Saturday, September 27, 2008

Capitalism vs. the Free Market

I regular reader has asked a very important question: what is the difference between free markets and capitalism. Most people do equate the two, and in lazier moments even I mistakenly use the term "capitalism" rather than "free markets," as I support the latter, but do not necessarily support the former.

The first thing to note is that the term "capitalism" was coined by Karl Marx. It describes not an economic system alone, but a politico-economic-social system. In this system, the government -- which is either run by or at least influenced by the bourgeois -- has laws on the books specifically designed to protect the economic interests of that class. The term "free market" describes a kind of economic system only -- an economic system that can exist under various forms of government.

In one of the papers I'm reading for the conference I'm going to on spontaneous orders, the author observed that the invisible hand of the free market worked exactly the same way in 1777, after the publication of Wealth of Nations, as it did in 1775 -- but that politics was never the same after Marx. Indeed, capitalism is a political idea; free markets are a kind of economic spontaneous order that arose naturally through the interaction of people through exchange.
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