Capitalism Resources

The Economics of Capitalism

In the realm of economics, capitalism applies the principle of individual rights to the production and exchange of goods and services. Viewed from the perspective of economics, capitalism is the system that completely separates economy and state. Under this arrangement, individuals are left free to produce, trade, and consume economic values, both material and spiritual, according to their own rational judgment. The government plays only the role of neutral umpire, providing a system of objective laws that protects property and contract, and that punishes the initiation of force and fraud in economic relationships. The question that remains is: how does such a system work?

Leaving individuals free to exercise their rights and pursue their economic self-interest is the basic requirement of a capitalist economic order. This principle, however, is not the only important aspect of a capitalist system. To understand capitalism, and to maintain and preserve it, it is not enough merely to state that the economy and state should be separate. It is important, as well, to comprehend how a capitalist economic system works. What are its basic features? Once individuals are left free, how are they likely to interact economically? What types of relationships will they form? By what arrangements will they carry on their interactions?

Economics is the field that answers these questions. It is the science that studies the production and exchange of wealth. By studying the operation of free markets, economics identifies and explains the causal laws that govern these phenomena. For example, an economist might observe how a new product competes with existing products, describing how economic actors in the marketplace respond to the manufacture, pricing, and distribution of the new product. Another example might involve an economist explaining why wage rates in a particular industry have risen relative to other wage rates over the previous decade. Economics also explains the full material consequences of protecting (or failing to protect) individual rights. For example, an economist might illustrate that leaving individual producers free to set their own prices maximizes prosperity and trade whereas government-mandated wages and prices bring dislocations, unemployment, and economic stagnation.

The field of economics also provides unique insights into the role of material production in human life by considering and integrating the long-term consequences of various economic actions. Because the proper standard of ethical conduct is man's life, lived long-term, economists show how the virtue of productiveness works out over the course of a whole life, the life of a single enterprise, or indeed, the life of a nation. Economists, thus, help to illustrate how a capitalist system of rights protection is both the moral and the practical system for human life.