Businesses Under Capitalist Systems

Free Enterprise

A free-enterprise system is based on private ownership as the means of production.

Learning Objectives

Explain how free enterprise leads to the economic system of capitalism

Key Takeaways

Key Points

  • Free- market systems operate in capitalist economies.
  • There are multiple variants of capitalism depending on interpretation and practice.
  • Economists emphasize the degree to which markets are free of government control (laissez faire) in capitalism.
  • Political economists focus on the presence of private property, as well as power, wage, and class relations.
  • Mixed economies and state capitalism are systems that incorporate different amounts of planned and market-driven elements in the state’s economic system.

Key Terms

  • mixed economy: Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety of government-sponsored aspects.
  • laissez-faire: A policy of governmental non-interference in economic affairs.
  • State capitalism: The term state capitalism has various meanings, but is usually described as commercial (profit-seeking) economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or existence of a significant number of state-owned business enterprises.

Free- Enterprise Defined

The definition of free enterprise is a business governed by the laws of supply and demand, where the government has no involvement in its decisions or actions. This economic system is based solely on private ownership as the means of production.

It is a private system in which all means of production are privately owned and operated.

Link to Capitalism

This is an example of capitalism in which government policies generally target the regulation and not the money.

Capitalism is generally considered to be an economic system that is based on private ownership of the means of production and the creation of goods or services for profit by privately-owned business enterprises.

Some have also used the term as a synonym for competitive markets, wage labor, capital accumulation, voluntary exchange, and personal finance. The designation is applied to a variety of historical cases, varying in time, geography, politics, and culture.

Variations of Capitalism

There are multiple variants of capitalism, including laissez faire, mixed economy, and state capitalism. There is, however, a general agreement that capitalism became dominant in the Western world following the demise of feudalism.

Economists, political economists, and historians have taken different perspectives on the analysis of capitalism. Economists usually emphasize the degree to which government does not have control over markets (laissez faire), as well as the importance of property rights.

Most political economists emphasize private property as well, in addition to power relations, wage labor, class, and the uniqueness of capitalism as a historical formation.

The extent to which different markets are free, as well as the rules defining private property, is a matter of politics and policy. Many states have what are termed mixed economies, referring to the varying degree of planned and market-driven elements in a state’s economic system.

A number of political ideologies have emerged in support of various types of capitalism, the most prominent being economic liberalism.

Capitalism gradually spread throughout the Western world in the 19th and 20th centuries.

GDP is on the y-axis and years are on the x-axis. The connected dots move across the bottom of the chart and then straight up.

People’s Republic of China’s Nominal Gross Domestic Product (GDP) Between 1952 to 2005: Scatter graph of the People’s Republic of China’s GDP between years 1952 to 2005, based on publicly available nominal GDP data published by the People’s Republic of China and compiled by Hitotsubashi University (Japan) and confirmed by economic indicator statistics from the World Bank.

Capitalism in the U.S.

Democratic capitalism is a political, economic, and social system with a market-based economy that is largely based on a democratic political system.

Learning Objectives

Demonstrate how capitalism in the US is controlled by its democratic political system

Key Takeaways

Key Points

  • The United States is often seen as having a democratic capitalist political- economic system.
  • The three pillars of democratic capitalism include economic incentives through free markets, fiscal responsibility, and a liberal moral-cultural system that encourages pluralism.
  • Some commentators argue that, although economic growth under capitalism has led to democratization in the past, it may not do so in the future; for example, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.
  • Proponents of capitalism have argued that indices of economic freedom correlate strongly with higher income, life expectancy, and standards of living.
  • Democratic Peace Theory states that capitalist democracies rarely make war with each other, and have little internal conflict. However, critics argue that this may have nothing to do with the capitalist nature of the states, and more to do with the democratic nature instead.

Key Terms

  • tripartite: In three parts.
  • pluralism: A social system based on mutual respect for each other’s cultures among various groups that make up a society, wherein subordinate groups do not have to forsake their lifestyle and traditions, but, rather, can express their culture and participate in the larger society free of prejudice.
  • capitalism: a socio-economic system based on the abstraction of resources into the form of privately-owned money, wealth, and goods, with economic decisions made largely through the operation of a market unregulated by the state
  • polity: An organizational structure of the government of a state, church, etc.

Democratic Capitalism and the US

The United States is often seen as having a democratic capitalist political-economic system. Democratic capitalism, also known as capitalist democracy, is a political, economic, and social system and ideology based on a tripartite arrangement of a market-based economy that is based predominantly on a democratic polity. The three pillars include economic incentives through free markets, fiscal responsibility, and a liberal moral-cultural system, which encourages pluralism.

In the United States, both the Democratic and Republican Parties subscribe to this (little “d” and “r”) democratic-republican philosophy. Most liberals and conservatives generally support some form of democratic capitalism in their economic practices. The ideology of “democratic capitalism” has been in existence since medieval times. It is based firmly on the principles of liberalism, which include liberty and equality. Some of its earliest promoters include many of the American founding fathers and subsequent Jeffersonians.

This economic system supports a capitalist, free-market economy subject to control by a democratic political system that is supported by the majority. It stands in contrast to authoritarian capitalism by limiting the influence of special interest groups, including corporate lobbyists, on politics. Some argue that the United States has become more authoritarian in recent decades.

The Relationship between Democracy and Capitalism

The relationship between democracy and capitalism is a contentious area in theory and among popular political movements. The extension of universal adult male suffrage in 19th century Britain occurred alongside the development of industrial capitalism. Since democracy became widespread at the same time as capitalism, many theorists have been led to posit a causal relationship between them. In the 20th century, however, according to some authors, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist regimes, absolute monarchies, and single-party states.

While some argue that capitalist development leads to the emergence of democracy, others dispute this claim. Some commentators argue that, although economic growth under capitalism has led to democratization in the past, it may not do so in the future. For example, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom. States that have highly capitalistic economic systems have thrived under authoritarian or oppressive political systems. Examples include:

  • Singapore, which maintains a highly open market economy and attracts lots of foreign investment, does not protect civil liberties such as freedom of speech and expression.
  • The private (capitalist) sector in the People’s Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government.
  • Augusto Pinochet’s rule in Chile led to economic growth by using authoritarian means to create a safe environment for investment and capitalism.
The graph shows that the GDP of the People's Republic of China (in billions of RMB yuan) was 67.9 billion in 1953. It rose slowly until 1978, when market-based economic reforms were enacted. Since then it has skyrocketed. It was 18232.1 billion in 2005.

People’s Republic of China’s Nominal Gross Domestic Product (GDP) Between 1952 to 2005: Scatter graph of the People’s Republic of China’s GDP between years 1952 to 2005, based on publicly available nominal GDP data published by the People’s Republic of China and compiled by Hitotsubashi University (Japan) and confirmed by economic indicator statistics from the World Bank.