Capitalism is the most significant economic system of the last several centuries and continues to have a profound impact on the world today. For example, it is a driving force in the economies of many modern democratic nations. With that said, historians acknowledge several different forms of capitalism today, including: laissez-faire capitalism and the welfare state. In general, each form of capitalism differs in the level of government involvement in the economy. Click on the links above to read more specific information about the different forms of capitalism.
Often, laissez-faire capitalism is also referred to as free market capitalism or market capitalism. Simply put, laissez-faire translates to “leave us alone” meaning that the government should remain out of the economy and instead allow individuals to freely carry out their own economic affairs. Historically, laissez-faire capitalism was most common during the 18th and 19th centuries in the timeframe of the Industrial Revolution. At the time, it was a revolutionary idea, because in the previous centuries, mercantilism had been the dominant economic system. In general, mercantilism is viewed as an economic system that favored heavy government control and regulation. At the time, absolute monarchs ruled over vast empires and controlled almost all aspects of the economy. However, prominent thinkers, including Adam Smith, began to argue against mercantilism in favor of an economic system with more freedom for individuals. The development of capitalism as an economic system, sought to reject the idea of government control of the economy and instead put the focus on individuals. On the economic spectrum, laissez-faire capitalism is a right-wing ideology that is fundamentally based on: private ownership, competition, free trade, self-reliance, self-interest, and the principles of supply and demand.
While laissez-faire capitalism is often associated with the 18th and 19th centuries and the time period of the Industrial Revolution, the welfare state is best associated with the 20th century and modern democratic nations. During the 19th century many people began to question whether or not laissez-faire capitalism was meeting the needs of all people in society. In fact, some argued that laissez-faire capitalism was causing a wide income gap in society between the business owners and working class. It was during this time period that the ideas of socialism developed. In general, socialism is a left-wing economic system that favors government intervention in the economy in order to try to decrease the imbalances created by laissez-faire capitalism. For instance, socialism supports the idea of government-funded social programs such as pensions and social assistance. These programs would be funded by those wealthy enough to afford the taxation while they would benefit those who were less well off financially. The ideas of socialism spread throughout Europe and North America and had a profound impact on capitalism. Essentially, it caused laissez-faire capitalism to adopt many of the principles of socialism, while also maintaining several of the main principles of laissez-faire capitalism. Therefore, the welfare state is placed near the center of the economic spectrum and takes a mixed approach to economics.
Often, the welfare state is also referred to as a mixed economy. Historically it developed out of the ideas of socialism and laissez-faire capitalism during the 20th century and can best be seen in the events of the Great Depression. During this time period, governments around the world, including the United States, transformed their economies to include elements of socialism. This was done in order to benefit working class people who were struggling in the economic downturn of the Great Depression. As such, the welfare state includes principles from both sides of the economic spectrum. For example, welfare states maintain many principles of laissez-faire capitalism, including: private ownership, competition, free trade, self-reliance, self-interest, and the principles of supply and demand. However, these same welfare states also adhere to socialist-based principles, such as: public ownership, cooperation, collective-interest, and government regulation to ensure the equitable distribution of income.