europe. Feudalism was a European system where military service is traded for land. This was the primary economic system in Europe in the 16th and 17th centuries.
Then came about the Dutch East India Company, which was founded in 1602. This was the first public company and marked a shift toward capitalism. The major economists that developed theories surrounding capitalism include Adam Smith and Karl Marx.
Adam Smith theorizes that capitalism is part of natural human behavior that is aligned in trade and commerce. Marxism says that capitalism is an unusual system that could be replaced with a superior system. Marx believes that capitalism is essentially powerful people taking control.
Is Free Market the Same as Capitalism?
They both are involved in determining the price and production of goods and services. On one hand, capitalism is focused on the creation of wealth and ownership of capital and factors of production, whereas a free market system is focused on the exchange of wealth, or goods and services.
Some key features of capitalism include the competition between companies and owners, private ownership and motivation to generate a profit. In a capitalistic society, the production and pricing of goods and services are determined by the free market, or supply and demand, however, some government regulation may occur. On the other hand, a private owner in a capitalist system can have a monopoly on the market and prevent free competition.
A free-market system is an economic system based solely on demand and supply, and there is little or no government regulation. In a free market system, a buyer and a seller transact freely and only when they voluntarily agree on the price of a good or service.
For example, suppose a seller wants to sell a toy for $5, and a buyer wants to buy that toy for $3. A transaction will occur when the buyer and the seller agree on a price. Because a free-market system is based solely on supply and demand, it leads to free competition in the economy, without any intervention from outside forces.
The problem, as I see it, is the polarization that occurs between the proponents of Capitalism and Socialism. What is see are advantages and disadvantages of both economic systems. Communism has failed since it devolves into authoritarianism and creates the abuse of by the elite which is rails against. Some Socialist leaning countries have successfully provided and excellent standard of living for their citizens. Capitalism has served our country well in many regards, despite the recent decline in purchasing power by our middle class.
My preference is what I have termed “Participative Capitalism” where the vast majority of our citizens participate and benefit from the system. For more detail on this concept please refer you to my Book: