What is Capitalism?

Capitalism. We Know it When We See It.  But Can We Define It?

Wall Street Law Blog Takes A Shot (without the help of investopedia, wikinvest, wikipedia, or any other kind of wiki...)

Scrolling through emails today, I came across an interesting discussion from a linked-in group that I follow.  The topic: What is Capitalism?

As I have often said, no economists write for Wall Street Law Blog.  Still, since we blog about finance and the economy on a regular basis, I decided to try defining capitalism without a net  (no research of any kind, and no review of any comments from the aforementioned linked-in discussion).  

Here is what I came up with -

Capitalism (n): A market-based economic system in which profit motive drives allocation of capital.

In other words - In a capitalist system (a) business activity is funded by investors and creditors, and (b) these investors and creditors assume the risk of loss in exchange for the possibility/expectation of financial gain.

In a pure capitalist economy, all capital allocation is driven by free markets, and all investment capital and debt capital is at risk. There would be no regulation.  Investment and extension of credit (loans and bond issues)  would instead be subject to the doctrine of caveat emptor (buyer beware).

Disclaimer...

I should probably add that I don't believe pure capitalism could work in the real world any better than pure communism (which does away with profit motive altogether).

By Brett Sherman
The Sherman Law Firm