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CAPITALISM / FREE MARKET ECONOMICS INFORMATIONAL SHEET
What is Capitalism?
Capitalism is a liberal economic philosophy based around private ownership of business, individual investment
in business, and the trade of goods and labor on an open market [in other words both goods and labor are
bought and sold].
Although there are examples of capitalism throughout history, modern capitalism developed in the Netherlands
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and England in the 17 and 18 centuries. In the 19 century, it provided one of the important foundations for
European industrialization, first in England and subsequently Western Europe. Today, most countries in the
world have capitalist economies, although many countries mix capitalism with other economic models.
The basic law of free-market capitalism is Supply & Demand. This basic law, liberals believe, should govern
market and provide for a prosperous economy.
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How does supply & demand work?
In a nutshell:
A) when supply > demand = low prices
B) when supply < demand = high prices
C) when supply = demand = reasonable prices
Markets should produce supply in the interest of demand. Ideally, manufacturers that carefully monitor this
balance can produce the goods people want and need. Supply and demand also determines employment
patterns (someone with a rare skill in high demand can expect a high pay).
Notes:
What factors will help a market system grow and flourish?
Liberals believe a market will flourish with little government Intervention in business (low taxes, little regulation in
prices, workplace conditions, salaries, and other business matters, etc.). Ideally, the market should run
independent of the government.
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Why do markets not always work?
Liberal economists believe greed and fear are the two human factors that can ruin this system and make the
laws not work. Supply and demand donʼt work when people get greedy or they get scared. When these human
factors intervene, liberals believe, markets can stop working effectively. The best remedy to fix a broken market
system, liberal economists believe, is to try and restore sane economic practice.
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Are market systems better than government managed economies?
Liberals believe that an economy based on demand (rather than command – which is what government run
economies do) will encourage entrepreneurs to try and anticipate demands that no one has addressed,
constantly pushing innovation forward. If producers know the government will pay them for their goods
regardless of quality, liberals believe innovation declines. Liberals also believe that governments are more likely
to be inefficient and wasteful, since they often put their needs above the laws of supply & demand.
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What are some criticisms of capitalism?
Critics of capitalism argue that the positive results of a market economy tend to benefit business owners first,
consumers second, and workers last. Since most worker are unskilled and unskilled labor is in high supply, the
monetary demand for a worker is low, and therefore salaries for unskilled workers will always remain low. Not
everyone can be a high-skilled worker (and if everyone was, there would be less demand for them). The vast
production of goods under industrial capitalism also requires a vast workforce of unskilled labor – critics of
capitalism therefore argue that the system requires a certain sector of the population always remain poor.
Critics also argue that a market system vulnerable to human greed and fear lends itself to crashes, which
generally hurt working people far more than business owners.
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