Pure Capitalism and the Market
THE MARKET SYSTEM
This chapter begins with a discussion of the institutional framework of the American market system.
Brief explanations are given for these characteristics of the market system: private property, freedom of
enterprise and choice, the role of self-interest, competition, markets and prices, the reliance on
technology and capital goods, specialization, use of money, and the active, but limited role of
In the final section of the chapter, the authors address the Four Fundamental Questions
faced by every economy and explain how a market economy answers each one.
Characteristics of the Market System
Private individuals and firms own most of the private property (land and capital).
Private property, coupled with the freedom to negotiate binding legal contracts, enables
individuals and businesses to obtain, control, use, and dispose of this property.
Private property rights encourage investment, innovation, exchange of assets,
maintenance of property, and economic growth.
Property rights extend to intellectual property through patents, copyrights, and
Freedom of enterprise and choice exist.
Freedom of enterprise means that entrepreneurs and businesses have the freedom to
obtain and use resources, to produce products of their choice, and to sell these products in
the markets of their choice.
Freedom of choice means that
Owners of property and money resources can use resources as they choose.
Workers can choose the training, occupations, and jobs they wish.
Consumers are free to spend their income in such a way as to best satisfy their wants
Self-interest is one of the driving forces in a market system.
Entrepreneurs try to
maximize profits or minimize losses; resource suppliers try to maximize income;
consumers try to maximize satisfaction.
As each tries to maximize profits, income, or satisfaction, the economy will benefit if
competition is present.
Competition among buyers and sellers is a controlling mechanism.
Large numbers of sellers mean that no single producer or seller can control the price or
Large number of buyers means that no single consumer or employer can control the price
or market demand.
Depending upon market conditions, producers can enter or leave an industry easily.
Markets and prices