Tuesday, December 1, 2009

Difference Between Capitalism and Free Markets

When people discuss the characteristics and possible reforms of capitalism and free markets, they have a tendency to use these two terms interchangeably. In reality the two are quite different things. Let me explain.

Capitalism is defined as a system of ownership of the means of production, specifically the non-labor means of production, which includes factories, tools, equipment, etc. In a capitalistic organization, these means of production are privately owned. Labor is paid a wage for their efforts, and any profits go to the owners of the capital.

A free market system is simply defined as one in which everyone is able to freely sell their goods and services with prices determined by supply and demand.

It is possible to have capitalism without a free market in specific situations. Examples include organizations that have an effective monopoly on a market – they can prevent competition from entering the market and can set prices to maximize their own profits instead of being restricted by supply and demand. Another example is the awarding of government no-bid contracts to capitalistic organizations.

It is also possible to have a free market that does not involve capitalism. Examples include the traditional farmers market or co-ops competing with each other. In both cases, the clear distinction between owners and workers that is characteristic of capitalism is gone, yet there is still a free market competition that sets prices based on supply and demand.

It’s important to keep these distinctions in mind when discussing future economic possibilities. It is possible to reform some of the major problems of capitalism while maintaining the benefits of a healthy free market, and vice versa.