What role does the government play in capitalism?

The proper role of government in a capitalist economic system has been the subject of heated debate for centuries. Unlike socialism, communism or fascism, capitalism does not assume the role of a centralized and coercive public authority. While almost all economic thinkers and legislators argue for some level of government influence in the economy, such interventions take place outside the strictly defined limits of capitalism.

Key takeaways

  • Capitalism is a type of economic system in which commerce and industry are run by private owners and the individual rather than the government.
  • Voluntary trade dominates, with resources competing to engage consumers and consumers competing with each other for resources.
  • Both ideas of private property and voluntary trade are in conflict with the government, which is a public institution.
  • Most proponents of capitalism, from libertarians to Keynesians, support the idea that government has some stake in the state of the economy.

Stateless capitalism

The term “capitalism” was made famous by the most notorious critic of the system, Karl Marx. In his book The capitalMarx referred to capitalists as those who owned the means of production and employed other workers for profit. Today, capitalism refers to the organization of society under two central principles: private property rights and voluntary trade.

Most modern concepts of private property are derived from John Locke’s theory of private property, in which human beings claim property by mixing their labor with unclaimed resources. Once owned, the only legitimate means of transferring ownership are through trade, gifts, inheritance, or gambling. In laissez-faire capitalism, individuals or companies own economic resources and control their use.

Voluntary trade is the mechanism that drives activity in a capitalist system. Resource owners compete with each other for consumers, who in turn compete with other consumers for goods and services. All this activity is integrated into the price system, which balances supply and demand to coordinate the distribution of resources.

These concepts – private ownership and voluntary trade – are antagonistic to the nature of government. Governments are public institutions, not private. They do not compromise voluntarily, but instead use taxes, regulations, the police, and the military to pursue goals that are free from the considerations of capitalism.

Government influence on capitalist results

Almost all defenders of capitalism support some level of government influence in the economy. The only exceptions are the anarcho-capitalists, who believe that all functions of the state can and should be privatized and exposed to market forces. Classical liberals, libertarians, and minarchists argue that capitalism is the best resource distribution system, but that government must exist to protect private property rights through the military, the police, and the courts.

In the United States, most economists identify as Keynesians, Chicago school, or classical liberals. Keynesian economists believe that capitalism works to a great extent, but macroeconomic forces within the business cycle require government intervention to help smooth it out. They support fiscal and monetary policy, as well as other regulations on certain business activities. Chicago school economists tend to support a moderate use of monetary policy and a lower level of regulation.

In terms of political economy, capitalism often faces socialism. Under socialism, the state owns the means of production and attempts to direct economic activity toward politically identified goals. Many modern European economies are a mixture of socialism and capitalism, although their structure is generally closer to the fascist concepts of public / private partnership with a planned economy.


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Mark Holland

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