Capitalism

The Capitalist System

The above definition encapsulates the distinguishing features of capitalism: (1) private property (above all, private ownership of the means of production); (2) the market as the mechanism for coordinating decisions; and (3) freedom of exchange and enterprise for the economic agents vis-à-vis the State and other agents, which implies decentralization of decision making, so that all decisions are made by those most directly affected by them.

The combination of private property and economic freedom gives rise to the incentives that are needed for the agents to base their decisions on criteria of efficiency—efficiency being understood as the achievement of the best possible outcome given the scarce resources available or, alternatively, as the achievement of the desired result using the least possible resources. Under certain conditions, this will lead to a social optimum, by which we mean an efficient allocation of scarce resources to serve goals such as those the agents themselves have freely decided.

The task of coordinating individual decisions is entrusted to the market and the price mechanism. It is assumed that prices contain all, or at least a large part of, the information that the agents need for their decisions to be efficient. Thus, the market performs three broad functions:

• 1.
  It is a mechanism for gathering, storing, processing, and transmitting, at minimal cost, information that is scattered among millions of agents who are not even aware that they have it and would not know how to use or share it—a task that no central planning office could ever perform.
• 2.
  It promotes and orients incentives so that the agents act as efficiently as possible, minimizing their costs and optimizing their outcomes.
• 3.
  It coordinates the decisions of those millions of agents so that their demands and supplies are reasonably well satisfied in time and space, without wastage of resources.

Varieties of Capitalism

The outline given above is the core of the theory of the capitalist system. But just as the market is the product of human action, but not of human design (i.e., it is a “spontaneous” order that arises informally and is continually evolving), capitalism, too, has developed in accordance with specific geographical and historical circumstances: through spontaneous evolution, through reactions to the incentives that have been created, and through the deliberate efforts of the agents.

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