Capitalism vs. The Free Market

From the time I began to gain an understanding of economics, I was always under the impression that Capitalism and The Free Market (TFM) were the same thing. Over the last few years, however, I have begun to understand that they are very related but very different terms.

TFM is a system based on the idea of personal property. Each individual has ownership of his/her property and they, therefore, have the exclusive right to decide what happens with that property. This being the case, any exchange of goods is done so with the explicit consent of the owner of said goods. Under such a system, no third party, including the government, would be allowed to interfere with or regulate the exchange of goods (zero market regulation). In other words, every individual is FREE to do whatever he/she pleases with his/her goods. If an individual wishes to exchange their goods for money, he may. If she wishes to give her goods to others at no cost, she may. In order to maintain the system, the only role required of the government would be to ensure all market exchanges are done with the consent of all parties involved (protection against theft, contract enforcement, etc.). *Footnote 1

Capitalism, on the other hand, is completely different from TFM in that it is not a system of rules. Capitalism is a philosophy, or set of beliefs, based on various assumptions on human nature, that dictates how one should act within the system. In other words, TFM is the rules of the game and Capitalism is one strategy on how to play the game. While Capitalism requires TFM, the reverse is not true. Any variety of strategies may be employed within TFM. Capitalism is only one available strategy.

While this is a matter of semantics, it is actually of great importance. Particularly to those who wish to defend the merits of TFM. I will explain why this is so important in a later post regarding the weaknesses of Capitalism. For now, the big take away from this post is that TFM and Capitalism are not the same thing.

1. I am not aware of any place on this Earth that maintains a true 100% Free Market. It would seem that such a place would be impossible since it requires some government protection to maintain its integrity, and yet, that same government must collect taxes in order to do its job, thereby interfering in the exchange of goods. Today, TFM exists on a relative scale. While the U.S. boasts a Free Market, it is nothing near TFM that existed at the time of the Founding. On the other hand, the U.S. market is still quite free when compared to nearly all other supposed Free Markets of the world.