Key terms in the Center's lexicon:
Capitalism is a system where the means of production are owned privately and operated for profit. It is a system opened to new ideas, new firms and new owners where decisions on investment, production, trade and pricing are largely determined by market forces. This does not mean that the state has no role in capitalism. On the contrary, the state needs to create the appropriate regulatory and legal framework without which markets will not function properly. Also, the state needs to provide public goods and ensure that there is adequate physical and human infrastructure.
Capitalism, also known as “free enterprise”, is characterized by its great openness to “innovation—the implementation of new commercial ideas coming from persons in private business—and to a great pluralism of views among wealth-owners and financiers. It is the latter who select the ideas to nurture by providing them the capital and incentives necessary for their development and marketing. The two groups together create a dynamic economy.
Proponents and critics of capitalism agree on its “dynamism”, particularly in comparison with the other private-ownership system known as the “corporatist” system. The latter is characterized by the introduction of institutions aimed at protecting the interest of “stakeholders” and the “social partners”, which include big employer confederations, big unions and monopolistic banks.
In capitalist economies such as the United States, the United Kingdom or Ireland, although most innovation comes from established companies—as in the pharmaceuticals and information technologies—much comes from start-ups—and that has often been the source of the most novel innovations.
The core problem of the corporatist economies in Europe—Germany, France, and Italy—in the last decades has been a lack of dynamism. A country can have a large welfare state but still develop a strong, dynamic economy, as long as it has economic institutions that reward innovation and an economic culture that prefers challenge and competition.
The dynamism in an economy is related to entrepreneurship and innovation. Economic growth does not necessarily imply dynamism. Growth can occur as a result of temporary terms of trade shocks without much dynamism or employment creation. During a commodities boom, for example, commodity exporters can grow without much dynamism. In post-conflict countries, rapid growth occurs in the immediate transition to peace because of large spikes in international aid and the presence of the international community in the country. Such growth is not dynamic nor sustainable.
Economic inclusion refers to the generalized employment in the formal sector for the active labor force. Economic inclusion also means social cohesion. The latter does not exist in societies in which a large part of the population is unemployed or works in vulnerable conditions in the informal sector. Social inclusion implies economic independence so that workers earn adequate income to have a good quality of life and enjoy the basic elements of the community life in a dignified way.