There is no consensus on the definition of capitalism, nor how it should be used as an analytical category. There are a variety of historical cases over which it is applied, varying in time, geography, politics and culture. Economists, political economists and historians have taken different perspectives on the analysis of capitalism. Scholars in the social sciences, including historians, economic sociologists, economists, anthropologists and philosophers have debated over how to define capitalism, however there is little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism.

Economists usually put emphasis on the market medievalism, degree of government does not have control over markets (laissez faire), and property rights, while most political economists emphasize private property, power relations, wage labor, and class. There is a general agreement that capitalism encourages economic growth. The extent to which different markets are “free”, as well as the rules determining what may and may not be private property, is a matter of politics and policy and many states have what are termed “mixed economies.”

Capitalism as a system developed incrementally from the 16th century in Europe, although capitalist-like organizations existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages. Capitalism became dominant in the Western world following the demise of feudalism. Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world. (CC Wikipedia – 02/28/2010)

Under a free trade policy, prices are a reflection of true supply and demand, and are the sole determinant of resource allocation. Free trade differs from other forms of trade policy where the allocation of goods and services amongst trading countries are determined by artificial prices that may or may not reflect the true nature of supply and demand. These artificial prices are the result of protectionist trade policies, whereby governments intervene in the market through price adjustments and supply restrictions. Such government interventions can increase as well as decrease the cost of goods and services to both consumers and producers.

Interventions include subsidies, taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements such as the North American Free Trade Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary to their formal titles) and any governmental market intervention resulting in artificial prices.

Most states conduct trade polices that are to a lesser or greater degree protectionist. One ubiquitous protectionist policy employed by states comes in the form of agricultural subsidies whereby countries attempt to protect their agricultural industries from outside competition by creating artificial low prices for their agricultural goods.

Free trade agreements are a key element of customs unions and free trade areas. The details and differences of these agreements are covered in their respective articles. (CC Wikipedia – 02/21/2010)

The history of money consists of three phases: commodity money, in which actual valuable objects are bartered; then representative money, in which paper notes (often called ‘certificates’) are used to represent real commodities stored elsewhere; and finally fiat money, in which paper notes are backed only by use of’ “lawful force and legal tender laws” of the government, in particular by its acceptability for payments of debts to the government (usually taxes).

Commodity money is inconvenient to store and transport. It also does not allow the government to control or regulate the flow of commerce within their dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other specie were retained as its backing.

Gold was a common form of representative money due to its rarity, durability, divisibility, fungibility, and ease of identification,[7] often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve.

It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.

The gold standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no inherent value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver.

Representative money and the gold standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. That system eventually collapsed in 1971, at which time all nations had switched to full fiat money.

According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery from the great depression. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country’s severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies. (CC Wikipedia – 09/05/2009)

In the 17th Century, liberal ideas began to influence governments in Europe, in nations such as The Netherlands, Switzerland, England and Poland, but they were strongly opposed, often by armed might, by those who favored absolute monarchy and established religion. In the 18th Century, in America, the first modern liberal state was founded, without a monarch or a hereditary aristocracy. The American Declaration of Independence, includes the words (which echo Locke) “all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness; that to insure these rights, governments are instituted among men, deriving their just powers from the consent of the governed.” (Thomas Jefferson, Declaration of Independence, July 4, 1776)

Today, most nations accept the ideals of freedom. But Liberalism comes in many forms. According to James L. Richardson, in Contending Liberalisms in World Politics: Ideology and Power, there are three main divisions within liberalism. The first is elitism versus democracy. The second is economic; whether freedom is best served by a free market or by a regulated market. The third is the question of extending liberal principles to the disadvantaged. (CC Wikipedia – 09/05/2009)

The theory holds that within the ideal free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other’s property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via transfer payments and they engage in trade simply because they both consent and believe that what they are getting is worth more to them than what they give up. Price is the result of buying and selling decisions en masse as described by the law of supply and demand.

Free markets contrast sharply with controlled markets or regulated markets, in which governments directly or indirectly regulate prices or supplies, which according to free market theory causes markets to be less efficient. Where government intervention exists, the market is a mixed economy. A free market describes a market without economic intervention and regulation by government. The terminology is used by economists and in popular culture. A free market requires protection of property rights, but no regulation, no subsidization, no single monetary system, and no governmental monopolies. It is the opposite of a controlled market, where the government regulates prices or how property is used.

The theory holds that within the ideal free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other’s property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via transfer payments and they engage in trade simply because they both consent and believe that what they are getting is worth more to them than what they give up. Price is the result of buying and selling decisions en masse as described by the law of supply and demand.

Free markets contrast sharply with controlled markets or regulated markets, in which governments directly or indirectly regulate prices or supplies, which according to free market theory causes markets to be less efficient. Where government intervention exists, the market is a mixed economy.