Capitalism has long been viewed as more than just an economic system, and until some yet-to-be… Capitalism has long been viewed as more than just an economic system, and until some yet-to-be determined date, we’re going to be hearing loud denunciations of it from the people occupying Pittsburgh.

Yet those who denounce capitalism seldom know what it is, or that what they’re protesting isn’t really capitalism and why the alternate systems they sometimes propose are not any better. It’s time to set the record straight on all three fronts.

What is capitalism? Essentially, it’s a system wherein resources are allocated based on markets that are relatively free and unfettered. The government remains impartial, and constricts itself to maintaining law and order, enforcing contracts and property rights, providing infrastructure and dealing with situations where the benefits or costs of doing a certain thing don’t entirely fall to the person or firm doing it. That’s about it.

The protestors point to the implosion of the housing market, particularly credit-default swaps and the housing bubble, as a product of this system. Was it? Yes and no. Credit default swaps would have been invented in an unbridled capitalistic system, but if these bets turned sour and the banks failed as a result, it would have been entirely on the heads of the banks. By bailing out the banks, the government has implied that misjudging risk is not punished, and it is by government action, not by the action of the markets, that the banks are encouraged to behave in a risky fashion.

The protestors also decry income inequality. This is partly the result of skill and education inequalities, and it provides an incentive for people to do certain jobs that would otherwise be unattractive. If a waiter and a doctor were paid the same, what incentive would anybody have to take on $100,000 in debt and spend eight years in school to become a doctor? Although people are irritated that CEOs make obscene amounts of money, they’re paid well because they’re uniquely talented at running a company. And if they aren’t talented, they get fired.

I would also ask the Occupy protesters what system they would propose to replace “capitalism” as it is practiced today. Many would suggest some brand of socialism, anarchy or communism. The problem with all three of these systems is that they depend on miracles.

Communism requires that the state have power sufficient to dismantle the bourgeoisie and grant workers control of the means of production. The problem is what comes next. Karl Marx and Friedrich Engels believed that after the worker’s paradise was achieved, the state would wither away. The problem is, when the people running the state are granted that much power, why would they voluntarily cede it? They didn’t do so in the USSR, Cuba, North Korea, China or  Cambodia, and they’ve failed to in many other places as well.

Anarchism swings to the other extreme, maintaining that once the state is gone, people will organize themselves in small collectives, make collective decisions and all will be well. The problem is that this requires cooperation between people, a lack of ambition to be the one in charge and mutual trust and respect. Not many people are that cooperative, selfless and trusting. A lot of people advocating anarchism aren’t even that cooperative: They would probably be unwilling to work with the very “fat cats” they now decry. Inadvertent experiments in anarchy and forced independent decision-making by small collectives, such as the types which took place in Somalia, Afghanistan, Congo and even New Orleans after Hurricane Katrina, have not demonstrated promising results.

Socialism seems the most appealing of the alternatives. Social Democrat governments have shaped European politics for generations. But the results there aren’t better than the results here. Greece is facing a complete financial meltdown that will lead to painful changes in the welfare state, one way or another. In Italy, welfare exacerbates anti-immigrant sentiment. The slums of France have been racked with race riots in the recent past as bad as anything we’ve seen here, and unemployment of poor youth is atrociously high. Great Britain, despite having state-provided health care, a generous social safety net and higher taxes than we do, still had massive riots this summer.

Capitalism, by contrast, is a good economic system for several reasons. Capitalism is democratic. When people speak of “the market,” they aren’t talking about a cabal of white men in fancy suits. The market is you, me and roughly 7 billion of our closest friends making decisions about what to buy. Decentralizing decision-making ensures its efficiency. In order to decide how many pairs of every kind of size 11 shoe need to go in every store in the country, a bureaucrat in Washington would have to have an incredible amount of information at his disposal. It is much easier to stock shoes correctly in a free-market system. The owner of every store has a good idea of what kinds of shoes are selling and orders more of those kinds. He has every incentive to get the number right: Order too many and he ends up with a huge surplus he can’t sell; order too few and customers get upset.

Another advantage of capitalism is that it encourages innovation and the development of new products and ideas. Apple created the iPhone because it thought it could make money selling it, not because the government ordered its development or Steve Jobs was feeling benevolent.

Capitalism has received an unfair hearing because few people understand it. It has also gotten an unfair hearing because a lot of what is supposedly an example of “unfettered capitalism” is in fact repulsive to the unfettered capitalist. We need to recognize that for all its faults, capitalism is still a better system than the most prominent alternatives.

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