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Freedom, Capitalism and Human Behavior Chapter 4: Capitalism

Michael C. Jensen

Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

William H. Meckling

Simon School, University of Rochester (Deceased)

June 30, 1999

Harvard Business School NOM Unit Working Paper No. 1999

Capitalism is far and away the most effective system ever invented for peacefully organizing cooperation among large numbers of human beings. The success enjoyed by capitalistic economies during the last 70 years is in sharp contrast to the dramatic and widespread failure of communist and socialist centrally planned closed economies.

The economies (primarily in the West) organized more or less as capitalistic have created enormous wealth and living standards for their members, while virtually all others have resulted in impoverishment. And it is becoming clear that they have accomplished this with much less damage to the environment than non-capitalist societies. Moreover, the difference is not merely one of resource endowments.

The current move toward more capitalist, open societies is drastically changing the world, and promises to go on for several generations. Because capitalism is widely misunderstood, it is paradoxically almost always under attack by those who would like to see societies organized in different ways. Private property capitalist systems are distinguished by the fact that most decision rights are assigned to private individuals or organizations. In contrast, socialist or communist systems assign most decision rights to the state or the governing party.

This chapter identifies the essence of capitalism, and demonstrates its remarkably close relationship to the Jensen-Meckling concept of freedom explained in the first three chapters. To do this I first give a brief definition (without much discussion) of alienable decision rights, which are the foundations of ownership and capitalism. Then I discuss the role of knowledge in society, the essential nature of capitalism and what makes it work.

Number of Pages in PDF File: 30

Keywords: alienability, freedom, capitalism, decision rights, role of government, transfer costs, agency costs

JEL Classification: A00, H00, K00

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Date posted: October 19, 2005 ; Last revised: May 18, 2013

Suggested Citation

Jensen, Michael C. and Meckling, William H., Freedom, Capitalism and Human Behavior Chapter 4: Capitalism (June 30, 1999). Harvard Business School NOM Unit Working Paper No. 1999. Available at SSRN: https://ssrn.com/abstract=638802 or http://dx.doi.org/10.2139/ssrn.638802

Contact Information

Michael C. Jensen (Contact Author)
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
William H. Meckling
Simon School, University of Rochester (Deceased)

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