Capitalism is an economic model designed to combat the problem that we don't liv e in a post scarcity society.

Since many people consider a free market to be a c ore part of capitalism this article will cover market capitalism. Socialism is i ts biggest competitor. Definition Capitalism has actually been used to mean a couple different things: The definition of Capitalism accepted by most is a system wherein certain indivi duals (the capitalist class) own the means of production and guide the economy. Various competing definitions have been created by supporters of capitalism and opposers of capitalism, but they are irrelevant here. The Rational Consumer First of all, we must note that all modern mainstream economic models assume a c ompletely rational consumer. One that would always look for the best, lowest pri ce before buying, provided that finding it out isn't too costly. This assumption is the basis for almost everything coming up. Invisible Hand The concept behind the invisible hand is if there is competition in an economy, each member of that economy can pursue their own self-interests and create gener al prosperity for all. An important concept early in the history of economic tho ught, this is a hotly contested idea today. Supply and Demand The price of something is determined by supply and demand. A higher quantity of a product means it is less likely a buyer will pay an outrageous amount of money for it because they can walk down the street and get it for a cheaper price. If the seller is the only one in possession of the product then that seller is the only way the buyer can get the product. If the buyer refuses to pay the seller' s price the seller will just move onto a different customer who is willing to bu y it. If there is high demand for a product sellers can get more money out of the prod uct because if desired badly enough buyers will pay whatever price. If there isn 't high demand for a product sellers are forced to lower pricesnote in order to raise demand. Higher demand for a product causes the price to go up. Less demand for a product cause the price to go down. Higher supply of a product causes the price to go d own. Lower supply of a product causes the price to go up. The level of supply is determined by the sellers and the level of demand is dete rmined by the buyers. If there are many sellers of the same product and many buy ers of the same product then determining prices is a bit like determining the we ather. Individual sellers of a product have no control over the price of a produ ct because if seller A cuts back their supply Seller B will increase their suppl y. Seller B is losing money over the reduced prices but is gaining money from se lling the extra inventory. Market Failures Market failures are instances when the market left alone does not produce the mo st efficient system to be put in place. It is almost entirely agreed that market failures do exist; the classical market failures are public goodsnote , externa litiesnote , and natural monopolynote . Left and right-wing economists have diff ering opinions on what constitutes a market failure. The general tendency among left-wing economists is to see more market failures, and to hold an optimistic v iew of government intervention, and the tendency among the right is to see fewer market failures, and to see more government failures when government chooses to intervene. Due to market failures, the existence of the invisible hand is debat ed by capitalists and anti-capitalists alike. Law of Diminishing Returns and how it affects supply The Law of Diminishing Returns states that the higher quantity of a product you make within a certain period of time the higher the cost of making an individual piece of that quantity. As an example if it costs two dollars to produce a sing le bottle in one day, and it will cost more than four dollars to make two bottle s in one day. For the sake of this example lets say it costs five dollars to mak e two bottles and each additional bottle costs an extra dollar to produce in one

day. As mentioned above individual sellers have no control over prices and have to ac cept whatever the market price is. Going with the above example if the market pr ice for bottles is seven dollars then sellers will make a profit off the first f ive bottles they produce, make even on the sixth one, and lose money on any cons ecutive bottles made within one day. If an individual seller wants to make a pro fit from any bottles after the fifth one either the price has to go up or produc tion costs have to be lowered. Additionally, the producer can slow down the rate of production to produce only a profitable amount of bottles per day. As for why each additional product costs more to produce than the last, imagine you are starving so you go to a fast food restaurant and order burgers. The firs t few burgers you buy taste delicious and are quenching your hunger. After a whi le it becomes less rational to spend money on burgers because if you eat enough you'll puke. (This is a related concept called marginal utility. Think of it thi s way: you are always asking "Do I want another burger?" and you keep eating unt il you want another burger less than it costs. For prices, it's this point where you stop buying burgers and the restaurant stops selling them that matters.) Another analogy would be someone who owns an apple orchard. In a few hours her w orkers could go through and easily pick all the apples off of the bottom branche s. The ones on the top branches however require more effort to get to. If a prof it is to be made from those prices have to be increased. In a factory setting ad ding a few workers will increase productivity because they can specialize on spe cific tasks, but if you add enough workers, people will be bumping into each oth er. Some workers will also be standing around doing nothing because there aren't any tasks to do. Paying these workers their wages is a waste of the employer's money because no profit is coming from it. Whether all situations operate in thi s manner is debatable but it's a well-observed effect. Economies of Scale Economies of Scale refers to a situation where it is cheaper for a business to p roduce more of an item than less. Think of it as like buying in bulk, but for pr oducers. It costs a great deal to make one hand-built automobile, as it takes a few skill ed workers a fairly long period of time to make it using hand tools and whatnot. Since this manufacture of only one unit of product takes a long period of time and uses skilled laborers (who earn more money than unskilled), the end product (a hand-built car) ends up costing a lot of money. It costs far less to make one machine-manufactured automobile because of the eco nomy of scale. This states that an efficient production process that makes the p roduct faster with unskilled laborers can in turn make more product in a far sho rter period of time and therefore cost less to make and sells for a lower price. The entire industrial revolution is built upon this concept. For a good real-life example: look at a Ford Model T or a Volkswagen Beetle. Mak ing either car by hand would result in a far slower turnout and a more expensive product, but the entire point of both vehicles was a cheaper product for the ma sses. They were cheaper because the more of them were made, the cheaper they bec ame to manufacture: the beginning capital (factory construction, machinery purch ase, etc.) was far greater than making a hand-built car, but the volume of the s ales made up for it. Role of government Capitalist economists are divided on the exact role the government should play i n the economy. Some of those roles include: Enforcing Property Rights: Stealing is wrong. Not only is theft generally agreed upon to morally damaging to the individual who steals, and causes suffering to those who are stolen from, but widespread theft (such as the looting that occurs in riots) creates massive market inefficiencies, and thus widespread theft woul d be a market failure. According to capitalists, if someone desires a product th ey should pay the agreed-upon price. Fraud is considered a form of stealing (as theft by trick) so it would fall under this. There is much debate on what counts as stealing. Supporters of capitalism believ e that using or taking the private property and personal possessions of someone

else is stealing, whereas socialists only believe that using or taking the perso nal possessions of someone else is stealing. Finally, anarcho-capitalists would say that enforcing the collection of taxes is stealing. Providing Public Services: Some things, such as lighthouses, well-maintained roa ds, and clean air are considered impossible for an individual person or organiza tion to make a profit from because property rights are near impossible to enforc e on these things. The government however can pay for these things with tax mone y, which they can force everyone to pay. Whether they should do this is the subj ect of debate among the many different schools of economic thought. See below. Included in this could be considered the funding of unprofitable markets until t he kinks can be worked out enough for the private sector to make a profit in the se markets. Various examples that are pointed to are the funding of the earlier voyages in the age of exploration that spanned the fifteenth to seventeenth cent uries, the space race, cancer research, and non-fossil fuel energy sources. Helping Out In Recessions: Recessions are viewed as a natural consequence of cap italism. The free market naturally goes through ups and downs. What you can do w ithout abolishing capitalism outright, which isn't an option for the overwhelmin g majority of economists, is make the ups last as long as possible while making the downs last as little as possible. If the economy is bad enough, the governme nt can either print more money or increase spending to boost the economy. It is an agreed principle of economics that these government actions can and will caus e economic expansion, but whether they should is debated by the left and right. (See different schools below.) Regulating Monopolies and Oligopolies: The problem with monopolies is that due t o the law of diminishing returns, it's impossible for them to make a profit maki ng huge quantities of a product, so prices naturally stay high. The government c an intervene in these situations and either force the company to break up, put a minimum limit on how much they have to produce, put a maximum limit on how much they can charge, and/or use tax money to reimburse the company for any lost pro fits if they increase supply. The problem with oligopolies is it reduces the lik elihood that individual suppliers will renege on a deal to keep total supply in the economy as low as possible. The government can regulate these in a similar m anner. Again, whether the government should regulate mono/oligopolies is debated . Though a moderate consensus is that governments should break up mono/oligopoli es as well prevent them from forming, what constitutes a mono/oligopoly is not a greed upon. Further to the left, economists believe that the state should assume control of a mono/oligopoly if it is naturally occurring, such as in the genera lly agreed-upon case of water or energy suppliers (it is extremely hard to foste r competition when actual land control is involved). Further to the right, it is argued that the side effects of the government trying to combat the mono/oligop oly will lead to far worse results than if just left alone. Regulating The Money Supply: Money is the lifeblood of a capitalist/market econo my. If the amount of money circulating in the economy is higher than the demand for money it will cause inflation. If the amount of money circulating in the eco nomy is lower than the demand it will cause deflation. Modern-day Austriansnote like Ron Paul do not believe the government should do this, but even among righ t-wing economists the need for the government to have a monetary regime is widel y supported. (To wit, the person who has used the central bank in the US to incr ease the money supply most is Ben Bernanke, a Repubican.) Banning Products: Markets will produce whatever people are willing to pay for ev en if the product isn't good for society (think fast food, or cigarettes). In th ese cases, government intervention is the only way to stop production and consum ption of them. This creates the black market problem however, such as in the cas e of illegal drugs. Black markets are viewed as market failures. Thus, whether b anning the creation of certain products should happen is, again, hotly debated. Bailing Out Companies: Some companies are considered "too big to fail" . If they go under, their suppliers may have to lay people off or go under as well becaus e of the lost business. The unemployed workers now have less money coming in and this could affect demand in other markets. In situations like this the governme nt can preventively step in but this is very controversial. Opponents saying doi

ng this prevents companies from learning from their mistakes and enforces the be havior that required the bailout in the first place, however, the people most of ten proposing a bailout are also the people most likely to support regulations t hat would prevent further occurences of that "bad behavior". Bailouts are actual ly a wide variety of fiscal practices, ranging from a simple loan from the gover nment to short-term nationlization of the firm. (IE, the government owns the com pany for a certain period of time.) Key Capitalist Thinkers and Their Ideas (In Chronological Order of Appearance) Adam Smith: Wrote The Wealth of Nations, laying the philosophical foundations of the capitalist system. Low taxes, next-to-zero regulation, and the invisible ha nd are part of all his ideas. David Ricardo: Came shortly after and formulated the basis of trade theory by no ticing the difference between comparative and absolute advantage. Absolute means a nation can simply produce more in a given time period, but comparative means that a nation can produce at less of a cost. Very few nations have an absolute a dvantage in trade, but having a comparative advantage in something is very usefu l (imagine that Brazil grows pineapples, Iceland catches cod and they trade with each other. Both parties benefit because of their specializations). Alfred Marshall: Discovered the concept of Supply and Demand and lent more credo s to the invisible hand. His methods of quantifying the benefits of production a nd consumption are the basis of welfare economics. His most important work, Prin ciples of Economics (mercifully, that's the full title) was the leading economic textbook for a very long time. Henry George: Could be seen as among the first left-leaning capitalists. He beli eved in general that people had property rights, but that nature was sacred and belonged to all people equally, and thus advocated public ownership of land. Wit hout getting too technical, he also saw common ownership of land as a way to dec rease poverty. His philosophy, which came to be known as Georgeism, is popular a mong environmentalists and green-politics activists. His most important work is Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy (shortened: Progress and P overty). His works paved the way for the ides of a graduated income tax (the mor e you make, the higher you pay in income taxes; the lower, the less). Thorsten Veblen: Veblen's work focuses mostly on studying the relationship betwe en individuals and social institutions in terms of economics. His most famous wo rk is The Theory of the Leisure Class: An Economic Study of Institutions (shorte ned as The Theory of the Leisure Class). John Maynard Keynes: Keynes is by far the most important economist of the 20th c entury - all others, even those who disagree with him more than the agree, are f orever left in his shadow and have been profoundly influenced by the man. The fi rst capitalist thinker to seriously propose extensive government intervention in the economy, or at least, the first with a serious following (see the Keynesian schools below). Nearly all major world leaders of capitalist countries, whether on the right or the left, use macroeconomic policies that are, to varying degre es, influenced by Keynes' books. Despite his reputation in some circles as a lef tist, he was definitely not a socialist. Whereas economists before Keynes were m ore focused on keeping inflation low, Keynes was obviously more focused on econo mic downturns. He proposed that deficit spending by government could be used as direct economic stimulus to help get economies out of recessions, and believed t hat regulation should be used to surgically remove the economic behaviors that c aused the last recession. What Smith is to the basic free-market model, and micr oeconomics, Keynes is to the basic mixed-market model, and macroeconomics. His m ost important work is The General Theory of Employment, Interest, and Money (sho rtened: The General Theory) in 1936. Milton Friedman: Probably the second most important economist of the 20th centur y. Friedman broke the Keynesian domination of economic thinking that had been in place since the 1930's, and brought back the free-market principles of Adam Smi th. He was an economic adviser to Ronald Reagan, and he also highly influenced M argaret Thatcher and other right-leaning leaders. Basically, he is to the right what Keynes is to the left. Among his most important contributions to economics

are his theory of a "natural rate of unemployment" and what would eventually be called stagflation (an economic period of high inflation and rising unemployment , leading to lower growth), saying that trying to prevent one of them will event ually cause both of them to rise. Most importantly, he argued that the only area of the economy that governments should regulate is the monetary supply, which s hould be controlled aggressively. Often called the leading opponent to Keynes; t his isn't really true, and Friedman, though he disagreed with Keynes' "initial" conclusions, openly said he was influenced by Keynesian economics and called Key nes' The General Theory "a great book." He argued that increased government infl uence in the economy would undermine basic liberties, so he's really popular wit h Libertarians. He also led to the US having a solely volunteer military, by the way. Robert Solow: Found that economic growth comes not from adding more input (labor and capital) but through advances in technology. Another notable contribution i s the introduction of the Neo-Classical growth model, also known as the Solan-Sw an growth model. He is a Neo-Keynesian (see below). Paul Krugman: The face of modern Keynesian economics. Predicted the 2007-8 finan cial collapse in his most popular work The Return of Depression Economics. That said, his most important contributions have been in trade theory. (He is among t he few leftists who are in full support of free trade.) His work fathered both n ew trade theory, and new economic geography, both of which are way to complex to begin to explain here. Depression Economics may be his most popular work, but h is most important works are the papers in Journal of International Economics and Journal of Political Economy which introduced those two theories, which won him his Nobel prize. For the life of us, we can't find the names of those papers bu t rest assured they're overly long and filled with overly complex vocabulary. He is identified as a Neo-Keynesian, but says he's leaning Post-Keynesian these da ys. Krugman is self-proclaimed to be One of Us and even (on a lark) wrote an ess ay in 1978 called The Theory of Interstellar Trade in an attempt "to cheer himse lf up when he was an oppressed assistant professor" in which he hypothesized abo ut how the time distortion associated with traveling at relativistic speeds shou ld affect billing rates for shipping and transportation across interstellar dist ances. Schools Of Thought Austrian School: Key thinkers include Ludwig von Mises, and Friedrich Hayek. Sin ce we're trying to avoid massive technical details, imagine these guys as the fr ee-market faithful to the core. Modern supporters include Ron Paul and his follo wers. This school is considered heterodox, which is a nice way of saying that mo st economists consider them completely wrong. Known for their dislike of central banking (ie. the Federal Reserve) and fiat currency ("it's money because we say so" - essentially allows printing money), backing of the gold standard (ie. mon ey is gold and government messing with it would be impossible), and different vi ews of recessions (during the booms people are making bad investments because ch eap credit makes them look good, recessions are the inevitable hangover period). Chicago School: Central thinker is Milton Friedman. The Chicago school has been noted for being very supportive of free-market fundamentals, but Friedman's more important contributions were to monetary theory, where he, in essence, supporte d massive government intervention. In short, monetarists are called so because t hey believe that the primary way the government should intervene in the economy is through controlling the money supply, and should otherwise be rather laissezfaire. Georgeists: Based on the thinking of Henry George. As noted, those mostly likely to be Georgeists in the modern age are environmentalists and green-politicians. Milton Friedman held the opinion that their land value tax proposal would be th e least damaging method of taxation to the economy. Institutional Economics: Developed out of Thorsten Veblen's work. Studies the in teractions between institutions and how that produces an economy. The earlier st rain of this is considered Heterodox. New Institutional Economics: Much like Neo-Keynesians (see below), institutional ists were able to regain a lot of respect within the greater establishment by in

corporating neoclassical analysis (to make that simple, "incorporating neoclassi cal analysis" generally just means taking a macroeconomic school and rooting it in the microeconomic basics). Keynesians or New Keynesians (sometimes called Old-Keynesians): First emerged as followers of Keynes during The Great Depression and post-war period. The influe nce of the Keynesian school and the success of Keynesian policies in practice le d the post-war period until the early '70s to be referred to as, alternately, th e "Golden Age of Capitalism" and "The Golden Age of Keynesianism". The original school lost support after Keynesian ideas played a key role in the "stagflation" of the '70s as predicted by Milton Friedman (see Chicago School) and after the "Lucas Critique" emerged noting that Keynesianism, as among the first macroecono mic schools of thought, had never bothered to root itself in microeconomic basic s. Sub-schools emerged afterwards, including... Post-Keynesians: According to Keynes biographer Lord Skidlesky, this school is t he closest to Keynes' thinking. Neo-Keynesians: Not to be confused with New Keynesians. Emerged in the '90s as a response to the Lucas critique by finding basis for Keynesian macroeconomics in microeconomics, though unlike other microeconomic-centric thinkers, they assume a number of market failures. Although out of fashion for much of the 80s and 90s, when monetarism was in full swing, these days Keynesianism is arguably making something of a comeback thank s to the ongoing financial crisis which began in 2008. More economists have been making the argument that the recession was caused by a lack of government overs ight and deregulation (their opponents vehemently deny this and claim government intervention was the root of the problem) and have supported strong regulation and deficit spending as a response. Ben Bernanke, head of the US Federal Reserve , was a prominent supporter of this view, as is Paul Krugman today. Social Democrats advocate use of the free market where it seems to work and use of government intervention where the free market seems to fail (see role of gove rnment above). Whether Social Democrats are considered capitalists, socialists, both, or neither varies from person to person, even among Social Democrats thems elves. Capitalism does allow for government intervention but social democrats ar e among the people mentioned above who see many market failures to correct.