Economics of Capitalism: The Free Market
Economically, when freedom under the rule of law is applied to the sphere of production and trade, its result is the free-market.
- In a free-market all economic relationships are voluntary
- Government as a referee and not a regulator
- Entrepreneurs use reason to create wealth
- Market prices as a coordinating mechanism for rational economic planning
- Capitalists as the prime-movers of economic progress
- Economic power as the power of reason (production); political power as the power of force (destruction)
“When I say ‘capitalism,’ I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism—with a separation of state and economics, in the same way and for the same reasons as the separation of state and church.” — Ayn Rand
In a free-market all economic relationships are voluntary
What makes a market free is the freedom from the initiation of physical force (and its corollary fraud) by both private criminals and public bureaucrats. Laissez-faire is not anarchy but requires a government to protect this freedom.
The government’s vital role in the free market is to ensure that all competitive and cooperative relationships are voluntary (free from coercion), by retaliating against those who initiate physical force and fraud and justly moderating contractual disputes under a non-arbitrary, objective rule of law.
Government as a referee and not a regulator
Under capitalism, the government does not “manage” and regulate the economy to determine its’ results, but acts as a referee protecting the rights of all individuals equally.
Entrepreneurs use reason to create wealth
Economically, because of the advantages of specialization from the division of labor, this results in profit-seeking entrepreneurs organizing capital resources (obtained from their saving from past production or financing from the savings of others) in the present to create business enterprises that create products and services to be traded for money in the future.
Market prices as a coordinating mechanism for rational economic planning
This money is used as a medium of indirect exchange to obtain other goods and services produced by others either for personal consumption or further production, the resulting transactions forming a market price system for products and services. These market prices are vital information used by all individuals to plan how they allocate their property and efforts (time).
Capitalists as the prime-movers of economic progress
It is these profit-seeking entrepreneurs, or capitalists, rationally risking capital to create future goods and services, who are the prime movers of the wealth-creating economic system of a capitalist society known as the free-market. If they are successful in their endeavors, they earn a profit and accumulate capital (create wealth); if they are unsuccessful, they make a loss and lose capital (destroy wealth).
Economic power as the power of reason (production); political power as the power of force (destruction)
This power to take the given and reorganize it to create economic value — wealth — with one’s mind is known as economic power: the power of production. In anti-capitalist, statist societies, economic entrepreneurs are replaced with political bureaucrats who are free to arbitrarily use their political power — the legal power to use force — to plunder the wealth of others.
For an in-depth presentation on the philosophical, ethical, political, legal, and economic foundations of capitalism take the Capitalism Visual Tour. The Capitalism Visual Tour is the most popular feature of this site. The rest of the capitalism site assumes you are familiar with the material provided in the tour.