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Free markets may not be perfect but they are probably the best way to organize an economy
CAPITALISM is often thought of as an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.
The essential feature of capitalism is the motive to make a profit. As Adam Smith, the 18th century philosopher and father of modern economics, said: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Both parties to a voluntary exchange transaction have their own interest in the outcome, but neither can obtain what he or she wants without addressing what the other wants. It is this rational self-interest that can lead to economic prosperity.
In a capitalist economy, capital assets-such as factories, mines, and railroads-can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses (see "Supply and Demand" in the June 2010 F&D).
Although some form of capitalism is the basis for nearly all economies today, for much of the last century it was but one of two major approaches to economic organization. In the other, socialism, the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits.
Pillars of capitalism
Capitalism is founded on the following pillars:
* private property , which allows people to own tangible assets such as land and houses and intangible assets such as stocks and bonds;
* self-interest, through which people act in pursuit of their own good, without regard for sociopolitical pressure. Nonetheless, these uncoordinated individuals end up benefiting society as if, in the words of Smith's 1776 Wealth of Nations, they were guided by an invisible hand;
* competition, through firms' freedom to enter and exit markets, maximizes social welfare, that is, the joint welfare of both producers and consumers;
* a market mechanism that determines prices in a decentralized manner through interactions between buyers and sellers-prices, in return, allocate resources, which naturally seek...