What capitalism is.
This page owns the canonical definition. Every other page on the site links here rather than redefining the word.
Capitalism is an economic system in which the means of production are privately owned and operated for profit, with investment, production, and prices determined by voluntary exchange in markets rather than by central authority.
This is the standard textbook definition; see any mainstream economics dictionary in sources.
The eight pillars.
- Private property in the means of production. Individuals and firms, not the state, own land, factories, tools, and capital. Ownership includes the right to use, profit from, sell, and exclude.
- Voluntary exchange. Transactions happen because both sides expect to gain. Nobody is commanded to buy, sell, or work for a specific party.
- The price signal. Prices formed by supply and demand carry compressed information about scarcity and desire. Hayek's 1945 essay "The Use of Knowledge in Society" is the canonical statement: no planner can gather the dispersed knowledge that prices summarize automatically.
- Profit and loss. Profit attracts capital toward what people value. Loss is the underrated half of the mechanism: it forces capital away from failure. A system that rescues every loser has disabled half its feedback loop.
- Open competition. Free entry and exit. Incumbents can be challenged, and the possibility of challenge disciplines them even when no challenger exists yet.
- Capital accumulation. Profits are reinvested to expand productive capacity. This compounding is what separates capitalism from mere trade, which is ancient.
- Wage labor. Most people sell their labor in a market rather than owning their own means of production. This is the pillar critics target most directly, and the honest version of this site says so here.
- Rule of law and enforceable contracts. The pure model still requires an umpire: courts that enforce property and contracts impartially. This is why the center of our spectrum is not "no state." Subtracting the umpire moves you rightward into laissez-faire and anarcho-capitalism.
What capitalism is not.
Four common confusions, in brief. Each one is expanded, with the evidence on both sides, on the myths page.
- Not simply markets and money. Markets predate capitalism by millennia. Capitalism adds private ownership of productive capital and systematic reinvestment for profit.
- Not "whatever corporations do." A firm lobbying for subsidies, bailouts, or barriers against competitors is engaged in rent-seeking, which the pure model condemns.
- Not cronyism. Crony capitalism describes a failure mode in which success depends on political connection rather than market performance. Defenders and critics both call it bad; they disagree about whether it is separable from capitalism in practice.
- Not the absence of all government. That is anarcho-capitalism, one band to the right of center on our spectrum.
Where the word came from.
Adam Smith never used the word "capitalism." The Wealth of Nations (1776) called its subject "the system of natural liberty." The word was popularized largely by critics: Louis Blanc used it in 1850, Proudhon in the 1860s, and Marx built Das Kapital (1867) around "the capitalist mode of production" while rarely using the bare word "capitalism." Werner Sombart's Der moderne Kapitalismus (1902) pushed the term into general academic use. A system named by its critics is a useful thing for readers to know on page one.
Sourced in sources.
The thinkers behind the system and its critics get a page of their own in the Full Theory tier.