What is the difference between capitalism and the free market?

https://news.ycombinator.com/item?id=4152690

by pkenjora • 14 years ago

10 11 14 years ago

news.ycombinator.com

Google definitions:<p>Capitalism: An economic and political system in which a country's trade and industry are controlled by private owners for profit.<p>Free market: An economic system in which prices are determined by unrestricted competition between privately owned businesses.<p>Those sound like the same thing? Why do we have two separate words for them? Can free market exist without capitalism or vice versa?<p>I have yet to get an answer without circular logic on this.

NeilCJames• 14 years ago

The difference is the word 'unrestricted.'

mseebach• 14 years ago

Capitalism deals with ownership, specifically of the production means.

Free markets is when the markets allow actors in the market to exchange goods and services without the interference of external powers, specifically the state.

These can theoretically exist independently, but are generally interdependant for mutual success.

cma• 14 years ago

This is not the forum for this...

molecule• 14 years ago

A better place for this question is http://www.reddit.com/r/AskReddit/submit

andrewmayne• 14 years ago

Capitalist systems could be described as systems where the government plays a larger role in monetary policy through banking, loans, etc.

In a true free market the government wouldn't bail out bad private investments or use public funds to bet on what politicians think are good investments.

aantthony• 14 years ago

It only depends on your definition, which will always end up being twisted for political purposes anyway.

I would say a free market is one without coercion, and capitalism is when private property rights over the means of production are well respected. But many others would alter this, such as saying that it requires a government money supply etc, which I think is not part of an appropriate definition. Not a meaningful discussion really.

molmalo• 14 years ago

They are different. You can have a regulated market, where while the country's trade and industry is still owned by private owners, the government dictates the rules that will establish the price for certain products and services.

This is a big generalization, but it's easier to understand this way:

Rich and industrialized countries, generally advocate for total free markets, because they already have well established and competitive industries. They have gone through the hassle of building those sectors from scratch decades ago, and now have easier and less expensive access to the newest technologies. As the first ones to develop much of the methodologies and technologies used by industry, they own the patents, so the basically control those markets. As most of their industries are now mature and richer (e.g. pharma, electronics, energy, chemical), if a new business rises in a developing economy with free market, they can often force an acquisition (for example through a hostile bid), and that way, maintain the status quo.

On the other side, many developing countries prefer the opposite. This happens for different reasons.

One reason may be trying to assure that the entire population has the possibility to access to certain products. One example that comes to my mind right now is milk. If local people can only pay $1 per litre, but the international price is.. say $3 per litre, the producer indubitably have a stronger desire to sell it to foreign countries (with evil face Eat when you have money!! Mua-ha-ha!). So, by regulating milk price, governments will let poor people access to elemental goods (and this usually happens with energy, water, oil, food, health).

Other reason is that in order to let the industrial sector grow and flourish, that nation has first to make a sacrifice, and, like a little plant, try to protect that sector from the outer world. One way of doing this is by subsidizing it (e.g. tax exemption, lower energy costs, cheaper credits and so on), and often, limiting the amount of entrance to the country of competing products that will make the local product look as overpriced and obsolete (import quotas). One way of limiting the importation of foreign products, is by applying import duties to that kind of product and setting import quotas. That way, the government tries to equal or put in advantage the local product vs the imported product, creating a local market that eventually will let local companies grow. As the local companies evolve, develop and compete, they will start to have more access to new technologies, higher quality products, and so they'll be able to compete in a regional market, and then, if lucky... a global market :) (Well, that's in theory, but it worked in many countries).

But then, It happens to exist a threat. Some countries will try to impose their products in other countries (imagine, who are the ones here?), and eventually dismantle local competitors doing something called "dumping" [1], which is basically predatory pricing. This is (as wikipedia states) "the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market". For example: Country One (C1) wants to place their products in Country Two (C2). C1 has already a large industrial sector, and wants to expand its market globally. So, the government helps their industries to expand into other economies, choosing C2 as a target. They subsidize exports to C2, basically annulling import duties from C2. This way, C1's company can place their products in C2, much cheaper than C2's local products. C2 industry eventually can't compete anymore and goes bankrupt. C1 now controls the market, and can start to raise prices. As dumping is hard to prove (WTO theoretically forbids this behavior), and fighting it usually involves heavy diplomatic consequences, those countries trying to maintain a certain industrial sector, and let it grow, work in advance by protecting that sector by the means of protectionist policies [2].

Of course, other countries will start to complain, because they can't sell as much products there as they want, calling for a free market. But the most funny thing, is that while those countries complain, they usually protect some other sector by themselves. (One example of this is the EU and USA and their agricultural protectionism).

Of course, as in the jungle, the stronger prevails. While richer countries call for free markets, poorer ones try to protect their own markets. But very often, developed countries also start to protect their own markets during certain economic cycles and crises, in an attempt to avoid unemployment and hostile acquisitions of their companies from foreign companies (look at Europe right now). So, one solution for this usually comes in the form of trade agreements. Some trade agreements include the possibility of a country selling certain product to the other, and vice-versa, while also usually establishing some kind of preference for those types of products to be traded between the signatories. Other treaties are much more open - the Free Trade Agreements, which virtually eliminates all kind of import quotas and tariffs on almost all goods and services trades between the signatories. The problem with the latter, is that if those two economies (countries, regions, trade areas, etc) don't complement or there are large differences between their competing industries, usually, the final result is the same as with dumping. That is, the weakest economy's companies closing, the strongest economy's companies controlling the market.

International trade is hard, because everyone wants the best for their own. There's only one cake, and everyone wants the biggest piece.

Hope it helps!

[1] http://en.wikipedia.org/wiki/Dumping_(pricing_policy)

[2] http://en.wikipedia.org/wiki/Protectionism#Protectionist_pol...

Edit: BTW, As others wrote, this is not the best place for this kind of question. But after writing all of this, I'll leave this answer here anyway.

MetaCosm• 14 years ago

"Why do we have two separate words for them?" ... did you just ask Hacker News why synonyms exist? Why does this one bother you more than ire versus anger or common versus ordinary?

Hyena• 14 years ago

There is no real difference. The term "capitalism" is felt to be dissimilar from "free market", but no one is usually able to articulate a coherent difference. The central problem is that "capitalism" took on negative connotations over time and became deeply connected to Marxist/anti-Marxist rhetoric. At its core, though, it's still largely about ownership, even in Marxist critique or anti-Marxist defense. "Free market" is also a loaded term, it seems to signal being a libertarian, but generally refers to exchange restrictions; libertarians usually use "property rights" with respect to ownership issues. "Market" is fairly neutral, I think.

To take a stab at it, "capitalism" emphasizes the ownership elements of markets; "free market" emphasizes the exchange elements of markets; "markets" is just a neutral term, there aren't markets without ownership (rightful or not) and exchange (good or not). Neither "capitalism" nor "free market" deny exchange or ownership, it is merely a rhetorical emphasis; both specify the same set of objects, they just signal which features the author intends to dwell on.

messel• 14 years ago

One word refers to an economic and political system, the other describes a market.

It's possible to have a (mostly) free market in an different type of political system.

toddh• 14 years ago

I don't think you can escape circular logic because the terms are vague and overlapping. The focus on private owners is also a dehabilitating diversion. The core is economic competition. Any self-interested actor will try disable competition through various means, including corruption of the public sector, so public/private loses meaning quickly in practice. A focus on private also means that the entirely rational strategies that China takes of locking in natural resources on a global scale and building long term competitive infrastructure are not open to the less competitive economic strategies championed by the US.

What is the difference between capitalism and the free market?

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