How does actual capitalism differ from theory?

A viewer asked this question on 5/21/2000:

Can you explain the difference between the principles of capitalism and the actual practices of capitalism in the developed western states?
Thank you.

JesseGordon gave this response on 5/21/2000:

I'd say by far the largest difference between theory and practice is via government intervention. The government in most western countries intervenes in a number of ways to alter capitalism-in-principle:

Regulation means that the government tells companies how they may operate, for the purpose of maintaining health & safety of workers or customers; for labor rules like the number of maximum hours; or for environmental or societal benefit. Every regulation is created because legislators (or ultimately citizens) don't want to allow the free rein of the conditions that were there without regulation. If the regulations are meaningful at all (and many aren't!) then their purpose is to change the way companies WOULD act in a purely capitalistic setting.

The government creates lots of monopolies, even in capitalistic societies like the US. These monopolies seem pretty benign, usually, but they are as much against the principles of pure capitalism as a corporate-based monopoly. Examples include the postal service (FedEx competes for "urgent packages" but is not allowed to deliver regular "non-urgent" mail. The purpose is to ensure that all US addresses can get mail for the same price); and most electric utilities (there's some "competition" these days, but most people can only buy electricity from one source in their town. That applies to most other utilities too, from water to cable TV).

Government taxes "distort" the market (that's an economic term that means the market doesn't act as it would in a purely capitalistic non-taxed setting). Any time you or a corporation choose a certain activity because of the tax implications, from deciding which 401(k) or IRA plan to choose, to deciding how much you can afford in a home mortgage, you are not acting as a pure capitalist.

NAFTA, GATT, and the WTO are removing many import and export controls these days, but they still exist and are a big factor in how companies work as well as what we buy as individuals. Pure capitalism implies pure free trade, which would mean that you can just as easily buy goods from China as from Texas.

Return to index