Capitalism and Laissez-Faire Economics Detailed Notes

Definition of Capitalism

  • Capitalism is defined as an economic system where most means of production are privately owned.
  • Goods, services, and income are distributed through markets.
  • Also referred to as free-market or free-enterprise economy.

Laissez-Faire Capitalism

  • Under laissez-faire capitalism, the state is separated from the economy much like it is from religion.
  • In a properly functioning free market:
    • Competition among businesses is expected to prevent any one business from dominating.
    • A monopoly is only acceptable if derived from superior business skills, not coercive practices.

Coercive Monopolies

  • Coercive monopolies occur when a firm uses legal or illegal means to prevent competition.
  • They often arise due to government intervention, such as franchises, subsidies, or tariffs.
  • Critics of socialism argue that it creates a monopoly by having the government control all means of production.

Individual Rights and Capitalism

  • Individual rights must be upheld for capitalism to function effectively.
  • In a system where the majority can violate the rights of the minority, capitalism is compromised.
  • A constitutionally limited democracy (like the U.S.) is beneficial in maintaining capitalist ideals.

Adam Smith and Capitalist Political Economy

  • Adam Smith wrote "An Inquiry into the Nature and Causes of the Wealth of Nations" in 1776, establishing the foundation for capitalist political economy.
  • Smith posited that societies progress through four stages:
    1. Original stage of hunters
    2. Nomadic agriculture
    3. Feudal farming
    4. Commercial interdependence
  • Each stage has corresponding needs that necessitate institutions, with increased government involvement in later stages.

Principles of Laissez-Faire Economics

  • Smith believed the ultimate stage should prioritize market decisions over government regulations.
  • He described laissez-faire capitalism as functioning through competition:
    • Individuals act in self-interest, leading to equilibrium through an "invisible hand" regulating the economy.
  • Prices, wages, rents, and profits are self-regulated resulting in an orderly distribution of income.

Economic Growth and Labor Division

  • Smith argued that national wealth could grow annually under competition.
  • The division of labor increases production, with benefits stemming from prior capital accumulation.
  • Wealth growth relies on the absence of artificial market regulations.

Critique of Monopoly and Regulation

  • Smith opposed both government regulation and monopolies as detrimental to capitalism.

Changes in the 20th Century

  • After World War I, capitalism's application shifted significantly:
    • International markets contracted.
    • Managed national currencies replaced the gold standard.
    • Nations erected barriers to free trade.
  • By the 1930s, many countries abandoned laissez-faire capitalism in favor of socialist governmental assistance.
  • Despite these changes, capitalism continues to exist in various forms into the 21st century.