Explainer Features of Capitalism
Legal Framework
Capitalism is often associated with freedom from government intervention. But capitalism does not function in a vacuum. It depends on a legal framework – a set of laws and institutions that define and enforce the rules of the game.
Here’s one example: laws protect private ownership. Property law punishes the person who steals John’s espresso machine or decides to occupy land owned by another person.
But the legal framework that sustains a capitalist society extends far beyond property.
Contract law allows people and businesses to make enforceable agreements.
If Andrew signs a contract agreeing to work for $15 per hour, that agreement is backed by law.
If John signs a year-long lease to rent a storefront for his coffee shop, the landlord cannot decide to charge higher rent six months in.
Corporate law allows businesses to organize as corporations.
This structure can limit the personal financial risk of owners. If a business fails, the owner might lose the capital they invested – but they won’t lose their shirt or their home.
Forming a corporation also makes it easier for a business to raise capital by selling shares of the company to investors.
Banking and financial regulations dictate how money is lent, borrowed, and invested.
Labor laws establish minimum wages.
Contract law allows people and businesses to make enforceable agreements.
If Andrew signs a contract agreeing to work for $15 per hour, that agreement is backed by law.
If John signs a year-long lease to rent a storefront for his coffee shop, the landlord cannot decide to charge higher rent six months in.
Corporate law allows businesses to organize as corporations.
This structure can limit the personal financial risk of owners. If a business fails, the owner might lose the capital they invested – but they won’t lose their shirt or their home.
Forming a corporation also makes it easier for a business to raise capital by selling shares of the company to investors.
Labor laws establish minimum wages.
Banking and financial regulations dictate how money is lent, borrowed, and invested.
Contract law allows people and businesses to make enforceable agreements.
If Andrew signs a contract agreeing to work for $15 per hour, that agreement is backed by law.
If John signs a year-long lease to rent a storefront for his coffee shop, the landlord cannot decide to charge higher rent six months in.
Corporate law allows businesses to organize as corporations.
This structure can limit the personal financial risk of owners. If a business fails, the owner might lose the capital they invested – but they won’t lose their shirt or their home.
Forming a corporation also makes it easier for a business to raise capital by selling shares of the company to investors.
Banking and financial regulations dictate how money is lent, borrowed, and invested.
Labor laws establish minimum wages.
These legal structures don’t just exist at the national level. International agreements and institutions help regulate trade, investment, and finance across borders.
To sum it up: legal structures permit, protect, and regulate capitalism. The “free markets” of capitalism aren’t just a collection of voluntary exchanges. They depend on the government – on courts, legislatures, regulatory agencies, and different enforcement mechanisms.
Episode Connections
- Episode 6: Thirty Glorious Years: After the Great Depression, new laws, regulations, and government programs help protect American workers and contribute to a strong middle class.
- Episode 10: The Extracted: Today, some historians and economists study the extent to which policies of the International Monetary Fund and the World Bank may negatively affect formerly colonized countries such as Sierra Leone.
- Episode 11: Better Capitalism? Reformers today advocate for new laws and regulations designed to limit excessive profit-seeking, increase taxes on corporations, and protect workers and the environment.