[Geoff332]

OK. I've got a bit of time. I'll start with capitalism. Capitalism is generally traced back to Adam Smith's Wealth of Nations, published in the late 18th century. At the time, we were seeing the end of the feudal system and the start of the industrial revolution (around the same time as he published this book, the Woolen Workers in the North of England were complaining about machinary entering the work-place). At the same time, the british financial system was getting well established. They had copied the system off the Dutch in the 16th or 17th century and it really formed the basis of economic face of the British empire.

Smith considered himself to be a moral philosopher -- heavily influenced by another of the mad Scottsmen: Hume. He was concerned with how to make a just and fair society, while he was witnessing a major powershift from the aristocractic land owners to factory owners. Central to his moral philosophy was the acquisition and distribution of resources.

The core of his thesis rests on one basic principle. If everyone is free to act in accordance with their own self-interest (within the law), then the overall effect on society will be optimised. It should be noted that Smith was a great proponent of justice. Probably the best statement of his thesis was:

Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.

If everyone acts out of their self-interest, then we arrive at this optimal point. In modern economic theory, this is known as "paereto optimisation". At that point, no one person can be made better off without making one or more other people worse off by a greater total amount.

What really defines capitalism are the mechnisms through which self-interest is enacted and bought to life. An economic system is concerned with the production and distribution (or allocation) of goods and services.

The first, and most obvious, is capital. Capital is the physical means of production -- usually meaning land, machinary and cash. For the accountants amoung you, it basically means assets (intangiable assets such as goodwill and intellectual property are fairly new things, and do muddy the waters a little). Under Adam Smith's ideology, capital should be privately owned by individuals. These individual is free to use this capital as they wish, within the bounds of justice.

The second component is labour -- an individual's industry. This is the effort of individual person in the production process. What the technology of the industrial revolution enabled was the twin concepts of division of labour and specialisation. A work process (such as making a pin) could be split into several parts, each of which was relatively simple. Each person could specialise in a part of the process and aspects of the process could be more easily mechanised due to the division. This led to vast improvements in the efficiency of labour, the defining characteristic of the industrial revolution is the application of capital to increase the productivity of labour.

Because of the division of labour, labour was generally considered to be flexible and substitutable. This means that for a given job, there was more than one person who could fill that job. Once you have relatively simple and specialised jobs, you can easily shift a new person into that job and get them working up to speed.

Labour and capital combined to give us the means of production (processing raw materials into output). Production is them a function of capital and labour. Because of the substitutability of labour, the power rested in the hands of the capitalist. This was a major power shift away from labour (the artisan who held specialised knowledge) to the capitalist (the owner of the means of production). They capitalist own the production, and is expected to pay the labour.

That's half the story; the other half is distribution. The core of capitalism's distribution mechanism is the market. A market is a place where buyers and sellers come to exchange goods and services. In most cases, the exchange involves cash -- although cash is not conceptually essential for capitalism (cash is an important part of capitalism, but it's role is functional. It allows certain capitalist mechanisms to function efficiently enough to make the system viable. Most importantly, it makes capital fluid, providing the capitalist with greater flexibility ion how they use their capital).

In a perfect market (economists call this perfect competition), you have many buyers and sellers with equal power. The buyers want to get more for less; the sellers want to sell more for more. Each seller's goods are identical to one another and everyone knows everything they need to know to make a good purchase decision. In this situation, the market settles at the optimal point, where the sellers make a fair profit and the buyers get sufficient quantity of what they want.

The assumptions of perfect competition are really important. The buyers and sellers must all be of equal power, and there must be enough of them that the actions of any single buyer or seller won't effect the total market position. The goods must be completely substitutable (each will satisfy identical needs and wants of the buyers). Both buyers and sellers must have complete (and free) information on the value of the goods. If all of these conditions are met and everyone acts from their own self-interest, then we reach a fair (paereto optimal) price point. Of course, these assumptions rarely, if ever, apply. As they get relaxed, we end up moving off that optimal point and the market becomes less efficient (and we have work to keep economists employed all year round).

The seller is the owner of the production -- the capitalist. The buyer is anyone who wants to buy something. Labour is sold in an identical process. The capitalist 'buys' the industry of an individual to make their capital productive. Individuals offer their labour and expect to get paid for it.

The role of Government in a capitalist system is to ensure justice. This, more than anything else, is the point of contention between left and right in western societies. Both sides generally agree on the basic ideas of capitalism (most western countries operate on the basis of private ownership of capital, on labour, and on market exchange of goods and services). The core difference is what consitutes justice. One argument is that justice revolves around rights -- primarily the right to life, freedom and property (where have I heard that before). As long as these rights are protected, the market will take care of everything else. The second revolves around ensuring fairness in market exchanges (economic justice). Economic justice includes the basic human rights, but argues that some important facets of justice are not adequately protected and ensured by the market (such as health-care) and should be protected by the state. Note that this position is neither socialist nor communist. It is a reflection of justice within (and part of) the original formulation of capitalism. The critics of this perspective argue that interferring with these things makes them less efficient.