Depending on one’s political ideology, free market capitalism either describes the engine of the United States’ economic might or the cause of crushing income inequality. To better understand why these two definitions are such opposites, the terms must first be correctly defined. While the two are often conflated, capitalism and the free market are not equivalent. The free market refers to the market economy, where, once provided the means, consumers can purchase what they want when they want it with minimal restrictions. Producers are free to create what they want in whatever quantity the market will support. Prices are set by individual agents in transactions through the law of supply and demand. Most countries of the world, including the United States and Europe employ market economies. Unfortunately, no economy is truly free. Most have regulations and protections, such as a minimum wage or product safety standards. However, as burdensome regulations are lifted from the economy, the nation as a whole benefits. Hong Kong has been consistently rated as one of the freest economies in the world and is, as a result, one of the wealthiest. The opposite of the free market is the planned economy. In a planned economy, government bureaucrats control most aspects of the economy. Planned economies are typically associated with Marxist states such as Venezuela, Cuba, Vietnam, and the former Soviet Union. Supporters of the planned economy suggest that public welfare is to be the highest motive of the economy, with a market economy placing profit as its prime mover. All centrally-planned economies are terrible. Historically, government bureaucrats have been unable (and will always be unable) to set the quantity of goods present in the economy equal to the efficient quantity. Three of the aforementioned nations have instituted various aspects of a market economies in order to survive. The fourth, Venezuela, has recently undergone major conflict after basing the bulk of their entire economy off of one single commodity: oil. Centrally planned economies are entirely untenable and unsustainable.
Capitalism refers to the private ownership of means of production, as opposed to government ownership. People who have accumulated sufficient wealth invest in companies, and in return receive a share of the profits in proportion to their share of ownership. The inverse of capitalism would be pure communism, in which the factors of production are entirely nationalized. Essentially, communism is an all-encompassing form of a planned economy, which is why the two institutions are inseparable. Democratic-socialist nations like those of Western Europe control some aspects of the economy, with the aim of promoting equitable access to all sectors of the population. While communism and the planned economy are inseparable, capitalism and the market economy are not. Western-European democratic-socialist nations have market economies, but they are not capitalistic. Their high tax rates and severe income redistribution discourage investment and provide less growth than capitalist nations like the United States or the quasi-independent nation of Hong Kong.
Capitalism and the market economy may not be inseparable, but nations do well to make use of both institutions in tandem. Economic freedom and financial prosperity are inextricably linked. As a nation’s economy grows freer, the nation grows more prosperous. Conversely, as a nation’s economy is saddled with burdensome regulations, the nation grows less prosperous. Ultimately, the best course of action for any nation lies in economic liberalization and deregulation.
Written By: Dalton Abrams
Contributor, The New American Right
President, College Republicans at UCR