Saturday, August 29, 2009

Capitalism and Free Markets

Capitalism is an economic system in which the means of production and distribution are privately or corporately owned.
Socialism, by contrast, is an economic system in which the means of production and distribution are collectively owned.

A free market occurs when the purchases and sales of goods and services occur without interference, intervention, regulation, or subsidization by the government.

What many advocates of capitalism and free markets fail to acknowledge is that they do not exist - at least not in a pure form.

Every society in the world is a combination of capitalism, socialism, and tradition. Every economy allocates its resources and products through tradition, command, and markets.

Under pure capitalism, the government does not produce or distribute anything. It provides no national defense, police and fire protection, public health, education, roads, highways, bridges, or garbage collection.

And when markets are unregulated by government, they create many socially undesirable outcomes, such as excessive amounts of pollution, poverty, and market power.

Many advocates of capitalism and free markets seem to imply there are only two options: capitalism or socialism. The reality is that there is a whole spectrum of ways to produce and distributes goods and services. Societies vary in the degree to which they rely on the government to improve market outcomes. It is deceptive to imply any increase in government involvement in the economy is a leap from one extreme to another. Instead, it may be a slight move along a broad continuum.

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