It cannot be stressed enough: without Capitalism, we’d be living at the level of a subsistence economy, constantly fighting among us for scarce resources, yet there is still incredible resentment towards the very concept of Capitalism, which is not only maligned, but completely misunderstood. So before engaging in any kind of debate about economics, it is essential to define what Capitalism really is.
Every single time people attack “Capitalism”, they attack a straw man. Marx didn’t know or understand Capitalism and totally misrepresented it, which is why 100% of his assumptions turned out to be wrong.
The usual claim is that Capitalism makes the rich richer and the poor poorer, while Socialism is supposed to make everyone equal and well off. But that's not what happens at all. In reality, it looks more like this:
The fundamental problem is that people do not understand Capitalism, as they always hear about it as it is defined by people who try to promote their own favorite ideology. Very few people really understand the genius of Capitalism and why it works so well.
Short definition:
Capitalism is a description of an emergent economic system. It explains what people do when they are free to act and can cooperate voluntarily to produce goods and services while refraining from violence, theft and fraud.
The following are essential elements for a capitalist economy:
I yet have to find a single anti-Capitalist who actually understands Capitalism. They always assume that Capitalism is about “rich people controlling the world”, about stock markets, shares and billionaires. But Capitalism has nothing to do with “rich people”.
If you create or buy a tool or acquire knowledge useful for the production of goods or services, or if you participate in any kind of voluntary trade, you are a capitalist.
Let me put it bluntly: the second you buy bread from a baker or butter from a supermarket, you are a capitalist.
Capitalism has been a constant throughout human history. We know that human beings made tools 200′000 years ago and traded goods all across Europe 40′000 to 60’000 years ago.
Remember: a single person creating a cabin in the woods and planting vegetables is a Capitalist, as this person creates capital goods - that's capitalism, even without trade. To the extent that this person's property rights are respected by others, trade is always a possibility.
Note that theft, fraud and violence are always possible, in any society. In a capitalist society, such acts have to be treated as crimes and prosecuted, as otherwise the foundation of capitalist wealth creation will be undermined.
Capitalism is usally presented as "just another ideology", but that's a complete missrepresentation. Caplitalism is descriptive, not prescriptive, i.e. it says what people do, it does not prescribe what they should do, or why:
Capitalism is 100% value-free, i.e. it does not imply any kind of value or goal, which is why it is not an ideology. There's nothing, in a capitalist society, that says: "People should consume goods", as many anti-capitalists suggest. Whether and what you consume is entirely up to you. Capitalism merely ensures that you will have many options for what you need or want.
If you want to help poor children in Africa, apply Capitalism. If you just want a nice home for yourself, apply Capitalism. In both cases, you will achieve your goal faster and with less effort and fewer resources than by any other system.
If you don't want to "consume" goods you don't need, you are entirely free not to. I never understood why anti-capitalists pretend that consumption of what they consider "cheap crap" is somehow demanded.
A typical complaint by anti-capitalists is about how Apple produces a new iPhone every year and how "dumb consumers" keep buying a new iPhone, even though they supposedly don't need a new one. They will then explain how they, personally, don't do that and still use some 10-year old flip-phone from Nokia, thus destroying their own argument.
Anti-capitalists always complain about how other people are "stupid" and "buy stuff they don't need". They fail to realize that maybe other people make their own rational decisions, how they have their own personal needs and how something as supposedly "silly" as social status is actually important for most people's success and happiness.
If it wasn't for consumer demand, Nokia would happily have kept selling the same crappy old phones without any kind of innovation - and that, too, would have been capitalism, if no one else had innovated or people had rejected the proposed innovations.
In fact, it would be entirely consistent with Capitalism if everyone just produced the absolute minimum required for survival and decided to live in mud huts. But that's clearly not a lifestyle favored by most.
Does Capitalism work, in practice to make people less poor? It actually does, miraculously!
The only non-fictional way to not be a capitalist is to live as hunter-gatherer, consuming exclusively food that exists in nature, using only simplistic and mostly natural tools and weapons for hunting and fishing.
A barter economy is still capitalist, just without the benefits of money, so it has to rely on the coincidence of needs.
Socialism and Communism are basically Capitalism with extra steps - they rely on the same methods of production of capital and consumption goods as in a capitalist society, but they remove individual liberty, entrepreneurship and property ownership rights, turning society into a gigantic post office where the post master makes all the decisions.
The difference between Socialism and Communism are purely rhetorical, although leftists can get extremely worked up about totally irrelevant details that will never have any importance in real life, as the utopian socialist societies they hope to implement will never exist.
Communists believe that at some future, unspecified point, through some mysterious, unexplained magic, all the problems of resource allocation will disappear and everyone will live in harmony.
What constitutes real, non-utopian Socialism?
Note that people under Socialism are not free to choose to live in mud huts as hunter-gatherers. Socialism imposes a certain life style and no one has the right to deviate from it. If that life style is "live in horrible concrete bunkers with furniture that would make Ikea blush and eat recycled food", then that is what everyone will have to do. Except the party leadership.
Mixed economies are based on some elements of a capitalist, free market economy and a government sector that is based on tax income, operating on government regulations, not market constraints:
Ultimately, any mixed economy ends up expanding its government sector - using its inefficiency as justification to encroach ever more on the market-driven economy. If this tendency is not countered by massive opposition from the civil society, it ends in full-fledged socialism, at which point the economy and the society will collapse.
Depending on the length and severity of the socialist "experiment", such a failed society will then either be able to re-build itself based on a capitalist model or it will go through endless cycles of violence and oppression.
Here is a quick summary, for reference:
[1] An illustration of why knowledge is the most important capital good: Germany was able to create the 3rd largest economy in the world within 25 years after WWII, starting essentially from rubble and with no military power, i.e. most of their capital goods had been destroyed and they had no means to rob anyone else, yet they managed to re-create all the material goods that had been destroyed in record time. This was possible because German workers already had all the required knowledge, i.e. the capital good "knowledge".
The assumption that Germany's success was based on the Marshall plan is false: the Marshall plan came and went and changed nothing. It was a drop on a hot stone - it redirected US tax payer money into the pockets of a few lucky Europeans who did nothing to improve the economy. It had the same effect as development aid on Africa, generating corruption without production. It's a mystery why people think that this kind of "aid" would have helped Europe, while being totally useless in Africa for over 70 years now.
The German economic "miracle" only took off for real after Ludwig Erhard abolished all the remaining war-time limitations (maximum prices etc.) that had been imposed on the German economy and that was after 1963.
[2] One of the main differences between a highly developed, wealthy economy and a 3rd world econoy is the amount of knowledge and the number of skills that are available in each society. In Africa, in rural areas, every adult person has a pretty impressive amount of knowlege about common tasks related to agriculture, domestic animals and simple construction jobs, but the knowlege hardly varies, from one person to the next. In a developed country, the people living in a single average city street will have extremely diverse skills, ranging from manual construction tasks and commercial skills to engineering, advanced medicine and scientific research.
One of the greatest delusions, in Marx & Engels, is their assumption that a human being could excel at everything - be a farmer, a hunter, a mechanic, a doctor, a scientist and an artist. It mostly serves as illustration of the fact that neither of them had ever accomplished any kind of meaningful work. Marx lived in filth and broken furniture. Clearly, did not even know how to repair a chair.
[3] One of the first and most important jobs for spies sent to western countries, from the USSR, was to collect and send back lists of consumer prices of various goods, so the Soviet planners could use them as indication of how to allocate their own resources.
[4] When businesses make serious mistakes, they go bankrupt or they have to downsize substantially. When IBM failed to take into account the extent of the personal computer revolution, during the 1980s, although they had contributed to it, this led to serious consequences for the company: by the beginning of the 1990s, they had to fire 200'000 of their 450'000 employees and they had to revise the way they did business. They could not use their size to force customers to buy from them. The initially much smaller Microsoft, which, around 1987, had only 1/100th the turnover of IBM, was able to win a huge market share in operating systems, although the IBM offer was technical better (OS/2). Size is often not an advantage. It makes businesses inflexible, bureaucratic and expensive to operate. Small startups are typically far more profitable than mature, large businesses. Of course there's a risk in investing in small businesses, but the profitable ones generate huge returns of 20 to 50% on the invested capital, while large businesses are happy with 5-10%.