In the United States, most people believe that the political systemof democracy
would be impossible without the economic systemof capitalism. In fact, democracy
and capitalism often contradict each other. Capitalism, after all, frees individuals to
pursue their own private interests in the marketplace; it promotes unconstrained
liberty. Democracy, on the other hand, constrains individual liberty in the name of
the common good. For instance, in capitalism, it makes sense for a factory to toss its
toxic waste into the nearest river: The money saved on proper waste disposal can go
into the stockholders’ pockets, maximizing profits. But in democracy, concern for the
common good (unpolluted rivers) requires the factory to dispose of its toxic waste
properly, limiting its individual liberty and reducing its profits.
As a result of the tension, capitalism in democratic countries has developed in
different ways, in an attempt to balance individual liberty and the common good, or
as it is sometimes framed, freedom and responsibility.Laissez-Faire Capitalism. This is the original form of capitalism, theorized by Adam
Smith, who argued that societies prosper best through individual self-interest ([1776]
1937, p. 508). Though it seems selfish on the surface, an entire nation full of people
pursuing their own narrowly defined self-interests actually produces “the greatest good
for the greatest number of people.” Thus, in laissez-faire capitalism, property and the
means of production should all be privately owned. Expansion and accumulation are
expected forms of “progress.” Markets should be able to compete freely to sell goods,
acquire raw materials, and hire labor. No government interference is necessary: The
“invisible hand” of supply and demand creates a self-regulating economy.
Laissez-faire dominated in Europe and North America through the nineteenth
century, but it fell into dispute during the worldwide economic crisis and depression
of the 1930s, when the “invisible hand” proved ineffective at staving off disaster. As
a result, the government had to step in to stabilize the market and stimulate the econ-
omy. Today, the relationship between the government and economy is no longer a
question of whether or not the government should be involved in economic life: Today
the questions are how much should the government be involved? In what sectors? In
what ways?State Capitalism. State capitalism requires that the government use a heavy hand in
regulating and constraining the marketplace. Companies may still be privately
owned, but they must also meet government-set standards of product quality,
worker compensation, and truth in advertising. In turn, the government provides
some economic security to companies to avoid catastrophic losses and controls
foreign imports to help local companies compete in world markets. This system
is still common in the rapidly developing countries of the Pacific Rim, such as
Japan, South Korea, and Singapore.Welfare Capitalism.Most contemporary capitalist countries, including the United
States, give the government even more control over private investors than state
capitalism. While there is a market-based economy for most goods and services,
there are also extensive social welfare programs, and the government owns some of
the most essential services, such as transportation, health care, and the mass media
(Barr, 2004; Esping-Anderson, 1990; Stephens and Huber, 2001). This is called
welfare capitalism.The U.S. economy incorporates elements of all three forms of capitalism. Many
companies seek to operate with as little government regulation as possible, and set
up corporate headquarters so they do not have to pay taxes in the United States426 CHAPTER 13ECONOMY AND WORK