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Democratic Capitalism is an economic system in which the means of production are privately owned and individuals are responsible for their own lives. Business organizations produce goods for a market guided by the forces of supply and demand; governments elected by the people are limited to protecting the community and maintaining order through the enforcement of contracts. Underlying capitalism is the presumption that private enterprise is the most efficient way to organize economic activity. Adam Smith expressed this idea in his Wealth of Nations (1776), extolling the free market in which the businessman is "led by an invisible hand to promote an end which was no part of his intention."

The marketplace is the center of the democratic capitalist system. It determines what will be produced, who will produce it, and how the rewards of the economic process will be distributed. From a political standpoint, the market system has two distinct advantages over other ways of organizing the economy: (a) no person or combination of persons can control the marketplace, which means that power is diffuse and cannot be monopolized by a party or a clique; (b) the market system tends to reward efficiency with profits and to punish inefficiency with losses. Economists often speak of capitalism as a free-market system ruled by competition. But capitalism in this ideal sense cannot be found anywhere in the world. The economic systems operating in Western countries today are mixtures of free competition and governmental control.

Many of the institutions of capitalism existed in ancient times. Trade, moneylending, and insurance were well known to the Greeks and Romans. However, it was with the rise of centralized monarchies and the growth of towns that a true merchant class developed, and commerce began to create a regional and international economy. From the 16th to the 18th century great rural-to-urban migrations created an abundance of capitalist labor. The Reformation encouraged a view of life more favorable to commerce than the medieval Roman Catholic outlook had been. The rise of science, with its emphasis on observation and inductive reasoning, tended to undermine the authority of the old order. The rising commercial and industrial classes, called by the French the bourgeoisie, sought a new political order corresponding to their economic interests.

Indeed, the concept of interest became a new political idea. The 17th-century English political theorists Thomas Hobbes and John Locke thought of society as created by a compact among people, in which the state's primary obligation was to protect the interests of its citizens. A central interest was the right of property. This current in political thought culminated in the work of Adam Smith, who argued that the commercial classes, if allowed enough political and economic freedom, could best achieve prosperity for the country. The crux of Smith's argument was that the economic order should be as independent as possible from the political order. Smith's Wealth of Nations was a critique of the existing system of state controls that he called mercantilism. He argued that state intervention not only diminished political freedom but also was economically inefficient. The state's proper role should be to protect private property and enforce contracts; production and distribution should be regulated by the market.

In fact, the idea of natural rights, now usually considered ends in themselves, were reinforced by the idea of economic independence. Economic freedom, the privilege of having, keeping, and inheriting property, is protected in the U.S. Constitution (1787) and is emphasized as a democratic liberty in the American Bill of Rights (1789), in the French Declaration of the Rights of Man (1789) and the Universal Declaration of Human Rights in the United Nations Charter (1946).

The 19th century was an era of unprecedented economic growth, especially in Britain and the United States. It was the age of laissez-faire economic liberalism and free trade, when politics and economics were thought of as separate spheres of human endeavor. The Industrial Revolution transformed society, first in Britain, then in France and Germany, and later in the United States. The modern firm was characterized by the sale of stocks and bonds which gave it access to the savings of the public, and the corporate form of organization gave it independence from its owner--in the eyes of the law, the corporation was a "person" and could sue as a legal entity, independently of its stockholders. The stockholders, concerned primarily with the return on their investment, tended to cede their powers to salaried managers. By the end of the century most people worked in the factory and the office. Large industrial cities developed, and with them trade unions and working-class political parties that regarded employers and capitalists as their enemies and the capitalist system itself as something to be modified or even eliminated. The most far-reaching attack on capitalism was that of Karl Marx and Friedrich Engels, whose writings became the intellectual basis of European socialism and communism.

The early theorists of capitalism had not foreseen the tendency of the business enterprise to grow ever larger, and thus a large segment of industry came to be controlled by a relatively few firms. The rise of the corporation and the domination of many industries by a few firms led to new ideas about capitalism. Many liberals and populists favored breaking up large corporations and requiring them to refrain from practices that were monopolistic or injurious to competition. For this they turned to the state, pressing for antitrust laws to guarantee a competitive economy. Others held that large firms were not necessarily less competitive than small ones and that it was wrong to conclude that modern capitalism was less dynamic and progressive than that of Adam Smith's day. The Austrian-American economist Joseph Schumpeter, arguing in defense of large firms, held that the prime mover in capitalist progress was not the small businessperson but the entrepreneur who introduced and developed new technologies.

The economic pessimism of the first half of the century soon gave way to the optimism of "Thatcherism" in Europe and the "Reagan revolution" inthe United States, which signaled the resurgence of laissez-faire capitalism as a dominant ideological and moral force. Central to the neo-capitalist philosophy--set forth by noted economists such as Milton Friedman and Paul Laffer--were two precepts: that the size of government had to be reduced and that the economy had to be deregulated. As a precondition for the resurgence of capitalism it was necessary for the governmentto enact substantial income tax cuts and effectively remove itself from the economic system. By the 1990s, free markets were no longer seen as throwbacks to a more primitive era but rather as the engine of future prosperity.

Bibliography: Bell, D., The Cultural Contradictions of Capitalism (1976); Braudel, Fernand, Civilization and Capitalism, 15th-18th Centuries, 3 vols. (Eng. trans., 1982-84); Chandler, A. D., Jr., The Visible Hand: The Managerial Revolution in American Business (1977); Cornwall, John, Modern Capitalism (1977; repr. 1982); Friedman, M., Capitalism and Freedom (1962; repr. 1981); Galbraith, J. K., The New Industrial State, 4th ed. (1985); Heilbroner, R. L., Beyond Boom and Crash (1978) and The Nature and Logic of Capitalism (1985); Schumpeter, J. A.Capitalism, Socialism, and Democracy 5th ed. (1976); Tawney, Richard H., Religion and the Rise of Capitalism (1947); Weber, Max, The Protestant Ethic and the Rise of Capitalism (1950; repr. 1984); Williamson, Oliver F., The Economic Institutions of Capitalism (1985).

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General Characteristics of Democratic Capitalism:

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