BB&T Academic Programs
What Capitalism Is
The Nature of Government
Economics of Capitalism
A system of capitalism must recognize and protect the rights of individuals to form and execute contracts. Because free individuals in a proper society do not have to deal with one another except by choice, a system of contract is essential. The justification for enforcement of contracts is the recognition that individuals have the capacity and right to bind themselves legally to perform some action or exchange some value. The proper basis for a system of contract law is the understanding that any disputes between rational men must be resolved by an impartial arbiter with an objective set of rules to define how such disputes will be resolved.
Under a proper government system, consenting adults may make any agreements they wish according to the best judgments of their own minds so long as those agreements are voluntary and do not implicate the initiation of force against any other party. Because breaches of contract involve the indirect use of physical force, it is vitally necessary for the government to provide a system of civil courts whereby contractual disputes can be resolved. It is also necessary for the government to define the context in which some breaches of contract may constitute criminal violations.
As the primary means of using and exchanging property in a social context, contracts form an essential foundation of a free economic system. Contracts facilitate a division of labor whereby individuals can specialize and trade for the goods they need to survive. Thus, the objects of contracts can range from a few hours of labor to a piece of land to a complex scientific process.
A consequence of the protection of contract rights is the ability of individuals to take coordinated action across large spans of time and geography. Through the creation of partnerships, corporations, trusts, or holding companies, individuals can contractually achieve economic results that are otherwise unavailable to them.